UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2010
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from ___ to___
Commission File Number 0-10004
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NAPCO SECURITY TECHNOLOGIES, INC.
---------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-2277818
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
333 Bayview Avenue, Amityville, New York 11701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 842-9400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share The NASDAQ Stock Market LLC
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(Title of Each Class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes _ No X
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes _ No X
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "Large accelerated filer", "Accelerated filer" and "Smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer _ Accelerated filer _ Non-accelerated filer _
Smaller reporting company X
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes _ No X
As of December 31, 2009, 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 $20,230,781
As of October 11, 2010, 19,095,713 shares of common stock of Registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
2010 Annual Meeting of Stockholders.
PART I
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ITEM 1: BUSINESS.
NAPCO Security Technologies, Inc. ("NAPCO" or the "Company") was incorporated in
December 1971 in the State of Delaware. Its executive offices are located at
333 Bayview Ave, Amityville NY 11701. Its telephone number is (631) 842-9400.
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment. On August 18, 2008, the Company, through the formation of a new
subsidiary, Marks USA I, LLC ("Marks"), acquired substantially all of the assets
and business of G. Marks Hardware, Inc. for $25.2 million, the repayment of $1
million of bank debt and the assumption of certain current liabilities. The
Marks business involves the manufacturing and distribution of door-locking
devices.
Website Access to Company Reports
Copies of our filings under the Securities Exchange Act of 1934 (including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to these reports) are available free of charge on
our website (www.napcosecurity.com) on the same day they are electronically
filed with the Securities and Exchange Commission.
Acquisition
On August 18, 2008, the Company acquired substantially all of the assets and
business of Marks for $25.2 million, the repayment of $1 million of bank debt
and the assumption of certain current liabilities. In August 2009, the Company
completed the move of all operations of Marks to its Dominican plant and into
the Company's corporate headquarters in Amityville. The Marks business involves
the manufacturing and distribution of door-locking devices.
Restructuring Costs
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. The
majority of these actions have been completed by June 30, 2010, while certain
remaining Production-related actions are expected to be completed by December
31, 2010. Accordingly, the Company recognized restructuring costs of $1,274,000
in the fiscal year ended June 30, 2009. Of this amount, $210,000 relates to
Workforce Reductions communicated in March 2009 and $1,064,000 to Business Exits
and related costs associated with inventory and lease impairments related to the
closure of the Marks, European and Middle East facilities. As of June 30, 2010,
$1,138,000 of the $1,274,000 in restructuring costs has been paid and $136,000
remains in accrued expenses.
Products
Access Control Systems. Access control systems consist of one or more of the
following: various types of identification readers (e.g. card readers, hand
scanners, etc.), a control panel, a PC-based computer and electronically
activated door-locking devices. When an identification card or other identifying
information is entered into the reader, the information is transmitted to the
control panel/PC which then validates the data and determines whether to grant
access or not by electronically deactivating the door locking device. An
electronic log is kept which records various types of data regarding access
activity.
The Company designs, engineers, manufactures and markets the software and
control panels discussed above. It also buys and resells various identification
readers, PC-based computers and various peripheral equipment for access control
systems.
Alarm Systems. Alarm systems usually consist of various detectors, a control
panel, a digital keypad and signaling equipment. When a break-in occurs, an
intrusion detector senses the intrusion and activates a control panel via
hard-wired or wireless transmission that sets off the signaling equipment and,
in most cases, causes a bell or siren to sound. Communication equipment such as
a digital communicator may be used to transmit the alarm signal to a central
station or another person selected by a customer.
The Company manufactures and markets the following products for alarm systems:
Automatic Communicators. When a control panel is activated by a signal from
an intrusion detector, it activates a communicator that can automatically
dial one or more pre-designated telephone numbers. If programmed to do so,
a digital communicator dials the telephone number of a central monitoring
station and communicates in computer language to a digital communicator
receiver, which prints out an alarm message.
Control Panels. A control panel is the "brain" of an alarm system. When
activated by any one of the various types of intrusion detectors, it can
activate an audible alarm and/or various types of communication devices.
For marketing purposes, the Company refers to its control panels by the
trade name, generally "Gemini(TM)" and "Magnum Alert(TM)" followed by a
numerical designation.
Combination Control Panels/Digital Communicators and Digital Keypad
Systems. A combination control panel, digital communicator and a digital
keypad (a plate with push button numbers as on a telephone, which
eliminates the need for mechanical keys) has continued to grow rapidly in
terms of dealer and consumer preference. Benefits of the combination format
include the cost efficiency resulting from a single microcomputer function,
as well as the reliability and ease of installation gained from the
simplicity and sophistication of micro-computer technology.
Door Security Devices. The Company manufactures a variety of exit alarm
locks including simple dead bolt locks, door alarms and
microprocessor-based electronic door locks with push button and card reader
operation.
Fire Alarm Control Panel. Multi-zone fire alarm control panels, which
accommodate an optional digital communicator for reporting to a central
station, are also manufactured by the Company.
Area Detectors. The Company's area detectors are both passive infrared heat
detectors and combination microwave/passive infrared detectors that are
linked to alarm control panels. Passive infrared heat detectors respond to
the change in heat patterns caused by an intruder moving within a protected
area. Combination units respond to both changes in heat patterns and
changes in microwave patterns occurring at the same time.
Video Surveillance Systems
--------------------------
Video surveillance systems typically consist of one or more video cameras, a
control panel and a video monitor or PC. More advanced systems can also include
a recording device and some type of remote communication device such as an
internet connection to a PC or browser-enabled cell phone. The system allows the
user to monitor various locations at once while recorders save the video images
for future use. Remote communication devices can allow the user to view and
control the system from a remote location.
The Company designs, engineers, and markets the software and control panels
discussed above. It also buys and resells various video cameras, PC-based
computers and peripheral equipment for video surveillance Systems.
Peripheral Equipment
The Company also markets peripheral and related equipment manufactured by other
companies. Revenues from peripheral equipment have not been significant.
Research and Development
The Company's business involves a high technology element. During the fiscal
years ended June 30, 2010 and 2009, the Company expended approximately
$4,922,000 and $5,116,000, respectively, on Company-sponsored research and
development activities conducted by its engineering department to develop and
improve the Products. The Company intends to continue to conduct a significant
portion of its future research and development activities internally.
Employees
As of June 30, 2010, the Company had approximately 1,003 full-time employees.
Marketing
The Company's staff of 43 sales and marketing support employees located at the
Company's Amityville and United Kingdom offices sells and markets the Products
primarily to independent distributors and wholesalers of security alarm and
security hardware equipment. Management estimates that these channels of
distribution represented approximately 49% of the Company's total sales for each
of the fiscal years ended June 30, 2010 and 2009. The remaining revenues are
primarily from installers and governmental institutions. The Company's sales
representatives periodically contact existing and potential customers to
introduce new products and create demand for those as well as other Company
products. These sales representatives, together with the Company's technical
personnel, provide training and other services to wholesalers and distributors
so that they can better service the needs of their customers. In addition to
direct sales efforts, the Company advertises in technical trade publications and
participates in trade shows in major United States and European cities. Some of
the Company's products are marketed under the "private label" of certain
customers.
In the ordinary course of the Company's business the Company grants extended
payment terms to certain customers. For further discussion on Accounts
Receivable and Concentration of Credit Risk see disclosures included in Item 7.
Competition
The security alarm products industry is highly competitive. The Company's
primary competitors are comprised of approximately 20 other companies that
manufacture and market security equipment to distributors, dealers, central
stations and original equipment manufacturers. The Company believes that no one
of these competitors is dominant in the industry. Certain of these companies
have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the features, quality,
reliability and pricing of, and the incorporation of the latest innovative and
technological advances into, its Products. The Company also competes by offering
technical support services to its customers. In addition, the Company competes
on the basis of its expertise, its proven products, its reputation and its
ability to provide Products to customers on a timely basis. The inability of the
Company to compete with respect to any one or more of the aforementioned factors
could have an adverse impact on the Company's business. Relatively low-priced
"do-it-yourself" alarm system products have become available in recent years and
are available to the public at retail stores. The principal components in the
Company's products are integrated circuits, printed circuit boards,
microprocessors, sheet metal, plastic resin, machined and cast metal components.
The Company believes that these products compete with the Company only to a
limited extent because they appeal primarily to the "do-it-yourself" segment of
the market. Purchasers of such systems do not receive professional consultation,
installation, service or the sophistication that the Company's Products provide.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of Napco's products want to install its products prior to the
summer; therefore sales of its products historically peak in the period April 1
through June 30, the Company's fiscal fourth quarter, and are reduced in the
period July 1 through September 30, the Company's fiscal first quarter. To a
lesser degree, sales in Europe are also adversely impacted in the Company's
first fiscal quarter because of European vacation patterns, i.e., many
distributors and installers are closed for the month of August. In addition,
demand is affected by the housing and construction markets. The severity of the
current economic downturn may also affect this trend.
Raw Materials
The Company prepares specifications for component parts used in the Products and
purchases the components from outside sources or fabricates the components
itself. These components, if standard, are generally readily available; if
specially designed for the Company, there is usually more than one alternative
source of supply available to the Company on a competitive basis. The Company
generally maintains inventories of all critical components. The Company for the
most part is not dependent on any one source for its raw materials.
Sales Backlog
In general, orders for the Products are processed by the Company from inventory.
A sales backlog of approximately $2,236,000 and $1,554,000 existed as of June
30, 2010 and 2009, respectively. The Company expects to fill all of the backlog
that existed as of June 30, 2010 during fiscal 2011.
Government Regulation
The Company's telephone dialers, microwave transmitting devices utilized in its
motion detectors and any new communication equipment that may be introduced from
time to time by the Company must comply with standards promulgated by the
Federal Communications Commission ("FCC") in the United States and similar
agencies in other countries where the Company offers such products, specifying
permitted frequency bands of operation, permitted power output and periods of
operation, as well as compatibility with telephone lines. Each new Product that
is subject to such regulation must be tested for compliance with FCC standards
or the standards of such similar governmental agencies. Test reports are
submitted to the FCC or such similar agencies for approval. Cost of compliance
with these regulations has not been material.
Patents and Trademarks
The Company has been granted several patents and trademarks relating to the
Products. While the Company obtains patents and trademarks as it deems
appropriate, the Company does not believe that its current or future success is
dependent on its patents or trademarks.
Foreign Sales
The revenues and identifiable assets attributable to the Company's domestic and
foreign operations for its last two fiscal years are summarized in the following
table:
Financial Information Relating to Domestic and Foreign Operations
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2010 2009
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(in thousands)
Sales to external customers(1):
Domestic $ 62,925 $ 62,676
Foreign 4,832 6,889
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Total Net Sales $ 67,757 $ 69,565
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Identifiable assets:
United States $ 54,896 $ 60,456
Dominican Republic (2) 18,235 18,822
Other foreign countries 537 2,308
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Total Identifiable Assets $ 73,668 $ 81,586
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(1) All of the Company's sales originate in the United States and are shipped
primarily from the Company's facilities in the United States and United Kingdom.
There were no sales into any one foreign country in excess of 10% of total Net
Sales.
(2) Consists primarily of inventories (2010 = $13,896,000; 2009 = $13,960,000)
and fixed assets (2010 = $4,246,000; 2009 = $4,696,000) located at the Company's
principal manufacturing facility in the Dominican Republic.
ITEM 1A: RISK FACTORS.
The risks described below are among those that could materially and adversely
affect the Company's business, financial condition or results of operations.
These risks could cause actual results to differ materially from historical
experience and from results predicted by any forward-looking statements related
to conditions or events that may occur in the future.
Our Business Could Be Materially Adversely Affected as a Result of General
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Economic and Market Conditions
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We are subject to the effects of general economic and market conditions. If
these conditions deteriorate, our business, results of operations or financial
condition could be materially adversely affected. In addition, since October
2008, the U.S. and international economies have experienced a significant
downturn and continue to be very volatile. In the event that the downturn in the
U.S. or international economies is prolonged or worsens, our revenue levels
could be further materially adversely affected in future periods. If the current
worldwide economic downturn continues or worsens, many of our current or
potential future customers may experience serious cash flow problems and as a
result may, modify, delay or cancel purchases of our products. Additionally,
customers may not be able to pay, or may delay payment of, accounts receivable
that are owed to us. Furthermore, the current downturn and market instability
makes it difficult for us to forecast our revenues.
Our Business Could Be Materially Adversely Affected as a Result of the Inability
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to Maintain Adequate Financing
------------------------------
Our business is dependent on maintaining the financing used in the Marks
acquisition and to fund operations. The current debt facilities provide for
certain minimum payments on the Marks term loan and financial covenants relating
to ratios affected by profit, asset and debt levels. The Company is not in
compliance with several of the covenants in the current facilities. The Company
and its banks have been in negotiations to amend and restate the existing terms
of the credit facilities and term loan. The Company and its banks have agreed in
principle on all the key terms and modifications to the existing revolving
credit agreement and term loan. This agreement would include waivers of the
existing non-compliance. The restated facilities would provide for restructured
covenants that reflect the Company's current financial condition. However, if
the Company does not consummate these new facilities or if profits, asset or
cash-flow levels decline below the minimums required to meet these covenants or
make the minimum debt payments, the debt facilities may be materially adversely
affected. Effects on the Company's financing could include higher interest
costs, reduction in borrowing availability or revocation of these credit
facilities.
Our Business Could Be Materially Adversely Affected by the Inability to Reduce
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Expenses Relative to the Current Decreases in Sales Levels
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While Management has begun implementation of a restructuring plan to reduce
expense levels relative to current sales levels, if this plan is delayed, not
completed or sales levels decrease further, our business may be adversely
affected.
Our Business Could Be Materially Adversely Affected as a Result of Housing and
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Commercial Building Market Conditions
-------------------------------------
We are subject to the effects of housing and commercial building market
conditions. If these conditions continue to deteriorate, resulting in a further
decline in new housing or commercial building starts, existing home or
commercial building sales or renovations, our business, results of operations or
financial condition could be materially adversely affected beyond the current
levels, particularly in our intrusion and door locking product lines.
Our Business Could Be Materially Adversely Affected as a Result of Lessening
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Demand in the Security Market
-----------------------------
Our revenue and profitability depend on the overall demand for our products.
Continued or worsening delays or reductions in spending, domestically or
internationally, for electronic security systems could further materially
adversely affect demand for our products, which could result in decreased
revenues or earnings.
The Markets We Serve Are Highly Competitive and We May Be Unable to Compete
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Effectively
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We compete with approximately 20 other companies that manufacture and market
security equipment to distributors, dealers, control stations and original
equipment manufacturers. Some of these companies may have substantially greater
financial and other resources than the Company. The Company competes primarily
on the basis of the features, quality, reliability and pricing of, and the
incorporation of the latest innovative and technological advances into, its
products. The Company also competes by offering technical support services to
its customers. In addition, the Company competes on the basis of its expertise,
its proven products, its reputation and its ability to provide products to
customers on a timely basis. The inability of the Company to compete with
respect to any one or more of the aforementioned factors could have an adverse
impact on the Company's business.
Our Business Could be Materially Adversely Affected as a result of Offering
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Extended Payment Terms to Customers
-----------------------------------
We regularly grant credit terms beyond 30 days to our customers. These terms are
offered in an effort to keep a full line of our products in-stock at our
customers' locations. The longer terms that are granted, the more risk is
inherent in collection of those receivables. We believe that our Bad Debt
reserves are adequate to account for this inherent risk.
Competitors May Develop New Technologies or Products in Advance of Us
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Our business may be materially adversely affected by the announcement or
introduction of new products and services by our competitors, and the
implementation of effective marketing or sales strategies by our competitors.
There can be no assurance that competitors will not develop products that are
superior to the Company's products. Further, there can be no assurance that the
Company will not experience additional price competition, and that such
competition may not adversely affect the Company's position and results of
operations.
The Company's Products are Subject to Technological Changes from Time to Time,
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Which may Result in Increased Research and Developments Expenditures to Attract
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or Retain Customers
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The industry in which the Company operates is characterized by constantly
improved products. Future success will depend, in part, on our ability to
continue to develop and market products and product enhancements
cost-effectively, which will require continued expenditures for product
engineering, sales and marketing. The Company's research and development
expenditures, which were $4,922,000 and $5,116,000 for 2010 and 2009,
respectively, are principally targeted at enhancing existing products, and to a
lesser extent at developing new ones. If the Company cannot modify its products
to meet its customers' changing needs, we may lose sales.
We Rely On Distributors To Sell Our Products And Any Adverse Change In Our
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Relationship With Our Distributors Could Result In A Loss Of Revenue And Harm
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Our Business.
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We distribute our products primarily through independent distributors and
wholesalers of security alarm and security hardware equipment. Our distributors
and wholesalers also sell our competitors' products, and if they favor our
competitors' products for any reason, they may fail to market our products as
effectively or to devote resources necessary to provide effective sales, which
would cause our results to suffer. In addition, the financial health of these
distributors and wholesalers and our continuing relationships with them are
important to our success. Some of these distributors and wholesalers may be
unable to withstand adverse changes in business conditions. Our business could
be seriously harmed if the financial condition of some of these distributors and
wholesalers substantially weakens.
Members of Management and Certain Directors Beneficially Own a Substantial
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Portion of the Company's Common Stock and May Be in a Position to Determine the
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Outcome of Corporate Elections
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Richard L. Soloway, our Chief Executive Officer, members of management and the
Board of Directors beneficially own 31.4% of the currently outstanding shares of
Common Stock. By virtue of such ownership and their positions with Napco, they
may have the practical ability to determine the election of all directors and
control the outcome of substantially all matters submitted to Napco's
stockholders.
In addition, Napco has a staggered Board of Directors. Such concentration of
ownership and the staggered Board could have the effect of making it more
difficult for a third party to acquire, or discourage a third party from seeking
to acquire, control of Napco.
We Are Dependent Upon the Efforts of Richard L. Soloway, Our Chief Executive
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Officer
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The success of the Company is largely dependent on the efforts of Richard L.
Soloway, Chief Executive Officer. The loss of his services could have a
material adverse effect on the Company's business and prospects. There is
currently no succession plan.
Our Business Could Be Materially Adversely Affected by an Increase in the
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Exchange Rate of the Dominican Peso
-----------------------------------
We are exposed to foreign currency risks due to our significant operations in
the Dominican Republic. We have significant operations in the Dominican
Republic which are denominated in Dominican pesos. We are subject to the risk
that currency exchange rates between the United States and the Dominican
Republic will fluctuate, potentially resulting in an increase in some of our
expenses when US dollars are transferred to Dominican pesos to pay these
expenses.
Our Business Could Be Materially Adversely Affected by the Integration of Marks
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into Our Existing Operations
----------------------------
Our business is dependent on the orderly, effective integration of the acquired
Marks business, technologies, product lines and employees into our organization.
If this integration is unsuccessful, our business may be materially adversely
affected.
The Company's Debt Repayments Relating to the Acquisition of Marks Require
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Substantially Higher Cashflows
------------------------------
The Marks acquisition requires quarterly principal debt repayments of
approximately $893,000, plus interest, that are in addition to the Company's
historical cash-flow requirements. A significant decline in the Company's
earnings or cashflows could put at risk the Company's ability to repay this debt
as well as to failing to meet certain financial covenants within the existing
Revolving Credit Agreement and the Term Loan.
ITEM 1B: UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2: PROPERTIES.
The Company owns executive offices and production and warehousing facilities at
333 Bayview Avenue, Amityville, New York. This facility consists of a
fully-utilized 90,000 square foot building on a six acre plot. This six-acre
plot provides the Company with space for expansion of office, manufacturing and
storage capacities. In March 2009, the Company began a Restructuring Plan, as
described in Note 14, which includes consolidating the operations of Marks from
the leased building described below into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. The move
from the leased building described below was completed in August 2009, prior to
the expiration of the lease. The Marks business involves the manufacturing and
distribution of door-locking devices.
The Company leased a building of approximately 35,000 square feet in Amityville,
NY. This facility provided all of the administrative, production and warehousing
space for the Company's recent Marks acquisition. The lease commenced in August
2008 and expired in August 2009.
The Company's foreign subsidiary located in the Dominican Republic, Napco DR,
S.A. (formerly known as NAPCO/Alarm Lock Grupo International, S.A.), owns a
building of approximately 167,000 square feet of production and warehousing
space in the Dominican Republic. That subsidiary also leases the land associated
with this building under a 99-year lease expiring in the year 2092. As of June
30, 2010, a majority of the Company's products were manufactured at this
facility, utilizing U.S. quality control standards.
The Company's foreign subsidiary located in the United Kingdom, Napco Group
Europe Ltd, leases office space of approximately 167 square feet. This lease
expires in January 2011.
The Company's former sales office located in the United Arab Emirates leased
office space of approximately 500 square feet. This lease expired in June 2010.
The Company has closed this office as part of its restructuring and,
accordingly, did not renew this lease.
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: RESERVED.
PART II
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ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Principal Market
NAPCO's Common Stock is traded on the NASDAQ Stock Market, Global Market System,
under the symbol NSSC.
The tables set forth below reflect the range of high and low sales of the Common
Stock in each quarter of the past two fiscal years as reported by the NASDAQ
Global Market System.
Quarter Ended Fiscal 2010
-------------------------
Common Stock Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
High $ 2.08 $ 2.86 $ 3.02 $ 2.58
Low $ 1.11 $ 1.43 $ 1.68 $ 1.70
Quarter Ended Fiscal 2009
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Common Stock Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
High $ 4.54 $ 2.90 $ 2.82 $ 1.72
Low $ 2.45 $ 1.02 $ 0.76 $ 1.01
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of October 7, 2010
was 121 (such number does not include beneficial owners of stock held in nominee
name).
Dividend Information
NAPCO has declared no cash dividends during the past two years with respect to
its Common Stock, and the Company does not anticipate paying any cash dividends
in the foreseeable future. Any cash dividends must be approved by the Company's
lenders.
Equity Compensation Plan Information as of June 30, 2010
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES WEIGHTED AVERAGE FOR FUTURE ISSUANCE
TO BE ISSUED UPON EXERCISE PRICE OF (EXCLUDING
EXERCISE OF OUTSTANDING SECURITIES REFLECTED
OUTSTANDING OPTIONS OPTIONS IN COLUMN (a)
PLAN CATEGORY (a) (b) (c)
Equity compensation plans approved 1,410,140 $ 2.99 388,000
by security holders:
Equity compensation plans not __ __ __
approved by security holders:
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Total 1,410,140 $ 2.99 388,000
=================================================================
ITEM 6: SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further
information, refer to the audited consolidated financial statements and the
notes thereto beginning on page FS-1 of this report.
Fiscal Year Ended and at June 30
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(In thousands, except share and per share data)
2010(1) 2009(1) 2008 2007(2) 2006(2)(3)
------- ------- ---- ------- ----------
Statement of earnings data:
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Net Sales $67,757 $69,565 $68,367 $66,202 $69,548
Gross Profit 14,522 15,096 20,412 23,998 26,956
Impairment of Goodwill 923 9,686 -- -- --
(Loss) Income from Operations (5,211) (14,917) 3,137 6,501 9,523
Net (Loss) Income (6,500) (13,382) 3,718 4,217 6,119
Cash Flow Data:
Net cash flows provided by (used in) operating activities 5,285 6,792 3,784 (3,674) (168)
Net cash flows used in investing activities (300) (25,229) (1,045) (1,294) (1,679)
Net cash flows (used in) provided by financing activities (3,572) 19,781 (1,722) 3,978 3,407
Per Share Data:
---------------
Net (loss) earnings per common share:
Basic $(.34) $(.70) $.19 $.21 $.31
Diluted $(.34) $(.70) $.19 $.20 $.30
Weighted average common shares outstanding:
Basic 19,096,000 19,096,000 19,263,000 19,961,000 19,785,000
Diluted 19,096,000 19,096,000 19,802,000 20,599,000 20,605,000
Cash Dividends declared per common share (4) $.00 $.00 $.00 $.00 $.00
Balance sheet data (5):
-----------------------
Working capital $3,502 $22,404 $41,293 $40,527 $36,321
Total assets 73,668 81,586 76,723 76,785 71,198
Long-term debt -- 18,749 12,400 10,900 4,700
Stockholders' equity 34,242 40,515 53,542 53,257 50,850
(1) Includes the operations and assets of Marks USA I which was acquired in
August 2008.
(2) Certain expenses in Cost of sales have been reclassified to Selling, general
and administrative expense to conform to the current year's presentation.
(3) Share and per share data have been restated to reflect the effect of a 3:2
stock split effective December 2005 and a 3:2 stock split effective June
2006.
(4) The Company has never paid a dividend on its common stock. It is the policy
of the Board of Directors to retain earnings for use in the Company's
business. Any dividends must be approved by the Company's primary lenders.
(5) Working capital is calculated by deducting Current Liabilities from Current
Assets.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company is a diversified manufacturer of security products, encompassing
intrusion and fire alarms, building access control systems and electronic
locking devices. These products are used for commercial, residential,
institutional, industrial and governmental applications, and are sold worldwide
principally to independent distributors, dealers and installers of security
equipment. International sales accounted for approximately 7% and 10% of our
revenues for the fiscal years ended June 30, 2010 and 2009 respectively.
The Company owns and operates manufacturing facilities in Amityville, New York
and the Dominican Republic. A significant portion of our operating costs are
fixed, and do not fluctuate with changes in production levels or utilization of
our manufacturing capacity. As production levels rise and factory utilization
increases, the fixed costs are spread over increased output, which should
improve profit margins. Conversely, when production levels decline our fixed
costs are spread over reduced levels, thereby decreasing margins.
On August 18, 2008, the Company acquired substantially all of the assets and
business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the repayment
of $1 million of bank debt and the assumption of certain current liabilities.
The Company also entered into a lease for the building where Marks has
maintained its operations. The lease provided for an annual base rent of
$288,750 plus maintenance and real estate taxes and expired in August 2009. In
March 2009, the Company began to move the Marks operations into its existing
facilities. The Company completed the majority of this consolidation by August
31, 2009. The Marks business involves the manufacturing and distribution of
door-locking devices.
The security products market is characterized by constant incremental innovation
in product design and manufacturing technologies. Generally, the Company devotes
7-8% of revenues to research and development (R&D) on an annual basis. Products
resulting from our R&D investments in fiscal 2010 did not contribute materially
to revenue during this fiscal year, but should benefit the Company over future
years. In general, the new products introduced by the Company are initially
shipped in limited quantities, and increase over time. Prices and manufacturing
costs tend to decline over time as products and technologies mature.
Economic and Other Factors
Since October 2008, the U.S. and international economies have experienced a
significant downturn and continue to be very volatile. In the event that the
downturn in the U.S. or international financial markets is prolonged, our
revenue, profit and cashflow levels could be materially adversely affected in
future periods. This could affect our ability to maintain adequate financing. If
the current worldwide economic downturn continues, many of our current or
potential future customers may experience serious cash flow problems and as a
result may, modify, delay or cancel purchases of our products. Additionally,
customers may not be able to pay, or may delay payment of, accounts receivable
that are owed to us. Furthermore, the current downturn and market instability
makes it difficult for us to forecast our revenues.
Seasonality
The Company's fiscal year begins on July 1 and ends on June 30. Historically,
the end users of Napco's products want to install its products prior to the
summer; therefore sales of its products historically peak in the period April 1
through June 30, the Company's fiscal fourth quarter, and are reduced in the
period July 1 through September 30, the Company's fiscal first quarter. To a
lesser degree, sales in Europe are also adversely impacted in the Company's
first fiscal quarter because of European vacation patterns, i.e., many
distributors and installers are closed for the month of August. In addition,
demand is affected by the housing and construction markets. The severity of the
current economic downturn may also affect this trend.
Restructuring Costs
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. We expect
these restructuring initiatives to cost between $1,200,000 and $1,500,000. The
majority of these initiatives have been completed by June 30, 2010, while
certain remaining Production-related actions are expected to be completed by
December 31, 2010. Accordingly, the Company recognized restructuring costs of
$1,274,000 in the fiscal year ended June 30, 2009. Of this amount, $210,000
relates to Workforce Reductions communicated in March 2009 and $1,064,000 to
Business Exits and related costs associated with inventory and lease impairments
related to the closure of the Marks, European and Middle East facilities. As of
June 30, 2010, $1,138,000 of the $1,274,000 in restructuring costs has been
incurred and $136,000 remains in accrued expenses.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventories; intangible
assets; goodwill; and income taxes.
Revenue Recognition
Revenues from merchandise sales are recorded at the time the product is shipped
or delivered to the customer pursuant to the terms of sale. We report our sales
levels on a net sales basis, which is computed by deducting from gross sales the
amount of actual returns received and an amount established for anticipated
returns and other allowances.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales and income. This accrual is calculated based on a
history of gross sales and actual sales returns, as well as management's
estimate of anticipated returns and allowances. As a percentage of gross sales,
sales returns, rebates and allowances were 6% and 9% for fiscal years ended June
30, 2010 and 2009, respectively.
Concentration of Credit Risk
An entity is more vulnerable to concentrations of credit risk if it is exposed
to risk of loss greater than it would have had if it mitigated its risk through
diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
The Company had two customers with accounts receivable balances that aggregated
21% and 24% of the Company's accounts receivable at June 30, 2010 and 2009,
respectively. Sales to neither of these customers exceeded 10% of net sales in
any of the past three fiscal years.
In the ordinary course of business, we have established a reserve for doubtful
accounts and customer deductions in the amount of $505,000 and $400,000 as of
June 30, 2010 and 2009, respectively. Our reserve for doubtful accounts is a
subjective critical estimate that has a direct impact on reported net earnings.
This reserve is based upon the evaluation of accounts receivable agings,
specific exposures and historical trends.
Inventories
Inventories are valued at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. The reported net
value of inventory includes finished saleable products, work-in-process and raw
materials that will be sold or used in future periods. Inventory costs include
raw materials, direct labor and overhead. The Company's overhead expenses are
applied based, in part, upon estimates of the proportion of those expenses that
are related to procuring and storing raw materials as compared to the
manufacture and assembly of finished products. These proportions, the method of
their application, and the resulting overhead included in ending inventory, are
based in part on subjective estimates and approximations and actual results
could differ from those estimates.
In addition, the Company records an inventory obsolescence reserve, which
represents the difference between the cost of the inventory and its estimated
market value, based on various product sales projections. This reserve is
calculated using an estimated obsolescence percentage applied to the inventory
based on age, historical trends, requirements to support forecasted sales, and
the ability to find alternate applications of its raw materials and to convert
finished product into alternate versions of the same product to better match
customer demand. There is inherent professional judgment and subjectivity made
by both production and engineering members of management in determining the
estimated obsolescence percentage. For the fiscal years 2010 and 2009, net
charges and balances in these reserves amounted to $394,000 and $1,841,000; and
$247,000 and $1,447,000, respectively. In addition, and as necessary, the
Company may establish specific reserves for future known or anticipated events.
The Company also regularly reviews the period over which its inventories will be
converted to sales. Any inventories expected to convert to sales beyond 12
months from the balance sheet date are classified as non-current.
Goodwill and Other Intangible Assets
The Company evaluates its Goodwill for impairment at least on an annual basis.
Those intangible assets that are classified as goodwill or as other intangibles
with indefinite lives are not amortized.
Impairment testing is performed in two steps: (i) the Company determines
impairment by comparing the fair value of a reporting unit with its carrying
value, and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. At the conclusion of fiscal 2009, the Company
performed its annual impairment evaluation required by this standard and
determined that the goodwill relating to its Alarm Lock and Continental
subsidiaries was impaired. Accordingly, the Company recorded an impairment
charge of $9,686,000 in the fourth quarter of fiscal 2009 which represents the
unamortized balance of this Goodwill. At the conclusion of the quarter ended
March 31, 2010, the Company performed an interim impairment evaluation and
determined that its remaining goodwill, relating to its Marks subsidiary, was
impaired. Accordingly, in the quarter ended March 31, 2010 the Company recorded
an impairment charge of $923,000 which represented the unamortized balance of
this Goodwill.
The Company's acquisition of substantially all of the assets and certain
liabilities of Marks included intangible assets with a fair value of $16,440,000
on the date of acquisition. The Company recorded the estimated value of
$9,800,000 related to the customer relationships, $340,000 related to a
non-compete agreement and $6,300,000 related to the Marks trade name within
intangible assets. The remaining excess of the purchase price of $923,000 was
assigned to Goodwill. The intangible assets will be amortized over their
estimated useful lives of twenty years (customer relationships) and seven years
(non-compete agreement). The Marks USA trade name was deemed to have an
indefinite life. The goodwill recorded as a result of the acquisition is
deductible for Federal and New York State income tax purposes over a period of
15 years.
Income Taxes
The Company adopted the provisions of ASC 740-10 as of July 1, 2007. The Company
has identified its U.S. Federal income tax return and its State return in New
York as its major tax jurisdictions. As a result the Company increased its
accrued income tax liability by $715,000, from $1,836,000 to $2,551,000, to
provide for additional reserves for uncertain income tax positions for U.S.
Federal and State income tax purposes. The fiscal 2006 and forward years are
still open for examination. The increase in the accrued income tax liability of
$715,000 was offset in part by a $230,000 increase to a deferred income tax
asset, resulting in a net reduction to retained earnings of $485,000
(representing the cumulative effect of adopting ASC 740-10).
During the year ending June 30, 2010 the Company decreased its reserve for
uncertain income tax positions by $83,000. As of June 30, 2010 the Company has a
long-term accrued income tax liability of $93,000. 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, 2010, the Company had accrued
interest totaling $23,000 and $77,000 of unrecognized net tax benefits
(including the related accrued interest and net of the related deferred income
tax benefit of $39,000) that, if recognized, would favorably affect the
company's effective income tax rate in any future period.
For the year ended June 30, 2010, the Company recognized a net benefit to income
tax expense of $64,000 ($83,000 liability reversal including interest, less the
related $28,000 reversal of deferred tax asset, plus current year interest
accrual on other reserves of $9,000).
A reconciliation of the U.S. Federal statutory income tax rate to our actual
effective tax rate on earnings before income taxes for fiscal 2010 is as follows
(dollars in thousands):
% of Pre-
Amount tax Income
---------- ------------
Tax at Federal statutory rate $ (2,579) 34.0%
Increases (decreases) in taxes resulting from:
Meals and entertainment 46 (0.6)%
State income taxes, net of Federal income tax
benefit 22 (0.3)%
Foreign source income and taxes 1,456 (19.2)%
Stock based compensation expense 68 (0.9)%
Tax reserve reversal (64) 0.9%
Other, net (33) 0.4%
---------- ------------
Effective tax rate $ (1,084) 14.3%
========== ============
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating activities
during fiscal 2010 were adequate to meet the Company's capital expenditure needs
and debt obligations. The Company's primary internal source of liquidity is the
cash flow generated from operations. The primary source of financing related to
borrowings under an $11,100,000 secured revolving credit facility. As of June
30, 2010 $11,100,000 was outstanding under this revolving line of credit. The
Company expects that cash on hand and cash generated from operations will be
adequate to meet its short-term liquidity requirements. As of June 30, 2010, the
Company's unused sources of funds consisted principally of $5,522,000 in cash.
The Company plans to utilize $1,786,000 of this cash to pre-pay two payments on
its term loan as described below.
On August 18, 2008, the Company and its banks amended and restated the existing
$25,000,000 revolving credit agreement. The amended facility was $50,000,000 and
provides for a $25,000,000 revolving credit line as well as a $25,000,000 term
portion of which the entire $25,000,000 was utilized to finance the asset
purchase agreement as described in Note 5 of the accompanying consolidated
financial statements. The amended revolving credit agreement and term loan was
amended in June 2009 to $11,100,000 and is secured by the accounts receivable, a
portion of inventory, the Company's headquarters building in Amityville, New
York, certain other assets of Napco Security Technologies, Inc. and the common
stock of three of the Company's subsidiaries. As of June 30, 2010 the Company
was not in compliance with several of the financial covenants in the existing
facilities for which it anticipates receiving the appropriate waivers from its
banks as part of therestatement of these facilities as described below.
The Company and its banks have been in negotiations to amend and restate the
existing terms of the credit facilities and term loan. As of the date ofthis
report, the Company and its banks have agreed in principle on all the key terms
and modifications to the existing revolving credit agreement and term loan.
Because the closing and final waivers will occur after the filing date of this
Form 10-K, the Company has classified this debt as current in the accompanying
financial statements. Upon completion of the closing this debt will be
reclassified as long-term in future filings. While the Company anticipates
consummating these restated facilities, there can be no assurances that it will
do so. The agreement would provide for an accelerated payment, made at closing,
consisting of the December 2010 and March 2011 installments (totaling
$1,786,000) and restructured financial covenants. The restated agreements also
would contain various modifications and conditions and bear interest based on
either the Prime Rate or an alternate rate based on LIBOR as described in the
agreement. The termination dates of the agreements would remain unchanged. The
revolving credit agreement terminates in August 2012 and any outstanding
borrowings are to be repaid or refinanced on or before that time. As of June 30,
2010 there was $11,100,000 outstanding under the revolving credit facility with
an interest rate of 7.25% and $18,749,000 outstanding under the term loan with
an interest rate of 7.25%. The term loan is being repaid in 19 quarterly
installments of $893,000 each,which commenced in December 2008, and a final
payment of $8,033,000 due in August 2013.
The agreements contain various restrictions and covenants including, among
others, restrictions on payment of dividends, restrictions on borrowings and
compliance with certain financial ratios, as defined in the restated agreement.
Management believes that current working capital and cash flows from operations
will be sufficient to fund the Company's operations through at least the first
quarter of fiscal 2012.
The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:
As of June 30,
----------------------------
2010 2009
---- ----
Current Ratio 1.1 to 1 2.0 to 1
Sales to Receivables 3.8 to 1 3.5 to 1
Total debt to equity .87 to 1 .82 to 1
As of June 30, 2010, the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders issued in the
normal course of business. On April 26, 1993, the Company's foreign subsidiary
entered into a 99-year land lease of approximately 4 acres of land in the
Dominican Republic, at an annual cost of approximately $288,000.
On August 18, 2008, the Company, pursuant to an Asset Purchase Agreement with
Marks, acquired substantially all of the assets and business for $25 million,
the repayment of $1 million of bank debt and the assumption of current
liabilities. The Marks business involves the manufacturing and distribution of
door-locking devices. The Company funded the acquisition with a term loan from
its lenders as described above.
The acquisition described above has been accounted for as a purchase and was
valued based on management's estimate of the fair value of the assets acquired
and liabilities assumed. The estimates of fair value were subject to adjustment
for a period of up to one year from the date of acquisition, and such
adjustments were not material. Costs in excess of identifiable net assets
acquired were allocated to goodwill in the first quarter of fiscal 2009. This
Goodwill was written off in the quarter ended March 31, 2010.
Working Capital. Working capital decreased by $18,902,000 to $3,502,000 at June
30, 2010 from $22,404,000 at June 30, 2009. The decrease in working capital was
primarily the result of the classification of the Company's outstanding debt
under its term loan as a current liability, as discussed above. The outstanding
debt under the term loan was classified as a non-current liability as June 30,
2009. Working capital is calculated by deducting Current Liabilities from
Current Assets.
Accounts Receivable. Accounts Receivable decreased by $2,259,000 to $17,740,000
at June 30, 2010 from $19,999,000 at June 30, 2009. This decrease resulted
primarily from the Company granting shorter payment terms to its customers and,
consequently, faster collections of Accounts Receivables.
Inventories. Inventories decreased by $4,752,000 to $24,082,000 at June 30, 2010
as compared to $28,834,000 at June 30, 2009. The decrease in inventory levels
was primarily the result of the Company utilizing existing inventory and
scheduling its component purchases and production of finished products more
closely with sales levels.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased by $1,888,000 to $9,325,000 as of June 30, 2010 as compared to
$7,437,000 at June 30, 2009. This increase is primarily due to increased
purchases of raw materials during the quarter ended June 30, 2010 as compared to
June 30, 2009, which was primarily the result of the higher sales levels in the
quarter ended June 30, 2010 as compared to the same quarter a year ago.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes the Company's contractual obligations by fiscal
year:
Payments due by period
--------------------------------------------------------------
Less than 1 More than 5
Contractual obligations Total year 1-3 years 3-5 years years
-------------------------- ----------- ----------- ----------- ---------- -----------
Long-term debt obligations $29,849,000 $3,572,000 $18,244,000 $8,033,000 $ --
Land lease (82 years
remaining) (1) 23,616,000 288,000 576,000 576,000 22,176,000
Operating lease obligations 96,000 58,000 38,000 -- --
Other long-term obligations
(employment agreements) (1) 1,932,000 1,140,000 750,000 42,000 --
--------------------------------------------------------------
Total $55,493,000 $5,058,000 $19,608,000 $8,651,000 $22,176,000
==============================================================
(1) See footnote 12 to the accompanying consolidated financial statements.
Results of Operations
Fiscal 2010 Compared to Fiscal 2009
Fiscal year ended June 30,
--------------------------
% Increase/
2010 2009 (decrease)
---- ---- -----------
Net sales $ 67,757 $ 69,565 (2.6)%
Restructuring costs included in
cost of sales -- 1,110 --
Gross profit 14,522 15,096 (3.8)%
Gross profit as a % of net sales 21.4% 21.7% (0.3)%
Selling, general and
administrative 18,810 20,163 (6.8)%
Impairment of goodwill 923 9,686 (90.5)%
Other restructuring costs -- 164 --
(Loss) income from operations (5,211) (14,917) 65.1%
Interest expense, net 2,366 1,637 44.5%
Other expense, net 7 127 (94.5)%
(Benefit)for income taxes (1,084) (3,299) 67.1%
Net (loss) income (6,500) (13,382) 51.4%
Net sales in fiscal 2010 decreased by 2.6% to $67,757,000 from $69,565,000 in
fiscal 2009. The decrease in sales was primarily the result of a decrease in
products specific to the Company's Middle East operation ($1,867,000). The
Company's sales continued to be adversely affected by the worldwide economic
downturn.
The Company's gross profit decreased $574,000 to $14,522,000 or 21.4% of net
sales in fiscal 2009 as compared to $15,096,000 or 21.7% of net sales in fiscal
2009. Gross profit in fiscal 2010 as compared to fiscal 2009 was affected by the
lower sales levels in fiscal 2010 and the restructuring costs charged in fiscal
2009.
Selling, general and administrative expenses as a percentage of net sales
decreased to 27.8% in fiscal 2010 from 29.0% in fiscal 2009. Selling, general
and administrative expenses for fiscal 2010 decreased $1,353,000 to $18,810,000
from $20,163,000 in fiscal 2009. These decreases resulted primarily from the
Company reducing its general payroll and certain selling and marketing expenses
in the second half of fiscal 2009 in reaction to the decline in sales levels
beginning in the third quarter of fiscal 2009. Fiscal 2010 reflects a full year
of these reduced expenses.
Interest expense for fiscal 2010 increased by $729,000 to $2,366,000 from
$1,637,000 for the same period a year ago. The increase in interest expense is
primarily the result of the increase in interest rates charged by the Company's
primary banks as partially offset by the Company's reduction of its outstanding
borrowings under its term loan.
Other expenses decreased $120,000 to $7,000 in fiscal 2010 as compared to
$127,000 in fiscal 2009.
The Company's benefit for income taxes for fiscal 2010 decreased by $2,215,000
to a benefit of $1,084,000 as compared to a benefit of $3,299,000 for the same
period a year ago. The decrease in the benefit for income taxes from fiscal 2009
to fiscal 2010 resulted primarily from the Company recognizing a net tax benefit
to income tax expense of $3,293,000 in fiscal 2009 for an impairment charge to
goodwill in that year.
Net loss for fiscal 2010 decreased by $6,882,000 to $(6,500,000) as compared to
$(13,382,000) in fiscal 2009. This resulted primarily from the impairment charge
to goodwill of $9,686,000 and restructuring costs of 1,274,000 in fiscal 2009,
as partially offset by the reduction of the benefit for income tax of 2,215,000,
all of which are discussed above.
Forward-looking Information
This Annual Report on Form 10-K and the information incorporated by reference
may include "Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The
Company intends the Forward-Looking Statements to be covered by the Safe Harbor
Provisions for Forward-Looking Statements. All statements regarding the
Company's expected financial position and operating results, its business
strategy, its financing plans and the outcome of any contingencies are
Forward-Looking Statements. The Forward-Looking Statements are based on current
estimates and projections about our industry and our business. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such Forward-Looking Statements. The Forward-Looking Statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by any Forward-Looking Statements. For example,
the Company is highly dependent on its Chief Executive Officer for strategic
planning. If he is unable to perform his services for any significant period of
time, the Company's ability to grow could be adversely affected. In addition,
factors that could cause actual results to differ materially from the
Forward-Looking Statements include, but are not limited to, the ability to
maintain adequate financing to fund operations, adverse tax consequences of
offshore operations, significant fluctuations in the exchange rate between the
Dominican Peso and the U.S. Dollar, distribution problems, unforeseen
environmental liabilities, the uncertain economic, military and political
conditions in the world and the successful integration of Marks into our
existing operations. 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 debt (consisting of a revolving
credit facility and a term loan) that provides for interest at a spread above
the prime rate. The Company is affected by market risk exposure primarily
through the effect of changes in interest rates on amounts payable by the
Company under this credit facility. At June 30, 2010, an aggregate principal
amount of approximately $29,849,000 was outstanding under the Company's credit
facility with a weighted average interest rate of approximately 7.25%. If
principal amounts outstanding under the Company's credit facility remained at
this year-end level for an entire year and the prime rate increased or
decreased, respectively, by 1% the Company would pay or save, respectively, an
additional $298,000 in interest that year.
A significant number of foreign sales transactions by the Company are
denominated in U.S. dollars. As such, the Company has shifted foreign currency
exposure onto many of its foreign customers. As a result, if exchange rates
move against foreign customers, the Company could experience difficulty
collecting unsecured accounts receivable, the cancellation of existing orders or
the loss of future orders. The foregoing could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
the Company transacts certain sales in Europe in British Pounds Sterling,
therefore exposing itself to a certain amount of foreign currency risk.
Management believes that the amount of this exposure is immaterial. We are also
exposed to foreign currency risk relative to expenses incurred in Dominican
Pesos ("RD$"), the local currency of the Company's production facility in the
Dominican Republic. The result of a 10% strengthening in the U.S. dollar to our
RD$ expenses would result in an annual decrease in income from operations of
approximately $300,000.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a. Financial Statements: Financial statements required pursuant to this Item
are presented on pages FS-1 through FS-25 of this report as follows:
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
Page
----
Report of Independent Registered Public Accounting Firm FS-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2010 and 2009 FS-2
Consolidated Statements of Operations for the Fiscal Years Ended
June 30, 2010 and 2009 FS-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended June 30, 2010 and 2009 FS-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2010 and 2009 FS-6
Notes to Consolidated Financial Statements FS-7
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Napco Security Technologies, Inc. and Subsidiaries
Amityville, New York
We have audited the accompanying consolidated balance sheets of Napco Security
Technologies, Inc. and Subsidiaries (the "Company") as of June 30, 2010 and
2009, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Napco Security
Technologies, Inc. and Subsidiaries as of June 30, 2010 and 2009 and the
consolidated results of its operations and its consolidated cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
October 14, 2010
FS-1
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2010 and 2009
(In Thousands)
ASSETS
2010 2009
------- -------
CURRENT ASSETS
Cash and cash equivalents $ 5,522 $ 4,109
Accounts receivable, net of reserves 17,740 19,999
Inventories 17,370 18,885
Prepaid expenses and other current assets 947 796
Income tax receivable 785 192
Deferred income taxes 448 532
------- -------
Total Current Assets 42,812 44,513
Inventories - non-current, net 6,712 9,949
Deferred income taxes 1,842 1,585
Property, plant and equipment, net 8,106 9,070
Intangible assets, net 13,870 15,209
Goodwill, net - 923
Other assets 326 337
------- -------
TOTAL ASSETS $73,668 $81,586
======= =======
See accompanying notes to consolidated financial statements.
FS-2
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2010 and 2009
(In Thousands, Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2010 2009
-------- --------
CURRENT LIABILITIES
Loan payable (see discussion below and Note 7) $ 29,849 $ 14,672
Accounts payable 5,320 4,049
Accrued expenses 2,242 1,475
Accrued salaries and wages 1,899 1,913
-------- --------
Total Current Liabilities 39,310 22,109
Long-term debt, net of current maturities 26,277 18,749
Accrued income taxes 116 213
-------- --------
Total Liabilities 39,426 41,071
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, par value $0.01 per share; 40,000,000 shares authorized;
20,095,713 shares issued; and 19,095,713 shares outstanding 201 201
Additional paid-in capital 14,006 13,779
Retained earnings 25,650 32,150
-------- --------
39,857 46,130
Less: Treasury Stock, at cost (1,000,000 shares) (5,615) (5,615)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 34,242 40,515
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,668 $ 81,586
======== ========
* The Company and its banks have been in negotiations to amend and restate the
existing terms of the credit facilities and term loan. As of October 14, 2010,
the Company and its banks have agreed in principle on all the key terms and
modifications to the existing revolving credit agreement and term loan and are
in the process of scheduling a closing date. Because the closing and final
waivers will occur after the filing date of this Form 10-K, the Company has
classified this debt as current in the accompanying financial statements. Upon
completion of the closing this debt will be reclassified as long-term in future
filings. See Footnote 7 for further disclosure.
See accompanying notes to consolidated financial statements.
FS-3
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2010 and 2009
(In Thousands, Except Share and Per Share Data)
2010 2009
------------ ------------
Net sales $ 67,757 $ 69,565
Cost of sales 53,235 53,359
Restructuring costs - 1,110
------------ ------------
Gross Profit 14,522 15,096
Selling, general, and administrative expenses 18,810 20,163
Impairment of goodwill 923 9,686
Restructuring costs - 164
------------ ------------
Operating Loss (5,211) (14,917)
Other expense:
Interest expense, net (2,366) (1,637)
Other, net (7) (127)
------------ ------------
(2,373) (1,764)
------------ ------------
Loss before Benefit for Income Taxes (7,584) (16,681)
Benefit for income taxes (1,084) (3,299)
------------ ------------
Net Loss $ (6,500) $ (13,382)
============ ============
Loss per share:
Basic $ (0.34) $ (0.70)
Diluted $ (0.34) $ (0.70)
Weighted average number of shares outstanding:
Basic 19,096,000 19,096,000
Diluted 19,096,000 19,096,000
See accompanying notes to consolidated financial statements.
FS-4
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2010 and 2009
(In Thousands, Except Share Data)
Common Stock Treasury Stock
----------------------- -----------------------
Number of Additional
Shares Paid-in Number of Retained
Issued Amount Capital Shares Amount Earnings Total
------------ -------- --------------- ----------- -------- ---------- ---------
BALANCE June 30, 2008 20,092,473 $ 201 $ 13,424 (1,000,000) $ (5,615) $ 45,532 $ 53,542
Exercise of employee
stock options 3,240 - 6 - - - 6
Stock-based compensation
expense - - 349 - - - 349
Net loss - - - - - (13,382) (13,382)
------------ -------- --------------- ---------- -------- ---------- ---------
BALANCE June 30, 2009 20,095,713 201 13,779 (1,000,000) (5,615) 32,150 40,515
Stock-based compensation
expense - - 227 - - - 227
Net loss - - - - - (6,500) (6,500)
------------ -------- --------------- ---------- -------- ---------- ---------
BALANCE June 30, 2010 20,095,713 $ 201 $ 14,006 (1,000,000) $ (5,615) $ 25,650 $ 34,242
============ ======== =============== ========== ======== ========== =========
See accompanying notes to consolidated financial statements.
FS-5
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2010 and 2009 (In Thousands)
2010 2009
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,500) $(13,382)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,658 2,727
Impairment of goodwill 923 9,686
Charge to obsolescence reserve 394 14
Provision for doubtful accounts 105 34
Deferred income taxes (173) (2,955)
Non-cash stock based compensation expense 227 349
Change in minority interest - (147)
Changes in operating assets and liabilities:
Accounts receivable 2,154 7,626
Inventories 4,358 5,164
Prepaid expenses and other current assets (151) 437
Income tax receivable (593) (192)
Other assets (44) 79
Accounts payable, accrued expenses, accrued salaries and
wages, accrued income taxes 1,927 (2,648)
-------- --------
Net Cash Provided by Operating Activities 5,285 6,792
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in business acquisition, net of cash acquired of $520 - (24,581)
Purchases of property, plant, and equipment (300) (648)
-------- --------
Net Cash Used in Investing Activities (300) (25,229)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from acquisition financing - 25,000
Principal payments on debt (3,572) (7,179)
Proceeds from long-term debt - 2,200
Proceeds from exercise of employee stock options - 6
Cash paid for deferred financing costs - (246)
-------- --------
Net Cash (Used in) Provided by Financing Activities (3,572) 19,781
-------- --------
Net Increase in Cash and Cash Equivalents 1,413 1,344
CASH AND CASH EQUIVALENTS - Beginning 4,109 2,765
-------- --------
CASH AND CASH EQUIVALENTS - Ending $ 5,522 $ 4,109
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net $ 2,244 $ 1,483
======== ========
Income taxes paid $ - $ -
======== ========
See accompanying notes to consolidated financial statements.
FS-6
NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
--------------------------------------------------------------------------
Nature of Business
Napco Security Technologies, Inc. and Subsidiaries (the "Company") is a
diversified manufacturer of security products, encompassing intrusion and fire
alarms, building access control systems and electronic locking devices. These
products are used for commercial, residential, institutional, industrial and
governmental applications, and are sold worldwide principally to independent
distributors, dealers and installers of security equipment.
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security
Technologies, Inc. and all of its wholly-owned subsidiaries, including those of
Marks USA I, LLC ("Marks"), a subsidiary which acquired substantially all of the
assets and certain liabilities of G. Marks Hardware, Inc. acquired on August 18,
2008. All inter-company balances and transactions have been eliminated in
consolidation. The Company has evaluated events subsequent to June 30, 2010
through the filing date of this report for potential recognition or disclosure
in these consolidated financial statements.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent gains and losses at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Critical estimates include management's judgments
associated with revenue recognition, concentration of credit risk, inventories,
goodwill and income taxes. Actual results could differ from those estimates.
Fourth Quarter Adjustments
In the fourth quarter of fiscal 2010 the Company recorded adjustments to
increase its reserve for obsolescence in its ending inventory. This adjustment
is based on the Company's estimate of the difference between the cost of the
inventory and its estimated market value, based on various product sales
projections.
Cash and Cash Equivalents
Cash and cash equivalents include approximately $3,916,000 and $2,010,000 of
short-term time deposits at June 30, 2010 and 2009, respectively. The Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The Company has cash balances in banks in
excess of the maximum amount insured by the FDIC and other international
agencies as of June 30, 2010 and 2009.
Accounts Receivable
Accounts receivable is stated net of the reserves for doubtful accounts of
$505,000 and $400,000 and for returns and other allowances of $1,180,000 and
$966,000 as of June 30, 2010 and June 30, 2009, respectively. Our reserves for
doubtful accounts and for returns and other allowances are subjective critical
estimates that have a direct impact on reported net earnings. These reserves are
based upon the evaluation of accounts receivable agings, specific exposures,
sales levels and historical trends.
FS-7
Inventories
Inventories are valued at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. The reported net
value of inventory includes finished saleable products, work-in-process and raw
materials that will be sold or used in future periods. Inventory costs include
raw materials, direct labor and overhead. The Company's overhead expenses are
applied based, in part, upon estimates of the proportion of those expenses that
are related to procuring and storing raw materials as compared to the
manufacture and assembly of finished products. These proportions, the method of
their application, and the resulting overhead included in ending inventory, are
based in part on subjective estimates and actual results could differ from those
estimates.
In addition, the Company records an inventory obsolescence reserve, which
represents the difference between the cost of the inventory and its estimated
market value, based on various product sales projections. This reserve is
calculated using an estimated obsolescence percentage applied to the inventory
based on age, historical trends, requirements to support forecasted sales, and
the ability to find alternate applications of its raw materials and to convert
finished product into alternate versions of the same product to better match
customer demand. There is inherent professional judgment and subjectivity made
by both production and engineering members of management in determining the
estimated obsolescence percentage. For the fiscal years 2010 and 2009, charges
and balances in these reserves amounted to $394,000 and $1,540,000; and $247,000
and $1,447,000, respectively. In addition, and as necessary, the Company may
establish specific reserves for future known or anticipated events.
The Company also regularly reviews the period over which its inventories will be
converted to sales. Any inventories expected to convert to sales beyond 12
months from the balance sheet date are classified as non-current.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to expense as
incurred; costs of major renewals and improvements are capitalized. At the time
property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and accumulated
depreciation accounts and the profit or loss on such disposition is reflected in
income.
Depreciation is recorded over the estimated service lives of the related assets
using primarily the straight-line method. Amortization of leasehold
improvements is calculated by using the straight-line method over the estimated
useful life of the asset or lease term, whichever is shorter.
Goodwill
The Company evaluates its Goodwill for impairment at least on an annual basis.
Those intangible assets that are classified as goodwill or as other intangibles
with indefinite lives are not amortized. Impairment testing is performed in two
steps: (i) the Company determines impairment by comparing the fair value of a
reporting unit with its carrying value, and (ii) if there is an impairment, the
Company measures the amount of impairment loss by comparing the implied fair
value of goodwill with the carrying amount of that goodwill. At the conclusion
of fiscal 2009, the Company performed its annual impairment evaluation required
by this standard and determined that the goodwill relating to its Alarm Lock and
Continental subsidiaries was impaired. Accordingly, the Company recorded an
impairment charge of $9,686,000 in the fourth quarter of fiscal 2009 which
represents the unamortized balance of this Goodwill. At the conclusion of the
quarter ended March 31, 2010, the Company performed an interim impairment
evaluation and determined that its remaining goodwill, relating to its Marks
subsidiary, was impaired. Accordingly, in the quarter ended March 31, 2010 the
Company recorded an impairment charge of $923,000 which represented the
unamortized balance of this Goodwill.
Intangible Assets
Certain intangible assets determined to have indefinite lives are not amortized
but are tested for impairment at least annually. Intangible assets with definite
lives are amortized over their useful lives and are reviewed for impairment at
least annually at the Company's fiscal year end of June 30 or more often
whenever there is an indication that the carrying amount may not be recovered.
The Company's acquisition of substantially all of the assets and certain
liabilities of Marks included intangible assets with a fair value of $16,440,000
on the date of acquisition. The Company recorded the estimated value of
$9,800,000 related to the customer relationships, $340,000 related to a
non-compete agreement and $6,300,000 related to the Marks trade name within
intangible assets. The intangible assets are amortized over their estimated
useful lives of twenty years (customer relationships) and seven years
(non-compete agreement). The Marks USA trade name was deemed to have an
indefinite life. The goodwill recorded as a result of the acquisition is
deductible for Federal and New York State income tax purposes over a period of
15 years.
Changes in intangible assets are as follows (in thousands):
June 30, 2010 June 30, 2009
------------------------------------- -----------------------------------------
Accumulated Net book Accumulated Net book
Cost amortization value Cost amortization value
------------------------------------- -----------------------------------------
Other intangible assets:
Customer relationships $ 9,800 $ (2,479) $ 7,321 $ 9,800 $ (1,189) $ 8,611
Non-compete agreement 340 (91) 249 340 (42) 298
Trademark 6,300 - 6,300 6,300 - 6,300
------------------------------------- -----------------------------------------
$ 16,440 $ (2,570) $ 13,870 $ 16,440 $ (1,231) $ 15,209
===================================== =========================================
Amortization expense for intangible assets subject to amortization was
approximately $1,339,000 and $1,231,000 for the years ended June 30, 2010 and
2009, respectively. Amortization expense for each of the next five years is
estimated to be as follows: 2011 - $1,154,000; 2012 - $1,065,000; 2013 -
$917,000; and 2014 - $781,000 and 2015 - $667,000. The weighted average
amortization period for intangible assets was 17.7 years and 18.7 years at June
30, 2010 and 2009, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets in question may
not be recoverable. An impairment would be recorded in circumstances where
undiscounted cash flows expected to be generated by an asset are less than the
carrying value of that asset.
Revenue Recognition
The Company recognizes revenue when the following criteria are met: (i)
persuasive evidence of an agreement exists, (ii) there is a fixed and
determinable price for the Company's product, (iii) shipment and passage of
title occurs, and (iv) collectibility is reasonably assured. Revenues from
merchandise sales are recorded at the time the product is shipped or delivered
to the customer pursuant to the terms of the sale. The Company reports its
sales levels on a net sales basis, with net sales being computed by deducting
from gross sales the amount of actual sales returns and other allowances and the
amount of reserves established for anticipated sales returns and other
allowances.
Sales Returns and Other Allowances
The Company analyzes sales returns and is able to make reasonable and reliable
estimates of product returns based on the Company's past history. Estimates for
sales returns are based on several factors including actual returns and based on
expected return data communicated to it by its customers. Accordingly, the
Company believes that its historical returns analysis is an accurate basis for
its allowance for sales returns. Actual results could differ from those
estimates.
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and
Administrative" expenses in the consolidated statements of operations and are
expensed as incurred. Advertising expense for the fiscal years ended June 30,
2010 and 2009 was $681,000 and $1,038,000, respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged to expense in
the year incurred. Company-sponsored research and development costs of
$4,922,000 and $5,116,000 were charged to expense for the fiscal years ended
June 30, 2010 and 2009, respectively, and are included in "Cost of Sales" in the
consolidated statements of operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred income tax
expense represents the change during the period in the deferred tax assets and
deferred tax liabilities. The components of the deferred tax assets and
liabilities are individually classified as current and non-current based on
their characteristics. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The Company measures and
recognizes the tax implications of positions taken or expected to be taken in
its tax returns on an ongoing basis.
Earnings Per Share
Basic net loss per common share (Basic EPS) is computed by dividing net loss by
the weighted average number of common shares outstanding. Diluted net income
per common share (Diluted EPS) is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
and convertible securities then outstanding.
The following provides a reconciliation of information used in calculating the
per share amounts for the fiscal years ended June 30 (in thousands, except per
share data):
Net Loss Weighted Average Shares Net Loss per Share
------------------------- ------------------------- -----------------------
2010 2009 2010 2009 2010 2009
---------- ----------- ---------- ----------- ---------- ---------
Basic EPS $ (6,500) $ (13,382) 19,096 19,096 $ (0.34) $ (0.70)
Effect of Dilutive
Securities:
Stock Options -- -- -- -- -- --
---------- ----------- ---------- ----------- ---------- ---------
Diluted EPS $ (6,500) $ (13,382) 19,096 19,096 $ (0.34) $ (0.70)
========== =========== ========== =========== ========== =========
Options to purchase 1,410,140 and 1,420,240 shares of common stock for the
fiscal years ended June 30, 2010 and 2009, 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 9.
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 $227,000 and $349,000 were recognized for
fiscal years 2010 and 2009, respectively. The effect on both Basic and Diluted
Earnings per share was $0.01 for fiscal year 2010 and $0.02 for fiscal year
2009.
Foreign Currency
All assets and liabilities of foreign subsidiaries are translated into U.S.
Dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
realized and unrealized gains and losses associated with foreign currency
translation, as well as related other comprehensive income, were not material
for the years ended June 30, 2010 and 2009.
Comprehensive Income (Loss)
For the fiscal years ended June 30, 2010 and 2009, the Company's operations did
not give rise to material items includable in comprehensive income (loss), which
were not already included in net income (loss). Accordingly, the Company's
comprehensive income (loss) approximates its net income (loss) 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 13, and no additional segment
data has been presented.
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and includes this
additional information in the notes to the financial statements where the fair
value is different than the book value of those financial instruments. When the
fair value approximates book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At June 30, 2010 and
2009, management of the Company believes the carrying value of all financial
instruments approximated fair value.
Shipping and Handling Revenues and Costs
The Company records the amount billed to customers in net sales ($514,000 and
$488,000 in fiscal years 2010 and 2009, respectively) and classifies the costs
associated with these revenues in cost of sales ($1,010,000 and $716,000 in
fiscal years 2010 and 2009, respectively).
New Accounting Pronouncements
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events ("Topic 855"):
Amendments to Certain Recognition and Disclosure Requirements". The amendments
remove the requirement for an SEC registrant to disclose the date through which
subsequent events were evaluated as this requirement would have potentially
conflicted with SEC reporting requirements. Removal of the disclosure
requirement is not expected to affect the nature or timing of subsequent events
evaluations performed by the Company. This ASU became effective upon issuance.
NOTE 2 - Business and Credit Concentrations
-------------------------------------------
The Company had two customers with accounts receivable balances that aggregated
21% and 24% of the Company's accounts receivable at June 30, 2010 and 2009,
respectively. Sales to neither of these customers exceeded 10% of net sales in
any of the past two years.
NOTE 3 - Inventories
--------------------
Inventories, net of reserves are valued at lower of cost (first-in, first-out
method) or market. The Company regularly reviews parts and finished goods
inventories on hand and, when necessary, records a provision for excess or
obsolete inventories. The Company also regularly reviews the period over which
its inventories will be converted to sales. Any inventories expected to convert
to sales beyond 12 months from the balance sheet date are classified as
non-current.
Inventories, net of reserves consist of the following:
June 30,
--------------------
2010 2009
--------- -------
Component parts $ 15,275 $17,941
Work-in-process 3,474 3,427
Finished product 5,333 7,466
--------- -------
$ 24,082 $28,834
========= =======
Classification of inventories, net of reserves:
Current $ 17,370 $18,885
Non-current 6,712 9,949
--------- -------
$ 24,082 $28,834
========= =======
NOTE 4 - Property, Plant, and Equipment
---------------------------------------
Property, plant and equipment consist of the following:
June 30,
---------------
2010 2009 Useful Life In years
------- ------- ------------------------------------------
(In thousands)
Land $ 904 $ 904 --
Buildings 8,911 8,911 30 to 40
Molds and dies 6,606 6,564 3 to 5
Furniture and fixtures 2,309 2,299 5 to 10
Machinery and equipment 18,119 17,871 7 to 10
Leasehold improvements 372 372 Shorter of the lease term or life of asset
------- -------
37,221 36,921
Less: accumulated depreciation
and amortization 29,115 27,851
------- -------
$ 8,106 $ 9,070
======= =======
Depreciation and amortization expense on property, plant, and equipment was
approximately $1,264,000 and $1,368,000 in fiscal 2010 and 2009, respectively.
NOTE 5 - Acquisition of Business
--------------------------------
On August 18, 2008, the Company acquired substantially all of the assets and
business of Marks for $25.2 million, the repayment of $1 million of bank debt
and the assumption of current liabilities. As such, the operations of Marks have
been included in the Company's Statement of Operations commencing on August 18,
2008. The Marks business involves the manufacturing and distribution of
door-locking devices. The Company completed this acquisition at a price in
excess of the value of the net identifiable assets because it believes that the
combination of the two companies offers the potential for manufacturing and
operational synergies as the Company combines the Marks operations and
production into its own door-locking operations and production structure. The
Company funded the acquisition with a term loan from its lenders as described in
Note 7.
The acquisition described above was accounted for as a purchase and was valued
based on management's estimate of the fair value of the assets acquired and
liabilities assumed. Based on the Company's evaluation, the allocation of the
purchase price for the acquisition was as follows (in thousands):
Assets Acquired:
Cash $ 520
Accounts receivable 1,836
Inventory 6,740
Prepaid expenses and other current assets 111
Property and equipment 801
Goodwill 923
Intangible assets 16,440
-------
27,371
-------
Less: Liabilities Assumed:
Line of credit borrowings outstanding 1,000
Accounts payable 637
Accrued expenses 339
-------
1,976
-------
Total consideration (including acquisition costs of $222) $25,395
=======
The Company recorded the estimated value of $9,800,000 related to the customer
relationships, $340,000 related to a non-compete agreement and $6,300,000
related to the Marks trade name within intangible assets and the excess of the
purchase price over the fair value of the acquired assets of $923,000 was
assigned to Goodwill. The intangible assets will be amortized over their
estimated useful lives of twenty years (customer relationships) and seven years
(non-compete agreement). The weighted average amortization period of these
assets is 19.6 years. The Marks trade name was deemed to have an indefinite
life. The goodwill recorded as a result of the acquisition is deductible for
Federal and New York State income tax purposes over a period of 15 years.
Unaudited pro-forma consolidated financial information is presented below as if
the acquisition had occurred as of the first day of the earliest period
presented. Results have been adjusted to account for: (1) the initial
$25,000,000 cash borrowing and related interest expense under the term loan, (2)
cash used to repay $1,000,000 in assumed bank debt at closing of the purchase
transaction, (3) deferred financing costs and related amortization associated
with the term loan, (4) additional salary and employee stock option expense for
employees not previously included in salary expense, and (5) amortization
expense of acquired intangible assets. The pro-forma information presented below
does not purport to present what actual results would have been if the
acquisition had occurred at the beginning of such periods, nor does the
information project results for any future period. The unaudited pro-forma
consolidated financial information should be read in conjunction with the
historical financial information included in other reports and documents filed
with the United Stated Securities and Exchange Commission.
The unaudited pro-forma consolidated financial information for the fiscal year
ended June 30, 2009 is as follows (in thousands, except share and per share
data):
2009
----------
Pro-forma:
Net sales $ 72,084
Net loss $ (13,288)
Net loss per share:
Basic $ (0.70)
Diluted $ (0.70)
Weighted average number of shares:
Basic 19,096,000
Diluted 19,096,000
NOTE 6 - Income Taxes
---------------------
The Benefit for income taxes is comprised of the following:
For the Years Ended June 30,
------------------------------
2010 2009
------- -------
(In thousands)
Current income taxes:
Federal $ (950) $ (293)
State 34 27
Foreign 5 6
------- -------
(911) (260)
Deferred income tax benefit (173) (3,039)
------- -------
Benefit for income taxes $(1,084) $(3,299)
======= =======
A reconciliation of the U.S. Federal statutory income tax rate to our actual
effective tax rate on earnings before income taxes is as follows (dollars in
thousands):
For the Years Ended June 30,
-----------------------------------------
2010 2009
------------------- -----------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
-------- ------- -------- -------
Tax at Federal statutory rate $(2,579) 34.0% $(5,672) 34.0%
Increases (decreases) in
taxes resulting from:
Meals and entertainment 46 (0.6)% 58 (0.4)%
State income taxes, net of
Federal income tax benefit 22 (0.3)% 18 (0.1)%
Foreign source income and taxes 1,456 (19.2)% 2,224 (13.3)%
Stock based compensation expense 68 (0.9)% 107 (0.6)%
Tax reserve reversal (64) 0.9% (53) 0.3%
Other, net (33) 0.4% 19 (0.1)%
-------- ------- -------- ------
Effective tax rate $(1,084) 14.3% $(3,299) 19.8%
======== ======= ======== ======
Deferred tax assets and deferred tax liabilities at June 30, 2010 and 2009 are
as follows (in thousands):
Current Long-Term
Deferred Tax Assets Deferred Tax Assets
(Liabilities) (Liabilities)
----------------------- --------------------
2010 2009 2010 2009
--------- ---------- --------- ---------
Accounts receivable $ 21 $ 21 $ -- $ --
Inventories 167 212 272 256
Accrued liabilities 260 299 32 36
Stock based compensation expense -- -- 128 119
Goodwill -- -- 2,113 1,897
Property, plant and equipment -- -- (658) (711)
Change in accounting principle
in fiscal 2008 -- -- 39 72
Other deferred tax liabilities -- -- (84) (84)
-------- ----------- ------- ------
448 532 1,842 1,585
Valuation allowance -- -- -- --
-------- ----------- ------- ------
Net deferred taxes $ 448 $ 532 $1,842 $1,585
======== =========== ======= ======
The Company has identified its U.S. Federal income tax return and its State
return in New York as its major tax jurisdictions. As a result the Company
increased its accrued income tax liability by $715,000, from $1,836,000 to
$2,551,000, to provide for additional reserves for uncertain income tax
positions for U.S. Federal and State income tax purposes. Fiscal 2006 and
forward years are still open for examination. The increase in the accrued income
tax liability of $715,000 was offset in part by a $230,000 increase to a
deferred income tax asset, resulting in a net reduction to retained earnings of
$485,000.
During the year ending June 30, 2010 the Company decreased its reserve for
uncertain income tax positions by $83,000. As of June 30, 2010 the Company has a
long-term accrued income tax liability of $93,000. 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, 2010, the Company had accrued
interest totaling $23,000 and $77,000 of unrecognized net tax benefits
(including the related accrued interest and net of the related deferred income
tax benefit of $39,000) that, if recognized, would favorably affect the
company's effective income tax rate in any future period.
For the year ended June 30, 2010, the company recognized a net benefit to income
tax expense of $64,000 ($83,000 liability reversal including interest, less the
related $28,000 reversal of deferred tax asset, plus current year interest
accrual on other reserves of $9,000).
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
Tax Interest Total
--------- ---------- ---------
Balance of gross unrecognized tax benefits as of July 1, 2009 $176,000 $ 37,000 $213,000
Reductions to unrecognized tax benefits as a result of a lapse
of the applicable statute of limitations (83,000) (14,000) (97,000)
--------- ----------- ---------
Balance of gross unrecognized tax benefits as of June 30, 2010 $ 93,000 $ 23,000 $116,000
========= =========== =========
Napco US plans to permanently reinvest a substantial portion of its foreign
earnings and as such has not provided US corporate taxes on the permanently
reinvested earnings. As of June 30, 2010, the Company had no undistributed
earnings of foreign subsidiaries.
NOTE 7 - Long-Term Debt
-----------------------
As of June 30, 2010, debt consisted of a revolving credit loan facility of
$11,100,000 with outstanding borrowings of $11,100,000 at June 30, 2010 and at
June 30, 2009.
On August 18, 2008, the Company and its banks amended and restated the existing
$25,000,000 revolving credit agreement. The amended facility was $50,000,000 and
provides for a $25,000,000 revolving credit line as well as a $25,000,000 term
portion of which the entire $25,000,000 was utilized to finance the asset
purchase agreement as described in Note 5 of the accompanying consolidated
financialstatements. The amended revolving credit agreement and term loan was
amended in June 2009 to $11,100,000 and is secured by the accounts receivable, a
portion of inventory, the Company's headquarters building in Amityville, New
York, certain other assets of Napco Security Technologies, Inc. and the common
stock of three of the Company's subsidiaries. As of June 30, 2010 and certain
quarters preceding as previously disclosed, the Company was not in compliance
with several of the financial covenants in the existing facilities for which it
anticipates receiving the appropriate waivers from its banks as part of the
restatement of these facilities as further described below.
The Company and its banks have been in negotiations to amend and restate the
existing terms of the credit facilities and term loan. As of the date of the
issuance of these financial statements, the Company and its banks have agreed in
principle on all the key terms and modifications to the existing revolving
credit agreement and term loan. Some of the key terms that have been agreed to
by both parties include anaccelerated payment of approximately $1,786,000 to be
made at closing, consisting of the December 2010 and March 2011 installments,
and restructuring of the financial covenants to better reflect the Company's
current financial condition. The Company anticipates receiving appropriate
waivers from the banks in connection with its non compliance at June 30, 2010
and for prior quarters. The restated agreement also provides for interest based
on either the Prime Rate or an alternate rate based on LIBOR and changes the
margins associated with these benchmarks. To consummate and finalize these
amendments, the Company and its banks are in the process of scheduling a closing
date. Because the closing and final waivers will occur after the filing date of
this Form 10-K, the Company has classified this debt as current in the
accompanying financial statements. Upon completion of the closing this debt will
be reclassified as long-term in future filings. The revolving credit agreement
terminates in August 2012 and any outstanding borrowings are to be repaid or
refinanced on or before that time. As of June 30, 2010 there was $11,100,000
outstanding under the revolving credit facility with an interest rate of 7.25%
and $18,749,000 outstanding under the term loan with an interest rate of 7.25%.
The term loan is being repaid in 19 quarterly installments of $893,000
each,whichcommenced in December 2008, and a final payment of $8,033,000 due in
August 2013.
The agreements contain various restrictions and covenants including, among
others, restrictions on payment of dividends, restrictions on borrowings and
compliance with certain financial ratios, as defined in the restated agreement.
NOTE 8 - Goodwill
-----------------
During the fourth quarter of fiscal 2009, the Company concluded indicators of
potential impairment were present due to the sustained decline in the Company's
share price resulting in the market capitalization of the Company being less
than its book value. The Company conducted an impairment test during the fourth
quarter of fiscal 2009 based on the facts and circumstances at that time and its
business strategy in light of existing industry and economic conditions, as well
as taking into consideration future expectations. Through its impairment testing
and review, the Company concluded its discounted cash flow analysis does not
support a residual implied fair value of its assets and liabilities relating to
the Alarm Lock acquisition in 1985 and the Continental acquisition in 2000. As a
result, for the quarter ended June 30, 2009, the Company recorded a non-cash
goodwill impairment charge of $9.7 million, which was the full carrying value of
goodwill relating to these two acquisitions as of that date.
At the conclusion of the quarter ended March 31, 2010, the Company amended its
projected discounted cash flows relating to its Marks subsidiary and, as a
result, performed an interim impairment test. The Company determined that this
remaining goodwill was impaired and in the quarter ended March 31, 2010 recorded
an impairment charge of $923,000 which represented the unamortized balance of
this Goodwill.
The changes in the carrying amounts of goodwill are as follows:
Consolidated Marks Continental Alarm Lock
-------------- ------- ------------- ------------
Balance, June 30, 2008 $ 9,686 $ -- $ 7,414 $ 2,272
Goodwill acquired during fiscal 2009 923 923 -- --
Goodwill impairment during fiscal 2009 (9,686) -- (7,414) (2,272)
-------------- ------- ------------- ------------
Balance June 30, 2009 923 923 -- --
Goodwill impairment during fiscal 2010 (923) (923) -- --
-------------- ------- ------------- ------------
Balance June 30, 2010 $ -- $ -- $ -- $ --
============== ======= ============= ============
NOTE 9 - Stock Options
----------------------
In December 2002, the stockholders approved the 2002 Employee Stock Option Plan
(the 2002 Plan). The 2002 Plan authorizes the granting of awards, the exercise
of which would allow up to an aggregate of 1,836,000 shares of the Company's
common stock to be acquired by the holders of such awards. Under the 2002 Plan,
the Company may grant stock options, which are intended to qualify as incentive
stock options (ISOs), to key employees. Any plan participant who is granted
ISOs and possesses more than 10% of the voting rights of the Company's
outstanding common stock must be granted an option with a price of at least 110%
of the fair market value on the date of grant.
Under the 2002 Plan, stock options have been granted to key employees with a
term of 10 years at an exercise price equal to the fair market value on the date
of grant and are exercisable in whole or in part at 20% per year from the date
of grant. At June 30, 2010, 1,471,480 stock options were granted, 364,520 stock
options were available for grant, and 1,317,906 stock options were exercisable
under this plan.
No options were granted during fiscal 2010. The fair value of each option
granted during fiscal 2009 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2009
--------
Risk-free interest rates 3.07%
Expected lives 10 years
Expected volatility 65%
Expected dividend yields 0%
The following table reflects activity under the 2002 Plans for the fiscal years
ended June 30,:
2010 2009
--------------------------- -----------------------------
Weighted Weighted
Average average
exercise exercise
Options price Options price
------------- ------------ -------------- -------------
Outstanding at beginning of year 1,390,240 $ 2.65 1,293,480 $ 2.84
Granted -- -- 100,000 4.25
Terminated (10,100) 2.72 -- --
Exercised -- -- (3,240) 1.90
--------------------------- ------------- -------------
Outstanding at end of year 1,380,140 $ 2.95 1,390,240 $ 2.95
============= ============= ============= =============
Exercisable at end of year 1,317,906 $ 2.85 1,240,720 $ 2.65
Weighted average fair value at
grant date of options granted $ n/a $ 1.22
Total intrinsic value of
options exercised $ -- $ 3,000
Total intrinsic value of
Options outstanding $ 5,620
Total intrinsic value of
Options exercisable $ 5,620
Cash received from option exercises for fiscal years 2010 and 2009 was $0 and
$6,000, respectively. The actual tax benefit realized for the tax deductions
from option exercises totaled $0 for both fiscal 2010 and 2009.
The following table summarizes information about stock options outstanding under
the 2002 Plan at June 30, 2010:
Options outstanding Options exercisable
---------------------------------------- ----------------------------
Weighted
Number average Weighted Number Weighted
Outstanding remaining average exercisable average
Range of exercise at June 30, contractual exercise at June 30, exercise
prices 2010 life price 2010 price
----------------- ------------ ------------- ------------ ------------- -------------
$0.72 to $ 4.00 1,014,390 3.1 $ 1.89 1,014,390 $ 1.89
$4.01 to $ 7.50 328,250 6.5 5.29 266,016 5.35
$7.51 to $11.16 37,500 5.7 11.16 37,500 11.16
------------ ------------- ------------ ------------- -------------
1,380,140 4.0 $ 2.95 1,317,906 $ 2.85
============ ============= ============ ============= =============
As of June 30, 2010, there was $62,000 of total unearned stock-based
compensation cost related to non-vested share-based compensation arrangements
granted under the 2002 Plan. That cost is expected to be recognized over a
weighted average period of 6 years. The total fair value of the options vested
during fiscal 2010 under the 2002 Plan was $222,575.
In September 2000, the stockholders approved a 10 year extension of the already
existing 1990 non-employee stock option plan (the 2000 Plan) to encourage
non-employee directors and consultants of the Company to invest in the Company's
stock. The 2000 Plan provided for the granting of non-qualified stock options,
the exercise of which would allow up to an aggregate of 270,000 shares of the
Company's common stock to be acquired by the holders of the stock options. The
2000 Plan provided that the option price will not be less than 100% of the fair
market value of the stock at the date of grant. Options were exercisable at 20%
per year and expire five years after the date of grant. Compensation cost is
recognized for the fair value of the options granted to non-employee directors
and consultants as of the date of grant. $19,000 of compensation expense was
recorded for stock options granted to directors under the 2000 Plan. There are
240,000 options available for future grants under the 2000 Plan.
The following table reflects activity under the 2000 Plan for the fiscal years
ended June 30,:
2010 2009
------------------- ------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
------- -------- --------- ----------
Outstanding at beginning of year 30,000 $ 5.03 30,000 $ 5.03
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
Cancelled/lapsed -- -- -- --
------ ------- --------- --------
Outstanding at end of year 30,000 $ 5.03 30,000 $ 5.03
====== ======= ========= ========
Exercisable at end of year 24,000 $ 5.03 18,000 $ 5.03
====== ======= ========= ========
Weighted average fair value at
grant date of options granted n/a n/a
Total intrinsic value of
options exercised n/a n/a
Total intrinsic value of
Options outstanding $ 0
Total intrinsic value of
Options exercisable $ 0
As of June 30, 2010, there was $13,000 of total unearned stock-based
compensation cost related to non-vested share-based compensation arrangements
granted under the 2000 Plan. That cost is expected to be recognized over a
weighted average period of 1 year. The total fair value of the options vested
during fiscal 2010 under the 2002 Plan was $18,960.
NOTE 10 - 401(k) Plan
---------------------
The Company maintains two 401(k) plans ("the Napco Plan" and "the Marks Plan")
that cover all U.S. non-union employees with one or more years of service and is
qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. The
Napco Plan provided for matching contributions of 50% of the first 2% of
employee contributions. During fiscal 2009 the Company amended this plan,
eliminating the provision for mandatory matching contributions. Company
contributions to the plan totaled approximately $0 and $55,000 for the years
ended June 30, 2010 and 2009, respectively. The Marks Plan was adopted by the
Company subsequent to the Marks acquisition in August 2008 and provides for
discretionary matching contributions. Company contributions to this plan were
$28,000 for fiscal 2010 and $0 for fiscal 2009.
NOTE 11 - Commitments and Contingencies
---------------------------------------
Leases
The Company is committed under various operating leases, which do not extend
beyond fiscal 2013. Minimum lease payments through the expiration dates of
these leases, with the exception of the land leases referred to below, are as
follows:
Year Ending June 30, Amount
-------------------- ----------
2011 $ 58,000
2012 26,000
2013 12,000
----------
Total $ 96,000
==========
Rent expense, with the exception of the land lease referred to below, totaled
approximately $153,000 and $440,000 for the fiscal years ended June 30, 2010 and
2009, respectively.
Land Lease
On April 26, 1993, one of the Company's foreign subsidiaries entered into a 99
year lease, expiring in 2092, for approximately four acres of land in the
Dominican Republic, at an annual cost of approximately $288,000, on which the
Company's principal production facility is located.
Litigation
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
Employment Agreements
As of June 30, 2010, the Company was obligated under five employment agreements
and one severance agreement. Compensation under the agreements includes annual
salaries approximating $1,140,000. The employment agreements provide for annual
bonuses based upon sales and profits, or a formula to be determined by the Board
of Directors, and various severance payments as defined in each agreement. The
agreement with the Company's Chief Executive Officer provides for a salary of
$587,000, includes additional compensation of 25,000 stock options that vest 20%
per year or upon a change in control, as defined, and a termination payment in
an amount equal to 299% of the average of the prior five calendar year's
compensation, subject to certain limitations, as defined. The employment
agreements expire at various times through August 2013.
NOTE 12 - Geographical Data
---------------------------
The Company is engaged in one major line of business: the development,
manufacture, and distribution of security alarm products and door security
devices for commercial and residential use. Sales to unaffiliated customers are
primarily shipped from the United States. The Company has customers worldwide
with major concentrations in North America, Europe, and South America.
The following represents selected consolidated geographical data for and as of
the fiscal years ended June 30, 2010 and 2009:
2010 2009
---- ----
(in thousands)
Sales to external customers(1):
Domestic $ 62,925 $ 62,676
Foreign 4,832 6,889
-------- --------
Total Net Sales $ 67,757 $ 69,565
======== ========
Identifiable assets:
United States $ 54,896 $ 60,456
Dominican Republic (2) 18,235 18,822
Other foreign countries 537 2,308
-------- --------
Total Identifiable Assets $ 73,668 $ 81,586
======== ========
(1) All of the Company's sales occur in the United States and are shipped
primarily from the Company's facilities in the United States and United
Kingdom. There were no sales into any one foreign country in excess of
10% of total net sales.
(2) Consists primarily of inventories (2010 = $13,896,000; 2009 =
$13,960,000) and fixed assets (2010 = $4,246,000; 2009 = $4,696,000)
located at the Company's principal manufacturing facility in the Dominican
Republic.
NOTE 13 - Restructuring costs
-----------------------------
In March 2009, the Company began a Restructuring Plan consisting of a series of
actions to consolidate its Sales, Production and Warehousing operations of Marks
and those in Europe and the Middle East into the Corporate Headquarters in
Amityville, NY and its production facility in the Dominican Republic. The
majority of these initiatives have been completed by June 30, 2010, while
certain remaining Production-related actions are expected to be completed by
December 31, 2010. Accordingly, the Company recognized restructuring costs of
$1,274,000 in the fiscal year ended June 30, 2009. Of this amount, $210,000
relates to Workforce Reductions communicated in March 2009 and $1,064,000 to
Business Exits and related costs associated with inventory and lease impairments
related to the closure of the Marks, European and Middle East facilities. As of
June 30, 2010, $1,138,000 of the $1,274,000 in restructuring costs has been
incurred and $136,000 remains in accrued expenses.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A: CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. At the conclusion of the
period ended June 30, 2010, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting.
Management is responsible for the preparation of Napco Security Technologies,
Inc. (Napco Security Technologies) consolidated financial statements and related
information. Management uses its best judgment to ensure that the consolidated
financial statements present fairly, in all material respects, Napco Security
Technologies consolidated financial position and results of operations in
conformity with generally accepted accounting principles.
The financial statements have been audited by an independent registered public
accounting firm in accordance with the standards of the Public Company
Accounting Oversight Board. Their report expresses the independent accountant's
judgment as to the fairness of management's reported operating results, cash
flows and financial position. This judgment is based on the procedures described
in the second paragraph of their report.
Napco Security Technologies management is responsible for establishing and
maintaining adequate internal control over financial reporting. Under the
supervision of management, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission published in 1992 and subsequent
guidance prepared specifically for smaller public companies. Based on that
evaluation, our management concluded that our internal control over financial
reporting was effective as of June 30, 2010.
Our internal control over financial reporting includes policies and procedures
that pertain to the maintenance of records that accurately and fairly reflect,
in reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States; (2) receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of our Company; and (3) unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial
statements are prevented or timely detected.
Limitations on Internal Control
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This annual report does not include an attestation report of Holtz Rubinstein
Reminick LLP, our registered public accounting firm regarding internal control
over financial reporting. Management's Report was not subject to attestation by
the company's registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit us to provide only
Management's Report in this annual report.
The Board of Directors of Napco Security Technologies has an Audit Committee
comprised of three non-management directors. The Committee meets periodically
with financial management and the independent auditors to review accounting,
control, audit and financial reporting matters. Holtz Rubinstein Reminick LLP
has full and free access to the Audit Committee, with and without the presence
of management.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting
during the quarter ended June 30, 2010 that has materially affected or is likely
to materially affect our internal controls over financial reporting.
ITEM 9B: OTHER INFORMATION
None
PART III
--------
The information called for by Part III is hereby incorporated by reference from
the information set forth under the headings "Election of Directors", "Corporate
Governance and Board Matters", "Executive Compensation", "Beneficial Ownership
of Common Stock" and "Principal Accountant Fees" in the Company's definitive
proxy statement for the 2010 Annual Meeting of Stockholders, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K.
We have adopted a Code of Ethics which applies to our senior executive and
financial officers, among others. The Code is posted on our website,
www.napcosecurity.com under the "Investors - Other" captions. We intend to make
all required disclosures regarding any amendment to, or waiver of, a provision
of the Code of Ethics for senior executive and financial officers by posting
such information on our website.
PART IV
-------
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)1. Financial Statements
The following consolidated financial statements of NAPCO Security Technologies,
Inc. and its subsidiaries are included in Part II, Item 8:
Page
----
Report of Independent Registered Public Accounting Firm FS-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2010 and 2009 FS-2
Consolidated Statements of Operations for the Fiscal Years
Ended June 30, 2010 and 2009 FS-4
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended June 30, 2010 and 2009 FS-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2010 and 2009 FS-6
Notes to Consolidated Financial Statements, June 30, 2010 FS-7
(a)3 and (b). Exhibits
Management Contracts designated by asterisk.
Exhibit No. Title
----------- -----
-----------------------------------------------------------------------------------------------------------------------
Ex-3.(i) Certificate of Amendment of Certificate of Exhibit-3.(i) to Report on Form 10-K for the
Incorporation fiscal year ended June 30, 2006
-----------------------------------------------------------------------------------------------------------------------
Ex-3.(ii) Certificate of Incorporation as amended Exhibit-3.(ii) to Report on Form 10-K for
the fiscal year ended June, 30 2006
-----------------------------------------------------------------------------------------------------------------------
Ex-3.(iii) Amended and Restated By-Laws Exhibit 3.(ii) to Report on Form 10-K for
the fiscal year ended June 30, 2010
-----------------------------------------------------------------------------------------------------------------------
Ex-10.A (i) Amended and Restated 1992 Incentive Stock Option Plan Exhibit 10.A(i) to Report on Form 10-K for
the fiscal year ended June 30, 2005
-----------------------------------------------------------------------------------------------------------------------
Ex-10.A (ii) 2002 Employee Stock Option Plan Exhibit 10.A(ii) to Report on Form 10-K for
the fiscal year ended June 30, 2008
-----------------------------------------------------------------------------------------------------------------------
Ex-10.B 2000 Non-Employee Stock Option Plan Exhibit-10.B to Report on Form 10-K for the
fiscal year ended June 30, 2006
-----------------------------------------------------------------------------------------------------------------------
Ex-10.C Loan and Security Agreement with Marine Midland Bank Exhibit 10-C to Report on Form 10-K for the
dated as of May 12, 1997 fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.D Revolving Credit Note #1 to Marine Midland Bank dated Exhibit 10-D to Report on Form 10-K for the
as of May 12, 1997 fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.E Revolving Credit Note #2 to Marine Midland Bank dated Exhibit 10-E to Report on Form 10-K for the
as of May 12, 1997 fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.F Promissory Note to Marine Midland Bank dated as of Exhibit 10-F to Report on Form 10-K for the
May 12, 1997 fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.G Amendment No.1 to the Loan and Security Agreement Exhibit 10-G to Report on Form 10-K for the
with Marine Midland Bank dated as of May 28, 1998 fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.H Term Loan Note to Marine Midland Bank dated as of May Exhibit 10-H to Report on Form 10-K for the
28, 1998 fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
*Ex-10.I Amended and Restated Employment Agreement with Exhibit 10.I to Report on Form 10-K for
Richard Soloway fiscal year ended June 30, 2010
-----------------------------------------------------------------------------------------------------------------------
*Ex-10.J Employment Agreement with Jorge Hevia Exhibit 10-J to Report on Form 10-K for the
fiscal year ended June 30, 2005
-----------------------------------------------------------------------------------------------------------------------
Ex-10.K Amendment No. 2 to the Loan and Security Agreement Exhibit 10-K to Report on Form 10-K for the
with HSBC Bank dated as of June 30, 1999 fiscal year ended June 30, 2005
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
*Ex-10.L Employment Agreement with Michael Carrieri Exhibit 10-L to Report on Form 10-K for the
fiscal year ended June 30, 2005
-----------------------------------------------------------------------------------------------------------------------
*Ex-10.M Indemnification Agreement dated August 9, 1999 Exhibit 10-M to Report on Form 10-K for the
fiscal year ended June 30, 2005
-----------------------------------------------------------------------------------------------------------------------
Ex-10.O Amendment No. 4 to Loan and Security Agreement Exhibit 10-O to Report on Form 10-K for the
fiscal year ended June 30, 2005
-----------------------------------------------------------------------------------------------------------------------
Ex-10.P Amendment No. 8 to Loan and Security Agreement Exhibit-10.P to Report on Form 10-K for the
fiscal year ended June 30, 2006
-----------------------------------------------------------------------------------------------------------------------
Ex-10.Q Note Modification Agreement Exhibit 10.X to Report on Form 10-K for
fiscal year ended June 30, 2001
-----------------------------------------------------------------------------------------------------------------------
Ex-10.R Amendment No. 10 to the Loan and Security Agreement Exhibit 10.R to Report on Form 10-K for
fiscal year ended June 30, 2003
-----------------------------------------------------------------------------------------------------------------------
Ex-10.S Amendment No. 3 to the Loan and Security Agreement Exhibit 10-S to Report on Form 10-K for the
fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.T Amendment No. 9 to the Loan and Security Agreement Exhibit 10-T to Report on Form 10-K for the
fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.U Amendment No. 11 to the Loan and Security Agreement Exhibit 10-U to Report on Form 10-K for the
fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.V Amendment No. 12 to the Loan and Security Agreement Exhibit 10-V to Report on Form 10-K for the
fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-10.W Amendment No. 13 to the Loan and Security Agreement Exhibit 10-W to Report on Form 10-K for the
fiscal year ended June 30, 2004
-----------------------------------------------------------------------------------------------------------------------
Ex-14.0 Code of Ethics Exhibit 14.0 to Report on Form 10-K for the
fiscal year ended June 30, 2010
-----------------------------------------------------------------------------------------------------------------------
Ex-21.0 Subsidiaries of the Registrant E-18
-----------------------------------------------------------------------------------------------------------------------
Ex-23.1 Consent of Independent Auditors E-19
-----------------------------------------------------------------------------------------------------------------------
Ex-31.1 Section 302 Certification of Chief Executive Officer E-20
-----------------------------------------------------------------------------------------------------------------------
Ex-31.2 Section 302 Certification of Chief Financial Officer E-21
-----------------------------------------------------------------------------------------------------------------------
Ex-32.1 Certification of Chief Executive Officer Pursuant to E-22
18 USC Section 1350 and Section 906 of Sarbanes -
Oxley Act of 2002
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Ex-32.2 Certification of Chief Financial Officer Pursuant to E-23
18 USC Section 1350 and Section 906 of Sarbanes -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
October 14, 2010
NAPCO SECURITY TECHNOLOGIES, INC.
(Registrant)
By: /s/RICHARD SOLOWAY
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Richard Soloway
Chairman of the Board of
Directors, President and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and the dates indicated.
Signature Title Date
--------- ----- ----
/s/RICHARD SOLOWAY Chairman of the Board of Directors, October 14, 2010
------------------------------- President and Secretary and Directo
Richard Soloway (Principal Executive Officer)
/s/KEVIN S. BUCHEL Senior Vice President of Operations October 14, 2010
------------------------------- and Finance and Treasurer and Director
Kevin S. Buchel (Principal Financial and Accounting Officer)
/s/PAUL STEPHEN BEEBER Director October 14, 2010
-------------------------------
Paul Stephen Beeber
/s/RANDY B. BLAUSTEIN Director October 14, 2010
-------------------------------
Randy B. Blaustein
/s/ARNOLD BLUMENTHAL Director October 14, 2010
-------------------------------
Arnold Blumenthal
/s/DONNA SOLOWAY Director October 14, 2010
-------------------------------
Donna Soloway
/s/ANDREW J. WILDER Director October 14, 2010
-------------------------------
Andrew J. Wilder