-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LOVNNQ/NnFJHCSKVCopliA4pc/cbi01KMYwtMGMO0wTO1u11eqdF1DiOnn09OKgA 28YH6TZli1AleJhRAy9djg== 0001157523-09-004092.txt : 20090522 0001157523-09-004092.hdr.sgml : 20090522 20090522165524 ACCESSION NUMBER: 0001157523-09-004092 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20090331 FILED AS OF DATE: 20090522 DATE AS OF CHANGE: 20090522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAPCO SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000069633 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112277818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10004 FILM NUMBER: 09849785 BUSINESS ADDRESS: STREET 1: 333 BAYVIEW AVE CITY: AMITYVILLE STATE: NY ZIP: 11701 BUSINESS PHONE: 5168429400 MAIL ADDRESS: STREET 1: 333 BAYVIEW AVE STREET 2: XXXXXXXXXXXXXXXXXXX CITY: AMITYVILLE STATE: NY ZIP: 11701 10-Q 1 a5970717.txt NAPCO SECURITY TECHNOLOGIES, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2009 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______. Commission File number: 0-10004 --------------------------------------------------------- NAPCO SECURITY TECHNOLOGIES, INC. -------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 11-2277818 - ------------------------------- ---------------------------- (State or other jurisdiction of (IRS Employer Identification incorporation of organization) Number) 333 Bayview Avenue Amityville, New York 11701 - ---------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) (631) 842-9400 --------------------------------------------------- (Registrant's telephone number including area code) NAPCO SECURITY SYSTEMS, INC. (Former name, former address and former fiscal year if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ------ ------ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes No ------ ------ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller reporting company X --- --- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No X ------ ------ Number of shares outstanding of each of the issuer's classes of common stock, as of: May 19, 2009 COMMON STOCK, $.01 PAR VALUE PER SHARE 19,095,713 1 ================================================================================
Page ---- PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX - MARCH 31, 2009 Condensed Consolidated Balance Sheets March 31, 2009 and June 30, 2008 3 Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2009 and 2008 4 Condensed Consolidated Statements of Operations for the Nine Months ended March 31, 2009 and 2008 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 31, 2009 and 2008 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20 ITEM 4. Controls and Procedures 20 PART II: OTHER INFORMATION 21 SIGNATURE PAGE 22
2 ================================================================================ PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, June 30, ASSETS 2009 (unaudited) 2008 (audited) ------ ---------------- ---------------- (in thousands, except share data) Current Assets: Cash and cash equivalents $ 2,567 $ 2,765 Accounts receivable, net of reserves 18,574 25,823 Inventories, net 26,012 19,548 Prepaid expenses and other current assets 748 1,121 Income tax receivable 790 -- Deferred income taxes 861 769 ---------------- ---------------- Total Current Assets 49,552 50,026 Inventories - non-current, net 8,777 7,724 Property, plant and equipment, net 9,215 8,989 Intangible assets, net 16,103 -- Goodwill 10,609 9,686 Other assets 440 298 ---------------- ---------------- Total Assets $ 94,696 $ 76,723 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Loans payable (Note 6) $ 34,314 $ -- Accounts payable 4,946 4857 Accrued expenses 1,603 1,333 Accrued salaries and wages 1,982 2,543 Accrued restructuring costs 350 -- ---------------- ---------------- Total Current Liabilities 43,195 8,733 Long-term debt -- 12,400 Accrued income taxes 210 294 Deferred income taxes 1,823 1,607 Minority interest in subsidiary -- 147 ---------------- ---------------- Total Liabilities 45,228 23,181 ---------------- ---------------- Commitments and Contingencies Stockholders' Equity: Common stock, par value $.01 per share; 40,000,000 shares authorized, 20,095,713 and 20,092,473 shares issued and 19,095,713 and 19,092,473 shares outstanding, respectively 201 201 Additional paid-in capital 13,710 13,424 Retained earnings 41,172 45,532 ---------------- ---------------- 55,083 59,157 Less: Treasury Stock, at cost (1,000,000 shares) (5,615) (5,615) ---------------- ---------------- Total stockholders' equity 49,468 53,542 ---------------- ---------------- Total Liabilities and Stockholders' Equity $ 94,696 $ 76,723 ================ ================ See accompanying notes to condensed consolidated financial statements (unaudited). 3 ================================================================================ NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31, ------------------------------------ 2009 2008 --------------- -------------- (in thousands, except share and per share data) Net sales $ 14,024 $ 16,222 Cost of sales 13,110 10,506 Restructuring costs 1,110 -- --------------- -------------- Gross (Loss) Profit (196) 5,716 Selling, general and administrative expenses 4,919 4,148 Restructuring costs 145 -- --------------- -------------- Operating (Loss) Income (5,260) 1,568 --------------- -------------- Other expense: Interest expense, net 426 216 Other expense, net 76 12 --------------- -------------- Total Other expense 502 228 --------------- -------------- (Loss) Income Before Minority Interest and Benefit for Income Taxes (5,762) 1,340 Minority interest in (income) loss of subsidiary (112) 33 --------------- -------------- (Loss) Income Before Benefit for Income Taxes (5,874) 1,373 Benefit for income taxes (859) (1,904) --------------- -------------- Net (Loss) Income $ (5,015) $ 3,277 (Loss) Earnings per share: Basic $ (0.26) $ 0.17 =============== =============== Diluted $ (0.26) $ 0.17 =============== =============== Weighted average number of shares outstanding: Basic 19,095,713 19,092,487 =============== ============== Diluted 19,095,713 19,626,043 =============== ============== See accompanying notes to condensed consolidated financial statements (unaudited). 4 ================================================================================ NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Nine Months Ended March 31, ------------------------------------ 2009 2008 --------------- --------------- (in thousands, except share and per share data) Net sales $ 50,586 $ 46,264 Cost of sales 37,852 29,877 Restructuring costs 1,110 -- --------------- --------------- Gross Profit 11,624 16,387 Selling, general and administrative expenses 15,142 12,731 Restructuring costs 145 -- --------------- --------------- Operating (Loss) Income (3,663) 3,656 --------------- --------------- Other expense: Interest expense, net 1,170 635 Other expense, net 101 30 --------------- --------------- Total Other expense 1,271 665 --------------- --------------- (Loss) Income Before Minority Interest and Provision for Income Taxes (4,934) 2,991 Minority interest in loss of subsidiary -- 92 --------------- --------------- (Loss) Income Before Provision for Income Taxes (4,934) 3,083 (Benefit) Provision for income taxes (574) (1,741) --------------- --------------- Net (Loss) Income $ (4,360) $ 4,824 =============== =============== (Loss) Earnings per share: Basic $ (0.23) $ 0.25 =============== =============== Diluted $ (0.23) $ 0.24 =============== =============== Weighted average number of shares outstanding: Basic 19,095,595 19,319,967 =============== =============== Diluted 19,095,595 19,873,655 =============== =============== See accompanying notes to condensed consolidated financial statements (unaudited). 5 ================================================================================ NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended March 31, ------------------------------------ 2009 2008 ------------------------------------ (in thousands) Cash Flows from Operating Activities: Net (loss) income $ (4,360) $ 4,824 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 1,440 854 Provision for doubtful accounts 126 40 Change to inventory obsolescence reserve (20) 150 Deferred income taxes 124 730 Non-cash stock based compensation expense 280 216 Change in minority interest (147) -- Changes in operating assets and liabilities, net of acquisition effects: Accounts receivable 8,959 3,731 Inventories (756) (6,607) Prepaid expenses and other current assets 485 (120) Income tax receivable (790) (443) Other assets 4 (113) Accounts payable, accrued expenses, accrued salaries and wages, and accrued income taxes (1,558) (2,061) Accrued restructuring costs 350 -- --------------- --------------- Net Cash Provided by Operating Activities 4,137 1,201 --------------- --------------- Cash Flows Used in Investing Activities: Cash used in business acquisition, net of cash acquired of $520 (24,581) -- Purchases of property, plant and equipment (428) (668) --------------- --------------- Net Cash Used in Investing Activities (25,009) (668) --------------- --------------- Cash Flows from Financing Activities: Proceeds from exercise of employee stock options 6 4 Proceeds from acquisition financing 25,000 -- Proceeds from long-term debt borrowings 2,200 5,000 Principal payments on long-term debt (6,286) (2,000) Cash paid for deferred financing costs (246) -- Cash paid for purchase of treasury stock -- (3,225) --------------- --------------- Net Cash Provided by (Used in) Financing Activities 20,674 (221) --------------- --------------- Net (decrease) increase in Cash and Cash Equivalents (198) 312 Cash and Cash Equivalents, Beginning of Period 2,765 1,748 --------------- --------------- Cash and Cash Equivalents, End of Period $ 2,567 $ 2,060 =============== =============== Cash Paid During the Period for: Interest $ 1,034 $ 589 =============== =============== Income taxes $ 130 $ 102 =============== =============== Non-cash Investing activities: Adjustment to Retained earnings relating to adoption of FIN 48 $ -- $ 485 =============== =============== Accrued Business Acquisition costs $ 295 $ -- =============== =============== Debt assumed in the Acquisition $ 1,000 $ -- =============== =============== See accompanying notes to condensed consolidated financial statements (unaudited). 6 ================================================================================ NAPCO SECURITY TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1.) Summary of Significant Accounting Policies and Other Disclosures ---------------------------------------------------------------- The accompanying Condensed Consolidated Financial Statements are unaudited. In management's opinion, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been made. The results of operations for the periods ended March 31, 2009 are not necessarily indicative of results that may be expected for any other interim period or for the full year. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended June 30, 2008. The accounting policies used in preparing these unaudited Condensed Consolidated Financial Statements are consistent with those described in the June 30, 2008 Consolidated Financial Statements. However, for interim financial statements, inventories are calculated using a gross profit percentage. In addition, the Condensed Consolidated Balance Sheet was derived from the audited financial statements but does not include all disclosures required by Generally Accepted Accounting Principles ("GAAP"). The consolidated financial statements include the accounts of Napco Security Technologies, Inc. and all of its wholly-owned subsidiaries, including those of Marks USA I, LLC ("Marks"), a newly formed subsidiary which acquired substantially all of the assets and certain liabilities of G. Marks Hardware, Inc. acquired on August 18, 2008 . The Company has also consolidated a 51%-owned joint venture. The 49% interest, held by a third party, is reflected as minority interest. All inter-company balances and transactions have been eliminated in consolidation. The Company has made a number of estimates and assumptions relating to the assets and liabilities, the disclosure of contingent assets and liabilities and the reporting of revenues and expenses to prepare these financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. Seasonality The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of Napco's products want to install its products prior to the summer; therefore sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. To a lesser degree, sales in Europe are also adversely impacted in the Company's first fiscal quarter because of European vacation patterns, i.e., many distributors and installers are closed for the month of August. In addition, demand is affected by the housing and construction markets. The severity of the current economic downturn may also affect this trend. Advertising and Promotional Costs Advertising and promotional costs are included in "Selling, General and Administrative" expenses in the condensed consolidated statements of operations and are expensed as incurred. Advertising expense for the three months ended March 31, 2009 and 2008 was $91,000 and $100,000, respectively. Advertising expense for the nine months ended March 31, 2009 and 2008 was $711,000 and $817,000, respectively. Research and Development Costs Research and development costs are included in "Cost of Sales" in the condensed consolidated statements of operations and are expensed as incurred. Research and development expense for the three months ended March 31, 2009 and 2008 was $1,259,000 and $1,375,000, respectively. Research and development expense for the nine months ended March 31, 2009 and 2008 was $3,823,000 and $4,097,000, respectively. Business Concentration and Credit Risk An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had two customers with accounts receivable balances that aggregated 31% and 34% of the Company's accounts receivable at March 31, 2009 and June 30, 2008, respectively. Sales to neither of these customers exceeded 10% of net sales in any of the past three fiscal years. 7 ================================================================================ Allowance for Doubtful Accounts In the ordinary course of business, the Company has established a reserve for doubtful accounts and customer deductions in the amount of $492,000 and $405,000 as of March 31, 2009 and June 30, 2008, respectively. The Company's reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical trends. Stock Options During the three months ended March 31, 2009 the Company granted no stock options under its 2002 Employee Incentive Stock Option Plan. During the nine months ended March 31, 2009 the Company granted 100,000 stock options under its 2002 Employee Incentive Stock Option Plan. These grants have an exercise price of $4.25, a fair value of approximately $198,000 and vest over a two-year period from the date of grant. There were no options granted under its 2000 Non-employee Incentive Stock Option Plan. During the three months ended March 31, 2009 there were no options exercised under either plan. During the nine months ended March 31, 2009 there were 3,240 options exercised, with proceeds of approximately $6,000, under the 2002 Employee Incentive Stock Option Plan and no exercises under the 2000 Non-employee Incentive Stock Option Plan. Intangible Assets Under the Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other Intangible Assets", all goodwill and certain intangible assets determined to have indefinite lives will not be amortized but will be tested for impairment at least annually. Intangible assets other than goodwill will be amortized over their useful lives and reviewed for impairment at least annually at the Company's fiscal yearend of June 30 or more often whenever there is an indication that the carrying amount may not be recovered. The Company's acquisition of substantially all of the assets and certain liabilities of Marks included intangible assets with a fair value of $16,440,000 on the date of acquisition. In accordance with the requirements of SFAS No. 141, "Business Combinations", the Company recorded the estimated value of $9,800,000 related to the customer relationships, $340,000 related to a non-compete agreement and $6,300,000 related to the Marks trade name within intangible assets. The remaining excess of the purchase price of $922,000 was assigned to Goodwill. In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the intangible assets will be amortized over their estimated useful lives of twenty years (customer relationships) and seven years (non-compete agreement). The Marks USA trade name was deemed to have an indefinite life. The goodwill recorded as a result of the acquisition is deductible for Federal and New York State income tax purposes over a period of 15 years. Recent Accounting Pronouncements In March 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company's adoption of SFAS No. 161 is not expected to have a material effect on its condensed consolidated financial statements. In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13." This FSP amends SFAS No. 157 to exclude certain leasing transactions accounted for under previously existing accounting guidance. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination, regardless of whether those assets and liabilities are related to leases. In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157". This FSP delays the effective date of SFAS No. 157, "Fair Value Measurements", for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP 157-3"). FSP 157-3 classified the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of FSP 157-3 did not have a material effect on the Company's condensed consolidated financial statements. 8 ================================================================================ In April 2008, the FASB issued FASB Staff Position SFAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations, and other U.S. GAAP principles. FSP SFAS 142-3 is effective for fiscal years beginning after December 31, 2008. The adoption of FSP SFAS 142-3 is effective July 1, 2009 and is not expected to have a material effect on the Company's condensed consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations," however, it retains the fundamental requirements of the former Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Among other requirements, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred. SFAS No. 141(R) requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business combination. SFAS No. 141(R) must be applied prospectively to business combinations that are consummated beginning in the Company's fiscal 2010. The Company's adoption of SFAS No. 141(R) is not expected to have a material effect on its condensed consolidated financial statements. In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160") to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other requirements, SFAS No. 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is to be reported as a separate component of equity in the consolidated financial statements. SFAS No. 160 also requires consolidated net income to include the amounts attributable to both the parent and the non-controlling interest and to disclose those amounts on the face of the consolidated statement of income. SFAS No. 160 must be applied prospectively for fiscal years, and interim periods within those fiscal years, beginning in the Company's fiscal 2010, except for the presentation and disclosure requirements, which will be applied retrospectively for all periods. The Company's adoption of SFAS No. 160 is not expected to have a material effect on its condensed consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. SFAS No. 159 became effective for the Company in its fiscal year ending June 30, 2009. The Company's adoption of SFAS No. 159 did not have a material effect on its condensed consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. In addition, this statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, this statement simplifies and codifies related guidance within generally accepted accounting principles. SFAS No. 157 became effective for the Company in its fiscal year ending June 30, 2009. The Company's adoption of SFAS No. 157 did not have a material effect on its condensed consolidated financial statements. Reclassification. Certain expenses in Cost of sales for fiscal 2008 have been reclassified to Selling, general and administrative expenses to conform with the current period's presentation. 9 ================================================================================ 2.) Stock-based Compensation ------------------------ The Company has established two share incentive programs as discussed in more detail in the Consolidated Financial Statements and related notes contained in the Company's annual report on Form 10-K for the year ended June 30, 2008. The Company accounts for its stock options and share units granted in accordance with SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)") which requires that all stock-based compensation must be recognized as an expense in the financial statements and that cost be measured at the fair market value of the award. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. Stock-based compensation costs of $73,000 and $64,000 were recognized in three months ended March 31, 2009 and 2008, respectively. Stock-based compensation costs of $280,000 and $216,000 were recognized in nine months ended March 31, 2009 and 2008, respectively. Unearned stock-based compensation cost was $370,000 as of March 31, 2009. The fair values of stock options granted during the nine months ended March 31, 2009 were estimated on the date of grant using the Black-Scholes option-pricing model that used the following weighted average assumptions: Expected life in years 5 Risk-free interest rates 3.07% Volatility 49.86% Dividend yield 0% 3.) Inventories, net ---------------- For interim financial statements, inventories are calculated using a gross profit percentage. The Company regularly reviews parts and finished goods inventories on hand and, when necessary, records a reserve for excess or obsolete inventories. As of March 31, 2009 and June 30, 2008, the balance in this reserve amounted to $1,412,000 and $1,200,000, respectively. 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): March 31, June 30, 2009 2008 ---------- ---------- Component parts $ 18,651 $ 12,924 Work-in-process 4,798 4,114 Finished product 11,340 10,234 $ 34,789 $ 27,272 ========== ========== Classification of inventories, net of reserves: Current $ 26,012 $ 19,548 Non-current 8,777 7,724 ---------- ---------- $ 34,789 $ 27,272 ========== ========== 4.) Earnings (Loss) Per Common Share -------------------------------- The Company follows the provisions of SFAS No. 128, "Earnings Per Share". In accordance with SFAS No. 128, earnings per common share amounts ("Basic EPS") were computed by dividing earnings by the weighted average number of common shares outstanding for the period. Earnings per common share amounts, assuming dilution ("Diluted EPS"), were computed by reflecting the potential dilution from the exercise of stock options. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the condensed consolidated statements of income. A reconciliation between the numerators and denominators of the Basic and Diluted EPS computations for earnings is as follows (in thousands except per share data): Three months ended March 31, 2009 ---------------------------------------- Net (Loss) Shares Per Share (numerator) (denominator) Amounts ------------ ------------ ------------ Basic EPS --------- Net loss, as reported $ (5,015) 19,096 $ (0.26) Effect of dilutive securities ----------------------------- Employee Stock Options $ -- -- $ - ------------ ------------ ------------ 10 ================================================================================ Diluted EPS ----------- Net loss, as reported and assumed option exercises $ (5,015) 19,096 $ (0.26) ============ ============ ============ 1,321,000 options to purchase shares of common stock in the three months ended March 31, 2009 were excluded in the computation of Diluted EPS because their inclusion would be anti-dilutive. Three months ended March 31, 2008 ---------------------------------------- Net (Loss) Shares Per Share (numerator) (denominator) Amounts ------------ ------------ ------------ Basic EPS --------- Net income, as reported $ 3,277 19,092 $ 0.17 Effect of dilutive securities Employee Stock Options $ -- 534 $ -- ------------ ------------ ------------ Diluted EPS ----------- Net income, as reported and assumed option exercises $ 3,277 19,626 $ 0.17 ============ ============ ============ 196,000 options to purchase shares of common stock in the three months ended March 31, 2008 were excluded in the computation of Diluted EPS because the exercise prices were in excess of the average market price for this period and their inclusion would be anti-dilutive. Nine months ended March 31, 2009 ---------------------------------------- Net (Loss) Shares Per Share (numerator) (denominator) Amounts ------------ ------------ ------------ Basic EPS --------- Net loss, as reported $ (4,360) 19,096 $ (0.23) Effect of dilutive securities Employee Stock Options $ -- -- $ -- ------------ ------------ ------------ Diluted EPS ----------- Net loss, as reported and assumed option exercises $ (4,360) 19,096 $ (0.23) ============ ============ ============ 970,000 options to purchase shares of common stock in the nine months ended March 31, 2009 were excluded in the computation of Diluted EPS because their inclusion would be anti-dilutive. Nine months ended March 31, 2008 ---------------------------------------- Net (Loss) Shares Per Share (numerator) (denominator) Amounts ------------ ------------ ------------ Basic EPS --------- Net income, as reported $ 4,824 19,320 $ 0.25 Effect of dilutive securities Employee Stock Options $ -- 554 $ (0.01) ------------ ------------ ------------ Diluted EPS ----------- Net income, as reported and assumed option exercises $ 4,824 19,874 $ 0.24 ============ ============ ============ 187,000 options to purchase shares of common stock in the nine months ended March 31, 2008 were excluded in the computation of Diluted EPS because the exercise prices were in excess of the average market price for this period and their inclusion would be anti-dilutive. Option activity during the nine months ended March 31, 2009 is summarized as follows: Weighted Average Options Exercise Price ------------ -------------- Outstanding at July 1, 2008 1,323,480 $ 2.89 Granted 100,000 4.25 Cancelled -- -- Exercised (3,240) (1.90) ------------ Outstanding at March 31, 2009 1,420,240 2.99 ============ Exercisable at March 31, 2009 1,255,588 ============ 11 ================================================================================ 5.) Acquisition of Business ----------------------- On August 18, 2008, the Company acquired substantially all of the assets and business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the repayment of $1 million of bank debt and the assumption of current liabilities as described more fully in the Asset Purchase Agreement. As such, the operations of Marks have been included in the Company's Statement of Operations for the period August 18, 2008 to March 31, 2009. The Marks business involves the manufacturing and distribution of door-locking devices. The Company completed this acquisition at a price in excess of the value of the net identifiable assets because it believes that the combination of the two companies offers the potential for manufacturing and operational synergies as the Company combines the Marks operations and production into its own door-locking operations and production structure. The Company funded the acquisition with a term loan from its lenders as described in Note 6. The acquisition described above was accounted for as a purchase and was valued based on management's estimate of the fair value of the assets acquired and liabilities assumed. The estimates of fair value are preliminary and subject to adjustment for a period of up to one year from the date of acquisition. Based on the Company's evaluation, the allocation of the purchase price for the acquisition was as follows (in thousands): Assets Acquired: Cash $ 520 Accounts receivable 1,836 Inventory 6,740 Prepaid expenses and other current assets 112 Property and equipment 801 Goodwill 922 Intangible assets 16,440 ------------ 27,371 ------------ Less: Liabilities Assumed: Line of credit borrowings outstanding 1,000 Accounts payable 637 Accrued expenses 339 ------------ 1,976 Total consideration (including acquisition Costs of $222) $ 25,395 ============ In accordance with the requirements of SFAS No. 141, "Business Combinations", the Company recorded the estimated value of $9,800,000 related to the customer relationships, $340,000 related to a non-compete agreement and $6,300,000 related to the Marks trade name within intangible assets and the excess of the purchase price over the fair value of the acquired assets of $922,000 was assigned to Goodwill. In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the intangible assets will be amortized over their estimated useful lives of twenty years (customer relationships) and seven years (non-compete agreement). The weighted average amortization period of these assets is 19.6 years. The Marks trade name was deemed to have an indefinite life. The goodwill recorded as a result of the acquisition is deductible for Federal and New York State income tax purposes over a period of 15 years. Unaudited pro-forma consolidated financial information is presented below as if the acquisition had occurred as of the first day of the earliest period presented. Results have been adjusted to account for: (1) the initial $25,000,000 cash borrowing and related interest expense under the term loan, (2) cash used to repay $1,000,000 in assumed bank debt at closing of the purchase transaction, (3) deferred financing costs and related amortization associated with the term loan, (4) additional salary and employee stock option expense for employees not previously included in salary expense, and (5) amortization expense of acquired intangible assets. The pro-forma information presented below does not purport to present what actual results would have been if the acquisition had occurred at the beginning of such periods, nor does the information project results for any future period. The unaudited pro-forma consolidated financial information should be read in conjunction with the historical financial information included in other reports and documents filed with the United Stated Securities and Exchange Commission. The unaudited pro-forma consolidated financial information for the three and nine months ended March 31, 2009 and 2008 is as follows (in thousands, except share and per share data): 12 ================================================================================ Three Months ended Nine Months ended March 31, March 31, ---------------------- ---------------------- 2009 2008 2009 2008 ---------- ---------- ---------- ---------- Pro-forma: Net sales $ 14,024 $ 22,169 $ 53,105 $ 64,901 Net income (loss) $ (5,015) $ 3,390 $ (4,267) $ 5,242 Net income (loss) per share: Basic $ (0.26) $ 0.18 $ (0.22) $ 0.27 Diluted $ (0.26) $ 0.17 $ (0.22) $ 0.26 Weighted average number of shares: Basic 19,095,713 19,092,487 19,095,595 19,319,967 Diluted 19,095,713 19,626,043 19,095,595 19,873,655 6.) Long Term Debt -------------- On August 18, 2008, the Company and its banks amended and restated the existing $25,000,000 revolving credit agreement. The amended facility was $50,000,000 and provides for a $25,000,000 revolving credit line as well as a $25,000,000 term portion of which the entire $25,000,000 was utilized to finance the asset purchase agreement as described in Note 5. The amended revolving credit agreement and term loan was amended in November 2008 to $20,000,000 and is secured by the accounts receivable, a portion of inventory, the Company's headquarters building in Amityville, New York, certain other assets of Napco Security Technologies, Inc. and the common stock of three of the Company's subsidiaries. The agreements bear interest based on either the Prime Rate or an alternate rate based on LIBOR as described in the agreement. The August amendment extended the revolving credit agreement to August 2012. Any outstanding borrowings are to be repaid or refinanced on or before that time. As of March 31, 2009 there was $11,100,000 outstanding under the revolving credit facility with an interest rate of 5.0% and $23,214,000 outstanding under the term loan with an interest rate of 5.0%. The term loan is being repaid in 19 quarterly installments of $893,000 each, commencing in December 2008, and a final payment of $8,033,000 due in August 2013. The agreements contain various restrictions and covenants including, among others, restrictions on payment of dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement. As of March 31, 2009 the Company was not in compliance with three of the covenants; the ratio of Funded Debt to EBITDA, Debt Service Coverage Ratio and a Modified Quick Ratio. As a result, the banks have notified the Company that they have limited the revolving line of credit to the amount currently outstanding of $11,100,000 until the credit facilities can be amended with the Company. The Company is currently in discussions with its banks regarding waivers for the non-compliance with the covenants at March 31, 2009 and amendments to the existing credit facilities. The Company expects to amend the existing credit facilities and receive the appropriate waivers from its banks but this has not been completed as of the date of this filing. As a result, the Company has classified the amount outstanding under these facilities as a current liability until it completes the amendment with the banks. 7.) Geographical Data ----------------- The Company is engaged in one major line of business: the development, manufacture, and distribution of security alarm products and door security devices for commercial and residential use. Sales to unaffiliated customers are primarily shipped from the United States. The Company has customers worldwide with major concentrations in North America, Europe, and South America. The Company observes the provisions of SFAS No. 131. The following represents selected consolidated geographical data for the three and nine months ended March 31, 2009 and 2008 (in thousands): Three Months ended Nine Months ended March 31, March 31, ---------------------- ---------------------- 2009 2008 2009 2008 ---------- ---------- ---------- ---------- Sales to external customers(1): -------------------------- Domestic $ 12,953 $ 13,288 $ 45,504 $ 38,255 Foreign 1,071 2,934 5,082 8,009 ---------- ---------- ---------- ---------- Total Net Sales $ 14,024 $ 16,222 $ 50,586 $ 46,264 ========== ========== ========== ========== 13 ================================================================================ As of ---------------------- March 31, June 30, 2009 2008 ---------- ---------- Identifiable assets: United States $ 68,045 $ 50,056 Dominican Republic (2) 21,614 19,841 Other foreign countries 5,037 6,826 ---------- ---------- Total Identifiable Assets $ 94,696 $ 76,723 ========== ========== (1) All of the Company's sales occur in the United States and are shipped primarily from the Company's facilities in the United States and United Kingdom. There were no sales into any one foreign country in excess of 10% of Net Sales. (2) Consists primarily of inventories ($16,818,000 and $14,754,000) and fixed assets ($4,713,000 and $4,970,000) located at the Company's principal manufacturing facility in the Dominican Republic as of March 31, 2009 and June 30, 2008, respectively. 8.) Commitments and Contingencies ----------------------------- 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. In August 2008, the Company entered into a lease for the building where Marks has maintained its operations. The lease provides for an annual base rent of $288,750 plus maintenance and real estate taxes, expires in August 2009 and provides for two annual extensions thereafter at similar terms and conditions. In March 2009, the Company began a Restructuring Plan, as described in Note 10, which includes consolidating the operations of Marks from this building into the Corporate Headquarters in Amityville, NY and its production facility in the Dominican Republic. The move from the leased building described above is expected to be completed prior to the expiration of the lease. The Marks business involves the manufacturing and distribution of door-locking devices. 9.) 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 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. 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 are 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. There are no current tax examinations in progress. Accordingly, as of March 31, 2009, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes. The Company adopted the provisions of FIN 48 as of July 1, 2007. The Company has identified its U.S. Federal income tax return and its State return in New York as its major tax jurisdictions. During the three and nine months ending March 31, 2009 the Company decreased its reserve for uncertain income tax positions by $95,000 and $84,000, respectively. As a result, as of March 31, 2009 the Company has a long-term accrued income tax liability of $210,000. 10.) Restructuring Costs ------------------- In March 2009, the Company began a Restructuring Plan consisting of a series of actions to consolidate its Sales, Production and Warehousing operations of Marks and those in Europe and the Middle East into the Corporate Headquarters in Amityville, NY and its production facility in the Dominican Republic. We expect these restructuring initiatives to cost between $1,200,000 and $1,500,000. The majority of these actions are expected to be completed by July 31, 2009, while certain Production-related actions are expected to be completed by December 31, 2009. Accordingly, the Company recognized Restructuring costs of $1,255,000 in the three and nine months ended March 31, 2009. Of this amount, $210,000 relates to Workforce Reductions communicated in March 2009 and $1,045,000 to Business Exits and related costs associated with inventory and lease impairments related to the closure of the Marks, European and Middle East facilities. As of March 31, 2009, $905,000 of the $1,255,000 in Restructuring costs has been incurred and $350,000 remains in accrued expenses. 14 ================================================================================ Item 2. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------ of Operations ------------- Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q and the information incorporated by reference may include "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The Company intends the Forward-Looking Statements to be covered by the Safe Harbor Provisions for Forward-Looking Statements. All statements regarding the Company's expected financial position and operating results, its business strategy, its financing plans and the outcome of any contingencies are Forward-Looking Statements. The Forward-Looking Statements are based on current estimates and projections about our industry and our business. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such Forward-Looking Statements. The Forward-Looking Statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any Forward-Looking Statements. For example, the Company is highly dependent on its Chief Executive Officer for strategic planning. If he is unable to perform his services for any significant period of time, the Company's ability to continue growing could be adversely affected. In addition, factors that could cause actual results to differ materially from the Forward-Looking Statements include, but are not limited to, the ability to maintain adequate financing to fund operations, adverse tax consequences of offshore operations, significant fluctuations in the exchange rate between the Dominican Peso and the U.S. Dollar, distribution problems, unforeseen environmental liabilities, the uncertain economic, military and political conditions in the world and the successful integration of Marks into our existing operations. Overview The Company is a diversified manufacturer of security products, encompassing intrusion and fire alarms, building access control systems and electronic locking devices. These products are used for commercial, residential, institutional, industrial and governmental applications, and are sold worldwide principally to independent distributors, dealers and installers of security equipment. International sales accounted for approximately 10% and 17% of our revenues for the nine months ended March 31, 2009 and 2008, respectively. The Company owns and operates manufacturing facilities in Amityville, New York and the Dominican Republic. A significant portion of our operating costs are fixed, and do not fluctuate with changes in production levels or utilization of our manufacturing capacity. As production levels rise and factory utilization increases, the fixed costs are spread over increased output, which should improve profit margins. Conversely, when production levels decline our fixed costs are spread over reduced levels, thereby decreasing margins. On August 18, 2008, the Company acquired substantially all of the assets and business of G. Marks Hardware, Inc. ("Marks") for $25.2 million, the repayment of $1 million of bank debt and the assumption of certain current liabilities. The Company also entered into a lease for the building where Marks has maintained its operations. The lease provides for an annual base rent of $288,750 plus maintenance and real estate taxes, expires in August 2009 and provides for two annual extensions thereafter. In March 2009 the Company began to move the Marks operations into its existing facilities. The Company plans on completing the majority of this consolidation by July 31, 2009. The Marks business involves the manufacturing and distribution of door-locking devices. The security products market is characterized by constant incremental innovation in product design and manufacturing technologies. Generally, the Company devotes 7-8% of revenues to research and development (R&D) on an annual basis. Products resulting from our R&D investments in fiscal 2008 did not contribute materially to revenue during this fiscal year, but should benefit the Company over future years. In general, the new products introduced by the Company are initially shipped in limited quantities, and increase over time. Prices and manufacturing costs tend to decline over time as products and technologies mature. Economic and Other Factors Since October 2008, the U.S. and international economies have experienced a significant downturn and continue to be very volatile. In the event that the downturn in the U.S. or international financial markets is prolonged, our revenue, profit and cashflow levels could be materially adversely affected in future periods. This could effect our ability to maintain adequate financing. If the current worldwide economic downturn continues, many of our current or potential future customers may experience serious cash flow problems and as a result may, modify, delay or cancel purchases of our products. Additionally, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Furthermore, the current downturn and market instability makes it difficult for us to forecast our revenues. Restructuring Costs In March 2009, the Company began a Restructuring Plan consisting of a series of actions to consolidate its Sales, Production and Warehousing operations of Marks and those in Europe and the Middle East into the Corporate Headquarters in Amityville, NY and its production facility in the Dominican Republic. We expect these restructuring initiatives to cost between $1,200,000 and $1,500,000. The majority of these actions are expected to be completed by July 31, 2009, while certain Production-related actions are expected to be completed by December 31, 2009. Accordingly, the Company recognized Restructuring costs of $1,255,000 in the three and nine months ended March 31, 2009. Of this amount, $210,000 relates to Workforce Reductions communicated in March 2009 and $1,045,000 to Business Exits and related costs associated with inventory and lease impairments related to the closure of the Marks, European and Middle East facilities. As of March 31, 2009, $905,000 of the $1,255,000 in Restructuring costs has been incurred and $350,000 remains in accrued expenses. 15 ================================================================================ Seasonality The Company's fiscal year begins on July 1 and ends on June 30. Historically, the end users of Napco's products want to install its products prior to the summer; therefore sales of its products historically peak in the period April 1 through June 30, the Company's fiscal fourth quarter, and are reduced in the period July 1 through September 30, the Company's fiscal first quarter. To a lesser degree, sales in Europe are also adversely impacted in the Company's first fiscal quarter because of European vacation patterns, i.e., many distributors and installers are closed for the month of August. In addition, demand is affected by the housing and construction markets. The severity of the current economic downturn may also affect this trend. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates. Our most critical accounting policies relate to revenue recognition; concentration of credit risk; inventories; intangible assets; goodwill; and income taxes. Revenue Recognition Revenues from merchandise sales are recorded at the time the product is shipped or delivered to the customer pursuant to the terms of sale. We report our sales levels on a net sales basis, which is computed by deducting from gross sales the amount of actual returns received and an amount established for anticipated returns and other allowances. Our sales return accrual is a subjective critical estimate that has a direct impact on reported net sales and income. This accrual is calculated based on a history of gross sales and actual sales returns, as well as management's estimate of anticipated returns and allowances. As a percentage of gross sales, sales returns, rebates and allowances were 10% and 6% for the nine months ended March 31, 2009 and 2008, respectively. Concentration of Credit Risk An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had if it mitigated its risk through diversification of customers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. The Company had two customers with accounts receivable balances that aggregated 31% and 34% of the Company's accounts receivable at March 31, 2009 and June 30, 2008, respectively. Sales to neither of these customers exceeded 10% of net sales in any of the past three fiscal years. In the ordinary course of business, we have established a reserve for doubtful accounts and customer deductions in the amount of $492,000 and $405,000 as of March 31, 2009 and June 30, 2008, respectively. Our reserve for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable agings, specific exposures and historical trends. Inventories For interim financial statements, inventories are calculated using a gross profit percentage. The Company regularly reviews parts and finished goods inventories on hand and, when necessary, records a reserve for excess or obsolete inventories. As of March 31, 2009 and June 30, 2008, the balance in this reserve amounted to $1,412,000 and $1,200,000, respectively. This reserve is based in part on subjective estimates and approximations and actual results could differ from those estimates. 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. 16 ================================================================================ In addition, the Company records an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated market value, based on various product sales projections. The balance in this reserve was $1,412,000 and $1,200,000 as of March 31, 2009 and June 30, 2008, respectively. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends, requirements to support forecasted sales, and the ability to find alternate applications of its raw materials and to convert finished product into alternate versions of the same product to better match customer demand. There is inherent professional judgment and subjectivity made by both production and engineering members of management in determining the estimated obsolescence percentage. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. The Company also regularly reviews the period over which its inventories will be converted to sales. Any inventories expected to convert to sales beyond 12 months from the balance sheet date are classified as non-current. Goodwill and Other Intangible Assets The Company accounts for Goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These statements established accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. In accordance with SFAS No. 142, intangible assets, including purchased goodwill, must be evaluated for impairment. 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. Those intangible assets that are classified as goodwill or as other intangibles with indefinite lives are not amortized. Impairment testing is performed in two steps: (i) the Company determines impairment by comparing the fair value of a reporting unit with its carrying value, and (ii) if there is an impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. At the conclusion of fiscal 2008, the Company performed its annual impairment evaluation required by this standard and determined that its goodwill is not impaired. The Company's acquisition of substantially all of the assets and certain liabilities of Marks included intangible assets with a fair value of $16,440,000 on the date of acquisition. In accordance with the requirements of SFAS No. 141, "Business Combinations", the Company recorded the estimated value of $9,800,000 related to the customer relationships, $340,000 related to a non-compete agreement and $6,300,000 related to the Marks trade name within intangible assets and Goodwill of $922,000 subject to further adjustment. In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the intangible assets will be amortized over their estimated useful lives of twenty years (customer relationships) and seven years (non-compete agreement). The Marks USA trade name was deemed to have an indefinite life. The goodwill recorded as a result of the acquisition is deductible for Federal and New York State income tax purposes over a period of 15 years. Income Taxes The 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 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. 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 are recognized separately in the quarter of the change. We do 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. There are no current tax examinations in progress. Accordingly, as of March 31, 2009, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes. 17 ================================================================================ Results of Operations
Three months ended March 31, Nine months ended March 31, (dollars in thousands) (dollars in thousands) ----------------------------------------- ----------------------------------------- % Increase/ % Increase/ 2009 2008 (decrease) 2009 2008 (decrease) -------------------------------------------------------------------------------------- Net sales $ 14,024 $ 16,222 (13.5)% $ 50,586 $ 46,264 9.3% Gross profit (loss) (196) 5,716 (103.4)% 11,624 16,387 (29.1)% Gross profit (loss) as a % of net sales (1.4)% 35.2% (36.6)% 23.0% 35.4% (12.4)% Selling, general and administrative 4,919 4,148 18.6% 15,142 12,731 18.9% Selling, general and administrative as a percentage of net sales 35.1% 25.6% 9.5% 29.9% 27.5% 2.4% Operating income (loss) (5,260) 1,568 (435.5)% (3,663) 3,656 (200.2)% Interest expense, net 426 216 97.2% 1,170 635 84.3% Other (income) expense 76 12 533.3% 101 30 236.7% Minority interest in net (loss) income of subsidiary (112) 33 (439.4)% -- 92 (100.0)% Provision (Benefit) for income taxes (859) (1,904) 54.9% (574) (1,741) 67.0% Net income (loss) (5,015) 3,277 (253.0)% (4,360) 4,824 (190.4)%
Sales for the three months ended March 31, 2009 decreased by approximately 14% to $14,024,000 as compared to $16,222,000 for the same period a year ago. Sales for the nine months ended March 31, 2009 increased by approximately 9% to $50,586,000 as compared to $46,264,000 for the same period a year ago. The decrease in sales for the three months ended March 31, 2009 was primarily from decreased sales of the Company's intrusion products ($2,974,000), products specific to the Company's Middle East operation ($1,595,000), door locking products ($1,441,000) and access control products ($369,000) as partially offset by the net sales added from the Marks acquisition ($4,177,000). The increase in sales for the nine months ended March 31, 2009 was primarily the result of the net sales added from the Marks acquisition ($12,265,000) and an increase in the company's door-locking products ($379,000) as partially offset by decreases in the Company's intrusion products ($6,725,000), products specific to the Company's Middle East operation ($1,484,000) and access control products ($114,000). The Company's sales were adversely affected by the worldwide economic downturn to a greater extent in the quarter ended March 31, 2009 as compared to previous quarters. Gross profit for the three months ended March 31, 2009 decreased to a loss of $196,000 or (1.4)% of sales as compared to a profit of $5,716,000 or 35.2% of sales for the same period a year ago. Gross profit for the nine months ended March 31, 2009 decreased to $11,624,000 or 23.0% of sales as compared to $16,387,000 or 35.4% of sales for the same period a year ago. The decrease in Gross profit in dollars and as a percentage of sales for the three and nine months was primarily due to the decrease in sales of the Company's non-Marks products as described above as well as $1,110,000 in restructuring costs in the three and nine months ended March 31, 2009 as partially offset by the addition of the Gross profit of Marks ($1,118,000 and $3,732,000, respectively) resulting from the acquisition on August 18, 2008. Selling, general and administrative expenses for the three months ended March 31, 2009 increased by $771,000 to $4,919,000, or 35.1% of sales, as compared to $4,148,000, or 25.6% of sales a year ago. Selling, general and administrative expenses for the nine months ended March 31, 2009 increased by $2,411,000 to $15,142,000, or 29.9% of sales, as compared to $12,731,000, or 27.5% of sales a year ago. The increases in dollars for the three and nine months ended March 31, 2009 was due primarily to the additional expenses relating to Marks ($820,000 and $2,415,000, respectively). The increases as a percentage of sales are due primarily to the decreases in sales as described above. Interest expense, net for the three months ended March 31, 2009 increased by $210,000 to $426,000 as compared to $216,000 for the same period a year ago. Interest expense, net for the nine months ended March 31, 2009 increased by $535,000 to $1,170,000 as compared to $635,000 for the same period a year ago. The increase in interest expense for the three and nine months resulted primarily from the increase in the Company's average outstanding debt, which was due to the $25,000,000 term loan utilized for the Marks acquisition in August 2008. The Company's provision for income taxes for the three months ended March 31, 2009 increased by $1,045,000 to a benefit of $859,000 as compared to a benefit of $1,904,000 for the same period a year ago. The Company's provision for income taxes for the nine months ended March 31, 2009 increased by $1,167,000 to a benefit of $574,000 as compared to a benefit of $1,741,000 for the same period a year ago. The increase in provision for income taxes for the three and nine months resulted primarily from the benefits recognized in the third quarter of fiscal 2008 for the reversal of certain tax reserves for which the statute of limitations expired and also in the second quarter of fiscal 2008 relating to the Company's corporate restructuring. As a result, the Company's effective rate for income tax was 14.6% and 11.6% for the three and nine months ended March 31, 2009, respectively as compared to (138.7)% and (56.4)% for the same periods a year ago. 18 ================================================================================ Net income decreased by $8,292,000 to a loss of $5,015,000 or $(0.26) per diluted share for the three months ended March 31, 2009 as compared to income of $3,277,000 or $0.17 per diluted share for the same period a year ago. Net income decreased by $9,184,000 to a loss of $4,360,000 or $(0.23) per diluted share for the nine months ended March 31, 2009 as compared to income of $4,824,000 or $0.24 per diluted share for the same period a year ago. The decrease for the three and nine months ended March 31, 2009 was primarily due to the decrease in net sales and gross profit in the Company's intrusion product lines. Liquidity and Capital Resources - ------------------------------- During the nine months ended March 31, 2009 the Company utilized all of its cash from operations and additional borrowings to complete the Marks acquisition ($26,173,000, which includes payment of the $1,000,000 of assumed debt), purchase inventory ($756,000) and property, plant and equipment ($428,000). As a result of the Company not being in compliance with the financial ratios described below, the Company's banks have notified the Company that they have limited the revolving line of credit to the amount currently outstanding of $11,100,000 until the credit facilities can be amended with the Company. The Company is currently in discussions with its banks regarding waivers for the non-compliance with the covenants at March 31, 2009 and amendments to the existing credit facilities. The Company expects to amend the existing credit facilities and receive the appropriate waivers from its banks but this has not been completed as of the date of this filing. As a result, the Company has classified the amount outstanding under these facilities as a current liability until it completes the amendment with the banks. While the Company expects to be able to negotiate amended credit facilities, should it fail to do so its current working capital, cash flows from operations and its revolving credit agreement may not be sufficient to fund the Company's operations through the next twelve months. Accounts Receivable at March 31, 2009 decreased $7,249,000 to $18,574,000 as compared to $25,823,000 at June 30, 2008. This decrease is primarily the result of the lower sales volume during the quarter ended March 31, 2009 as compared to the quarter ended June 30, 2008, which is typically the Company's highest, as partially offset by the Accounts Receivable generated by Marks ($2,179,000). Inventories at March 31, 2009 increased by $7,517,000 to $34,789,000 as compared to $27,272,000 at June 30, 2008. This increase was primarily the result of the Marks acquisition ($5,064,000) as well as the Company level-loading its production schedule in anticipation of its historical sales cycle where a larger portion of the Company's sales occur in the latter fiscal quarters as compared to the earlier quarters. The Company initiated several steps in order to reduce inventory levels in fiscal 2008 and is continuing them in fiscal 2009. These efforts were mitigated by the decreased sales volume that has occurred during the first nine months of fiscal 2009 (exclusive of the sales resulting from the Marks acquisition) and which was below the sales forecast used by the Company to plan and build it's inventory. These forecasts have been adjusted subsequent to March 31, 2009. On August 18, 2008, the Company and its banks amended and restated the existing $25,000,000 revolving credit agreement. The amended facility was $50,000,000 and provides for a $25,000,000 revolving credit line as well as a $25,000,000 term portion of which the entire $25,000,000 was utilized to finance the asset purchase agreement as described in Note 5. The amended revolving credit agreement and term loan was amended in November 2008 to $20,000,000 and amended in May 2009 to $11,100,000 and is secured by all the accounts receivable, inventory, the Company's headquarters in Amityville, New York and certain other assets of Napco Security Technologies, Inc. and the common stock of three of the Company's subsidiaries. The agreements bear interest based on either the Prime Rate or an alternate rate based on LIBOR as described in the agreement. The August amendment extended the revolving credit agreement to August 2012. Any outstanding borrowings are to be repaid or refinanced on or before that time. As of March 31, 2009 there was $11,100,000 outstanding under the revolving credit facility with an interest rate of 5.0% and $23,214,000 outstanding under the term loan with an interest rate of 5.0%. The term loan is being repaid in 19 quarterly installments of $893,000 each, commencing in December 2008, and a final payment of $8,033,000 due in August 2013. The agreements contain various restrictions and covenants including, among others, restrictions on payment of dividends, restrictions on borrowings and compliance with certain financial ratios, as defined in the agreement. The Company is currently not in compliance with the covenants relating to the ratio of Funded Debt to EBITDA, Debt Service Coverage Ratio and a Modified Quick Ratio, which constitutes an event of default under its credit facilities, and is currently in discussions with it's banks regarding the appropriate waivers as well as amendments to the existing credit facilities as discussed above. As of March 31, 2009 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders issued in the normal course of business. 19 ================================================================================ ITEM 3: Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------ The Company's principal financial instrument is long-term debt (consisting of a revolving credit facility and term loan) that provides for interest based on the prime rate or an alternate rate based on LIBOR as described in the agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit facility. At March 31, 2009, an aggregate principal amount of approximately $34,314,000 was outstanding under the Company's credit facility with a weighted average interest rate of approximately 5.0%. If principal amounts outstanding under the Company's credit facility remained at this level for an entire year and the prime rate increased or decreased, respectively, by 1% the Company would pay or save, respectively, an additional $343,000 in interest that year. A significant number of foreign sales transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto many of its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations. In addition, the Company transacts certain sales in Europe in British Pounds Sterling, therefore exposing itself to a certain amount of foreign currency risk. Management believes that the amount of this exposure is immaterial. We are also exposed to foreign currency risk relative to expenses incurred in Dominican Pesos ("RD$"), the local currency of the Company's production facility in the Dominican Republic. The result of a 10% strengthening in the U.S. dollar to our RD$ expenses would result in an annual decrease in income from operations of approximately $315,000. ITEM 4: Controls and Procedures - ------------------------------- We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. At the conclusion of the period ended March 31, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in alerting them in a timely manner to information relating to the Company required to be disclosed in this report except as follows: Management's review over its internal controls at the conclusion of fiscal 2008 identified conditions which they deemed to be material weaknesses, (as defined by standards established by the SEC and the Public Company Accounting Oversight Board) with respect to certain of our inventory valuation methods both at year-end and relating to the Gross profit method used to calculate Gross profit and Inventories for interim reporting purposes. Management has informed its independent auditors and the Audit Committee that it has corrected its method of calculating its gross profit and inventory for interim reporting by including a more comprehensive review of changes within the business and accounting for those changes where appropriate. The Company has also initiated a review of the ways in which we can more accurately cost its inventory for year-end reporting and will continue to monitor the effectiveness of these actions and will make any other changes or take such additional actions as management determines to be appropriate. Management expects to complete the actions relating to the year-end inventory valuation during fiscal 2009. The Company has excluded from this assessment the internal control over financial reporting of Marks USA, which was acquired in August 2008. Total assets and total net sales subject to Marks USA internal control over financial reporting, represented 26% and 24%, respectively, of the Company's consolidated total assets and net sales for the nine months ended March 31, 2009. During the third quarter of fiscal 2009, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting except for the procedure described above which has corrected the weakness relating to interim Gross profit and inventory calculations. 20 ================================================================================ PART II: OTHER INFORMATION Item 1A. Risk Factors ------------ Information regarding the Company's Risk Factors are set forth in the Company's Annual Report on Form 10-K for the year ended June 30, 2008. There have been no material changes in the risk factors previously disclosed in the Company's Form 10-K for the year ended June 30, 2008 during the three months ended March 31, 2009 except as follows: Our Business Could Be Materially Adversely Affected as a Result of the --------------------------------------------------------------------------- Inability to Maintain Adequate Financing ---------------------------------------- Our business is dependent on maintaining the financing used in the Marks acquisition and to fund operations. The current debt facilities provide for certain minimum payments on the Marks term loan and financial covenants relating to ratios affected by profit and debt levels. If profits or cash-flow levels decline below the minimums required to meet these covenants or make the minimum debt payments, the debt facilities may be materially adversely affected. Effects on the Company's financing could include higher interest costs, reduction in borrowing availability or revocation of the existing credit facilities. Our Business Could Be Materially Adversely Affected as a Result of General --------------------------------------------------------------------------- Economic and Market Conditions ------------------------------ We are subject to the effects of general economic and market conditions. If these conditions deteriorate, our business, results of operations or financial condition could be materially adversely affected. In addition, since October 2008, the U.S. and international economies have experienced a significant downturn and continue to be very volatile. In the event that the downturn in the U.S. or international economies is prolonged, our revenue levels could be materially adversely affected in future periods. If the current worldwide economic downturn continues, many of our current or potential future customers may experience serious cash flow problems and as a result may, modify, delay or cancel purchases of our products. Additionally, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Furthermore, the current downturn and market instability makes it difficult for us to forecast our revenues. Our Business Could Be Materially Adversely Affected by the Inability to --------------------------------------------------------------------------- Reduce Expenses Relative to the Current Decreases in Sales Levels ----------------------------------------------------------------- While Management has begun implementation of a restructuring plan to reduce expense levels relative to current sales levels, if this plan is unsuccessful, delayed or sales levels decrease further, our business may be adversely affected. Our Business Could Be Materially Adversely Affected by the Integration of --------------------------------------------------------------------------- Marks into Our Existing Operations ---------------------------------- Our business is dependent on the orderly, effective integration of the acquired Marks business, technologies, product lines and employees into our organization. If this integration is unsuccessful, our business may be materially adversely affected. Item 6. Exhibits -------- 31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard L. Soloway, Chairman of the Board and President 31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S. Buchel, Senior Vice President of Operations and Finance 32.1 Section 1350 Certifications 21 ================================================================================ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 21, 2009 NAPCO SECURITY TECHNOLOGIES, INC. (Registrant) By: /s/ RICHARD L. SOLOWAY ------------------------------------------------------------- Richard L. Soloway Chairman of the Board of Directors, President and Secretary (Chief Executive Officer) By: /s/ KEVIN S. BUCHEL ------------------------------------------------------------- Kevin S. Buchel Senior Vice President of Operations and Finance and Treasurer (Principal Financial and Accounting Officer) 22 ================================================================================ EX-31.1 2 a5970717ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 SECTION 302 CERTIFICATION I, Richard Soloway, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Napco Security Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 21, 2009 /s/RICHARD SOLOWAY Richard Soloway Chief Executive Officer (Principal Executive Officer) 23 ================================================================================ EX-31.2 3 a5970717ex312.txt EXHIBIT 31.2 EXHIBIT 31.2 SECTION 302 CERTIFICATION I, Kevin S. Buchel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Napco Security Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 21, 2009 /s/KEVIN S. BUCHEL Kevin S. Buchel Chief Financial Officer (Principal Financial Officer) 24 ================================================================================ EX-32.1 4 a5970717ex321.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Napco Security Technologies, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2009 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, RICHARD L. SOLOWAY, Chief Executive Officer of the Company, certify, that to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 21, 2009 /s/ RICHARD L. SOLOWAY ------------------------------------------- Richard L. Soloway, Chief Executive Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Napco Security Technologies, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2009 filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, KEVIN S. BUCHEL, Chief Financial Officer of the Company, certify, that to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 21, 2009 /s/ KEVIN S. BUCHEL ---------------------------------------- Kevin S. Buchel, Chief Financial Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 25 ================================================================================ -----END PRIVACY-ENHANCED MESSAGE-----