NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
NOTE 1 - Nature of Business
and Summary of Significant Accounting Policies
Nature of Business
:
Napco Security Technologies, Inc. and Subsidiaries (the "Company"
or “Napco”) 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 Napco's products want to install its products prior to the summer; therefore
sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced
in the period July 1 through September 30, the Company's fiscal first quarter. In addition, demand is affected by the housing and
construction markets. Deterioration of the current economic conditions may also affect this trend.
Significant Accounting Policies
:
Principles of Consolidation
The unaudited condensed consolidated financial statements of the
Company, including these notes, have been prepared by the Company in accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial information and pursuant to the rules and regulations promulgated by the U.S. Securities
and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted or condensed. However, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed
consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements
for the year ended June 30, 2017 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the
SEC on September 13, 2017. Results of consolidated operations for the interim periods are not necessarily indicative of a full
year’s operating results. The unaudited condensed consolidated financial statements herein include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Accounting Estimates
The preparation of financial statements in
conformity with GAAP 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, allowance for doubtful accounts, 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, short-term certificates of deposit, current receivables and payables and certain other short-term financial instruments
approximate their fair value as of December 31, 2017 due to their short-term maturities; Long-Term Debt - The carrying amounts
of the Company’s long-term debt at December 31, 2017 in the amount of $2,000,000 and 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 certificates of deposit at December 31, 2017 and June 30, 2017. The Company considers all highly liquid
investments with original maturities of three months or less to be cash equivalents. The Company has cash balances in banks in
excess of the maximum amount insured by the FDIC and other international agencies as of December 31, 2017 and June 30, 2017. 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 $175,000 as of December 31, 2017 and $155,000 as of June 30, 2017 and for returns and other allowances
of $1,145,000 as of December 31, 2017 and $1,250,000 as of June 30, 2017. Our reserves for doubtful accounts and for returns and
other allowances are subjective critical estimates that have a direct impact on reported net earnings. These reserves are based
upon the evaluation of our accounts receivable aging, specific exposures, sales levels and historical trends.
Inventories
Inventories are valued at the lower of cost
or net realizable value, with cost being determined on the first-in, first-out (FIFO) method. The reported net value of inventory
includes finished saleable products, work-in-process and raw materials that will be sold or used in future periods. Inventory costs
include raw materials, direct labor and overhead. The Company’s overhead expenses are applied based, in part, upon estimates
of the proportion of those expenses that are related to procuring and storing raw materials as compared to the manufacture and
assembly of finished products. These proportions, the method of their application, and the resulting overhead included in ending
inventory, are based in part on subjective estimates and actual results could differ from those estimates.
In addition, the Company records an inventory
obsolescence reserve, which represents any excess of the cost of the inventory over its estimated market value, based on various
product sales projections. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based
on age, historical trends, requirements to support forecasted sales, and the ability to find alternate applications of its raw
materials and to convert finished product into alternate versions of the same product to better match customer demand. In addition,
and as necessary, the Company may establish specific reserves for future known or anticipated events. There is inherent professional
judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence
percentage.
The Company also regularly reviews the period
over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from
the balance sheet date are classified as non-current.
Property, Plant, and Equipment
Property, plant, and equipment are carried
at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major
renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition
is reflected in income.
Depreciation is recorded over the estimated
service lives of the related assets using primarily the straight-line method. Amortization of leasehold improvements is calculated
by using the straight-line method over the estimated useful life of the asset or lease term, whichever is shorter.
Intangible Assets
Intangible assets determined to have indefinite
lives are not amortized. Intangible assets with definite lives are amortized over their useful lives. Indefinite-lived intangible
assets are reviewed for impairment at least annually at the Company’s fiscal year end of June 30 or more often whenever there
is an indication that the carrying amount may not be recovered.
The Company’s acquisition of substantially
all of the assets and certain liabilities of G. Marks Hardware, Inc. (“Marks”) in August 2008 included intangible assets
recorded at fair value on the date of acquisition. The intangible assets are amortized over their estimated useful lives of twenty
years (customer relationships). The Marks trade name was deemed to have an indefinite life.
Changes in intangible assets are as follows
(in thousands):
|
|
December 31, 2017
|
|
|
June 30, 2017
|
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
9,800
|
|
|
$
|
(7,969
|
)
|
|
$
|
1,831
|
|
|
$
|
9,800
|
|
|
$
|
(7,784
|
)
|
|
$
|
2,016
|
|
Trade name
|
|
|
5,900
|
|
|
|
—
|
|
|
|
5,900
|
|
|
|
5,900
|
|
|
|
—
|
|
|
|
5,900
|
|
|
|
$
|
15,700
|
|
|
$
|
(7,969
|
)
|
|
$
|
7,731
|
|
|
$
|
15,700
|
|
|
$
|
(7,784
|
)
|
|
$
|
7,916
|
|
Amortization expense for intangible assets
subject to amortization was approximately $92,000 and $110,000 for the three months ended December 31, 2017 and 2016, respectively.
Amortization expense for intangible assets subject to amortization was approximately $185,000 and $220,000 for the six months ended
December 31, 2017 and 2016, 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 10.6 years and 11.6 years at December 31, 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 8% for the each of
the six months ended December 30, 2017 and 2016, respectively.
Advertising and Promotional Costs
Advertising and promotional costs are included
in "Selling, General and Administrative" expenses in the consolidated statements of income and are expensed as incurred.
Advertising expense for the three months ended December 31, 2017 and 2016 was $462,000 and $498,000, respectively. Advertising
expense for the six months ended December 31, 2017 and 2016 was $1,103,000 and $1,172,000, 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
income. Company-sponsored research and development expense for the three months ended December 31, 2017 and 2016 was $1,639,000
and $1,609,000, respectively. Company-sponsored research and development expense for the six months ended December 31, 2017 and
2016 was $3,246,000 and $3,237,000, 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 enactment of H. R. 1, Tax Cuts and Jobs Act on December 22, 2017 reduced the U. S. Corporate income tax rate to 21%
and had a favorable impact on the Company’s net deferred tax liabilities. The effect on the deferred tax assets and liabilities
for the change in tax rate is recognized in income in the three and six month periods ending December 31, 2017 which 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 three months ended December 31 (in thousands, except per share data):
|
|
Net Income
|
|
|
Weighted Average Shares
|
|
|
Net Income per Share
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1,233
|
|
|
$
|
857
|
|
|
|
18,849
|
|
|
|
18,798
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
|
|
53
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
1,233
|
|
|
$
|
857
|
|
|
|
18,883
|
|
|
|
18,851
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
Options to purchase 870 and 5,000 shares of common stock for the
three months ended December 31, 2017 and 2016, 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.
The following provides a reconciliation of
information used in calculating the per share amounts for the six months ended December 31 (in thousands, except per share data):
|
|
Net Income
|
|
|
Weighted Average Shares
|
|
|
Net Income per Share
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
2,123
|
|
|
$
|
1,425
|
|
|
|
18,848
|
|
|
|
18,792
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
|
|
52
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
2,123
|
|
|
$
|
1,425
|
|
|
|
18,881
|
|
|
|
18,844
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Options to purchase 435 and 5,000 shares of common stock for the
six months ended December 31, 2017 and 2016, respectively, were not included in the computation of Diluted EPS because their inclusion
would be anti-dilutive. These options were still outstanding at the end of the respective periods.
Stock-Based Compensation
The Company has established two share incentive
programs as discussed in Note 7.
Stock-based compensation cost is measured at
the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period.
Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility
and forfeiture rates, among other factors.
Stock-based compensation costs of $103,000
and $65,000 were recognized for three months ended December 31, 2017 and 2016, respectively. Stock-based compensation costs of
$136,000 and $98,000 were recognized for six months ended December 31, 2017 and 2016, respectively. The effect on both Basic and
Diluted Earnings per share was $0.00 for the three and six months ended December 31, 2017 and 2016.
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 period. The realized and unrealized gains and losses associated with foreign currency translation,
as well as related other comprehensive income, were not significant for the either of the three and six months ended December 31,
2017 and 2016.
Comprehensive Income
For the three and six months ended December
31, 2017 and 2016, the Company's operations did not give rise to significant 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.
Shipping and Handling Revenues and Costs
The Company records the amount billed to customers
for shipping and handling in net sales ($125,000 and $105,000 in the three months ended December 31, 2017 and 2016, respectively
and $247,000 and $245,000 in the six months ended December 31, 2017 and 2016, respectively) and classifies the costs associated
with these revenues in cost of sales ($252,000 and $217,000 in the three months ended December 31, 2017 and 2016, respectively
and $459,000 and $433,000 in the six months ended December 31, 2017 and 2016, respectively).
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 became effective for the Company’s fiscal
2018 first quarter and the guidance prescribes different transition methods for the various provisions (i.e., retrospective, modified
retrospective or prospective). The adoption of this standard did not have a material effect on our 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 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 (“NRV”). ASU 2015-11 was effective for the Company’s quarter ended September 30, 2017. The adoption of
this standard did not 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 two customers, both of which are nationwide distributors of the Company’s products, with accounts receivable
balances that comprised 15% and 14% of the Company’s accounts receivable at December 31, 2017 and 24% and 10% at June 30,
2017. Sales to neither of these customers exceeded 10% of net sales in either of the three or six months ended December 31, 2017.
Sales to one of these customers comprised 13% and 14% of net sales for the three and six months ended December 2016, respectively.
NOTE
3 - Inventories
Inventories, net of reserves are valued at
lower of cost (first-in, first-out method) or NRV. 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):
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Component parts
|
|
$
|
17,310
|
|
|
$
|
16,638
|
|
Work-in-process
|
|
|
4,610
|
|
|
|
4,415
|
|
Finished product
|
|
|
9,946
|
|
|
|
9,526
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,866
|
|
|
$
|
30,579
|
|
|
|
|
|
|
|
|
|
|
Classification of inventories, net of reserves:
|
|
|
|
|
|
Current
|
|
$
|
26,687
|
|
|
$
|
26,212
|
|
Non-current
|
|
|
5,179
|
|
|
|
4,367
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,866
|
|
|
$
|
30,579
|
|
NOTE 4 – Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
Useful Life in Years
|
|
|
|
|
|
|
Land
|
|
$
|
904
|
|
|
$
|
904
|
|
|
—
|
Buildings
|
|
|
8,911
|
|
|
|
8,911
|
|
|
30 to 40
|
Molds and dies
|
|
|
7,171
|
|
|
|
7,058
|
|
|
3 to 5
|
Furniture and fixtures
|
|
|
2,599
|
|
|
|
2,570
|
|
|
5 to 10
|
Machinery and equipment
|
|
|
22,544
|
|
|
|
22,183
|
|
|
7 to 10
|
Leasehold improvements
|
|
|
633
|
|
|
|
485
|
|
|
Shorter of the lease term or life of asset
|
|
|
|
42,762
|
|
|
|
42,111
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(36,052
|
)
|
|
|
(35,568
|
)
|
|
|
|
|
$
|
6,710
|
|
|
$
|
6,543
|
|
|
|
Depreciation and amortization expense on property,
plant, and equipment was $248,000 and $213,000 for the three months ended December 31, 2017 and 2016, respectively. Depreciation
and amortization expense on property, plant, and equipment was $484,000 and $422,000 for the six months ended December 31, 2017
and 2016, respectively.
NOTE 5 - Income Taxes
The provision for income taxes
represents Federal, foreign, and state and local income taxes. The effective rate differs from statutory rates due to the
effect of state and local income taxes, tax rates in foreign jurisdictions, tax benefit of R&D credits and certain
nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and non-recurring
factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, and state and local income
taxes. For the three and six months ended December 31, 2017 the effective tax rate was favorably impacted by the enactment of
H.R. 1, Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act reduced the U.S. Corporate income tax
rate to 21% and resulted in a $286,000 reduction in the Company’s net deferred tax liabilities. As the Company has a
June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. federal statutory rate of
approximately 27.55% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years. The Company reported
$208,000 of provisional expense on its unremitted foreign earnings. Accounting Standard Codification (“ASC”) 740
requires filers to record the effects of tax law changes in the period enacted. However, the SEC issued Staff Accounting
Bulletin No. 118 (“SAB 118”), that permits filers to record provisional amounts during a measurement period
ending no later than one year from the date of the Act’s enactment. As of December 31, 2017, the Company has not
completed accounting for the tax effects of enactment of the Act; however, the Company has made a reasonable estimate of the
effects on the existing deferred balances as well as the computation of the one-time transition tax. In addition, changes
in judgment from the evaluation of new information resulting in the recognition de-recognition or re-measurement of a tax
position taken in a prior annual period is recognized separately in the quarter of the change.
The Company does not expect that our unrecognized
tax benefits will significantly change within the next twelve months. We file a consolidated U.S. income tax return and tax returns
in certain state and local and foreign jurisdictions. As of December 31, 2017 we remain subject to examination in all tax jurisdictions
for all relevant jurisdictional statutes for fiscal years 2014 and thereafter.
The Company has identified its U.S. Federal
income tax return and its State return in New York as its major tax jurisdictions.
NOTE
6 - Long-Term Debt
As of December 31, 2017, long-term debt consisted
of a revolving credit facility of $11,000,000 (the “Revolving Credit Facility”) which expires in June 2021.
Outstanding balances and interest rates as
of December 31, 2017 and June 30, 2017 are as follows (dollars in thousands):
|
|
December 31, 2017
|
|
|
June 30, 2017
|
|
|
|
Outstanding
|
|
|
Interest Rate
|
|
|
Outstanding
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
$
|
2,000
|
|
|
|
2.5
|
%
|
|
$
|
3,500
|
|
|
|
2.2
|
%
|
The Revolving Credit Facility (the “Agreement”)
also provides for a LIBOR-based interest rate option of LIBOR plus 1.15% to 2.00%, depending on the ratio of outstanding debt to
EBITDA, which is to be measured and adjusted quarterly, a prime rate-based option of the prime rate plus 0.25% and other terms
and conditions as more fully described in the Agreement. In addition, the Agreement provides for availability under the Revolving
Credit Facility to be limited to the lesser of $11,000,000 or the result of a borrowing base formula based upon the Company’s
Accounts Receivables and Inventory values net of certain deductions. The Company’s obligations under the Agreement continue
to be secured by all of its assets, including but not limited to, deposit accounts, accounts receivable, inventory, and the Company’s
corporate headquarters in Amityville, NY, equipment and fixtures and intangible assets. In addition, the Company’s wholly-owned
subsidiaries, with the exception of the Company’s foreign subsidiaries, have issued guarantees and pledges of all of their
assets to secure the Company’s obligations under the Agreement. All of the outstanding common stock of the Company’s
domestic subsidiaries and 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. The
Company recorded non-cash compensation expense relating to stock-based compensation of $103,000 and $65,000 for the three months
ended December 31, 2017 and 2016, respectively ($0.00 per basic and diluted share for each period). The Company recorded non-cash
compensation expense relating to stock-based compensation of $136,000 and $98,000 for the six months ended December 31, 2017 and
2016, respectively ($0.00 per basic and diluted share for each period).
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 December 31, 2017,
88,100 stock options were granted, 60,300 stock options were exercisable and 823,900 stock options were available for grant under
this plan.
The following table reflects activity under
the 2012 Plan for the six months ended December 31,:
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
70,600
|
|
|
$
|
5.84
|
|
|
|
112,500
|
|
|
$
|
5.54
|
|
Granted
|
|
|
20,000
|
|
|
|
8.97
|
|
|
|
5,000
|
|
|
|
8.15
|
|
Terminated/Lapsed
|
|
|
—
|
|
|
|
—
|
|
|
|
(400
|
)
|
|
|
6.31
|
|
Exercised
|
|
|
(2,500
|
)
|
|
|
6.31
|
|
|
|
(1,500
|
)
|
|
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
88,100
|
|
|
$
|
6.53
|
|
|
|
115,600
|
|
|
$
|
5.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
60,300
|
|
|
$
|
6.03
|
|
|
|
74,500
|
|
|
$
|
5.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date of options granted
|
|
$
|
111,000
|
|
|
|
|
|
|
$
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
7,000
|
|
|
|
|
|
|
$
|
9,000
|
|
|
|
|
|
Total intrinsic value of options outstanding
|
|
$
|
279,000
|
|
|
|
|
|
|
$
|
331,000
|
|
|
|
|
|
Total intrinsic value of options exercisable
|
|
$
|
221,000
|
|
|
|
|
|
|
$
|
218,000
|
|
|
|
|
|
500 and 1,500 stock options were exercised
during the three months ended December 31, 2017 and 2016, respectively. $3,000 and $9,000 was received from option exercises during
the three months ended December 31, 2017 and 2016, respectively, and the actual tax benefit realized for the tax deductions from
option exercises was $0 for each of these periods. 2,500 and 1,500 stock options were exercised during the six months ended December
31, 2017 and 2016, respectively. $16,000 and $9,000 was received from option exercises during the six months ended December 31,
2017 and 2016, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of
these periods.
The following table summarizes information
about stock options outstanding under the 2012 Employee Plan at December 31, 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-$9.63
|
|
|
88,100
|
|
|
|
7.3
|
|
|
$
|
6.53
|
|
|
|
60,300
|
|
|
$
|
6.03
|
|
|
|
|
88,100
|
|
|
|
7.3
|
|
|
$
|
6.53
|
|
|
|
60,300
|
|
|
$
|
6.03
|
|
As of December 31, 2017, there was $132,000
of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan.
20,000 and 5,000 options were granted during the three and six months ended December 31, 2017 and 2016, respectively. The total
fair value of the options vesting during the three months ended December 31, 2017 and 2016 under this plan was $80,000 and $59,000,
respectively. The total fair value of the options vesting during the six months ended December 31, 2017 and 2016 under this plan
was $96,000 and $75,000, respectively.
2012 Non-Employee Stock Option Plan
In December 2012, the stockholders approved
the 2012 Non-Employee Stock Option Plan (the “2012 Non-Employee Plan”). This plan authorizes the granting of awards,
the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders
of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and
its subsidiaries.
Under the 2012 Non-Employee Plan, stock options
may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of
grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan
shall vest in full upon a “change in control” as defined in the plan. At December 31, 2017, 29,200 stock options were
granted, 15,200 stock options were exercisable and no stock options were available for grant under this plan.
The following table reflects activity under
the 2012 Non-Employee Plan for the six months ended December 31,:
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
14,200
|
|
|
$
|
4.69
|
|
|
|
35,000
|
|
|
$
|
4.73
|
|
Granted
|
|
|
15,000
|
|
|
|
8.70
|
|
|
|
—
|
|
|
|
—
|
|
Terminated/Lapsed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,200
|
)
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
29,200
|
|
|
$
|
6.75
|
|
|
|
29,800
|
|
|
$
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
15,200
|
|
|
$
|
5.53
|
|
|
|
20,800
|
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date of options granted
|
|
$
|
83,000
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
|
n/a
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
Total intrinsic value of options outstanding
|
|
$
|
86,000
|
|
|
|
|
|
|
$
|
112,000
|
|
|
|
|
|
Total intrinsic value of options exercisable
|
|
$
|
63,000
|
|
|
|
|
|
|
$
|
78,000
|
|
|
|
|
|
No stock options were exercised during the
three or six months ended December 31, 2017. No cash was received from option exercises during the three or six months ended December
31, 2017 and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods. 5,200
options were exercised during the three and six months ended December 31, 2016. All of the 5,200 exercises were settled by exchanging
3,056 shares of the Company’s common stock which were retired and returned to authorized. No cash was received from option
exercises during the three and six months ended December 31, 2016 and the actual tax benefit realized for the tax deductions from
option exercises was $0 for each of these periods.
The following table summarizes information
about stock options outstanding under the 2012 Non-Employee Plan at December 31, 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 - $8.70
|
|
|
29,200
|
|
|
|
8.1
|
|
|
$
|
6.75
|
|
|
|
15,200
|
|
|
$
|
5.53
|
|
|
|
|
29,200
|
|
|
|
8.1
|
|
|
$
|
6.75
|
|
|
|
15,200
|
|
|
$
|
5.53
|
|
As of December 31, 2017, there was $72,000
of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee
Plan. 15,000 options were granted during the three and six months ended December 31, 2017. No options were granted during the three
or six months ended December 31, 2016. The total fair value of the options vesting during the three months ended December 31, 2017
and 2016 under this plan was $22,000 and $6,000, respectively. The total fair value of the options vesting during the six months
ended December 31, 2017 and 2016 under this plan was $39,000 and $22,000, respectively.
2002 Employee Stock Option Plan
In December 2002, the stockholders approved
the 2002 Employee Stock Option Plan (the “2002 Employee Plan”). This plan expired in October 2012. This plan authorized
the granting of awards, the exercise of which would allow up to an aggregate of 1,836,000 shares of the Company's common stock
to be acquired by the holders of such awards. Under this plan, the Company may have granted stock options, which were intended
to qualify as incentive stock options (ISOs), to key employees. Any plan participant who was granted ISOs and possessed more than
10% of the voting rights of the Company's outstanding common stock must have been granted an option with a price of at least 110%
of the fair market value on the date of grant.
Under the 2002 Employee Plan, stock options
have been granted to key employees with a term of 10 years at an exercise price equal to the fair market value on the date of grant
and are exercisable in whole or in part at 20% per year from the date of grant. At December 31, 2017, 1,471,480 stock options had
been granted and no stock options were exercisable. No further stock options were available for grant under this plan after the
plan’s expiration in October 2012.
The following table reflects activity
under the 2002 Employee plan for the three months ended December 31,:
|
|
2017
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
5,000
|
|
|
$
|
5.35
|
|
|
|
102,500
|
|
|
$
|
6.04
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Terminated/Lapsed
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,500
|
)
|
|
|
6.02
|
|
Exercised
|
|
|
(5,000
|
)
|
|
|
5.35
|
|
|
|
(52,000
|
)
|
|
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
40,000
|
|
|
$
|
5.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
40,000
|
|
|
$
|
5.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value at grant date of options granted
|
|
|
n/a
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
20,000
|
|
|
|
|
|
|
$
|
114,000
|
|
|
|
|
|
Total intrinsic value of options outstanding
|
|
|
n/a
|
|
|
|
|
|
|
$
|
113,000
|
|
|
|
|
|
Total intrinsic value of options exercisable
|
|
|
n/a
|
|
|
|
|
|
|
$
|
113,000
|
|
|
|
|
|
0 and 5,000 stock options were exercised
during the three and six months ended December 31, 2017, respectively. The 5,000 exercises were settled in cashless exercises
by exchanging 2,815 shares of the Company’s common stock which were retired and returned to unissued status. No cash was
received from option exercises during either of the three or six months ended December 31, 2017 and the actual tax benefit realized
for the tax deductions from option exercises was $0 for each of these periods. 52,000 stock options were exercised during the
three and six months ended December 31, 2016. 45,500 of the 52,000 exercises were settled by exchanging 40,655 shares of the Company’s
common stock which were retired and returned to authorized. The remaining 6,500 exercises were paid for in cash. $40,000 was received
from option exercises during the three and six months ended December 31, 2016 and the actual tax benefit realized for the tax
deductions from option exercises was $0 for each of these periods.
NOTE 8 – Stockholders’ Equity
Transactions
On September 16, 2014 the Company’s board
of directors authorized the repurchase of up to 1 million of the approximately 19.4 million shares of the Company’s common
stock outstanding. The repurchase will be made from time to time in the open market or in privately negotiated transactions subject
to market conditions and the market price of the common stock. Relative to the Loan Agreement described in Note 6, the Company’s
lender gave its consent to this stock repurchase plan. 22,600 shares were purchased under this plan during the three and six months
ended December 31, 2017.
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 $33,000 and $27,000 for
the three months ended December 31, 2017 and 2016, respectively and $64,000 and $55,000 for the six months ended December 31, 2017
and 2016, 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 2023
.
Rent expense, with the exception of the land
lease referred to below, totaled approximately $7,000 and $6,000 for the three months ended December 31, 2017 and 2016, respectively
and $13,000 and $12,000 for the six months ended December 31, 2017 and 2016, 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 December 31, 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 $334,000,
a bonus arrangement for fiscal 2018 and, if terminated by the Company without cause, severance of nine months’ salary and
continued company-sponsored health insurance for six months from the date of termination. The employment agreement with the SVP
of Engineering expires in August 2018 and provides for an annual salary of $302,000, a bonus arrangement for fiscal 2018 and, if
terminated by the Company without cause, severance of nine month’s salary and continued company-sponsored health insurance
for six months from the date of termination. The severance agreement is with the Senior Vice President of Operations and Finance
and provides for, if terminated by the Company without cause or within three months of a change in corporate control of the Registrant,
severance of nine month’s salary, continued company-sponsored health insurance for six months from the date of termination
and certain non-compete and other restrictive provisions. Each of the severance agreements with the SVP of Sales, the SVP of Engineering
and the Senior Vice President of Operations and Finance contains non-compete restrictions for three years after the employee’s
termination of employment
.
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 (in thousands)
|
|
Three months ended December 31,
|
|
|
Six months ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales to external customers(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
20,451
|
|
|
$
|
20,100
|
|
|
$
|
41,103
|
|
|
$
|
39,593
|
|
Foreign
|
|
|
661
|
|
|
|
615
|
|
|
|
1,183
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
21,112
|
|
|
$
|
20,715
|
|
|
$
|
42,286
|
|
|
$
|
40,883
|
|
|
|
December
31, 2017
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
52,124
|
|
|
$
|
55,550
|
|
|
|
|
|
|
|
|
|
Dominican
Republic (2)
|
|
|
18,363
|
|
|
|
15,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets
|
|
$
|
70,487
|
|
|
$
|
70,862
|
|
|
|
|
|
|
|
|
|
(1) All of the Company's sales originate in
the United States and are shipped primarily from the Company's facilities in the United States. There were no sales into any one
foreign country in excess of 10% of total Net Sales.
(2) Consists primarily of inventories (December
31, 2017 = $14,765, June 30, 2017 = $11,831) and long-lived assets (December 31, 2017 = $3,379, June 30, 2017 = $3,233) located
at the Company's principal manufacturing facility in the Dominican Republic.