a. Financial Statements: Financial statements required pursuant
to this Item are presented on pages FS-1 through FS-25 of this report as follows:
Management has prepared and is responsible for our consolidated
financial statements and related notes. Management is also responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Napco
Technologies, Inc. (the “Company”) internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with the authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for
external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s
annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following
material weaknesses: 1. The documentation of a key review control over product shipments was not designed properly to evidence
the operating effectiveness of the control, and a portion of the Company’s shipments were not subjected to this review control
due to in-process consolidation of warehouse operations. This was rectified by the end of the period. 2. Controls around subscription-based
service revenue were not assessed at the transaction level because they are largely automated, but subjected only to management-level
reasonableness review 3. Management’s reviews of price lists and pricing discounts are not formally documented on a consistent
basis, and 4. Review of system-based pricing for certain products and services was not performed to correct data entry errors,
although no significant errors were detected.
Management conducted an assessment of the effectiveness of internal
control over financial reporting based on the framework in
Internal Control – Integrated Framework (2013)
as
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined
that as of June 30, 2017, the Company did not maintain effective internal control over financial reporting.
The effectiveness of our internal control over financial reporting
as of June 30, 2017 has been audited by
Baker Tilly Virchow
Krause,
LLP, an independent registered public accounting firm, as stated in their report included herein.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Nature of Business and Summary of Significant Accounting
Policies
Nature of Business
:
Napco Security Technologies, Inc. and Subsidiaries
(the "Company") is a diversified manufacturer of security products, encompassing access control systems, door-locking
products, intrusion and fire alarm systems and video surveillance products for commercial and residential use. These products are
used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to
independent distributors, dealers and installers of security equipment.
The Company's fiscal year begins on July 1
and ends on June 30. Historically, the end users of the Company's products want to install its products prior to the summer; therefore
sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced
in the period July 1 through September 30, the Company's fiscal first quarter. In addition, demand is affected by the housing and
construction markets.
Significant Accounting Policies
:
Principles of Consolidation
The consolidated financial statements include
the accounts of Napco Security Technologies, Inc. and all of its wholly-owned subsidiaries. All inter-company balances and transactions
have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates
include management's judgments associated with reserves for sales returns and allowances, concentration of credit risk, inventory
reserves, intangible assets and income taxes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The methods and assumptions used to estimate
the fair value of the following classes of financial instruments were: Current Assets and Current Liabilities - The carrying amount
of cash, certificates of deposits, current receivables and payables and certain other short-term financial instruments approximate
their fair value as of June 30, 2017 due to their short-term maturities; Long-Term Debt - The carrying amount of the Company’s
long-term debt, including the current portion, at June 30, 2017 in the amount of $3,500,000 approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents include approximately
$460,000 of short-term time deposits at June 30, 2017 and June 30, 2016. 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, 2017 and June 30, 2016. The Company has historically
not experienced any credit losses with balances in excess of FDIC limits
Accounts Receivable
Accounts receivable is stated net of the reserves
for doubtful accounts of $155,000 and $145,000 and for returns and other allowances of $1,250,000 and $1,255,000 as of June 30,
2017 and June 30, 2016, respectively. Our reserves for doubtful accounts and for returns and other allowances are subjective critical
estimates that have a direct impact on reported net earnings. These reserves are based upon the evaluation of our accounts receivable
aging, specific exposures, sales levels and historical trends.
Inventories
Inventories are valued at the lower of cost
or market, with cost being determined on the first-in, first-out (FIFO) method. The reported net value of inventory includes finished
saleable products, work-in-process and raw materials that will be sold or used in future periods. Inventory costs include raw materials,
direct labor and overhead. The Company’s overhead expenses are applied based, in part, upon estimates of the proportion of
those expenses that are related to procuring and storing raw materials as compared to the manufacture and assembly of finished
products. These proportions, the method of their application, and the resulting overhead included in ending inventory, are based
in part on subjective estimates and actual results could differ from those estimates.
In addition, the Company records an inventory
obsolescence reserve, which represents any excess of the cost of the inventory over its estimated market value, based on various
product sales projections. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based
on age, historical trends, requirements to support forecasted sales, and the ability to find alternate applications of its raw
materials and to convert finished product into alternate versions of the same product to better match customer demand. In addition,
and as necessary, the Company may establish specific reserves for future known or anticipated events. There is inherent professional
judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence
percentage.
The Company also regularly reviews the period
over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from
the balance sheet date are classified as non-current.
Property, Plant, and Equipment
Property, plant, and equipment are carried
at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major
renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition
is reflected in income.
Depreciation is recorded over the estimated
service lives of the related assets using primarily the straight-line method. Amortization of leasehold improvements is calculated
by using the straight-line method over the estimated useful life of the asset or lease term, whichever is shorter.
Intangible Assets
Intangible assets determined to have indefinite
lives are not amortized but are tested for impairment at least annually. Intangible assets with definite lives are amortized over
their useful lives. Intangible assets are reviewed for impairment at least annually at the Company’s fiscal year end of June
30 or more often whenever there is an indication that the carrying amount may not be recovered.
The Company’s acquisition of substantially
all of the assets and certain liabilities of G. Marks Hardware, Inc. (“Marks”) in August 2008 included intangible assets
recorded at fair value on the date of acquisition. The intangible assets are amortized over their estimated useful lives of twenty
years (customer relationships) and seven years (non-compete agreement). The Marks trade name was deemed to have an indefinite life.
Changes in intangible assets are as follows
(in thousands):
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
Customer relationships
|
|
$
|
9,800
|
|
|
$
|
(7,784
|
)
|
|
$
|
2,016
|
|
|
$
|
9,800
|
|
|
$
|
(7,343
|
)
|
|
$
|
2,457
|
|
Non-compete agreement
|
|
|
340
|
|
|
|
(340
|
)
|
|
|
—
|
|
|
|
340
|
|
|
|
(340
|
)
|
|
|
—
|
|
Trade name
|
|
|
5,900
|
|
|
|
—
|
|
|
|
5,900
|
|
|
|
5,900
|
|
|
|
—
|
|
|
|
5,900
|
|
|
|
$
|
16,040
|
|
|
$
|
(8,124
|
)
|
|
$
|
7,916
|
|
|
$
|
16,040
|
|
|
$
|
(7,683
|
)
|
|
$
|
8,357
|
|
Amortization expense for intangible assets
subject to amortization was approximately $441,000, $529,000 and $667,000 for the fiscal years ended June 30, 2017, 2016 and 2015,
respectively. Amortization expense for each of the next five fiscal years is estimated to be as follows: 2018 - $371,000; 2019
- $313,000; 2020 -$264,000; 2021 - $223,000; and 2022 - $188,000. The weighted average amortization period for intangible assets
was 11.1 years and 12.1 years at June 30, 2017 and 2016, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable.
Impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than
the carrying value of that asset.
Revenue Recognition
The Company recognizes revenue when the following
criteria are met: (i) persuasive evidence of an agreement exists, (ii) there is a fixed and determinable price for the Company's
product or service, (iii) shipment and passage of title occurs or service has been provided, and (iv) collectability is reasonably
assured. Revenues from product sales are recorded at the time the product is shipped or delivered to the customer pursuant to the
terms of the sale. Revenues for services are recorded at the time the service is provided to the customer pursuant to the terms
of sale. The Company reports its sales on a net sales basis, with net sales being computed by deducting from gross sales the amount
of actual sales returns and other allowances and the amount of reserves established for anticipated sales returns and other allowances.
Sales Returns and Other Allowances
The Company analyzes sales returns and is able
to make reasonable and reliable estimates of product returns based on the Company’s past history. Estimates for sales returns
are based on several factors including actual returns and based on expected return data communicated to it by its customers. Accordingly,
the Company believes that its historical returns analysis is an accurate basis for its allowance for sales returns. Actual results
could differ from those estimates. As a percentage of gross sales, sales returns, rebates and allowances were 7%, 7% and 8% for
the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Advertising and Promotional Costs
Advertising and promotional costs are included
in "Selling, General and Administrative" expenses in the consolidated statements of operations and are expensed as incurred.
Advertising expense for the fiscal years ended June 30, 2017, 2016 and 2015 was $2,444,000, $2,144,000 and $1,671,000, respectively.
Research and Development Costs
Research and development costs incurred by
the Company are charged to expense as incurred and are included in "Cost of Sales" in the consolidated statements of
operations. Company-sponsored research and development expense for the fiscal years ended June 30, 2017, 2016 and 2015 was $6,723,000,
$6,169,000 and $5,382,000, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred
tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The Company measures and recognizes the tax
implications of positions taken or expected to be taken in its tax returns on an ongoing basis.
Net Income Per Share
Basic net income per common share (Basic EPS)
is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share
(Diluted EPS) is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents
and convertible securities then outstanding.
The following provides a reconciliation of
information used in calculating the per share amounts for the fiscal years ended June 30 (in thousands, except per share data):
|
|
Net Income
|
|
|
Weighted Average Shares
|
|
|
Net Income per Share
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
5,599
|
|
|
$
|
5,773
|
|
|
$
|
4,845
|
|
|
|
18,809
|
|
|
|
18,874
|
|
|
|
19,164
|
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45
|
|
|
|
20
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
5,599
|
|
|
$
|
5,773
|
|
|
$
|
4,845
|
|
|
|
18,854
|
|
|
|
18,894
|
|
|
|
19,169
|
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.25
|
|
Options to purchase 0, 127,404 and 255,688 shares of common stock
for the fiscal years ended June 30, 2017, 2016 and 2015, respectively, were not included in the computation of Diluted EPS because
their inclusion would be anti-dilutive. These options were still outstanding at the end of the respective periods.
Stock-Based Compensation
The Company has established two share incentive
programs as discussed in Note 7.
Stock-based compensation cost is measured at
the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period.
Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility
and forfeiture rates, among other factors.
Stock-based compensation costs of $102,000,
$103,000 and $101,000 were recognized for fiscal years ended June 30, 2017, 2016 and 2015, respectively. The effect on both Basic
and Diluted Earnings per share was $0.01 for each of the fiscal years ended June 30, 2017, 2016 and 2015.
Foreign Currency
All assets and liabilities of foreign subsidiaries
are translated into U.S. Dollars at fiscal period-end exchange rates. Income and expense items are translated at average exchange
rates prevailing during the fiscal year. The realized and unrealized gains and losses associated with foreign currency translation,
as well as related other comprehensive income, were not material for the fiscal years ended June 30, 2017, 2016 and 2015.
Comprehensive Income
For the fiscal years ended June 30, 2017, 2016
and 2015, the Company's operations did not give rise to material items includable in comprehensive income, which were not already
included in net income. Accordingly, the Company's comprehensive income approximates its net income for all periods presented.
Segment Reporting
The Company’s reportable operating segments
are determined based on the Company's management approach. The management approach is based on the way that the chief operating
decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company's
results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only
one segment. The Company has presented required geographical data in Note 11, and no additional segment data has been presented.
Shipping and Handling Revenues and Costs
The Company records the amount billed to customers
for shipping and handling in net sales ($461,000, $492,000 and $515,000 in the fiscal years ended June 30, 2017, 2016 and 2015,
respectively) and classifies the costs associated with these revenues in cost of sales ($947,000, $918,000 and $945,000 in fiscal
years ended June 30, 2017, 2016 and 2015).
Recently Issued Accounting Standards
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued authoritative guidance that changes the way companies account for certain aspects of
share-based payments to employees. The most significant impact relates to the accounting for income tax effects of share-based
compensation awards. This new guidance is part of the FASB’s simplification initiative and requires that all excess
tax benefits and tax deficiencies be recorded as income tax expense or benefit in the income statement. In addition, companies
are required to treat the tax effects of exercised or vested awards as discrete items in the period that they occur. Other
updates include changing the threshold on tax withholding requirements. Under this guidance, an employer can withhold up
to the maximum statutory withholding rates in a jurisdiction without tainting the award classification. Additionally, this
guidance allows companies to elect a forfeiture recognition method whereby they account for forfeitures as they occur (actual)
or they estimate the number of awards expected to be forfeited (current GAAP). Lastly, as it relates to public entities,
this guidance also provides requirements for the cash flow classification of cash paid by an employer when directly withholding
shares for tax-withholding purposes and excess tax benefits. This guidance becomes effective for the Company’s fiscal
2018 first quarter, with early adoption permitted, and the guidance prescribes different transition methods for the various provisions
(i.e., retrospective, modified retrospective, or prospective). The Company does not expect this to have a material effect
on its consolidated results of operations and financial condition.
.
In February 2016, the FASB issued authoritative
guidance that requires lessees to account for most leases on their balance sheets with the liability being equal to the present
value of the lease payments. The right-of-use asset will be based on the lease liability adjusted for certain costs such
as direct costs. Lease expense will be recognized similar to current accounting guidance with operating leases resulting
in a straight-line expense and financing leases resulting in a front-loaded expense similar to the current accounting for capital
leases. This guidance becomes effective for the Company’s fiscal 2020 first quarter, with early adoption permitted.
This guidance must be adopted using a modified retrospective transition approach for leases that exist or are entered into after
the beginning of the earliest comparative period in the financial statements, and provides for certain practical expedients.
The Company is currently evaluating the timing, impact and method of applying this guidance on its consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”. The amendments require
deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet.
As a result, each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does
not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax
assets of another jurisdiction. ASU 2015-17 is effective for the Company’s
fiscal year ended June 30, 2018. Early
application is permitted. We have early adopted ASU 2015-17 as of December 31, 2016. The new guidance will be applied prospectively.
Prior periods were not retrospectively adjusted.
In July 2015, the FASB issued ASU 2015-11 “Inventory
(Topic 330): Simplifying the Measurement of Inventory” (ASU 2015-11). The amendments in ASU 2015-11 simplify the subsequent
measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective
for the Company’s quarter ended September 30, 2017. Early application is permitted. We have not early adopted ASU 2015-11.
The new guidance must be applied prospectively after the date of adoption. We are in the process of evaluating the adoption of
this ASU, and do not expect this to have a material effect on our consolidated results of operations and financial condition.
In May 2014, the FASB issued authoritative
guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity
to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a single comprehensive
five-step principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including
most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date
of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until fiscal
2019. In addition, the FASB is allowing companies to early adopt this guidance for the Company’s fiscal 2018.
The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients,
or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance
when it becomes effective and has not yet selected a transition method. The Company is currently evaluating the impact of
adoption on its consolidated financial statements.
NOTE 2 - Business and Credit Concentrations
An entity is more vulnerable to concentrations
of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification
of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance.
The Company had one customer with an accounts receivable balance that comprised 24% and 22% of the Company’s accounts receivable
June 30, 2017 and 2016, respectively. Sales to this customer comprised 13% of net sales in each of the fiscal years ended June
30, 2017, 2016 and 2015.
NOTE 3 - Inventories
Inventories, net of reserves are valued at
lower of cost (first-in, first-out method) or market. The Company regularly reviews parts and finished goods inventories on hand
and, when necessary, records a provision for excess or obsolete inventories. The Company also regularly reviews the period over
which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance
sheet date are classified as non-current.
Inventories, net of reserves consist of the
following (in thousands):
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Component parts
|
|
$
|
16,638
|
|
|
$
|
14,021
|
|
Work-in-process
|
|
|
4,415
|
|
|
|
3,758
|
|
Finished product
|
|
|
9,526
|
|
|
|
7,558
|
|
|
|
$
|
30,579
|
|
|
$
|
25,337
|
|
Classification of inventories, net of reserves:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
26,212
|
|
|
$
|
21,428
|
|
Non-current
|
|
|
4,367
|
|
|
|
3,909
|
|
|
|
$
|
30,579
|
|
|
$
|
25,337
|
|
NOTE 4 - Property, Plant, and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
June 30,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Useful Life in Years
|
|
|
|
|
|
|
Land
|
|
$
|
904
|
|
|
$
|
904
|
|
|
—
|
Buildings
|
|
|
8,911
|
|
|
|
8,911
|
|
|
30 to 40
|
Molds and dies
|
|
|
7,058
|
|
|
|
7,036
|
|
|
3 to 5
|
Furniture and fixtures
|
|
|
2,570
|
|
|
|
2,531
|
|
|
5 to 10
|
Machinery and equipment
|
|
|
22,183
|
|
|
|
21,035
|
|
|
7 to 10
|
Leasehold improvements
|
|
|
485
|
|
|
|
294
|
|
|
Shorter of the lease term or life of asset
|
|
|
|
42,111
|
|
|
|
40,711
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(35,568
|
)
|
|
|
(34,662
|
)
|
|
|
|
|
$
|
6,543
|
|
|
$
|
6,049
|
|
|
|
Depreciation and amortization expense on property,
plant, and equipment was approximately $920,000, $878,000 and $890,000 in fiscal 2017, 2016 and 2015, respectively.
NOTE 5 - Income Taxes
The provision for income taxes is comprised of the following (in
thousands):
|
|
For the Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
280
|
|
|
$
|
(31
|
)
|
|
$
|
(49
|
)
|
State
|
|
|
55
|
|
|
|
27
|
|
|
|
35
|
|
|
|
|
335
|
|
|
|
(4
|
)
|
|
|
(14
|
)
|
Deferred income tax provision
|
|
|
361
|
|
|
|
375
|
|
|
|
230
|
|
Provision for income taxes
|
|
$
|
696
|
|
|
$
|
371
|
|
|
$
|
216
|
|
A reconciliation of the U.S. Federal statutory
income tax rate to our actual effective tax rate on earnings before income taxes is as follows for the years ended June 30, (dollars
in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of
Pre-tax
Income
|
|
|
Amount
|
|
|
% of
Pre-tax
Income
|
|
|
Amount
|
|
|
% of
Pre-tax
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at Federal statutory rate
|
|
$
|
2,140
|
|
|
|
34.0
|
%
|
|
$
|
2,089
|
|
|
|
34.0
|
%
|
|
$
|
1,721
|
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases (decreases) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meals and entertainment
|
|
|
68
|
|
|
|
1.1
|
%
|
|
|
61
|
|
|
|
1.0
|
%
|
|
|
66
|
|
|
|
1.3
|
%
|
State income taxes, net of Federal income tax benefit
|
|
|
28
|
|
|
|
0.4
|
%
|
|
|
20
|
|
|
|
0.3
|
%
|
|
|
21
|
|
|
|
0.4
|
%
|
Foreign source income not subject to tax
|
|
|
(1,286
|
)
|
|
|
(20.4
|
)%
|
|
|
(1,278
|
)
|
|
|
(20.8
|
)%
|
|
|
(1,069
|
)
|
|
|
(21.1
|
)%
|
R&D Credit refund
|
|
|
(286
|
)
|
|
|
(4.5
|
)%
|
|
|
(415
|
)
|
|
|
(6.8
|
)%
|
|
|
(328
|
)
|
|
|
(6.5
|
)%
|
Undistributed foreign earnings
|
|
|
—
|
|
|
|
—
|
%
|
|
|
(90
|
)
|
|
|
(1.4
|
)%
|
|
|
(93
|
)
|
|
|
(1.8
|
)%
|
Other, net
|
|
|
32
|
|
|
|
0.5
|
%
|
|
|
(16
|
)
|
|
|
(0.3
|
)%
|
|
|
(102
|
)
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$
|
696
|
|
|
|
11.1
|
%
|
|
$
|
371
|
|
|
|
6.0
|
%
|
|
$
|
216
|
|
|
|
4.3
|
%
|
Deferred tax assets and deferred tax liabilities at June 30, 2017
and 2016 are as follows (in thousands):
|
|
Deferred Tax Assets
(Liabilities)
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
26
|
|
|
$
|
26
|
|
Inventories
|
|
|
586
|
|
|
|
564
|
|
Accrued Liabilities
|
|
|
453
|
|
|
|
400
|
|
Stock based compensation expense
|
|
|
28
|
|
|
|
154
|
|
Intangibles
|
|
|
(258
|
)
|
|
|
(14
|
)
|
R&D credit
|
|
|
1,427
|
|
|
|
1,214
|
|
Property, plant and equipment
|
|
|
(579
|
)
|
|
|
(503
|
)
|
Other deferred tax liabilities
|
|
|
(1,039
|
)
|
|
|
(702
|
)
|
|
|
|
644
|
|
|
|
1,139
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Net deferred tax assets
|
|
$
|
644
|
|
|
$
|
1,139
|
|
The Company has identified the United States
and New York State as its major tax jurisdictions. The fiscal 2012 and forward years are still open for examination.
During the year ending June 30, 2017 the Company
increased its reserve for uncertain income tax positions by $35,000. 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, 2017, the Company had accrued
interest totaling $0 and $183,000 of unrecognized net tax benefits that, if recognized, would favorably affect the Company’s
effective income tax rate in any future period. The Company uses the flow through method to account for investment tax credits
earned on eligible research and development expenditures. Under this method, the investment tax credits are recognized as a reduction
to income tax expense.
A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows (in thousands):
|
|
Tax
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance of gross unrecognized tax benefits as of July 1, 2015
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
102
|
|
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits
|
|
|
46
|
|
|
|
—
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of gross unrecognized tax benefits as of June 30, 2016
|
|
|
148
|
|
|
$
|
—
|
|
|
|
148
|
|
Increases to unrecognized tax benefits resulting from the generation of additional R&D credits
|
|
|
35
|
|
|
|
—
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of gross unrecognized tax benefits as of June 30, 2017
|
|
$
|
183
|
|
|
$
|
—
|
|
|
$
|
183
|
|
The Company plans to permanently reinvest a
substantial portion of its foreign earnings and as such has not provided US corporate taxes on the permanently reinvested earnings.
As of June 30, 2017, the Company had approximately $12.4 million of undistributed earnings of foreign subsidiaries.
NOTE 6 - Long-Term Debt
As of June 30, 2017, long-term debt consisted
of a revolving line of credit of $11,000,000 (“Agreement”) which expires in June 2021. The Company had one term loan
outstanding at June 30, 2016 which was repaid during fiscal 2017.
Outstanding balances and interest rates as
of June 30, 2017 and June 30, 2016 are as follows:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Outstanding
|
|
|
Interest Rate
|
|
|
Outstanding
|
|
|
Interest Rate
|
|
Revolving line of credit
|
|
$
|
3,500
|
|
|
|
2.2
|
%
|
|
$
|
2,000
|
|
|
|
1.6
|
%
|
Term loan
|
|
|
—
|
|
|
|
—
|
|
|
|
2,800
|
|
|
|
1.6
|
%
|
Total debt
|
|
$
|
3,500
|
|
|
|
2.2
|
%
|
|
$
|
4,800
|
|
|
|
1.6
|
%
|
The Agreement also provides for a LIBOR-based
interest rate option of LIBOR plus 1.15% to 2.00%, depending on the ratio of outstanding debt to EBITDA, which is to be measured
and adjusted quarterly, a prime rate-based option of the prime rate plus 0.25% and other terms and conditions as more fully described
in the Agreement. In addition, the Agreement provides for availability to be limited to the lesser of $11,000,000 or the result
of a borrowing base formula based upon the Company’s Accounts Receivables and Inventory values net of certain deductions.
The Company’s obligations under the Agreement continue to be secured by all of its assets, including but not limited to,
deposit accounts, accounts receivable, inventory, and the Company’s corporate headquarters in Amityville, NY, equipment and
fixtures and intangible assets. In addition, the Company’s wholly-owned subsidiaries, with the exception of the Company’s
foreign subsidiaries, have issued guarantees and pledges of all of their assets to secure the Company’s obligations under
the Agreement. All of the outstanding common stock of the Company’s domestic subsidiaries and 65% of the common stock of
the Company’s foreign subsidiaries has been pledged to secure the Company’s obligations under the Agreement.
The Agreement contains various restrictions
and covenants including, among others, restrictions on payment of dividends, restrictions on borrowings and compliance with certain
financial ratios, as defined in the Agreement.
NOTE 7 - Stock Options
The Company follows ASC 718 (“Share-Based
Payment”), which requires that all share based payments to employees, including stock options, be recognized as compensation
expense in the consolidated financial statements based on their fair values and over the requisite service period. For
the fiscal years ended June 30, 2017, 2016 and 2015, the Company recorded non-cash compensation expense of $102,000 ($0.01 per
basic and diluted share), $103,000 ($0.01 per basic and diluted share) and $101,000 ($0.01 per basic and diluted share), respectively,
relating to stock-based compensation
2012 Employee Stock Option Plan
In December 2012, the stockholders approved
the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise
of which would allow up to an aggregate of 950,000 shares of the Company's common stock to be acquired by the holders of such awards.
Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued
employees. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company's outstanding
common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.
Under the 2012 Employee Plan, stock options
may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market
value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option
granted under this plan shall vest in full upon a “change in control” as defined in the plan. At June 30, 2017, 70,600
stock options were granted, 38,700 stock options were exercisable and 843,900 stock options were available for grant under this
plan.
The fair value of each option granted during
fiscal 2017, 2016 and 2015 were estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
2.4
|
%
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
Expected lives
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
10 years
|
|
Expected volatility
|
|
|
52
|
%
|
|
|
54
|
%
|
|
|
54
|
%
|
Expected dividend yields
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The Company uses a weighted-average expected
stock-price volatility assumption that is a combination of both current and historical implied volatilities of the underlying stock.
The implied volatilities were obtained from publicly available data sources. For the weighted-average expected option life
assumption, the Company considers the exercise behavior of past grants. The average risk-free interest rate is based on the
U.S. Treasury Bond rate for the expected term of the options and the average dividend yield is based on historical experience.
The following table reflects activity under
the 2012 Plan for the fiscal years ended June 30,:
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
Outstanding, beginning of year
|
|
|
112,500
|
|
|
$
|
5.54
|
|
|
|
112,500
|
|
|
$
|
5.30
|
|
Granted
|
|
|
5,000
|
|
|
|
8.15
|
|
|
|
15,000
|
|
|
|
6.05
|
|
Terminated
|
|
|
(11,400
|
)
|
|
|
6.10
|
|
|
|
(15,000
|
)
|
|
|
4.29
|
|
Exercised
|
|
|
(35,500
|
)
|
|
|
5.13
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding, end of year
|
|
|
70,600
|
|
|
$
|
5.84
|
|
|
|
112,500
|
|
|
$
|
5.54
|
|
Exercisable, end of year
|
|
|
38,700
|
|
|
$
|
5.98
|
|
|
|
55,700
|
|
|
$
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date of options granted
|
|
$
|
5.22
|
|
|
|
|
|
|
$
|
3.86
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
152,000
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
Total intrinsic value of options outstanding
|
|
$
|
252,000
|
|
|
|
|
|
|
$
|
93,000
|
|
|
|
|
|
Total intrinsic value of options exercisable
|
|
$
|
132,000
|
|
|
|
|
|
|
$
|
43,000
|
|
|
|
|
|
The following table summarizes information
about stock options outstanding under the 2012 Employee Plan at June 30, 2017:
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Range of
exercise prices
|
|
Number
outstanding
|
|
|
Weighted
average
remaining
contractual life
|
|
|
Weighted
average exercise
price
|
|
|
Number
exercisable
|
|
|
Weighted
average exercise
price
|
|
$4.29-$8.15
|
|
|
70,600
|
|
|
|
7.0
|
|
|
$
|
5.84
|
|
|
|
38,700
|
|
|
$
|
5.58
|
|
|
|
|
70,600
|
|
|
|
7.0
|
|
|
$
|
5.84
|
|
|
|
38,700
|
|
|
$
|
5.58
|
|
As of June 30, 2017, there was $119,000 of
unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 5,000
and 15,000 options were granted during the fiscal years ended June 30, 2017 and 2016, respectively. 34,000 of the 35,500 stock
options exercised during the fiscal year ended June 30, 2017 were settled by exchanging 16,120 shares of the Company’s common
stock which were retired and returned to unissued status upon receipt. The total fair value of the options vesting during the fiscal
years ended June 30, 2017 and 2016 under this plan was $79,000 and $119,000, respectively. $10,000 and $0 was received from option
exercises for the fiscal years ended June 30, 2017 and 2016, respectively, and the actual tax benefit realized for the tax deductions
from option exercises was $0 for each of these periods.
2012 Non-Employee Stock Option Plan
In December 2012, the stockholders approved
the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise
of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards.
Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.
Under the 2012 Non-Employee Plan, stock options
may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of
grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan
shall vest in full upon a “change in control” as defined in the plan. At June 30, 2017, 14,200 stock options were granted,
5,200 stock options were exercisable and 15,000 stock options were available for grant under this plan.
The following table reflects activity under
the 2012 Non-Employee Plan for the fiscal years ended June 30,:
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
Outstanding, beginning of year
|
|
|
35,000
|
|
|
$
|
4.73
|
|
|
|
35,000
|
|
|
$
|
4.73
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Terminated
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(20,800
|
)
|
|
|
4.76
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding, end of year
|
|
|
14,200
|
|
|
$
|
4.69
|
|
|
|
35,000
|
|
|
$
|
4.73
|
|
Exercisable, end of year
|
|
|
5,200
|
|
|
$
|
4.76
|
|
|
|
19,000
|
|
|
$
|
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date of options granted
|
|
|
n/a
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
96,000
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
Total intrinsic value of options outstanding
|
|
$
|
67,000
|
|
|
|
|
|
|
$
|
57,000
|
|
|
|
|
|
Total intrinsic value of options exercisable
|
|
$
|
24,000
|
|
|
|
|
|
|
$
|
30,000
|
|
|
|
|
|
The following table summarizes information
about stock options outstanding under the 2012 Non-Employee Plan at June 30, 2017:
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Range of
exercise prices
|
|
Number
outstanding
|
|
|
Weighted average
remaining
contractual life
|
|
|
Weighted
average exercise
price
|
|
|
Number
exercisable
|
|
|
Weighted
average exercise
price
|
|
$4.37 - $4.88
|
|
|
14,200
|
|
|
|
6.6
|
|
|
$
|
4.69
|
|
|
|
5,200
|
|
|
$
|
4.76
|
|
|
|
|
14,200
|
|
|
|
6.6
|
|
|
$
|
4.69
|
|
|
|
5,200
|
|
|
$
|
4.76
|
|
As of June 30, 2017, there was $28,000 of unearned
stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. No options
were granted during the fiscal years ended June 30, 2017 and 2016, respectively. The 20,800 stock options exercised during the
fiscal year ended June 30, 2017 were settled by exchanging 9,998 shares of the Company’s common stock which were retired
and returned to unissued status upon receipt. The total fair value of the options vesting during each of the fiscal years ended
June 30, 2017 and 2016 under this plan was $22,000.
2002 Employee Stock Option Plan
In December 2002, the stockholders approved
the 2002 Employee Stock Option Plan (the 2002 Employee Plan). This plan expired in October 2012. This plan authorized the granting
of awards, the exercise of which would allow up to an aggregate of 1,836,000 shares of the Company's common stock to be acquired
by the holders of such awards. Under this plan, the Company may have granted stock options, which were intended to qualify as incentive
stock options (ISOs), to key employees. Any plan participant who was granted ISOs and possessed more than 10% of the voting rights
of the Company's outstanding common stock must have been granted an option with a price of at least 110% of the fair market value
on the date of grant.
Under the 2002 Employee Plan, stock options
have been granted to key employees with a term of 10 years at an exercise price equal to the fair market value on the date of grant
and are exercisable in whole or in part at 20% per year from the date of grant. At June 30, 2017, 1,471,480 stock options had been
granted, 5,000 stock options were exercisable and no further stock options were available for grant under this plan after the plans
expiration in October 2012.
The following table reflects activity under
the 2002 Employee plan for the fiscal years ended June 30,:
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
Outstanding, beginning of year
|
|
|
102,500
|
|
|
$
|
6.04
|
|
|
|
208,500
|
|
|
$
|
6.86
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Terminated/Lapsed
|
|
|
(10,500
|
)
|
|
|
6.02
|
|
|
|
(38,500
|
)
|
|
|
11.03
|
|
Exercised
|
|
|
(87,000
|
)
|
|
|
6.08
|
|
|
|
(67,500
|
)
|
|
|
5.73
|
|
Outstanding, end of period
|
|
|
5,000
|
|
|
$
|
5.35
|
|
|
|
102,500
|
|
|
$
|
6.04
|
|
Exercisable, end of period
|
|
|
5,000
|
|
|
$
|
5.35
|
|
|
|
102,500
|
|
|
$
|
6.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date of options granted
|
|
|
n/a
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
289,000
|
|
|
|
|
|
|
$
|
42,000
|
|
|
|
|
|
Total intrinsic value of options outstanding
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
40,000
|
|
|
|
|
|
Total intrinsic value of options exercisable
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
40,000
|
|
|
|
|
|
The following table summarizes information
about stock options outstanding under the 2002 Employee Plan at June 30, 2017:
|
|
Options outstanding and exercisable
|
|
Range of
exercise
prices
|
|
Number
outstanding
|
|
|
Weighted average
remaining contractual
life
|
|
|
Weighted
average
exercise price
|
|
$5.35
|
|
|
5,000
|
|
|
|
0.3
|
|
|
$
|
5.35
|
|
|
|
|
5,000
|
|
|
|
0.3
|
|
|
$
|
5.35
|
|
As of June 30, 2017, there was no unearned
stock-based compensation cost related to share-based compensation arrangements granted under the 2002 Non-Employee Plan. 87,000
and 67,500 stock options were exercised during the fiscal years ended June 30, 2017 and 2016, respectively. 80,500 of the 87,000
stock options exercised during the fiscal year ended June 30, 2017 were settled by exchanging 59,418 shares of the Company’s
common stock which was included in Treasury Stock upon receipt. The 67,500 stock options exercised during the fiscal year ended
June 30, 2016 were settled by exchanging 53,868 shares of the Company’s common stock which were retired and returned to unissued
status upon receipt. $39,000 and $0 was received from option exercises for the fiscal years ended June 30, 2017 and 2016, respectively,
and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.
NOTE 8 - Stockholders’ Equity
Transactions
On September 16, 2014 the Company’s board
of directors authorized the repurchase of up to 1 million of the approximately 19.4 million shares of the Company’s common
stock outstanding. The repurchase will be made from time to time in the open market or in privately negotiated transactions subject
to market conditions and the market price of the common stock. Relative to the loan agreements described in Note 6, the Company’s
lender gave its consent to this stock repurchase plan. During the fiscal year ended June 30, 2017 the Company did not repurchase
any shares of its outstanding common stock. Shares repurchased prior to fiscal 2017 are included in the Company’s Treasury
Stock as of June 30, 2017.
During fiscal 2017, certain employees and Directors
exercised incentive stock options under the Company’s 2012 and 2002 Plans totaling 143,300 shares. 135,300 of these exercises
were completed as cashless exercises as allowed for under the Plans, where the exercise shares are issued by the Company in exchange
for shares of the Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees
was 85,536 and was based upon the per share price on the effective date of the option exercise.
During fiscal 2016, certain employees exercised
incentive stock options under the Company’s 2002 Plan totaling 67,500 shares. All of these exercises were completed as cashless
exercises as allowed for under the 2002 Plan, where the exercise shares are issued by the Company in exchange for shares of the
Company’s common stock that are owned by the optionees. The number of shares surrendered by the optionees was 53,868 and
was based upon the per share price on the effective date of the option exercise.
NOTE 9 - 401(k) Plan
The Company maintains a 401(k) plan (“the
Plan”) that covers all U.S. non-union employees with one or more years of service and is qualified under Sections 401(a)
and 401(k) of the Internal Revenue Code. Company contributions to this plan are discretionary and totaled $118,000, $111,000 and
$122,000 for the years ended June 30, 2017, 2016 and 2015, respectively.
NOTE 10 - Commitments and Contingencies
Leases
The Company is committed under various operating
leases, not including the land lease discussed below, which do not extend beyond fiscal 2019. Minimum lease payments through the
expiration dates of these leases, with the exception of the land leases referred to below, are as follows:
Year Ending June 30,
|
|
Amount
|
|
2018
|
|
$
|
22,000
|
|
2019
|
|
|
14,000
|
|
|
|
|
|
|
Total
|
|
$
|
36,000
|
|
Rent expense, with the exception of the land
lease referred to below, totaled approximately $23,000, $26,000 and $30,000 for the fiscal years ended June 30, 2017, 2016 and
2015, respectively.
Land Lease
On April 26, 1993, one of the Company's foreign
subsidiaries entered into a 99 year lease, expiring in 2092, for approximately four acres of land in the Dominican Republic at
an annual cost of $288,000, on which the Company's principal production facility is located.
Litigation
In the normal course of business, the Company
is a party to claims and/or litigation. Management believes that the settlement of such claims and/or litigation, considered in
the aggregate, will not have a material adverse effect on the Company's financial position and results of operations.
Employment Agreements
As of June 30, 2017, the Company was obligated
under three employment agreements and one severance agreement. The employment agreements are with the Company’s CEO, Senior
Vice President of Sales and Marketing (“the SVP of Sales”) and the Senior Vice President of Engineering (“the
SVP of Engineering”). The employment agreement with the CEO provides for an annual salary of $730,000, as adjusted for inflation;
incentive compensation as may be approved by the Board of Directors from time to time and a termination payment in an amount up
to 299% of the average of the prior five calendar year's compensation, subject to certain limitations, as defined in the agreement.
The employment agreement renews annually in August unless either party gives the other notice of non-renewal at least six months
prior to the end of the applicable term. The employment agreement with the SVP of Sales expires in October 2018 and provides for
an annual salary of $324,000, a bonus arrangement for fiscal 2017 and, if terminated by the Company without cause, severance of
nine months’ salary and continued company-sponsored health insurance for six months from the date of termination. The employment
agreement with the SVP of Engineering expires in August 2018 and provides for an annual salary of $293,000, a bonus arrangement
for fiscal 2017 and, if terminated by the Company without cause, severance of nine month’s salary and continued company-sponsored
health insurance for six months from the date of termination. The severance agreement is with the Senior Vice President of Operations
and Finance and provides for, if terminated by the Company without cause or within three months of a change in corporate control
of the Registrant, severance of nine month’s salary, continued company-sponsored health insurance for six months from the
date of termination and certain non-compete and other restrictive provisions.
NOTE 11 - Geographical Data
The Company is engaged in one major line of
business: the development, manufacture, and distribution of access control systems, door security products, intrusion and fire
alarm systems and video surveillance products for commercial and residential use. Sales to unaffiliated customers are primarily
shipped from the United States. The Company has customers worldwide with major concentrations in North America.
Financial Information Relating to Domestic
and Foreign Operations
|
|
Fiscal Year ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Sales to external customers(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
84,820
|
|
|
$
|
79,931
|
|
|
$
|
74,736
|
|
Foreign
|
|
|
2,554
|
|
|
|
2,582
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
87,374
|
|
|
$
|
82,513
|
|
|
$
|
77,762
|
|
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
55,550
|
|
|
$
|
51,272
|
|
|
$
|
50,998
|
|
Dominican Republic (2)
|
|
|
15,312
|
|
|
|
13,497
|
|
|
|
14,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Identifiable Assets
|
|
$
|
70,862
|
|
|
$
|
64,769
|
|
|
$
|
65,037
|
|
(1) All of the Company's sales originate in
the United States and are shipped primarily from the Company's facilities in the United States. There were no sales into any one
foreign country in excess of 10% of total Net Sales.
(2) Consists primarily of inventories (2017
= $11,831; 2016 = $10,076) and fixed assets (2017 = $3,233; 2016 = $3,311) located at the Company's principal manufacturing facility
in the Dominican Republic.
NOTE 12 - Subsequent Events
The Company has evaluated subsequent events occurring after the
date of the consolidated financial statements for events requiring recording or disclosure in the financial statements.
b. Supplementary Financial Data
QUARTERLY RESULTS
The following table sets forth unaudited financial data for each
of the Company's last eight fiscal quarters (in thousands except for per share data):
|
|
Fiscal Year Ended June 30, 2017,
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
Net Sales
|
|
$
|
20,168
|
|
|
$
|
20,715
|
|
|
$
|
20,807
|
|
|
$
|
25,684
|
|
Gross Profit
|
|
|
6,452
|
|
|
|
6,617
|
|
|
|
6,663
|
|
|
|
9,846
|
|
Income from Operations
|
|
|
716
|
|
|
|
1,064
|
|
|
|
1,136
|
|
|
|
3,462
|
|
Net Income
|
|
|
568
|
|
|
|
857
|
|
|
|
952
|
|
|
|
3,222
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
.03
|
|
|
|
.05
|
|
|
|
.05
|
|
|
|
.17
|
|
Diluted EPS
|
|
|
.03
|
|
|
|
.05
|
|
|
|
.05
|
|
|
|
.17
|
|
|
|
Fiscal Year Ended June 30, 2016,
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
Net Sales
|
|
$
|
18,149
|
|
|
$
|
20,497
|
|
|
$
|
19,808
|
|
|
$
|
24,059
|
|
Gross Profit
|
|
|
5,637
|
|
|
|
6,201
|
|
|
|
6,108
|
|
|
|
9,638
|
|
Income from Operations
|
|
|
324
|
|
|
|
1,026
|
|
|
|
1,217
|
|
|
|
3,756
|
|
Net Income
|
|
|
315
|
|
|
|
976
|
|
|
|
1,044
|
|
|
|
3,438
|
|
Net Income Per Share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
.02
|
|
|
|
.05
|
|
|
|
.06
|
|
|
|
.18
|
|
Diluted EPS
|
|
|
.02
|
|
|
|
.05
|
|
|
|
.06
|
|
|
|
.18
|
|
Seasonality
The Company's fiscal year begins on July 1
and ends on June 30. Historically, the end users of the Company’s products want to install its products prior to the summer;
therefore sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter,
and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. In addition, demand is affected
by the housing and construction markets. Deterioration of the current economic conditions may also affect this trend.