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EX-32 - Henry Bros. Electronics, Inc.v177170_ex32.htm
EX-99 - Henry Bros. Electronics, Inc.v177170_ex99.htm
EX-3.7 - Henry Bros. Electronics, Inc.v177170_ex3-7.htm
EX-21.1 - Henry Bros. Electronics, Inc.v177170_ex21-1.htm
EX-31.2 - Henry Bros. Electronics, Inc.v177170_ex31-2.htm
EX-23.1 - Henry Bros. Electronics, Inc.v177170_ex23-1.htm
EX-31.1 - Henry Bros. Electronics, Inc.v177170_ex31-1.htm
EX-31.3 - Henry Bros. Electronics, Inc.v177170_ex31-3.htm
EX-14.1 - Henry Bros. Electronics, Inc.v177170_ex14-1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 (Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
 
Commission File No. 005-62411
 

 
HENRY BROS. ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

 
Delaware
 
22-3690168
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
17-01 Pollitt Drive, Fair Lawn, NJ
 
07410
(address of principal executive offices)
 
(Zip Code)

(201) 794-6500
(Registrant’s telephone number, including area code)
 

 
Securities registered pursuant to Section 12(b) of the Act: None
 

 
Securities registered pursuant to Section 12(g) of the Act:
 

 
Title of each class: 
Name of each exchange on which registered:
Common Stock, $.01 par value
The NASDAQ Stock Market
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨     No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨     No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘accelerated filer and large accelerated filer’ in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one): Large accelerated filer o 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 Securities Exchange Act of 1934). Yes  ¨     No  x .
 
At June 30, 2009, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $14,835,726 (based on the closing price of the registrant’s common stock on the NASDAQ Stock Market  on such date).

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
Classes:
 
Outstanding at March 8, 2010
Common Stock, par value $.01 per share
 
6,035,366

Documents Incorporated by Reference:       None

 
 

 

Table of Contents
 
PART I
 
   
Item 1. Business
3
   
Item 1A.  Risk Factors
7
   
Item 1B.  Unresolved Staff Comments
9
   
Item 2. Properties
9
   
Item 3. Legal Proceedings
10
   
Item 4. (Removed and Reserved)
10
   
PART II
 
   
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
10
   
Item 6. Selected Financial Data
12
   
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
12
   
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
19
   
Item 8. Financial Statements and Supplementary Data
19
   
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
19
   
Item 9A. Controls and Procedures
20
   
Item 9B. Other Information
20
   
PART III
 
   
Item 10. Directors, Executive Officers and Corporate Governance
21
   
Item 11. Executive Compensation
23
   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
29
   
Item 13. Certain Relationships and Related Transactions and Director Independence
31
   
Item 14. Principal Accountant Fees and Services
31
   
PART IV
 
   
Item 15. Exhibits, Financial Statement Schedules
32
   
Signatures
33
   
F-1
 
 
2

 

 
Item 1.
Business
 
Business Development.
 
In 1950, John, Ray, and Hartford Henry founded Henry Bros. Electronics.  They sold Henry Bros. Electronics to Communication Group, Inc. (“CGI”) in 1985.  In 1989, Jim Henry, our Chairman and Chief Executive Officer, and Irvin Witcosky, our former President and Chief Operating Officer reacquired certain assets, including the name Henry Bros. Electronics from CGI. In 1991 we acquired the assets of the former Motorola CCTV division and formed Viscom Products, Inc. (“Viscom”). In 1999 we formed a company named Integcom Corp., incorporated in Delaware, into which we transferred both HBE and Viscom. In 2001, we changed our name to Diversified Security Solutions, Inc. and in 2005 we changed our name to Henry Bros. Electronics, Inc. (“HBE”).  Following is a listing of key business developments since the inception of HBE:
 
 
·
In November 2001, we completed our initial public offering, including the underwriter’s over-allotment option of an aggregate of 1,725,000 shares of common stock. Our shares are traded on the NASDAQ under the ticker symbol HBE.
 
 
·
In May 2002, we purchased Photo Scan Systems, Inc. (“Photo Scan”) a security integrator located in southern California and changed its name to Henry Bros. Electronics, Inc. in December 2002.
 
 
·
In August 2002, Photo Scan acquired National Safe of California, Inc. which sells and services alarm security equipment, lock and timing mechanisms, vault security, control and backup systems and high resolution security equipment used by commercial banks.
 
 
·
In September 2002, Photo Scan acquired Corporate Security Integration, LLC (“CSI”) a security integrator located in Phoenix, Arizona, and subsequently changed its name to Henry Bros. Electronics, LLC.
 
 
·
In April 2004, we acquired Airorlite Communications, Inc. (“Airorlite”), a company located in New Jersey that specializes in the design, manufacture and maintenance of wireless communications equipment used to enhance emergency radio frequency services and cellular communication for both fixed and mobile applications.
 
 
·
In October 2005, we acquired Securus, Inc. a security integrator with offices in Denver and Colorado Springs, Colorado.
 
 
·
In October 2006, we acquired CIS Security Systems Corp. (“CIS”), a privately-held security systems integrator with offices in Baltimore, Maryland and Newington, Virginia and acquired certain assets of Southwest Securityscan, Inc. (SSI), a privately-held company headquartered in Duncanville, Texas that provides installation, service and monitoring of access, surveillance and alarm systems.

Our principal executive offices are located at 17-01 Pollitt Drive, Fair Lawn, New Jersey 07410, and our telephone number is (201) 794-6500.

 Business of Issuer
 
We are an established leader in the electronic physical security industry providing technology-based integrated electronic security systems, services and emergency preparedness consultation to commercial enterprises and government agencies.
 
Security Distributing and Marketing magazine (“SDM”) ranks by each of their 2008 revenue the top 100 largest firms selling closed circuit TV (“CCTV”), access control and integrated security systems.  We were ranked  No. 14 in SDM's Top Systems Integrators Report published in July 2009. As a single-source/turn-key provider of diversified technology-based integrated security solutions, we can expedite project completion and optimize system manpower performance. The continually evolving security requirements of commercial and government entities, together with rapidly advancing technology, provides numerous opportunities for us to assist our clients with their security needs.
 
We believe that the following key attributes provide us with a sustainable competitive advantage:
 
·
Experience and expertise;
 
·
Technological know-how;
 
·
Commitment to customer service; and
 
·
Strong list of references.

 
3

 

Our Vision and Strategy
 
Our vision is to maintain our leadership position in security technology. We intend to do this in part by:
 
·
Providing advice on product selection and system design;
 
·
Examining and thoroughly testing each security product as it would be set up for use in our customers’ facilities; and
 
·
Using only systems and components that are reliable and efficient to use.
 
In addition to growing the business organically, we have been actively pursuing the strategic acquisition of synergistic integrators and specialty products and service companies to further fuel steady growth.  Consistent with our expansion strategy, we have acquired seven companies since May of 2002.
 
Business Segments
 
Our operations are divided into two business segments – Security System Integration (“Integration”) and Specialty Products and Services (“Specialty”). The Integration segment provides a cradle to grave services for a wide variety of security, communications and control systems.  The Company specializes in turn-key systems that integrate many different technologies.  Systems are customized to meet the specific needs of its customers. Through the Specialty segment we provide emergency preparedness programs, and specialized radio frequency communication equipment and integration.  Each of the Company’s segments markets its products and services nationwide with an emphasis in Arizona, California, Colorado, Maryland, New Jersey, New York, Texas and Virginia. Customers are primarily medium and large businesses and governmental agencies. The Company derives a majority of its revenues from project installations and to a smaller extent, maintenance service revenue.

 Integration Segment
 
At the beginning of each new client relationship, we designate one member of our professional staff as the client service contact. This individual is the point person for communications between the client and us and often serves as the client's project manager for all of its security needs. Our engagement may include:
 
 
·
Consulting and planning;
 
·
Engineering and design;
 
·
Systems installation and management;
 
·
Systems training; and
 
·
Maintenance and technical support.
 
Consulting and Planning
 
Security consulting and planning are the initial phases of determining a security solution for a project. We have developed a planning process that identifies all systems, policies and procedures that are required for the successful operation of a security system that will both meet a client's current needs and accommodate its projected future requirements. Our consulting and planning process includes the following steps:
 
 
·
Identify the client's objectives and security system requirements;
 
·
Survey the site(s), including inventory of physical components and software and evaluation of client's existing infrastructure and security system;
 
·
Assess and prioritize the client's vulnerabilities;
 
·  
Develop and evaluate system alternatives;
 
·
Recommend a conceptual security plan design;
 
·
Estimate the cost of implementing the conceptual plan; and
 
·
Develop a preliminary implementation schedule.

As a result of this process, we provide the client with a master plan for an effective security solution that addresses routine operating needs as well as emergency situations.
 
We believe that our comprehensive planning process enables our clients to budget for their security requirements on a long-term basis, identify opportunities for cost reduction and prepare for future risks.

 
4

 

 
The engineering and design process involves preparation of detailed project specifications and working drawings by a team of our engineers, systems designers and computer-aided design system operators.  These specifications and drawings detail the camera sensitivity requirements, layout of the control center, placement of cameras, card readers and other equipment and electrical requirements. Throughout our engineering and design process, our goal is to understand our client's operational preferences in order to design a system that is functional, cost-effective and accommodates our client's present and future requirements. In addition, we attempt to incorporate our client's existing personnel, equipment and other physical resources into the system design.

 When retained as a single-source provider for turn-key security solutions, we select system components required under the specifications and drawings. We recommend that our customers buy proven off-the-shelf devices and software and resort to custom equipment only when absolutely necessary.
 
We have made a strategic decision not to represent any equipment manufacturer exclusively, thereby maintaining objectivity and flexibility in equipment selection. We believe that our technical proficiency with the products available from a wide range of manufacturers enables us to select components that will best meet a project's requirements.
 
Systems Installation and Management
 
Under the supervision of the manager of the project, our technicians install hardware, integrate hardware and software, and validate and test the system. Subcontractors typically perform the aspects of systems integration that do not require a high level of technical expertise, such as wire installation and basic construction. Components that may be integrated in a security system include the following:
 
·
Access control systems, which are designed to exclude unauthorized personnel from specified areas;
 
·
Intrusion detection systems, which detect unauthorized door and window openings, glass breakage, vibration, motion, noise and alarms and other peripheral equipment;
 
·
Closed circuit television systems, which monitor and record entry and exit activity or provide surveillance of designated areas;
 
·
Critical condition monitoring systems, which provide alarm monitoring and supervision of various systems and facilities; and
 
·
Intercoms, public address systems, fire detection signals and network connectivity that can expand a local security system into a closely controlled worldwide system.
 
Systems Training
 
Upon completion of a systems integration project, we typically will provide the customer with system documentation and training in the operation and maintenance of the system.
 
Maintenance and Technical Support
 
We provide maintenance and technical support services on a scheduled, on-call, or emergency basis. These services include developing and implementing maintenance programs both for security systems designed, engineered, or integrated by us and for existing systems.
 
Specialty Segment
 
Airorlite specializes in designing, manufacturing and maintaining wireless communications equipment used to enhance and extend emergency radio frequency services and cellular communication for both fixed and mobile applications. Our Diversified Securities Solutions, Inc. division (formerly our EPP division) works with high-rise office building management to analyze their specific facilities needs relating to emergency response plans and the communication and training of such plans to the building community.

 
5

 

 
Our marketing activities are conducted on both national and regional levels. We obtain engagements through direct negotiation with clients, competitive bid processes and referrals. At the national level, we conduct analyses of various industries and target those with significant demand for security solutions.
 
We have developed expertise in the security regulations applicable to airports and seaports, high-rise buildings, public transportation systems, healthcare, financial, educational and other vertical markets.  We have identified several key industries or facility types that we believe have substantial and increasing requirements for security services, including corporate campuses and federal facilities.
 
Customers
 
We provide our products and services to customers in the public and private sectors through direct sales to end-users and through subcontracting agreements and have provided services to customers representing each of the vertical markets described under Marketing.
 
Suppliers
 
We procure components and finished products from a variety of suppliers as needed through purchase orders. We actively manage this process to ensure component quality, steady supply and best costs. While there could be a short-term disruption in qualifying vendors, we believe that the components we utilize could be obtained from alternative sources, or that our products could be redesigned to use alternative suppliers’ components, if necessary.
 
Competition
The security industry is highly fragmented and competitive. We compete on a local, regional and national basis with systems integrators, consulting firms and engineering and design firms. Our competitors include equipment manufacturers and vendors that also provide security services. Many of our competitors have greater name recognition and financial resources.  We believe that we compete primarily on our ability to deliver solutions that effectively meet a client's requirements and, to a lesser extent and primarily in competitive bid situations, on price. Many of the larger public sector projects require performance bonds, which may limit our ability to compete with larger competitors as the prime contractor, depending upon the specifications of the project.
 
Employees
 
As of March 8, 2010, we had 205 full time employees, including officers, of whom: 113 were engaged in engineering, systems installation and maintenance services, 57 in administration and accounting, and 35 in marketing and sales. None of our employees are covered by a collective bargaining agreement or are represented by a labor union. We consider our relationship with our employees to be satisfactory.
 
Our business requires substantial technical capabilities in many disciplines, from mechanics and computer science to electronics and advanced software. We emphasize continued training for new and existing technical personnel. Accordingly, we conduct training classes and seminars in-house, send select employees to technical schools and avail ourselves of training opportunities offered by equipment manufacturers and other specialists on a regular basis.
 
Seasonality
 
Revenue generated by our services have typically been seasonal in nature and there could be periods of fluctuations in revenue volume due to the timing of project installations or factors that are beyond the Company’s control, such as weather and construction delays.
 
Backlog
 
At December 31, 2009, the dollar amount of backlog believed to be firm was $28,021,794. At December 31, 2008, our backlog was $23,701,243.
 
All orders are subject to modification or cancellation by the customer within the limits of contractual agreements . We believe that backlog alone is not an indicator of actual sales for the current fiscal year or any succeeding period.

 
6

 

Pricing
 
We employ a variety of pricing strategies for our services. Systems integration project pricing is based upon the estimated cost of the equipment for the project including a profit margin, plus the estimated hours for each skill set, required to complete the project multiplied by the fully burdened hourly rate, plus a profit margin.  Pricing for engineering and maintenance services are determined based on the scope of the specific project and the length of our engagement. Proposals for consulting and threat assessment services are priced based on an estimate of hours, multiplied by standard selling rates or on a project basis.
 
AVAILABLE INFORMATION
 
We maintain an Internet website at the following address: www.hbe-inc.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K. We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge, as soon as reasonably practicable, after we electronically file the information with, or furnish it to, the SEC. 
 
FORWARD-LOOKING STATEMENTS
 
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Forward looking statements may be identified by such words or phrases as “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may” and similar expressions. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. The forward-looking statements used herein are not guarantees of future performance and involve a number of risks and uncertainties. Factors that might cause actual results to differ materially from the expected results described in or underlying our forward-looking statements include:

 
·
Conditions in the general economy and in the markets served by us;
 
·
Competitive factors, such as price pressures;
 
·
Interruptions of suppliers’ operations or the refusal of our suppliers to provide us with component materials; and
 
·
The risk factors listed from time to time in our SEC reports.

This list is not exhaustive. Except as required under federal securities laws and the rules and regulations promulgated by the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the filing of this Annual Report on Form 10-K, whether as a result of new information, future events, changes in assumptions or otherwise .

Item 1A.
Risk Factors
 
Our business, operations and financial conditions are subject to various risks.  Some of these are described below.  This section does not describe all risks that may be applied to our Company, our industry or our business and is intended only as a summary of certain material risk factors.
 
Current economic conditions may cause a decline in business spending which could adversely affect our business and financial performance.
 
Our operating results are impacted by the health of the U.S economy.  Our business and financial performance may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit to our customers and recession.
 
We are dependent upon a small number of customers for a large portion of our revenues.
 
We have a small number of customers from which we receive a large portion of our revenues.  Our work with our largest customer accounted for 9.1% of total revenue during 2009, with our five largest customers represented approximately 22.9% of our 2009 revenue. Revenues from governmental agencies accounted for 34.2 % in 2009, versus 36.7% and 40.7% in 2008 and 2007, respectively.  Consequently, we are often required to replace one customer with one or more other customers in order to generate the same amount of revenues.  There can be no assurance that we will continue to be able to do so.
 
 
7

 

Some of our orders and contracts may be cancelled or modified so there is a risk that our backlog may not be fulfilled.
 
Some of our orders and contract backlog are subject to cancellation or modification by our customers at any time so we cannot be certain that we will fully recognize revenue from them. At December 31, 2009, the dollar amount of backlog believed to be firm was $28.021,794.
 
We are dependent on a few vendors and rely on timely delivery of equipment from outside sources.
 
There are a few vendors from whom we obtain devices and software for specific access control, imaging, remote transmission, smart key and mobile applications. The loss of any one of these companies as suppliers could have a materially adverse impact on our business, financial condition and results of operations if we are unable to develop or acquire new technologies from other sources. We believe there are alternative vendors to source such products.

 Timely vendor deliveries of equipment meeting our quality control standards from all suppliers are also important to our business because each installed system requires the integration of a variety of elements to be fully functional. The failure to deliver any component when required, in operating condition, can delay the project, triggering contract penalties, delay in progress payments and may result in cancellation of the project.
 
We have not been consistently profitable and may not be profitable in the future.
 
For the years ended December 31, 2009, 2008 and 2007 our revenues were $55,105,469, $62,357,466 and $57,852,216, respectively.  Our net loss was $823,957 for the year ended December 31, 2009.  We had net income of $1,557,756 for the year ended December 31, 2008 and a net loss of $303,304 for the year ended December 31, 2007.  Accordingly, we can make no assurances that we will be profitable in the future.
 
We experience intense competition for business from a variety of sources.
 
In systems integration, we compete for new business with large construction firms, electrical contractors and consultants in the security business and other systems integrators. Many of our competitors are much larger and have greater resources.  In order to effectively compete in the future, we may have to charge less for our services, which may result in lower profit margins.
 
We rely on a key executive.
 
James E. Henry is vital to our business. Losing him could have a materially adverse impact on our business, financial condition or results of operations.

Our business and growth will suffer if we are unable to hire and retain highly skilled personnel.
 
Competition for highly skilled employees is intense in our industry. The design and manufacture of equipment, and the installation of our systems, requires substantial technical capabilities in many disparate disciplines from mechanics and computer science to electronics and advanced software. Our future success depends on our ability to attract, train, motivate and retain highly skilled employees. If we are unable to hire and retain skilled personnel, our growth may be restricted, the quality of our products and services diminished and our revenues and the value of your investment reduced. There is no assurance that we will be able to retain our skilled employees or attract, assimilate and retain other highly skilled employees in the future.
 
Lengthy revenue cycles.
 
Revenue from our services and products frequently involves a substantial commitment of resources to evaluate a potential project and prepare a proposal. In addition, approval of proposals often involves a lengthy process due to clients' internal procedures and capital expenditure approval processes.  We may not be awarded a project that we have prepared a proposal for and, even if we are, a substantial period of time may elapse from when we make a proposal to when we can recognize revenues from the project.
 
Seasonality.
 
Revenues of our services have typically been seasonal in nature and there could be periods of fluctuations in revenue volume due to the timing of project installations or factors that are beyond the Company’s control, such as weather and construction delays.

 
8

 

 
Part of our growth strategy involves acquisitions or joint ventures with other system integrators. This strategy is subject to the following risks, the occurrence of which could have a materially adverse impact on our business, financial condition or results of operations:
 
 
·
We may not be able to identify suitable acquisition and joint venture candidates.
 
·
If the purchase price of an acquisition includes cash, we may need to use a significant portion of our available cash or credit facility with our bank.
 
·
We could have difficulty assimilating the acquired company's operations and personnel or working with the joint venture.  These difficulties could disrupt our ongoing business, distract our management and employees and increase our costs.
 
·
We may not be able to retain key employees of the acquired companies or maintain good relations with its customers or suppliers.
 
·
We may be required to incur additional debt.
 
·
We may be required to issue equity securities to pay for such acquisition, which will dilute existing shareholders.
 
·
We may have to incur significant accounting charges, such as for an impairment of intangible assets, which may adversely affect our results of operations.
 
The trading volume in our common stock fluctuates and as a result you may find it difficult to sell your shares of our common stock.
 
Our common stock is listed on the Nasdaq Stock Market.  Trading in our common stock fluctuates and on some days is minimal.  Failure to maintain an active trading market in our common stock could negatively affect the price of our common stock and your ability to sell our common stock.
 
Item 1B.     Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
A description of the facilities we lease follows:
 
 
·
31,801 square foot sales, office, training and warehouse facility that also serves as our corporate office in Fair Lawn, New Jersey.  This facility is a portion of a single-story, cinder block building in a commercial and industrial park. The lease on this space terminates on October 31, 2016, and provides for an annual rent of $214,657 (escalates yearly) until that date, payable in equal monthly installments of $17,888, plus taxes of approximately $5,414 per month. We are also responsible for the cost of property tax increases, utilities, repairs, maintenance, alterations, cleaning and insurance.
 
 
·
8,980 square foot sales, office and warehouse facility in Fullerton, California. A two-story, concrete building in an office complex, this space is leased until November 15, 2011 at an average annual rent of $113,148 and has an annual escalation clause, payable in equal monthly installments of $9,429, with additional costs for maintenance, insurance, repairs and alterations, utilities, property tax increases and cleaning.
 
 
·
4,749 square foot sales, office and warehouse facility in Irving, Texas near the Dallas-Fort Worth Airport. A single-story, cinder block building in an office complex, this space is leased until August 1, 2015, at an annual average rental of $39,600, payable in equal monthly installments of $3,300, with additional costs for insurance, repairs and alterations, utilities, property taxes and cleaning.
 
 
·
3,000 square foot sales, office and warehouse facility in Houston, Texas.  A single-story, brick veneer building in an office complex, this space is leased until February 28, 2012 at an annual rental of $18,000, with additional costs for insurance, repairs and alterations, utilities, property taxes and cleaning.
 
 
·
7,628 square foot sales, office and warehouse facility in Phoenix, Arizona near the Phoenix Airport. A single-story, concrete building in an office complex, this space is leased until September  2012 at an average annual rental of $107,388, payable in average monthly installments of $8,949, with additional costs for insurance, repairs and alterations, utilities, taxes increases and cleaning.
 
 
·
2,711 square foot office space in New York City for sales and project management personnel. This lease commenced on December 29, 2006, with an annual rental of $68,962, payable in monthly installments of $5,747, not including utilities.  The lease escalates yearly and expires February 29, 2012.
 
 
9

 

 
7,636 square foot sales, office and warehouse facility in Wheat Ridge, Colorado. This facility is in a single-story, multi-office complex. The lease on this space terminates May 2014 and provides for an average annual rent of $55,068 and has an annual escalation clause, payable in initial monthly installments of $4,773, with additional costs for property taxes, utilities, repairs, maintenance, alterations, cleaning and insurance.
 
 
·
3,500 square foot sales, office and warehouse space in Colorado Springs, Colorado.  This facility is in a single story multi-office complex.  The lease terminates July 2012 and provides for an annual rent of $19,800 and has an annual escalation clause, payable in monthly installments of $1,650, with additional costs for property taxes, utilities, repairs, maintenance, alterations, cleaning and insurance.
 
 
·
4,800 square foot sales, office and warehouse facility in Newington, Virginia.  This facility is in a single story multi-office complex.  The annual rent is $83,738 and has an annual escalation clause. The lease expires on July 31, 2010. The lease includes utilities.
 
 
·
2,400 square foot sales office facility in Baltimore, Maryland.  This facility is in a single story brick multi-office complex. The annual rent is $29,722 and has an annual escalation clause.  The lease expires on August 31, 2011. There are additional charges for trash removal, gas and common area maintenance.

These facilities or similar facilities should meet our operational needs for the foreseeable future.

 Item 3.  Legal Proceedings

We know of no material litigation or proceeding, pending or threatened, to which we are or may become a party.

Item 4.  (Removed and Reserved)
 
PART II
 
Item 5.   Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

On October 1, 2008, we switched the listing of our common stock from the American Stock Exchange (“AMEX”) to The Nasdaq Stock Market® (“NASDAQ”). Our common stock, $.01 par value per share, is now traded under the symbol NASDAQ: HBE. The following table presents high and low sales prices of our common stock as reported on the NASDAQ or AMEX, as appropriate, for the periods indicated:

 
10

 


2009
 
High
   
Low
 
First Quarter
 
$
7.52
   
$
5.50
 
Second Quarter
 
$
7.34
   
$
5.58
 
Third Quarter
 
$
6.00
   
$
4.40
 
Fourth Quarter
 
$
5.49
   
$
3.79
 
                 
2008
 
High
   
Low
 
First Quarter
 
$
5.00
   
$
4.14
 
Second Quarter
 
$
6.55
   
$
4.95
 
Third Quarter
 
$
7.10
   
$
5.52
 
Fourth Quarter
 
$
6.80
   
$
4.73
 
 
 
(a)
Number of Holders of Common Stock.  The number of holders of record of our Common Stock on December 31, 2008 was 36. Since a portion of the shares of the common stock are held in street or nominee name, it is believed that there are significant number of additional beneficial owners of common stock.  On November 11, 2009, the Company's Certificate of Incorporation was amended to increase the number of the Company's authorized shares of Common Stock from 10,000,000 shares to 20,000,000 shares.
 
 
(b)
Dividends.  There were no cash dividends or other cash distributions made by us during the years ended December 31, 2009 and 2008.  Future dividend policy will be determined by our Board of Directors based on our earnings, financial condition, capital requirements and other existing conditions.  It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future.
 
 
(c)
In connection with the acquisition of Securus Inc. on October 10, 2005, the Company issued an aggregate of 150,001 shares of its common stock of which 150,001 are being held in escrow pursuant to the stock purchase escrow agreement between the Company and the selling shareholders of Securus, Inc.  These shares held in escrow may be earned out through December 31, 2010 based upon the aggregate value of the earnings before interest and tax (“EBIT”) to $2,960,000. The issuance of the shares of restricted stock in connection with the aforementioned transaction was made in reliance upon the exemption provided in section 4(2) of the Securities Act of 1933, as amended.
 
 
(d)
In connection with the acquisition of all the capital stock of CIS Security Systems Corp. (“CIS”) on October 2, 2006 , the Company issued an aggregate of 20,000 shares of its common stock.   The Company issued an additional 55,000 shares of its restricted common stock since the acquisition to CIS’s selling shareholder after CIS met certain performance targets. The issuances of the shares of restricted stock in connection with the aforementioned transactions was made in reliance upon the exemption provided in section 4(2) of the Securities Act of 1933, as amended.   The selling shareholder may earn an additional 25,000 shares of the Company’s common stock if CIS achieves certain performance targets through December 2011 .
 
 
(e)
Securities authorized for issuance under equity compensation plans.
 
See Item 12 of this Annual Report on Form 10-K for information about our equity compensation plans.
 
 
11

 


   
Years ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Results of operations:
                             
Net revenues
 
$
55,105,469
     
62,357,466
   
$
57,852,216
   
$
42,132,852
   
$
42,156,188
 
Cost of revenue
   
40,848,553
     
46,465,194
     
45,076,126
     
30,818,832
     
31,581,187
 
Selling, general and administrative
   
14,985,849
     
12,797,730
     
12,695,509
     
12,720,381
     
8,422,193
 
Net (loss) income
   
(823,957)
     
1,557,756
     
(303,304
)
   
(2,260,138
)
   
1,137,974
 
                                         
Per common share:
                                       
Net (loss) income
                                       
Basic
 
$
(0.14)
     
0.27
   
$
(0.05
)
 
$
(0.39
)
 
$
0.20
 
Diluted
   
(0.14)
     
0.26
     
(0.05
)
   
(0.39
)
   
0.20
 
Cash dividends declared
   
-
     
-
     
-
     
-
     
-
 
                                         
Financial position at year-end:
                                       
Total assets
 
$
32,692,295
     
36,610,108
   
$
32,331,570
   
$
31,371,609
   
$
25,161,530
 
Long term debt, net of current portion
   
4,830,517
     
4,855,662
     
465,539
     
3,463,236
     
727,961
 
Total Liabilities
   
16,751,915
     
20,551,151
     
18,397,478
     
17,360,991
     
9,178,564
 
Shareholders' equity
   
15,940,380
     
16,058,957
     
13,934,092
     
14,010,618
     
15,982,966
 
 
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are an established leader in the electronic physical security industry, specializing in integrated security systems and emergency preparedness.  Our operations are divided into two business segments – Security System Integration (“Integration”) and Specialty Products and Services (“Specialty”). The Integration segment provides “cradle to grave” services for a wide variety of security, communications and control systems.  The Company specializes in turn-key systems that integrate many different technologies.  Systems are customized to meet the specific needs of its customers. Through the Specialty segment we provide emergency preparedness programs, and specialized radio frequency communication equipment and integration.  Each of the Company’s segments markets nationwide with an emphasis in Arizona, California, Colorado, Maryland, New Jersey, New York, Texas and Virginia. Customers are primarily medium and large businesses and governmental agencies. The Company derives a majority of its revenues from project installations and, to a smaller extent, maintenance service revenue.
 
Our Vision and Strategy
 
Our vision is to maintain our leadership position in security technology. We intend to do this in part by:
 
 
·
Providing advice on product selection and system design;
 
·
Examining and thoroughly testing each security product as it would be set up for use in our customers’ facilities; and
 
·
Using only systems and components that are reliable and efficient to use.
 
In addition to growing the business organically, we have been actively pursuing the strategic acquisition of synergistic integrators and specialty products and service companies to further fuel steady growth.  Consistent with our expansion strategy, we acquired seven companies since May of 2002, which include the two acquisitions made in October 2006 (See Note 17 to the  Consolidated Financial Statements included in this Annual Report on Form 10-K). To finance our acquisitions, we have used a combination of internally generated cash, the sale of company common stock and bank debt.
 
 
12

 

 
There are several factors impacting operating margins, including levels of competition for a particular project and the size of the project.  As a significant amount of our costs are relatively fixed, such as  labor costs, increases or decreases in revenues can have a significant impact on operating margins.  The Company continually monitors costs and pursues cost control measures and sales initiatives to improve operating margins.
 
RECENT ACCOUNTING PRONOUNCEMENTS:
 
In June 2009, the FASB issued guidance now codified as FASB ASC Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on the Company’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

In April 2008, the FASB issued additional guidance within ASC 350-30, General Intangibles Other than Goodwill (“ASC 350-30”). The required provisions within ASC 350-30 amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the prior guidance within ASC 350  Intangibles – Goodwill and Other . The guidance shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption.  ASC 350-30 is intended to improve the consistency between the useful life of an intangible asset determined under prior requirements within ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other GAAP. We have evaluated the new statement and have determined that it does not have a significant impact on the determination ore reporting of our financial results.

In April 2009, the FASB amended Fair Value Accounting to provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also provides guidance on identifying circumstances that indicate a transaction is not orderly. We have evaluated the new statement and have determined the adoption did not have a material impact on the Consolidated Financial Statements.

In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued. This pronouncement is effective for interim or fiscal periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows. However, the provisions of FASB ASC Topic 855 resulted in additional disclosures with respect to subsequent events. The Company evaluated all events or transactions that occurred after December 31, 2009 up through the date we filed this annual report on Form 10-K.  During this period no material subsequent events came to our attention.

In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, “Financial Instruments,” which amends previous Topic 825 guidance to require disclosures about fair value of financial instruments in interim as well as annual financial statements. This pronouncement is effective for periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.

 
13

 

 
The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the Company’s consolidated financial statements.
 
Revenue Recognition
 
 Revenue from a project in either the Integration or Specialty segments are recognized on the percentage of completion method, whereby revenue and the related gross profit are determined based upon the actual costs incurred to date for the project to the total estimated project costs at completion. Project costs generally include all material and shipping costs, the Company’s direct labor, subcontractor costs and an allocation of indirect costs related to the direct labor. Changes in the project scope, site conditions, staff performance and delays or problems with the equipment used on the project can result in increased costs that may not be billable or accepted by the customer and results in a loss or lower profit than was originally anticipated at the time of the proposal.
 
Estimates for the costs to complete the project are continuously updated by management during the performance of the project. Provisions for changes in estimated costs and losses, if any, on uncompleted projects are made in the period in which such changes are determined.   In general, we determine a project to be substantially completed after:
 
1. The scope of work is completed, which includes installing the equipment as required in the contract.
2. System is functional and has been tested.
3. Training has been provided.
 
The majority of the Company’s projects are completed within a year. Revenue from product sales are recognized when title and risk of loss passes to the customer.
 
Service contracts, which are generally separate and distinct agreements from project agreements, are billed either monthly or quarterly on the last day of the month covered by the contract.  Accordingly, revenue from service contracts are recognized ratably over the length of the agreement. In 2007, 2008 and 2009, the Company did not bundle any significant service contracts with our systems installation work.
 
Trade Receivables and Allowance for Doubtful Accounts
 
Trade receivables are stated at net realizable value.  This value includes an appropriate allowance for estimated uncollectible accounts. The allowance is evaluated on a regular basis by management and is based upon historical experience with the customer, the aging of the past due amounts and the relationship with and economic status of our customers. The evaluation is based upon estimates taking into account the facts and circumstances at the time of the evaluation. Actual uncollectible accounts could exceed our estimates and changes to its estimates will be accounted for in the period of change.  Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  Our trade receivables are not collateralized.

 Inventory Valuation
 
Inventory is stated at the lower of cost or market value.  Cost has been determined using the first-in, first-out method.  Inventory quantities on-hand are regularly reviewed, and where necessary, reserves for excess and obsolete inventories are recorded.
 
Warranty
 
The Company offers warranties on all products, including parts and labor that range from one year to three years depending upon the type of product concerned.  For products made by others, the Company passes along the manufacturer’s warranty to the end user.
 
 
14

 

 
The Company’s intangible assets include goodwill and other intangibles. Other intangibles consist of the fair value of acquired customer lists, service contracts acquired, trade names, and covenants not to compete.  Goodwill represents the excess of purchase price over fair value of net assets acquired at the date of acquisition. Collectively, these assets which affect the amount of future period amortization expense and possible impairment expense that we will incur. Management’s judgments regarding the existence of impairment indicators are based on various factors, including market conditions and operational performance of our business. As of December 31, 2009 and 2008, we had $4,674,232 and $4,608,745, respectively, of goodwill and other intangibles, accounting for 14.3% and 12.6% of our total assets at the respective dates. The goodwill is not amortizable; the majority of other intangibles are. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We test our goodwill for impairment, at least annually. This test is conducted in December of each year in connection with the annual budgeting and forecast process. Also, on a quarterly basis, we evaluate whether events have occurred that would negatively impact the realizable value of our intangibles or goodwill.
 
Effective January 1, 2002, the Company adopted the provisions of FASB ASC 350 “Goodwill and Other”.   In accordance with that statement, goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Prior to January 1, 2002, the Company had not recorded goodwill or other intangible assets of indefinite lives. Intangible assets with estimable useful lives, consisting primarily of acquired customer lists, service contracts and covenants not to compete are amortized on a straight-line basis over their estimated useful lives of three to fifteen years and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the intangible asset’s remaining useful life is changed, the intangible asset will be amortized over the remaining useful life. If the asset being amortized is determined to have an indefinite useful life, the asset will be tested for impairment. The impairment test will consist of measuring its fair value with its carrying amount. If the carrying amount of the intangible assets exceeds its fair value, an impairment loss is recognized for an amount equal to the excess and the adjusted carrying amount is recognized as its new accounting basis.
 
The Company’s goodwill impairment test is based on a two part procedure consistent with the requirements of FASB ASC 350. The first test consists of determining the fair value of the reporting unit and comparing it to the carrying value of the reporting unit. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, a second test is performed. In step two, the implied fair value of the goodwill (which is the excess of the fair value of the reporting unit over the fair value of the net assets) is compared to the carrying value of the goodwill. An impairment loss is recognized for any excess value of goodwill over the implied value. We determined the reporting unit by analyzing geographic regions, as management evaluates the Company’s performance in this manner. We have identified five separate and distinct operating units for the testing requirements of FASB ASC 350, and evaluate each reporting unit for impairment.

We completed our annual goodwill impairment analysis as of December 31, 2009. Our assessment did not result in good will impairment. Significant assumptions used in the include revenue growth, margins and discount rates. We used historical performance and management estimates of future performance to determine margins and growth rates. Of reporting units with goodwill, these entities had a combined fair value that is in excess of its carrying value by approximately 147%. However, there were certain individual entities that, while not requiring an impairment expense in 2009, given the current economic climate, resulted in a reduction in the fair value that is in excess of its carrying value compared to the impairment  analysis conducted in 2008.  Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
  
Income Taxes
 
Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 
15

 

Comparison of the year ended December 31, 2009 to the year ended December 31, 2008

Analysis of consolidated statement of operations
   
For the years ended December 31,
 
   
2009
   
2008
   
% change
 
Revenue
  $ 55,105,469     $ 62,357,466       -11.6 %
Cost of revenue
    40,848,553       46,465,194       -12.1 %
Gross profit
    14,256,916       15,892,272       -10.3 %
Operating expenses:
                       
Selling, general & administrative expenses
    14,985,849       12,797,730       17.1 %
Operating (loss) profit
    (728,933 )     3,094,542       -123.6 %
                         
Interest income
    28,610       91,558       -68.8 %
Other income
    38,885       17,266       125.2 %
Interest expense
    (280,911 )     (271,290 )     3.5 %
(Loss) income before tax expense
    (942,349 )     2,932,076       -132.1 %
Tax (benefit) expense
    (118,392 )     1,374,320       -108.6 %
Net (loss) income
  $ (823,957 )   $ 1,557,756       -152.9 %

Revenue - Revenue for the year ended December 31, 2009 was $55,105,469, representing a decrease of $7,251,997 or 11.6%, as compared to revenue of $62,357,466 for the year ended December 31, 2008.   Revenue was down in the Company’s New Jersey, California, Arizona, and Mid-Atlantic regions in 2009 versus 2008.  The New Jersey region had the greatest decrease, as a result of the winding down of large projects that were not replaced by similar projects due to competitive margin pressure in the marketplace.   The overall declines in revenues are also due to the protracted credit freeze and economic downturn, which is having a significant negative impact on construction markets and capital spending patterns of commercial businesses. Partially offsetting these declines was an increase in revenue resulting from the L-3 Contract (in February 2008, the Company entered into a subcontractor agreement with Global Security & Engineering Solutions, a division of L-3 Services, Inc.      (“L-3”) pursuant to which L-3 would issue task orders under its Indefinite Quantity Firm Fixed Price Contract with the U.S. Marine Corp Systems Command to deliver a Tactical Video Capture System (“TVCS”))., and increases in the Colorado and Texas regions, which were up 12.4% on a combined basis. The L-3 contract generated $3.5 million incremental revenue in 2009 over 2008 and the Company’s Airorlite business also had a modest increase in 2009 over the prior year.
 
Cost of Revenue - Cost of revenue for the year ended December 31, 2009 was $40,848,553 as compared to $46,465,194 for the year ended December 31, 2008. While gross profit dollars were lower in 2009 versus 2008, principally as a result of the lower revenues, the gross profit margin for the year ended December 31, 2009 was 25.9% as compared to 25.5% for the year ended December 31, 2008.   In the first quarter of 2008, our Airorlite subsidiary incurred significant losses in order to complete work on certain open contracts which depressed gross profit for that period in 2008.  Our New Jersey, Arizona, Mid-Atlantic and California Banking operations had both lower period-over-period gross profit margin and gross profit dollars due to a combination of: 1) decline in revenues; 2) competitive pricing of projects given the current economy, and 3) cost overruns on a limited number of projects.   The L-3 Contract generated profit during the year ended December 31, 2009, albeit at a lower margin percent than the Company’s overall gross margin.

Selling, General and Administrative Expenses - Selling, general and administrative expense was $14,985,849 for the year ended December 31, 2009 as compared to $12,797,730 for the year ended December 31, 2008. This increase of $2,188,119 or 17.1% was mainly attributable to higher personnel related costs, higher bad debt expense and professional fees, and lower overhead absorption into cost of goods sold due to the lower revenues in 2009 compared to 2008. As part of our strategic growth initiative, we have increased our sales force starting in the last quarter of 2008 and continuing throughout the third quarter of 2009.   This initiative was implemented in order to take advantage of an anticipated increase in security spending related to public projects and the expansion of the Company’s national footprint into Houston, Texas.  Higher training costs for our sales and technical staff, as well as costs for an internet based service program, were also incurred during 2009 compared with 2008, which contributed to the overall increase.
 
Interest Income – Interest income for the year ended December 31, 2009 was $28,610 as compared to $91,558 for the year ended December 31, 2008.  This decrease was attributable to lower average cash balances during the nine month period ended December 31, 2009 versus the same period in the prior year.
 
Interest Expense - Interest expense for the year ended December 31, 2009 was $280,911 as compared to $271,290 for the year ended December 31, 2008.  While the average outstanding revolving debt balance was $1,362,901 higher in the year ended December 31, 2009 versus that in the year ended December 31, 2008, the average prime rate of interest paid was 155 basis points lower in the 2009 period than it was in 2008 resulting in the lower interest expense.

 
16

 
 
Tax Expense – A tax benefit of $118,392, based upon a loss before taxes of  $942,349 was realized for the year ending December 31, 2009. The effective tax rate for the year ended December 31, 2009 was 12.6%, The tax rate is a result of the Company operating in multiple states and jurisdictions with higher tax rates, combined with the impact of being unable to claim certain state tax benefits on subsidiary losses.  Tax expense for the year ended December 31, 2008 was $1,374,320.  This provision was driven primarily as a result of the Company operating in multiple states and jurisdictions with higher tax rates, combined with the impact of being unable to claim a state tax benefit on the Airorlite subsidiary losses.
 
Net (Loss) Income - As a result of the above noted factors our net loss was $823,957 for the year ended December 31, 2009 compared to net income of $1,557,756 for the year ended December 31, 2008. This resulted in diluted loss per share of $0.12 on weighted average diluted common shares outstanding of 5,865,187 for the year ended December 31, 2009, as compared to diluted earnings per share of $0.26 on weighted average diluted common shares outstanding of 5,988,782 for the year ended December 31, 2008.

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

Analysis of consolidated statement of operations

   
For the years ended December 31
       
   
2008
   
2007
   
% change
 
Revenue
 
$
62,357,466
   
$
57,852,216
     
7.8
%
Cost of revenue
   
46,465,194
     
45,076,126
     
3.1
%
Gross profit
   
15,892,272
     
12,776,090
     
24.4
%
                         
Operating expenses:
                       
Selling, general and administrative expenses
   
12,797,730
     
12,695,509
     
0.8
%
Goodwill and intangible asset impairment charges
   
-
     
43,999
     
-100.0
%
Operating profit
   
3,094,542
     
36,582
     
8359.3
%
                         
Interest income
   
91,558
     
73,493
     
24.6
%
Other income (expense)
   
17,266
     
(191
)
   
-9152.6
%
Interest expense
   
(271,290
)
   
(349,907
)
   
-22.5
%
Income (loss) before tax expense
   
2,932,076
     
(240,023
)
   
1321.6
%
                         
Provision for income taxes
   
1,374,320
     
63,281
     
2071.8
%
Net income (loss)
 
$
1,557,756
   
$
(303,304
)
   
613.6
%

Revenue - Revenue for the year ended December 31, 2008 was $62,357,466 representing an increase of $4,505,250 or 7.8%, as compared to revenue of $57,852,216 for the year ended December 31, 2007.  Arizona operations continued to show significant revenue improvement as revenues from its top three customers showed year over year increases.  Improved revenues from our Colorado and Virginia operations also contributed to the higher revenues for the year ended December 31, 2008, compared to the same period in the prior year.  These increases were partially offset by a decline in revenue from our California Banking operations, as well as from our Airorlite subsidiary.  While up significantly from preceding years, New Jersey / New York’s revenues were flat in 2008 compared to 2007.  A significant portion of the revenues in both years for New Jersey / New York resulted from work completed for several large public agencies in the New York Metropolitan area.  In February 2008, the Company entered into a subcontractor agreement with Global Security & Engineering Solutions, a division of L-3 Services, Inc.      (“L-3”) pursuant to which L-3 would issue task orders under its Indefinite Quantity Firm Fixed Price Contract with the U.S. Marine Corp Systems Command to deliver a Tactical Video Capture System (“TVCS”).  TVCS is used for real-time visualization and situational awareness while Marine units are conducting military operations in urban terrain training exercises.  The performance period of the contract is three years.  In 2008, the revenue recognized under this contract represented $2.6 million and there were outstanding task orders included in our backlog of approximately $2.3 million at December 31, 2008.

 
17

 
 
Selling, General and Administrative Expenses - Selling, general and administrative expenses were $12,797,730 for the year ended December 31, 2008 as compared to $12,695,509 for the year ended December 31, 2007. This increase of 0.8% or $102,221 was mainly attributable to higher vehicle expense due to increased fuel costs during 2008, higher stock option expense and a net increase in bad debt expense for the current year period, partially offset by improved labor utilization, lower professional fees, and lower depreciation and amortization of intangibles expense.

Interest Income – Interest income for the year ended December 31, 2008 was $91,558 as compared to $73,493 for the year ended December 31, 2007.  This increase was attributable to higher cash balances during the twelve month period ended December 31, 2008 versus the same period in the prior year.
 
Interest Expense - Interest expense for the year ended December 31, 2008 was $271,290 as compared to $349,907 for the year ended December 31, 2007.  Although the average outstanding debt balance was only $171,391 higher in the twelve month period ended December 31, 2008 versus that in the year ended December 31, 2007, the average prime rate of interest paid was 301 basis points lower in the 2008 period than it was in 2007.
 
Tax Expense –Tax expense for the year ended December 31, 2008 was $1,374,320.  This provision was driven primarily as a result of the Company operating in multiple states and jurisdictions with higher tax rates, combined with the impact of being unable to claim a state tax benefit on the Airorlite subsidiary losses. Tax expense for the year ended December 31, 2007 was $63,281.  This provision was driven primarily by profitability in states with higher income tax rates.

 Net Income (Loss) - As a result of the above noted factors our net income was $1,557,756 for the year ended December 31, 2008 compared to a net loss of $303,304 for the year ended December 31, 2007. This resulted in diluted earnings per share of $0.26 on weighted average diluted common shares outstanding of 5,988,782 for the year ended December 31, 2008, as compared to diluted loss per share of $0.05 on weighted average diluted common shares outstanding of 5,768,864 for the year ended December 31, 2007.
 
Liquidity and Capital Resources As of December 31, 2009, we had cash and cash equivalents of $2,917,046.
 
 Our net current assets were $13,748,868 at December 31, 2009 versus $13,944,121 at December 31, 2008. Total debt at December 31, 2009 was $5,367,070 compared to the December 31, 2008 balance of $5,485,404.

 Cash provided by operating activities was $3,704,388 during the year ended December 31, 2009.  The most significant source of cash resulted from a net decrease in accounts receivable and retainage receivable of $5,794,746, and $1,460,554, respectively.  This was partially offset by a decrease in accounts payable and accrued expenses of $1,566,894 and $1,326,558, respectively, and an increase in prepaid expenses and income taxes receivable of $545,537.
 
Cash used in investing activities was $519,919.  The most significant expenditures were for computer and software purchases and earn-out payments related to the CIS acquisition, and a minor acquisition of another business in 2009.
 
Cash from financing activities used $295,129, representing the final payoff of the term loan and capital lease payments, partially offset by proceeds from stock option exercises of $203,669.
 
We currently have an $8 million revolving credit facility with TD Bank.   Borrowings under the revolving credit facility were $4,335,898, at December 31, 2009. It is our expectation and intent to use cash from operations and to incur additional debt as appropriate to finance future working capital and acquisitions.  Additionally, to fund future acquisitions we would consider the issuance of subordinated debt, or the sale of equity securities, or the sale of existing Company assets.   The Company is required to maintain certain financial and reporting covenants and restrictions on dividend payments under the terms of the Loan Agreement with TD Bank, N.A. (See Note 8 to the Consolidated Financial Statements included in this Annual Report on Form 10-K).

Backlog and Bookings
 
Booked orders of $59,426,020 for the year ended December 31, 2009 were general flat as compared to $59,491,543 for the year ended December 31, 2008. The Company’s backlog as of December 31, 2009 was $28,021,794 and was $23,701,243 at December 31, 2008.  The primary factor for the increase in the backlog is attributable to the several large public agency jobs in New Jersey / New York for which we were awarded the contracts to in the fourth quarter of 2009, as well as increased bookings in our California integration and Texas operations, partially offset by lower bookings related to the L-3 Contract. Booked orders increased $2,874,564 to $59,491,543 in the year ended December 31, 2008 as compared to $56,616,979 in the corresponding period of 2007.

 
18

 

DIVIDENDS
 
We have not declared cash dividends on our common equity. The payment of dividends is prohibited under the existing credit agreement with TD Bank, N. A.  We may, in the future, declare dividends under certain circumstances.

 
Revenues generated by our services have typically been seasonal in nature and there could be periods of fluctuations in revenue volume due to the timing of project installations or factors that are beyond the Company’s control, such as weather and construction delays.
 
INFLATION
 
Our revenues and costs generally have kept pace with inflation.
 
OFF BALANCE SHEET ARRANGEMENTS
 
We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance, special purpose entities or variable interest entities which are often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

AGGREGATE CONTRACTUAL OBLIGATIONS
 
As of December 31, 2009, the Company’s contractual obligations, including payments due by period, are as follows:
   
Payment due by period
 
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
                                           
Long-term debt Obligations
  $ -     $ 4,335,898     $ -     $ -     $ -     $ -     $ 4,335,898  
                                                         
Interest Obligations on Long-term debt
    173,436       86,718       -       -       -       -       260,154  
                                                         
Capital Lease Obligations
    347,018       358,332       218,595       87,386       -       -       1,011,331  
                                                         
Short-term debt
    194,665       -       -       -       -       -       194,665  
                                                         
    $ 715,119     $ 4,780,948     $ 218,595     $ 87,386     $ -     $ -     $ 5,802,048  

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
 
We have one revolving loan for which the interest rate on outstanding borrowings is variable and is based upon the prime rate of interest. At December 31, 2009 and 2008 there was $4,335,898 outstanding under this revolving credit facility.

Item 8.  Financial Statements and Supplementary Data
 
Refer to pages F-1 through F-24.
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.
 
19

 

ITEM 9A (T). CONTROLS AND PROCEDURES
 
(a) EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
 
The Company’s management, with the participation of our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. The term “disclosure controls and procedures,” as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2009, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
 
 (b) MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:

·
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and
 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.   Based on our assessment, management believes that, as of December 31, 2009, the Company’s internal controls over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in management's evaluation during the fourth quarter of fiscal year 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
  There were no events requiring disclosure that had not been made under Form 8-K in the fourth quarter of our fiscal year

 Item 9B.   Other Information

There were no events requiring disclosure that had not been made under Form 8-K in the fourth quarter of our fiscal year.

 
20

 

 
Item 10.        Directors, Executive Officers and Corporate
 
Identification of Directors (ages are as of March 8, 2010):
           
Director
Name
 
Age
 
Position(s) with the  Company
 
Since
             
Richard D. Rockwell
 
54
 
Chairman and Director
 
2007
James E. Henry
 
56
 
Vice-Chairman, Chief Executive Officer, Treasurer and Director
 
1998
Brian Reach.
 
55
 
President, Chief Operating Officer, Secretary and Director
 
2004
Robert L. De Lia Sr
 
62
 
Director
 
2004
James W. Power
 
80
 
Director
 
2005
Joseph P. Ritorto
 
78
 
Director
 
2002
David Sands
 
53
 
Director
 
2005
             
           
Officer
Name
 
Age
 
Position(s) with the  Company
 
Since
James E. Henry
 
56
 
Vice-Chairman, Chief Executive Officer, Treasurer and Director
 
1998
Brian Reach.
 
55
 
President, Chief Operating Officer, Secretary and Director
 
2004
John P. Hopkins
 
49
 
Chief Financial Officer
 
2006
Brian J. Smith
 
55
 
Corporate Controller
 
2007
Christopher Peckham
 
44
 
Chief Information Officer / Chief Security Officer
 
2007

Richard D. Rockwell has served as a director of the Company since November 2007. In December 2009, Mr. Rockwell was named Chairman of the Company's Board of Directors, having previously served as Vice Chairman since November 2008. Mr. Rockwell also serves the Company's Executive Committee as Chairman. Mr. Rockwell has been Owner and Chairman of Professional Security Technologies LLC, a full service security systems integrator since 1996.  Mr. Rockwell has been Owner and President of Main Security Surveillance, Inc. since 2005.  From 1982 to 2003, Mr. Rockwell was Founder, Owner and Chief Executive Officer of Professional Security Bureau, Ltd. (“PSB”), a security guard services company.  In 2003 PSB, with annual revenues in excess of $100 million, was divested to Allied Security.  From 1997 through 2003, Mr. Rockwell was co-founder and Chairman of TransNational Security Group, LLC (“TSG”).  TSG afforded the member companies with opportunities for national sales and marketing, national contracting, and combined purchasing power.  From 1995 to 2005, Mr. Rockwell was founder and owner of PeopleVision, a full service advertising and display manufacturing company.  From 1981 to 1982, Mr. Rockwell was vice president, legal affairs of Metropolitan Maintenance Company, a publicly-traded company listed on the Boston stock exchange.  Mr. Rockwell received a Bachelor of Arts from Ithaca College and a Juris Doctor from Western New England College of Law.

James E. Henry co-founded the Company’s predecessor company in 1989 and served as President and Chief Executive Officer until December 2001 when he was elected Chairman of the Board. Mr. Henry continues to serve as Chief Executive Officer and is also the Company’s Treasurer. Mr. Henry graduated from the University of New Hampshire with a Bachelor of Science degree in electrical engineering. In addition to his other responsibilities, Mr. Henry has continued to design, install, integrate and market security and communications systems as well as manage the Company’s research and development.
 
Brian Reach, in addition to his prior duties, was named Chief Operating Officer in August 2006 and President in March 2007.  Mr. Reach has been a member of the Company’s Board of Directors since February 2004 and has served as the Company’s Vice-Chairman since June 2004 and as its Secretary since November 2004. From September 1999 until April 2002, Mr. Reach was the Chief Financial Officer of Globix Corporation, a provider of application, media and infrastructure management services. Globix’s common stock is traded on the OTC Bulletin Board. From May 1997 to August 1999, Mr. Reach was the Chief Financial Officer of IPC Communications, a provider of integrated telecommunications equipment and services to the financial industry. During his tenure at IPC, Mr. Reach successfully guided IPC through its leveraged recapitalization and financially restructured IPC enabling it to invest in strategic acquisitions and next generation technologies. Prior to IPC, Mr. Reach was the Chief Financial Officer of Celadon Group, Inc. and Cantel Industries, Inc. Mr. Reach became a certified public accountant in 1980 and received his Bachelor of Science degree in accounting from the University of Scranton in 1977.

 Robert L. De Lia, Sr. has been a member of our Board since May 2004. Currently, Mr. De Lia is vice president of TJ’s Motorsport, a privately held company dedicated to supplying quality motor sport products. From 2002 to 2003, Mr. De Lia was the President and Chief Executive Officer of Airorlite Communications, Inc., a company that specializes in designing, manufacturing and maintaining wireless communications equipment used to enhance and extend emergency radio frequency services and cellular communication for both fixed and mobile applications. In April 2004, a wholly-owned subsidiary of the Company purchased all of the issued and outstanding shares of stock of Airorlite Communications, Inc. From 1987 to 1999, Mr. De Lia was the President and Chief Executive Officer of Fiber Options, Inc. Mr. De Lia graduated from the New York Institute of Technology in 1969.

 
21

 

 James W. Power has been a member of our Board since December 2005. Mr. Power, director of RAE Systems, Inc., a manufacturer of equipment used to detect weapons of mass destruction, hazardous materials and toxic chemicals; and the principal partner in J.W. Power & Associates. Mr. Power previously served as Chairman of the Board of InfoGraphic Systems Corp.; President and Chief Executive Officer of Martec\SAIC; President and Chief Executive Officer of Pinkerton Control Systems and has held senior executive positions with Cardkey Systems, Inc., Nitrol Corporation and TRW Data Systems. Previously, he has served as a director of National Semiconductor, ICS Corporation, and Citicorp Custom Credit and Citicorp Credit Services.
 
Joseph P. Ritorto has been a member of our Board since January 2002. Mr. Ritorto is the co-founder of First Aviation Services, Inc., which is located in Teterboro Airport, Teterboro, New Jersey and provides a variety of aviation support services. Mr. Ritorto has been an officer, in various capacities, of First Aviation Services since 1986. Mr. Ritorto sold First Aviation Services to a group led by Goldman Sachs in May 2008.  From 1991, until he retired in May 2001, Mr. Ritorto served as the Senior Executive Vice President and Chief Operating Officer of Silverstein Properties, Inc. In this capacity, Mr. Ritorto’s responsibilities included overseeing operations and directing the lease administration of Silverstein owned and managed properties.
 
David Sands has been a member of our Board since 2005.  Mr. Sands is a certified public accountant and a partner of Buchbinder Tunick & Company LLP where he is the head of the tax department. Mr. Sands is a member of the American Institute of Certified Public Accountants and the New York State Society of CPAs. Mr. Sands has also lectured at the New York University Summer Continuing Education and the Foundation for Accounting Education Programs. Mr. Sands received a Bachelor of Science from SUNY at Buffalo and a Master of Science in Taxation from Pace University.
 
John P. Hopkins was appointed Chief Financial Officer in August 2006. Prior to joining the Company, Mr. Hopkins was Chief Financial Officer for Measurement Specialties from July 2002 to August 2006, was Vice President, Finance from April 2001 to July 2002, and was Vice President and Controller from January 1999 to March 2001, with Cambrex Corporation, a provider of scientific products and services to the life sciences industry. From 1988 to 1998, he held various senior financial positions with ARCO Chemical Company, a manufacturer and marketer of specialty chemicals and chemical intermediates. Mr. Hopkins is a Certified Public Accountant and was an Audit Manager for Coopers & Lybrand prior to joining ARCO Chemical. Mr. Hopkins holds a B.S. in Accounting from West Chester University, and an M.B.A. from Villanova University.
 
Brian J. Smith was appointed Corporate Controller in April 2007.  Prior to joining the Company, Mr. Smith was VP-General Manager NetVersant of New York, a provider of voice and data system infrastructure from 2002.  From 1991 to 2002 Mr. Smith held various senior financial positions with Insilco Technologies, a manufacturer and distributor of electronic components.  Mr. Smith is a Certified Public Accountant and began his career as an auditor for KPMG Peat Marwick.  Mr. Smith holds a B.S. in Accounting from Fordham University.
 
Christopher Peckham was appointed Chief Information Officer / Chief Security Officer in September 2007.  Prior to joining the Company, Mr. Peckham was Director of Operations with Sungard Higher Education from 2003.  From 1999 to 2003, Mr. Peckham served in several VP positions at Globix Corporation in the areas of Network and Systems Engineering, Operations, and Information Technology.  Prior to that, he held positions in networking and systems at Icon CMT, PFMC, and NJIT.  Mr. Peckham received the B.S., M.S., and Ph.D. degrees in electrical engineering from the New Jersey Institute of Technology and a MBA from Rutgers University.
 
(c) Compliance with Section 16(a) of the Exchange Act
 
Section 16(a) of the Exchange Act, requires our directors and officers, and persons who own more than 10% of our Common Stock, to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of our Common Stock and other equity securities. Our officers, directors and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, for the year ended December 31, 2009, based solely on a review of the copies of such reports furnished to the Company and representations by these individuals that no other reports were required during the year ended December 31, 2009, all Section 16(a) filing requirements applicable to our directors, officers and greater than 10% beneficial owners have been timely filed.

 (d) Code of Conduct and Ethics
 
We have a Code of Conduct that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer and a Code of Ethics that applies to our senior financial officers. You can find our Code of Conduct and Code of Ethics on our website: www.hbe-inc.com.   We will post there any amendments to these Codes, as well as any waivers that are required to be disclosed by the rules of either the Securities and Exchange Commission or NASDAQ.

 
22

 

Item 11.     Executive Compensation
 
Summary Compensation Table
 
The following table sets forth summary information concerning the annual compensation for the years ended December 31, 2009 and 2008 for our principal executive officer (“PEO”), principal financial officer (“PFO”) and our most highly compensated executive officers other than our PEO and our PFO for the year ended December 31, 2009:
 
   
 
 
Salary
   
Bonus
   
Option
Awards
   
All Other
compensation
   
Total
 
Name and Principal Position
 
Year
 
($)
   
($)
   
($)(1)
   
($) (2)
   
($)
 
James E Henry, Vice-Chairman,
 
2009
    213,927       -             750       214,677  
Chief Executive Officer, Treasurer
 
2008
    180,131       36,050       -       -       216,181  
and Director  
2007
    174,148       -       -       -       174,148  
Brian Reach, President, Chief Operating
 
2009
    213,927       -               7,050       220,977  
Officer, Secretary and Director
 
2008
    180,131       36,050       -       6,300       222,481  
   
2007
    173,019       -       10,626       6,281       189,926  
John P. Hopkins, Chief Financial Officer
 
2009
    199,388       -               6,750       206,138  
   
2008
    180,131       33,050       -       6,000       219,181  
   
2007
    175,000       -       31,879       6,500       213,379  
Brian J. Smith (3)
 
2009
    164,478       -               6,000       170,478  
   
2008
    147,971       17,803       -       6,000       171,774  
   
2007
    100,223       -       12,035       4,250       116,508  
Christopher Peckham (4)
 
2009
    149,260       -               5,550       154,810  
   
2008
    125,926       25,189       -       4,800       155,915  
   
2007
    36,058       -       5,407       1,400       42,865  

(1) Represents the dollar amount recognized for financial statement reporting purposes with respect to the years ended December 31, 2007 and 2006 for the fair value of the option granted to the named executive officer. The fair value was estimated in accordance with FASB 123R. For a more detailed discussion on the valuations made and assumptions used to calculate the fair value of our options refer to Note 10 of our Annual Report on Form 10-K for the year ended December 31, 2009.

(2) For Mssrs. Hopkins, Smith and Peckham represents auto allowances. For Mr. Reach represents medical premium reimbursement. For Mssrs. Henry, Reach, Hopkins and Peckham, also includes 401(k) Plan matching contribution from the Company.

(3) Effective April 14, 2007 Mr. Smith became the Corporate Controller.

(4) Effective September 10, 2007 Mr. Peckham became the Chief Information Officer / Chief Security Officer.
 
Grants of Plan-Based Awards in 2009

There were no grants of stock options under our existing stock option plans issued by us during 2009 to executive officers named in the Summary Compensation Table.

 
23

 

Outstanding Equity Awards at December 31, 2009

The following table contains information concerning unexercised options held as of December 31, 2009 by the executive officers named in the Summary Compensation Table:
 
 
 
Option Awards
 
 
Number of
Securities
Underlying
Options
Exercisable
   
Number of
Securities
Underlying
Options
Unexercisable
   
Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options
   
Option
Exercise
Price
 
Option
Expiration
Name
 
(#)
   
(#)
   
(#)
   
($)
 
Date
Brian Reach
    100,000 (1)     -       -       7.10  
5/31/2010
Brian Reach
    30,000 (2)     20,000 (2)     -       3.71  
8/8/2012
John P. Hopkins
    90,000 (3)     60,000 (3)     -       3.71  
8/8/2012
Brian Smith
    16,000       24,000 (4)     -       4.26  
5/14/2013
Brian Smith
    4,000       6,000 (5)     -       4.11  
11/8/2013
Christopher Peckham
    20,000       30,000 (6)     -       4.65  
9/11/2013

(1) Represents grant of 100,000 incentive stock options which vests equally in 25 monthly installments of 4,000, with the installment vesting on June 30, 2004.
 
(2) Represents grant of 50,000 incentive stock options which vests in five equal installments of 10,000 on August 8, 2007, 2008, 2009, 2010, and 2011, respectively.
 
(3) Represents grant of 150,000 incentive stock options which vests in five equal installments of 30,000 on August 8, 2007, 2008, 2009, 2010, and 2011, respectively.
 
(4) Represents grant of 40,000 incentive stock options which vests in five equal installments of 8,000 on April 13, 2008, 2009, 2010, 2011, and 2012, respectively.
 
(5) Represents grant of 10,000 incentive stock options which vests in five equal installments of 2,000 on November 8, 2008, 2009, 2010, 2011, and 2012, respectively.
 
(6) Represents grant of 50,000 incentive stock options which vests in five equal installments of 10,000 on September 11, 2008, 2009, 2010, 2011, and 2012, respectively.

Directors who are also our employees receive no additional compensation for attendance at board meetings. Mr. Henry and Mr. Reach are the only members of the Board of Directors who are also employees.   For the year ended December 31, 2009, all of our outside Directors, that is, Directors who are not employees or full-time consultants of the Company, each received compensation as follows:

 
24

 

   
Fees
Earned or
Paid in
Cash
   
Option
Awards
   
Total
 
Name
 
$(1)
   
$(2)
   
($)
 
Richard D. Rockwell
    13,250       5,840 (3)     19,090  
Robert De Lia, Sr.
    13,250       5,840 (4)     19,090  
James W. Power
    13,250       5,840 (5)     19,090  
Joseph P. Ritorto
    13,250       5,840 (6)     19,090  
David Sands
    13,250       5,840 (7)     19,090  
 
(1)  The Company’s non-employee directors receive a quarterly fee of $1,250 and an annual stock option grant to purchase 2,000 shares of the Company’s common stock at the closing share price on the day of the grant and $1,000 for attendance at each Board or Committee meeting.
 
(2)  Represents the dollar amount recognized for financial statement reporting purposes with respect to the year ended December 31, 2008 for the fair value of the option granted to the named Director.  The fair value was estimated in accordance with FASB 123R.  For a more detailed discussion on the valuations made and assumptions used to calculate the fair value of our options refer to Note 10 of our Annual Report on Form 10-K for the year ended December 31, 2008.

(3)  At December 31, 2008, Mr. Rockwell held options to purchase 4,000 shares of Common Stock.
 
(4)  At December 31, 2008, Mr. De Lia, Sr. held options to purchase 14,000 shares of Common Stock.
 
(5)   At December 31, 2008, Mr. Power held options to purchase 12,000 shares of Common Stock.

(6)  At December 31, 2008, Mr. Ritorto held options to purchase 14,000 shares of Common Stock.
 
(7)  At December 31, 2008, Mr. Sands held options to purchase 12,000 shares of Common Stock.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
The current members of the Compensation Committee are Messrs. Ritorto, DeLia and Rockwell. The Board made all decisions concerning executive compensation related to 2009. No executive officer of the Corporation served as a member of the Board of Directors of another entity during 2009.  None of the members of the Compensation Committee has ever been an officer or employee of Henry Bros. Electronics, Inc. or any of its subsidiaries, and no “compensation committee interlocks” existed during fiscal 2009.
 
COMPENSATION DISCUSSION AND ANALYSIS
 
Through the following questions and answers we explain all material elements of our executive compensation:

 What are the objectives of our executive compensation programs?
 

Our corporate goal is to maximize our total return to our shareholders through share price appreciation. Towards this goal, we seek to compensate our executives at levels that are competitive with peer companies so that we may attract, retain and motivate highly capable executives. We also design our compensation programs to align our executives’ interests with those of our shareholders.
 
Our 2009 executive compensation, reflects our effort to realize these objectives.
 
What are the principal components of our executive compensation programs?
 
Overview: Our executive compensation programs consist of three principal components: (i) a base salary; (ii) annual bonuses; and (iii) stock option grants. The Company’s policy for compensating our executive officers is intended to provide significant annual long-term performance incentives. We describe each of these principal components below.

Relationship of the principal components:   We have allocated the three principal components of our executive compensation programs in a manner that we believe optimizes each executive’s contribution to us. We have not established specific formulae for making the allocation.

 
25

 

 Base Salary:   We do not have employment agreements with any of our executives. Base salaries for executive officers are determined by evaluating a variety of factors, including the experience of the individual, the competitive marketplace for managerial talent, the Company’s performance, the executive’s performance, and the responsibilities of the executive.  Although our Compensation Committee annually reviews salaries of our executive officers, our Compensation Committee does not automatically adjust base salaries if it concludes that adjustments to other components of the executive’s compensation would be more appropriate.
 
Annual Bonus: Cash bonus awards are based on a variety of factors, including the individual performance of the executive and the Company’s performance.
 
Long-Term Incentive Compensation (Stock Options for Common Shares):   The Compensation Committee believes that stock-based compensation arrangements are essential in aligning the interests of management and the stockholders. The Company’s 2002, 2006 and 2007 Stock Plans provides for the issuance of stock options to its executive officers and other employees. Stock options to purchase shares of the Company’s common stock are issued at an exercise price equal to the fair market value of such stock on the date immediately preceding the date on which the stock option is granted. These options typically vest over a three to five year period from the date of grant and are granted to the Company’s executive officers and other employees as part of their employment with the Company or as a reward for past individual and corporate performance. The size of awards is determined by the Committee based on factors such as the executive’s position, individual performance and the Company’s performance.
 
What do we seek to reward and accomplish through our executive compensation programs?
 
We believe that our compensation programs, collectively, enable us to attract, retain and motivate high quality executives. We provide annual bonus awards primarily to provide performance incentives to employees to meet corporate performance objectives. Our corporate objectives are measured by sales increases, operating margins, net income and other items of performance as determined on an annual basis. We design long-term incentive awards primarily to motivate and reward employees over longer periods. Through vesting and forfeiture provisions that we include in awards of stock options we provide an additional incentive to executives to act in furtherance of our longer-term interests. An executive whose employment with us terminates before equity-based awards have vested, either because the executive has not performed in accordance with our expectations or because the executive chooses to leave, will generally forfeit the unvested portion of the award.

 Why have we selected each principal component of our executive compensation programs ?
 
We have selected programs that we believe are commonly used by public companies, both within and outside of our industry, because we believe commonly used programs are well understood by our shareholders, employees and analysts. Moreover, we selected each program only after we first confirmed, with the assistance of outside professional advisors, that the program comports with settled legal and tax rules.
 
How do we determine the amount of each principal component of compensation to our executives?
 
Our Compensation Committee exercises judgment and discretion in setting compensation for our senior executives. The Committee exercises its judgment and discretion only after it has first evaluated the recommendations of our Chief Executive Officer and Chief Operating Officer and evaluated our corporate performance.

What specific items of corporate performance do we take into account in setting compensation policies and making compensation decisions?
 
Our corporate performance primarily impacts the annual bonuses and long-term incentive compensation that we provide our executive officers. We use or weight items of corporate performance differently in our annual bonus and long-term compensation awards and some items are more determinative than others.
 
Goals for executives in 2009 varied because the areas of responsibility of executives differ. Goals are generally developed around metrics tied to our growth and profitability, including increases in revenue and operating profit, decreases in expenses, execution of acquisitions, enhanced operational efficiencies and development of additional opportunities for our long-term growth.

 
26

 

How do we determine when awards are granted, including awards of equity-based compensation?
 
Historically, our Compensation Committee has awarded annual bonuses in the quarter following the year end. The Compensation Committee makes awards of stock options on an ad hoc basis, but generally quarterly, following review of pertinent financial information and industry data. In addition, the Compensation Committee conducts a thorough review of stock option awards and grant procedures annually. The date on which the Committee has met has varied from year to year, primarily based on the schedules of Committee members, the timing of compilation of data requested by the Committee and the timing related to the hiring of senior management.
 
Over the past years our equity-based awards to executives have taken the form of stock options. The number of stock options subject to an award has been computed by taking into account the Company’s performance, the particular executive’s performance, our retention objectives, and other factors.
 
What factors do we consider in decisions to increase or decrease compensation materially?
 
Historically, we have generally not decreased the base salaries of our executive officers or reduced their incentive compensation targets due to individual performance. When an executive’s performance falls short of our expectations then we believe our interests are best served by replacing the executive with an executive who performs at the level we expect. The factors that we consider in decisions to increase compensation include the individual performance of the executive, responsibility of the executive and our corporate performance, as discussed above.

 To what extent does our Compensation Committee consider compensation or amounts realizable from prior compensation in setting other elements of compensation?
 
The primary focus of our Compensation Committee in setting executive compensation is the executive’s current level of compensation, including recent awards of long-term incentives, taking into account the executive’s performance and our corporate performance. The Committee has not adopted a formulaic approach for considering amounts realized by an executive from prior equity-based awards.
 
How do accounting considerations impact our compensation practices?
 
Accounting consequences are not a material consideration in designing our compensation practices. However, we design our equity awards so that its overall cost fell within a budgeted dollar amount and so that the awards would qualify for classification as equity awards under FAS 123R. Under FAS 123R the compensation cost recognized for an award classified as an equity award is fixed for the particular award and, absent modification, is not revised with subsequent changes in market prices of our common shares or other assumptions used for purposes of the valuation.

How do tax considerations impact our compensation practices?
 
Prior to implementation of a compensation program and awards under the program, we evaluate the federal income tax consequences, both to us and to our executives, of the program and awards. Before approving a program, our Compensation Committee receives an explanation from our outside professionals as to the tax treatment of the program and awards under the program and assurances from our outside professionals that the tax treatment should be respected by taxing authorities.
 
Section 162(m) of the Internal Revenue Code limits our tax deduction each year for compensation to each of our Chief Executive Officer and our four other highest paid executive officers to $1 million unless, in general, the compensation is paid under a plan that is performance-related, non-discretionary and has been approved by our shareholders. Generally, Section 162(m) has not had a significant impact on our compensation programs.
 
What are our equity or other security ownership requirements for executives and our policies regarding hedging the economic risk of share ownership?
 
We do not maintain minimum share ownership requirements for our executives. We do not have a policy regarding hedging the economic risk of share ownership.
 
To what extent do we benchmark total compensation and material elements of compensation and what are the benchmarks that we use?
 
While the Compensation Committee does not perform formal benchmarks, they do compare the elements of total compensation to compensation provided by knowledge gained in the industry.

 
27

 

Do we have a policy regarding the recovery of awards or payments if corporate performance measures upon which awards or payments are based are restated or adjusted in a manner that would reduce the size of an award or payment?
 
For non-executive officers, we have a policy that provides for a case-by-case review to determine if a recovery of an award is necessary if a performance measure used to calculate the award is subsequently adjusted in a manner that would have reduced the size of the award.  For executive officers, we have a policy that requires a recovery of an award if a performance measure used to calculate the award is subsequently adjusted in a manner that would have reduced the size of the award.
 
What is the role of our executive officers in the compensation process?
 
Our Compensation Committee meets periodically with our Chief Executive Officer and Chief Operating Officer to address executive compensation, including the rationale for our compensation programs and the efficacy of the programs in achieving our compensation objectives. The Compensation Committee also relies on executive management to evaluate compensation programs to assure that they are designed and implemented in compliance with laws and regulations, including SEC reporting requirements. The Compensation Committee relies on the recommendations of our Chief Executive Officer and Chief Operating Officer regarding the performance of individual executives. At meetings in 2009 the Compensation Committee received recommendations from our Chief Executive Officer and Chief Operating Officer regarding salary adjustments and annual bonus and stock option awards for our executive officers. Our Chief Executive Officer and Chief Operating Officer play a significant role in determining the annual cash compensation of our executive officers. The Compensation Committee believes that it is important for it to receive the input of the Chief Executive Officer and Chief Operating Officer on compensation matters since they are knowledgeable about the activities of our executive officers and the performance of their duties and responsibilities, as well as their contributions to the growth of the Company and its business. The Compensation Committee accepted these recommendations after concluding that the recommendations comported with the Committee’s objectives and philosophy and the Committee’s evaluation of our performance and industry data.
 
Compensation Committee Report
 
Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with our management and based on the review and discussion recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. The Board accepted the Compensation Committee’s recommendation. This report is made by the undersigned members of the Compensation Committee:

Joseph P. Ritorto (Chair)
Robert De Lia, Sr.
Richard D. Rockwell
 
 
28

 

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

a)           The following table provides information with respect to the equity securities that are authorized for issuance under our compensation plans as of December 31, 2009:

Equity Compensation Plan Information - For the Year Ended December 31, 2009:
 
Plan category
 
Number of
securities to
be issued upon
exercise
of outstanding
options,
warrants and
rights
(a)
   
Weighted
average
exercise price of
outstanding
options, warrants
and rights
(b)
   
Number of
securities
remaining
available for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
 
Equity compensation plans approved by security holders
   
997,799
*
 
$
4.96
     
166,400
 
Equity compensation plans not approved by security holders
   
0
   
$
0
     
0
 
Total
   
997,799
   
$
4.96
     
166,400
 
 
* This amount includes options issuable pursuant to our 2002, 2006 and 2007 Stock Option Plans.  The plans authorizes the issuance of options to purchase up to 230,000,  250,000 and 250,000 shares of our Common Stock to employees, directors, and consultants of the Company under the 2002, 2006 and 2007 Stock Option Plans, respectively .

 Also included in the 997,799 issued options are options issued pursuant to our Incentive Stock Option Plan.  The Board of Directors and our shareholders approved the adoption of the Incentive Stock Option Plan on December 23, 1999.  Our Incentive Stock Option Plan provides for the granting of options to purchase a maximum of 500,000 shares of the Company's common stock. This plan expired December 24, 2009.

b)           Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
 
The table that follows sets forth, as of March 8, 2010 certain information regarding beneficial ownership of our common stock by each person who is known by us to beneficially own more than 5% of our common stock. The table also identifies the stock ownership of each of our directors, each of our officers, and all directors and officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.
 
Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

 
29

 

The applicable percentage of ownership is based on 5,971,583 shares outstanding as of March 8, 2010.

 
Number of
shares
beneficially
owned
   
Percentage of Common
Stock Beneficially
Owned
 
             
Richard D. Rockwell, Chairman and Director (2)
    2,096,013       34.7 %
                 
James E. Henry, Vice-Chairman, Chief Executive Officer, Treasurer
               
   and Director
    1,205,519       20.0 %
                 
Brian Reach, President, Chief Operating Officer,
               
   Secretary, and Director (3)
    262,000       4.3 %
                 
John P. Hopkins, Chief Financial Officer (4)
    94,500       1.6 %
                 
Brian J. Smith, Corporate Controller (5)
    28,000       *  
                 
Christopher Peckham, Chief Information Officer / Chief Security Officer (6)
    20,000       *  
                 
Robert De Lia, Sr., Director (7)
    70,694       1.2 %
                 
James W. Power, Director (8)
    12,000       *  
                 
Joseph P. Ritorto, Director (9)
    69,196       1.1 %
                 
David Sands, Director (10)
    12,000       *  
                 
All executive officers and directors as a group (10 persons) (10)
    3,869,922       64.1 %
                 
*  Less than 1%
               
                 
CERTAIN BENEFICIAL OWNERS
               
                 
NONE
               

(1)  Except as otherwise indicated, the address of each individual listed is c/o the Company at 17-01 Pollitt Drive, Fair Lawn, NJ 07410.

(2)  The amount shown for Mr. Rockwell includes two currently exercisable options to purchase 2,000 shares each of the Company’s Common Stock at a price of $5.60 and $6.43.
 
(3) The amount shown for Mr. Reach includes a currently exercisable option to purchase 100,000 shares of the Company’s Common Stock at a price of $7.10 per share and a currently exercisable option to purchase 30,000 shares of the Company’s Common Stock at a price of $3.71 per share.
 
(4) The amount shown for Mr. Hopkins includes a currently exercisable option to purchase 90,000 shares of the Company’s Common Stock at a price of $3.71 per share.
 
(5) The amount shown for Mr. Smith includes a currently exercisable option to purchase 16,000 shares of the Company’s Common Stock at a price of $4.26 per share and 4,000 shares of the Company’s Common Stock at a price of $4.11 per share.
 
(6) The amount shown for Mr. Peckham includes a currently exercisable option to purchase 20,000 shares of the Company’s Common Stock at a price of $4.65 per share.
 
 
30

 

(7) The amount shown for Mr. De Lia, Sr. includes four currently exercisable options to purchase 2,000 shares each of the Company’s Common Stock at a price of $4.90, $3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable option to purchase 4,000 shares of the Company’s Common Stock at a price of $5.60 per share.

(8) The amount shown for Mr. Power includes four currently exercisable options to purchase 2,000 shares each of the Company’s Common Stock at a price of $6.08, $3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable option to purchase 4,000 shares of the Company’s Common Stock at a price of $5.60 per share.

(9) The amount shown for Mr. Ritorto includes four currently exercisable options to purchase 2,000 shares each of the Company’s Common Stock at $4.90, $3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable option to purchase 4,000 shares of the Company’s Common Stock at a price of $5.60 per share.
 
(10) The amount shown for Mr. Sands includes four currently exercisable options to purchase 2,000 shares each of the Company’s Common Stock at a price of $4.90, $3.33, $4.65 and $6.43 per share, respectively, and one currently exercisable option to purchase 4,000 shares of the Company’s Common Stock at a price of $5.60 per share.
 
(11) The amount shown includes currently exercisable options to purchase 314,000 shares of the Company’s Common Stock.

 
a) Joseph P. Ritorto, a member of our Board of Directors since January 2002, was co-founder of First Aviation Services, Inc. (“First Aviation”).  Mr. Ritorto sold First Aviation to a group led by Goldman Sachs in May 2008. In 2007 the Company had revenues of $546,375  principally associated with an integrated security systems project with First Aviation.  During the period in 2008 that the business was owned by Mr. Ritorto, the Company had no revenues from First Aviation.  There are no outstanding accounts receivable due from First Aviation at December 31, 2009 related to the period that the business was owned by Mr. Ritorto.

Richard D. Rockwell, a member of the Board of Directors since November 2007, has been Owner and Chairman of Professional Security Technologies LLC, a full service security systems integrator since 1996.  The Company had revenues of  $120,130, $51,447 and $4,787 for the years 2009, 2008 and 2007, respectively.  These revenues were principally related to the sale of equipment.  There was a balance of $39,192 in accounts receivable as of December 31, 2009.

b) The Company considers Messrs. De Lia, Power , Ritorto, Rockwell and Sands to be independent directors in accordance the NASDAQ’s listing standards.
 
Item 14.    Principal Accountant Fees and Services
 
Fees Paid to Our Independent Auditors During 2009 and 2008
 
Audit Fees
 
The aggregate fees paid to Amper, Politziner & Mattia, LLP for professional services rendered for the audits of the Company’s annual financial statements on Form 10-K  in 2009 and the review of the financial statements on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2009 were $253,860.  
 
The aggregate fees paid to Amper, Politziner & Mattia, LLP for professional services rendered for the audits of the Company’s annual financial statements on Form 10-K in 2008 and the review of the financial statements on Form 10-Q for the quarter ended September 30, 2008 were $161,710.  
 
Audit-Related Fees
 
There were no audit-related fees paid to Amper, Politziner & Mattia, LLP in 2009 and 2008.

Audit related services include due diligence in connection with acquisitions, consultation on accounting and internal control matters, audits in connection with proposed or consummated acquisitions and review of registration statements. 
 
 
31

 

 Tax Fees
 
There were no tax fees paid to Amper, Politziner & Mattia, LLP in 2009 and 2008.
 
All Other Fees
 
There were no other fees paid to Amper, Politziner & Mattia, LLP in 2009 and 2008.
 
Pre-Approval of Audit and Permissible Non-Audit Services
 
The Audit Committee approved 100% of the fees paid to the principal accountant for audit-related, tax and other fees. The Audit Committee pre-approves all non-audit services to be performed by the auditor. The percentage of hours expended on the principal accountant’s engagement to audit the Company’s financial statements for the most recent year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0%.
 
Part IV
 
Item 15.         Exhibits, Financial Statement Schedules
 
(a)   The following consolidated financial statements and schedules are filed at the end of this report, beginning on page F-l. Other schedules are omitted because they are not required or are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

(b)   See Exhibit Index following this Annual Report on Form 10-K.

Document
 
Pages
     
Reports of Independent Registered Public Accounting Firm
 
F-1
     
Consolidated Balance Sheet as of December 31, 2009 and 2008
 
F-2
     
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
 
F-3
     
Consolidated Statements of Shareholder’s Equity for the Years Ended December 31, 2009, 2008 and 2007
 
F-4
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
 
F-5
     
Notes to Consolidated Financial Statements
 
F-6 to F-24
 
 
32

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 as amended, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:    March 12, 2009
HENRY BROTHER ELECTRONICS, INC.
 
     
 
By:   /s/ James E. Henry
 
 
James E. Henry
 
 
Vice-Chairman, Chief Executive Officer, Treasurer and Director
 

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Each person, in so signing also makes, constitutes, and appoints James E. Henry and Brian Reach, and each of them acting alone, as his true and lawful attorneys-in-fact, with full power of substitution, in his name, place, and stead, to execute and cause to be filed with the SEC any or all amendments to this report.

 
SIGNATURE
   
Date: March 12, 2009
/s/ Richard D. Rockwell
 
Richard D. Rockwell
 
Chairman and Director
   
Date: March 12, 2009
/s/ James E. Henry
 
James E. Henry
 
Vice-Chairman, Chief Executive Officer, Treasurer and Director
   
Date: March 12, 2009
/s/ Brian Reach
 
Brian Reach
 
President, Chief Operating Officer,
 
Secretary and Director
   
Date: March 12, 2009
/s/ John P. Hopkins
 
John P. Hopkins
 
Chief Financial Officer
   
Date: March 12, 2009
/s/  Robert L. DeLia Sr.
 
Robert L. DeLia Sr.
 
Director
   
Date: March 12, 2009
/s/ James W. Power
 
James W. Power
 
Director
   
Date: March 12, 2009
/s/ Joseph P. Ritorto
 
Joseph P. Ritorto
 
Director
   
Date: March 12, 2009
/s/ David Sands
 
David Sands
 
Director
 
 
33

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Henry Bros. Electronics, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Henry Bros. Electronics, Inc. and Subsidiaries (the “Company”) as of December 31 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Henry Bros. Electronics, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

In connection with our audit of the financial statements referred to above, we audited Schedule II – Valuation and Qualifying Accounts.  In our opinion, the financial schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.
 
/s/ Amper, Politziner & Mattia LLP

March 12, 2010
Edison, New Jersey

 
F-1

 


Item 1.    Financial Statements

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
December 31,
   
December 31,
 
   
2009
   
2008
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 2,917,046     $ 27,704  
Accounts receivable-net of allowance for doubtful accounts of $712,206 at December 31, 2009 and $801,306 at December 31, 2008
    12,053,139       18,164,066  
Inventory
    1,245,306       1,201,477  
Costs in excess of billings and estimated profits
    6,003,533       5,512,101  
Deferred tax asset
    1,251,443       1,363,309  
Retainage receivable
    295,928       1,756,481  
Prepaid expenses and income tax receivable
    1,423,541       878,003  
Other assets
    161,479       330,052  
Total current assets
    25,351,415       29,233,193  
                 
Property and equipment - net of accumulated depreciation of $3,622,058 at December 31, 2009 and $2,993,961 at December 31, 2008
    2,254,054       2,328,438  
Goodwill
    3,785,480       3,592,080  
Intangible assets - net of accumulated amortization $ 1,187,013 in 2009 and  $1,018,870 in 2008
    888,752       1,016,665  
Deferred tax asset
    -       -  
Other assets
    412,594       439,732  
TOTAL ASSETS
  $ 32,692,295     $ 36,610,108  
                 
LIABILITIES & STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 5,360,471     $ 6,927,365  
Accrued expenses
    3,507,060       4,833,618  
Accrued taxes
    -       200,774  
Billings in excess of costs and estimated profits
    1,567,874       2,006,751  
Deferred income
    136,574       157,890  
Current portion of long-term debt
    536,552       629,742  
Other current liabilities
    494,017       532,932  
Total current liabilities
    11,602,548       15,289,072  
                 
Long-term debt, less current portion
    4,830,517       4,855,662  
Deferred tax liability
    318,850       406,417  
TOTAL LIABILITIES
    16,751,915       20,551,151  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued
    -       -  
Common stock, $.01 par value; 20,000,000 shares authorized at December 31, 2009 and 10,000,000 shares authorized at December 31, 2008.  6,035,366 shares issued and outstanding in 2009 and 5,966,583 shares in 2008
     60,354        59,666  
Additional paid in capital
    18,437,288       17,732,596  
Accumulated deficit
    (2,557,262 )     (1,733,305 )
TOTAL EQUITY
    15,940,380       16,058,957  
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
  $ 32,692,295     $ 36,610,108  
 
F-2

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
For the years ended December 31,
 
   
2009
   
2008
   
2007
 
Revenue
  $ 55,105,469     $ 62,357,466     $ 57,852,216  
Cost of revenue
    40,848,553       46,465,194       45,076,126  
Gross profit
    14,256,916       15,892,272       12,776,090  
Operating expenses:
                       
Selling, general & administrative expenses
    14,985,849       12,797,730       12,695,509  
Intangible asset impairment charges
    -       -       43,999  
Operating (loss) profit
    (728,933 )     3,094,542       36,582  
                         
Interest income
    28,610       91,558       73,493  
Other income
    38,885       17,266       (191 )
Interest expense
    (280,911 )     (271,290 )     (349,907 )
(Loss) income before tax expense
    (942,349 )     2,932,076       (240,023 )
Tax (benefit) expense
    (118,392 )     1,374,320       63,281  
Net (loss) income
  $ (823,957 )   $ 1,557,756     $ (303,304 )
                         
BASIC (LOSS) EARNINGS PER COMMON SHARE:
                       
Basic (loss) earnings per common share
  $ (0.14 )   $ 0.27     $ (0.05 )
Weighted average common shares
    5,865,187       5,786,104       5,768,864  
                         
DILUTED (LOSS) EARNINGS PER COMMON SHARE:
                 
Diluted (loss) earnings per common share
  $ (0.14 )   $ 0.26     $ (0.05 )
Weighted average diluted common shares
    5,865,187       5,988,782       5,768,864  
 
See accompanying notes to the consolidated financial statements.
 
F-3

 
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
   
Common Stock
   
Additional
             
   
par value $0.01
   
Paid-in
   
Retained
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Total
 
Balance at December 31, 2006
    5,916,065     $ 59,161     $ 16,900,653     $ (2,949,196 )   $ 14,010,618  
                                         
Cumualitive effect for adpotion of ASC 740
                      (38,561 )     (38,561 )
                                         
Shares issued in connection with
                                       
   the acquisition of CIS Security Systems
    10,000       100       37,400               37,500  
                                         
Amortization of value assigned to
                                       
  stock option grants
                    227,839               227,839  
                                         
Net loss
                            (303,304 )     (303,304 )
                                         
Balance at December 31, 2007
    5,926,065       59,261       17,165,892       (3,291,061 )     13,934,092  
                                         
Recovery from shareholder, net
                    59,443               59,443  
                                         
Surrendered shares to purchase fixed asset
    (3,200 )     (32 )     (14,048 )             (14,080 )
                                         
Employee stock options exercised
    23,718       237       119,021               119,258  
                                         
Shares issued in connection with
                                       
   the acquisition of CIS Security Systems
    20,000       200       120,350               120,550  
                                         
Amortization of value assigned to
                                       
  stock option grants
                    281,938               281,938  
                                         
Net income
                            1,557,756       1,557,756  
                                         
Balance at December 31, 2008
    5,966,583       59,666       17,732,596       (1,733,305 )     16,058,957  
                                         
Employee stock options exercised
    43,783       438       203,231               203,669  
                                         
Shares issued in connection with
                                       
   the acquisition of CIS Security Systems
    25,000       250       139,100               139,350  
                                         
Amortization of value assigned to
                                       
  stock option grants
                    362,361               362,361  
                                         
Net loss
                            (823,957 )     (823,957 )
                                         
Balance at December  31, 2009
    6,035,366     $ 60,354     $ 18,437,288     $ (2,557,262 )   $ 15,940,380  
 
See accompanying notes to the consolidated financial statements.
 
F-4

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
         
 
For the years ended December 31,
 
         
 
2009
   
2008
   
2007
 
Cash flows from operating activities:
                 
Net (loss) income
  $ (823,957 )   $ 1,557,756     $ (303,304 )
Adjustments to reconcile net income from operations
                       
to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
    1,040,322       840,738       899,325  
Bad debt expense
    316,181       346,602       41,123  
Provision for obsolete inventory
    8,305       202,490       180,000  
Impairment charges
            -       43,999  
Stock option expense
    362,361       281,938       227,839  
Deferred income taxes
    24,299       88,895       (26,730 )
Changes in operating assets and liabilities:
                       
Accounts receivable
    5,794,746       (5,204,110 )     280,677  
Inventory
    (43,830 )     56,964       67,002  
Costs in excess of billings and estimated profits
    (491,432 )     (2,317,062 )     1,448,430  
Retainage receivable
    1,460,554       (48,357 )     (317,657 )
Other assets
    195,711       (14,970 )     (25,002 )
Prepaid expenses and income tax receivable
    (545,537 )     22,920       (446,123 )
Accounts payable
    (1,566,894 )     (1,230,408 )     2,184,728  
Accrued expenses
    (1,326,558 )     1,766,022       (1,576,749 )
Taxes Payable
    (200,774 )     -       -  
Billings in excess of costs and estimated profits
    (438,877 )     429,749       409,743  
Deferred income
    (21,317 )     (48,571 )     (270,315 )
Other liabilities
    (38,915 )     81,437       198,609  
Net cash provided by (used in) operating activities
    3,704,388       (3,187,967 )     3,015,595  
Cash flows from investing activities:
                       
Purchase of businesses, net of cash acquired
    (90,230 )     (62,500 )     (25,000 )
Purchase of property and equipment
    (429,688 )     (569,494 )     (652,704 )
Net cash used in investing activities
    (519,918 )     (631,994 )     (677,704 )
Cash flows from financing activities:
                       
Recovery from shareholder, net
    -       59,443       -  
Proceeds from exercising of stock options - net of fees
    203,669       119,258       -  
Borrowings under revolving loan agreement
    2,150,000       700,001       788,000  
Repayments under revolving agreement
    (2,150,000 )     -       -  
Payments of bank loans
    (103,410 )     (221,110 )     (206,602 )
Net repayments of other debt
    (74,328 )     -       (9,135 )
Payments of equipment financing
    (321,059 )     (87,377 )     167,443  
Net cash used in financing activities
    (295,128 )     570,215       739,706  
         
                       
Increase (decrease) in cash and cash equivalents
    2,889,342       (3,249,746 )     3,077,597  
Cash and cash equivalents - beginning of period
    27,704       3,277,450       199,853  
Cash and cash equivalents - end of period
  $ 2,917,046     $ 27,704     $ 3,277,450  
Supplemental disclosure of cash flow information:
                       
Amount paid for the period for:
                       
Interest    
  $ 276,553     $ 265,876     $ 331,924  
Taxes    
    707,083       1,032,642       240,000  
Non-cash investing and financing activities:
                       
Equipment financed
    368,108       316,511       359,040  
Issuance of stock to acquire businesses
    143,400       120,550       37,500  
Surrender shares to purchase fixed assets
    -       14,080       -  
 
See accompanying notes to the consolidated financial statements.
 
F-5

 
 
Notes to the Consolidated Financial Statements

1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Henry Bros. Electronics, Inc., (the “Company”) and its subsidiaries, are divided into two business segments – Security System Integration (“Integration”) and Specialty Products and Services (“Specialty”). The Integration segment provides “cradle to grave” services for a wide variety of security, communications and control systems.  The Company specializes in turn-key systems that integrate many different technologies.  Systems are customized to meet the specific needs of its customers. Through the Specialty Products and Services segment we provide emergency preparedness programs, mobile digital recording solutions and specialized radio frequency communication equipment and integration.  Each of the Company’s segments markets nationwide with an emphasis in the Arizona, California, Colorado, Maryland, New Jersey, New York, Texas and Virginia metropolitan areas. Customers are primarily medium and large businesses and governmental agencies. The Company derives a majority of its revenues from project installations and to a smaller extent, maintenance service revenue.
 
The table below shows revenue percentage by geographic location for each of the years ended December 31:

   
Year ended
       
   
December 31,
       
   
2009
   
2008
   
2007
 
New Jersey/New York
    51 %     45 %     46 %
California
    17 %     20 %     20 %
Texas
    5 %     4 %     4 %
Arizona
    8 %     11 %     8 %
Colorado
    10 %     8 %     9 %
Virginia / Maryland
    8 %     10 %     8 %
Integration segment
    99 %     98 %     95 %
Specialty segment
    4 %     2 %     7 %
Inter-segment
    -3 %     0 %     -2 %
Total revenue
    100 %     100 %     100 %
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a)   Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  Acquisitions are recorded as of the purchase date, and are included in the consolidated financial statements from the date of acquisition.  All material intercompany transactions have been eliminated in consolidation.
 
 (b)   Revenue Recognition
 
Revenue from a project in either the Integration or Specialty segments are recognized on the percentage of completion method, whereby revenue and the related gross profit are determined based upon the actual costs incurred to date for the project to the total estimated project costs at completion. Project costs generally include all material and shipping costs, the Company’s direct labor, subcontractor costs and an allocation of indirect costs related to the direct labor. Changes in the project scope, site conditions, staff performance and delays or problems with the equipment used on the project can result in increased costs that may not be billable or accepted by the customer and results in a loss or lower profit from what was originally anticipated at the time of the proposal.
 
Estimates for the costs to complete the project are periodically updated by management during the performance of the project. Provision for changes in estimated costs and losses, if any, on uncompleted projects are made in the period in which such losses are determined.   In general, we determine a project to be substantially completed after:
 
1.       The scope of work is completed which includes installing the equipment as required in the contract.
 
2.       System is functional and has been tested.
 
3.       Training has been provided.

F-6

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
Except for projects in excess of $1 million, the majority of the Company’s projects are completed within a year. Revenue from product sales are recognized when title and risk of loss passes to the customer.  Service contracts, which are separate and distinct agreements from project agreements, are billed either monthly or quarterly.  Accordingly, revenues from service contracts are recognized ratably over the length of the agreement.
 
  (d)   Use of Estimates
 
The preparation of financial statements, in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Revenue and costs relating to security integration systems projects and service agreements are particularly affected by management’s estimates. The contract sale price and estimated costs are based upon the facts and circumstances known at the time of the proposal. Estimates for the costs to complete the contract are periodically updated during the performance of the contract. Unpredictable events can occur during the performance of the contract that can increase the costs and reduce the estimated gross profit. Change orders to record additional costs may not be approved or can become subject to long negotiations with the customer and can result in concessions by the Company. Considerable judgments are made during the performance of the contract that affects the Company’s revenue recognition and cost accruals that may have a significant impact on the results of operations reported by the Company.
 
(e)   Cash Equivalents
 
The Company considers highly liquid instruments with original maturity of three months or less to be cash equivalents.
 
(f)   Trade Receivables and Allowance for Doubtful Accounts
 
Trade receivables are stated at net realizable value.  This value includes an appropriate allowance for estimated uncollectible accounts. The allowance is evaluated on a regular basis by management and is based upon historical experience with the customer, the aging of the past due amounts and the relationship with and economic status of our customers. The evaluation is based upon estimates taking into account the facts and circumstances at the time of the evaluation. Actual uncollectible accounts could exceed the Company’s estimates and changes to its estimates will be accounted for in the period of change.  Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

(g)   Inventory
 
Inventory is stated at the lower of cost or market value.  Cost has been determined using the first-in, first-out method.  Inventory quantities on-hand are periodically reviewed, and where necessary, reserves for excess and obsolete inventories are recorded.
 
(h)  Retainage Receivable
 
Retainage receivables represent balances billed but not paid pursuant to retainage provisions of the project contracts and will be due and payable upon completion of specific tasks or the completion of the contract.
 
(i)   Property and Equipment
 
Property and equipment are recorded at cost, net of accumulated depreciation.  Depreciation is computed on a straight-line basis over estimated useful lives of four to ten years.  Leasehold improvements are amortized over the shorter of related lease term or the estimated useful lives.  Upon retirement or sale, the costs of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the determination of income.  Repairs and maintenance costs are expensed as incurred. Annually, the Company routinely reviews its property and equipment for impairment, and accordingly, will write-down those assets to their estimated fair value.  There was no impaired property and equipment in 2009, 2008 and 2007.
 
F-7

 
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
 (j)    Intangible Assets
 
The Company’s intangible assets include goodwill and other intangibles. Other intangibles consist of the fair value of acquired customer lists, service contracts acquired, trade names, and covenants not to compete.  Goodwill represents the excess of purchase price over fair value of net assets acquired at the date of acquisition. Collectively, these assets which affect the amount of future period amortization expense and possible impairment expense that we will incur. Management’s judgments regarding the existence of impairment indicators are based on various factors, including market conditions and operational performance of our business. As of December 31, 2009 and 2008, we had $4,674,232 and $4,608,745, respectively, of goodwill and other intangibles, accounting for 14.3% and 12.6% of our total assets at the respective dates. The goodwill is not amortizable; the majority of other intangibles are. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We test our goodwill for impairment, at least annually. This test is conducted in December of each year in connection with the annual budgeting and forecast process. Also, on a quarterly basis, we evaluate whether events have occurred that would negatively impact the realizable value of our intangibles or goodwill.
 
Effective January 1, 2002, the Company adopted the provisions of FASB ASC 350 “Goodwill and Other”.   In accordance with that statement, goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Prior to January 1, 2002, the Company had not recorded goodwill or other intangible assets of indefinite lives. Intangible assets with estimable useful lives, consisting primarily of acquired customer lists, service contracts and covenants not to compete are amortized on a straight-line basis over their estimated useful lives of three to fifteen years and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the intangible asset’s remaining useful life is changed, the intangible asset will be amortized over the remaining useful life. If the asset being amortized is determined to have an indefinite useful life, the asset will be tested for impairment. The impairment test will consist of measuring its fair value with its carrying amount. If the carrying amount of the intangible assets exceeds its fair value, an impairment loss is recognized for an amount equal to the excess and the adjusted carrying amount is recognized as its new accounting basis.
 
The Company’s goodwill impairment test is based on a two part procedure consistent with the requirements of FASB ASC 350. The first test consists of determining the fair value of the reporting unit and comparing it to the carrying value of the reporting unit. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, a second test is performed. In step two, the implied fair value of the goodwill (which is the excess of the fair value of the reporting unit over the fair value of the net assets) is compared to the carrying value of the goodwill. An impairment loss is recognized for any excess value of goodwill over the implied value. We determined the reporting unit by analyzing geographic regions, as management evaluates the Company’s performance in this manner. We have identified five separate and distinct operating units for the testing requirements of FASB ASC 350, and evaluate each reporting unit for impairment.

We completed our annual goodwill impairment analysis as of December 31, 2009. Our assessment did not result in good will impairment. Significant assumptions used in the include revenue growth, margins and discount rates. We used historical performance and management estimates of future performance to determine margins and growth rates. Of reporting units with goodwill, these entities had a combined fair value that is in excess of its carrying value by approximately 147%. However, there were certain individual entities that, while not requiring an impairment expense in 2009, given the current economic climate, resulted in a reduction in the fair value that is in excess of its carrying value compared to the impairment  analysis conducted in 2008.  Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
 
The Company recorded an impairment charge of $43,999 for the write down of a trade name for the year ended December 31, 2007.  There were no write downs for the years ended December 31, 2009 and 2008.

 In 2009, 2008 and 2007 there no charges to operations resulted from management’s goodwill impairment evaluation. 
 
(k)   Concentrations of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. At various times, the Company had cash balances at certain financial institutions in excess of federally insured limits.  However, the Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
Credit risk is generally diversified due to the large number of customers that make up the Company’s customer base and their geographic dispersion. The Company performs an ongoing credit evaluation of its customers. In 2009, billings to one customer represented 9.1% of the Company’s consolidated revenue or 9.8% of revenue from the Integration segment. In 2009, accounts receivable from one customer represented 10.7% of the Company’s consolidated net accounts receivable.  Revenues from government agencies were 34.2%, 36.7% and 40.7%  of total revenue for the years ended December 31, 2009, 2008 and 2007, respectively.

There are a few vendors from whom we obtain devices and software for specific access control, imaging, remote transmission, smart key and mobile applications. The loss of any one of these companies as suppliers could have a materially adverse impact on our business, financial condition and results of operations if we are unable to develop or acquire new technologies from other sources. We believe there are alternative vendors to source such products.

Timely vendor deliveries of equipment meeting our quality control standards from all suppliers are also important to our business because each installed system requires the integration of a variety of elements to be fully functional. The failure to deliver any component when required, in operating condition, can delay the project, triggering contract penalties, delay in progress payments and may result in cancellation of the project.
 
 (l)   Income Taxes
 
Deferred taxes are provided on the asset and liability method whereby assets and liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the amounts reported for financial statement purposes and corresponding amounts for tax purposes.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
(m)   Fair Value of Financial Instruments
 
The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, accrued expenses, short and long-term debt, approximate their fair values as of December 31, 2009.
 
 (n)   Marketing and Advertising Costs
 
The Company expenses marketing and advertising cost when the marketing and advertisement occurs.  Total marketing and advertising expenses amounted to approximately $106,669, $93,599 and $63,759 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
(o)   Stock Based Compensation

The Company follows Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Shared−Based Payment,” (SFAS No. 123R). SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period that the employee is required to perform services in exchange for the award. SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant date fair value of the award. The Company adopted SFAS No. 123R using the modified prospective method. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

 (p)    Warranty
 
The Company offers warranties on all products, including parts and labor that ranges from one to three years, depending upon the product. For products made by others, the Company passes along the manufacturer’s warranty to the end user.  For the years ended December 31, 2009, 2008 and 2007, warranty expense was $102,357, $40,155 and $44,868, respectively.
 
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
 (q)   Net (Loss) Earnings  Per Share
 
The computation of basic (loss) earnings  per share is based upon the weighted average number of shares of common stock outstanding during the period. The computation of diluted loss per share excludes the dilutive effects of common stock equivalents such as options and warrants. Potentially dilutive securities are not included in loss per share for the years ended December 31, 2009 and 2007 as their inclusion would be antidilutive.

The following securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:
 
   
December 31,
 
   
2009
   
2007
 
Options to purchase common stock
    39,837       50,834  
                 
Shares issued in connection with the acquisition of Securus Inc., held in escrow
    150,001       150,001  
 
 
FASB issued Statement of Financial Accounting Standards No. 131, “ Disclosure about Segments of an Enterprise and Related Information ” (“Statement 131”), that establish standards for the reporting by public business enterprises of financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to shareholders. The Company has identified two operating segments in which it operates; Security Systems Integration (“Integration”) and Specialty Products and services (“Specialty”). The Integration segment provides design, installation and support services for a wide variety of security, communications and control systems.  The Company specializes in turn-key systems that integrate many different technologies.  Systems are customized to meet the specific needs of its customers. The Specialty Products and Services segment (“Specialty”) includes the Company’s emergency preparedness planning programs business and its wireless business specializes in designing, manufacturing and maintaining wireless communications equipment used to enhance and extend emergency radio frequency services and cellular communication for both fixed and mobile applications.

 Each of the Company’s segments market nationwide with an emphasis in the Arizona,  California, Colorado, Maryland, New Jersey, New York, Texas and Virginia metropolitan areas. Customers are primarily medium and large businesses and governmental agencies. The Company derives a majority of its revenues from project installations and, to a smaller extent, maintenance service revenue.
 
(s)   Recent Accounting Pronouncements

 In June 2009, the FASB issued guidance now codified as FASB ASC Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on the Company’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

In April 2008, the FASB issued additional guidance within ASC 350-30, General Intangibles Other than Goodwill (“ASC 350-30”). The required provisions within ASC 350-30 amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the prior guidance within ASC 350  Intangibles – Goodwill and Other . The guidance shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption.  ASC 350-30 is intended to improve the consistency between the useful life of an intangible asset determined under prior requirements within ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other GAAP. We have evaluated the new statement and have determined that it does not have a significant impact on the determination ore reporting of our financial results.

F-10

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
In April 2009, the FASB amended Fair Value Accounting to provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also provides guidance on identifying circumstances that indicate a transaction is not orderly. We have evaluated the new statement and have determined the adoption did not have a material impact on the Consolidated Financial Statements.

In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued. This pronouncement is effective for interim or fiscal periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows. However, the provisions of FASB ASC Topic 855 resulted in additional disclosures with respect to subsequent events. The Company evaluated all events or transactions that occurred after December 31, 2009 up through the date we filed this annual report on Form 10-K.  During this period no material subsequent events came to our attention.

In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, “Financial Instruments,” which amends previous Topic 825 guidance to require disclosures about fair value of financial instruments in interim as well as annual financial statements. This pronouncement is effective for periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.
 
 
Accounts receivable consisted of the following:
 
   
December 31,
 
   
2009
   
2008
 
Completed contracts, including retentions
  $ 4,407,312     $ 2,829,701  
Contracts in progess:
    8,358,033       16,135,671  
                 
      12,765,345       18,965,372  
Less: Allowance for doubtful accounts
    712,206       801,306  
    $ 12,053,139     $ 18,164,066  
 
At December 31, 2009 and 2008, the largest accounts receivable from any one customer represented 10.7% and 10.1% of the net accounts receivable, respectively.
 
 
F-11

 

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

3.         COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
 
Costs and billing on uncompleted contracts consisted of the following:
 
   
December 31,
 
   
2009
   
2008
 
Cost incurred on uncompleted contracts
  $ 46,259,927     $ 68,235,896  
Billings on uncompleted contracts
    41,824,268       64,730,546  
    $ 4,435,659     $ 3,505,350  

Included in accompanying Balance Sheets under the following captions:

   
December 31,
 
   
2009
   
2008
 
Costs in excess of billings and estimated profits
  $ 6,003,533     $ 5,512,101  
Billing in excess of costs and estimated profits
    1,567,874       2,006,751  
    $ 4,435,659     $ 3,505,350  
 
4.           INVENTORY
 
Inventories consisted of the following:
 
   
December 31,
 
   
2009
   
2008
 
             
Component parts
  $ 160,318     $ 166,254  
Finished goods
    1,542,169       1,810,762  
      1,702,487       1,977,016  
Less: Valuation allowance
    (457,181 )     (775,539 )
Net inventory
  $ 1,245,306     $ 1,201,477  
 
 
F-12

 
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
5.           PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following:
 
   
December 31,
 
   
2009
   
2008
 
             
Office equipment
  $ 556,141     $ 518,156  
Demo and testing equipment
    430,104       330,403  
Automotive equipment
    2,256,036       2,114,458  
Computer equipment
    1,703,077       1,669,172  
Machinery and equipment
    437,043       293,659  
Leasehold improvements
    436,304       396,551  
      5,818,705       5,322,399  
Less:  Accumulated depreciation
    (3,564,651 )     (2,993,961 )
    $ 2,254,054     $ 2,328,438  
 
Depreciation expense was $872,181, $672,881 and $689,884 for the years ended December 31, 2009, 2008 and 2007, respectively.

 Equipment under capital leases included in Property and Equipment are as follows:
 
   
December 31,
 
   
2009
   
2008
 
             
Automotive equipment
  $ 1,476,423     $ 1,187,543  
Less: Accumulated depreciation
    (745,008 )     (420,249 )
    $ 731,415     $ 767,294  
 
6.           GOODWILL

Goodwill consisted of the following:
 
   
December 31
 
   
2009
   
2008
 
             
National Safe of California, Inc.
  $ 483,753     $ 483,753  
Photo Scan Systems, Inc.
    472,475       472,475  
Henry Bros. Electronics, LLC (Arizona)
    317,114       317,114  
Airolite Communications, Inc.
    250,034       250,034  
Securus, Inc.
    971,210       971,210  
CIS Security Systems Corp.
    1,252,600       1,059,200  
Southwest Securityscan, Inc.
    38,294       38,294  
    $ 3,785,480     $ 3,592,080  
 
In 2009, 2008 and 2007 there were no charges to operations resulting from management’s goodwill impairment evaluation. 
 
F-13

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
7.           INTANGIBLE ASSETS

Intangible assets consist of the following:
 
   
Amortizable Intangibles
             
   
Acquired
         
Covenant
         
Total
             
   
Customer
   
Service
   
Not to
   
Trade
   
Amortizable
   
Trade
   
Total
 
   
List
   
Rights
   
Compete
   
Name
   
Intangibles
   
Name
   
Intangibles
 
Gross carrying value:
                                         
December 31, 2007
    959,998       436,649       287,773       36,001       1,720,421       315,114       2,035,535  
Additions (deletions)
    -       -       -       -       -       -       -  
Impairment charge
    -       -       -       -       -       -       -  
December 31, 2008
    959,998       436,649       287,773       36,001       1,720,421       315,114       2,035,535  
Additions (deletions)
    40,230       -       -       -       40,230       -       40,230  
Impairment charge
    -       -       -       -       -       -       -  
December 31, 2009
    1,000,228       436,649       287,773       36,001       1,760,651       315,114       2,075,765  
                                                         
Accumulated amortization:
                                                       
December 31, 2007
    (291,553 )     (236,661 )     (287,773 )     (36,001 )     (851,988 )     -       (851,988 )
2008 Amortization
    (118,690 )     (48,193 )                     (166,883 )             (166,882 )
Impairment charge
    -       -       -       -       -       -       -  
December 31, 2008
    (410,243 )     (284,854 )     (287,773 )     (36,001 )     (1,018,871 )     -       (1,018,870 )
2008 Amortization
    (119,950 )     (48,192 )     -       -       (168,142 )     -       (168,143 )
Impairment charge
    -       -       -       -       -       -       -  
December 31, 2009
    (530,193 )     (333,046 )     (287,773 )     (36,001 )     (1,187,013 )     -       (1,187,013 )
Net carrying value
  $ 470,035     $ 103,603     $ -     $ -     $ 573,638     $ 315,114     $ 888,752  
                                                         
Weighted average life in years
   
11
     
6
     
3
     
5
     
6
                 
 
Amortization expense was $168,143, $166,882, and $208,868 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Future amortization expense for the next five years is as follows:
 
December 31
       
2010
  $ 169,072  
2011
    125,120  
2012
    125,120  
2013
    99,471  
2014
    41,086  
 
F-14

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
8.           LONG-TERM DEBT
 
On June 30, 2005, the Company entered into a loan agreement (the “Loan Agreement”) with TD Bank, N.A. pursuant to which TD Bank extended a $4 million two-year credit facility (the “Revolving Loan”), to the Company and refinanced $1 million of existing indebtedness to TD Bank into a five year term loan (the “Term Loan”).
 
On October 6, 2008, the Company executed its fourth amendment to the Revolving Loan with TD Bank, increasing its line of credit from $4 million to $8 million. The Revolving Loan is subject to certain borrowing base limitations.  On November 11, 2009 the term of the Revolving Loan  has been extended to June 30, 2011.  Advances under the Revolving Loan may be used to finance working capital and acquisitions. Interest is paid monthly in arrears at TD Bank’s prime rate (3.25% at both December 31, 2009 and December 31, 2008).  As part of the extension of the Term Loan to June 30, 2011, the interest rate will now be subject to a minimum floor rate of 4.0%.  TD Bank has a first priority security interest on the Company’s accounts receivable and inventory.

The Term Loan provided for the payment of sixty equal monthly installments of principal and interest in the amount of $19,730 commencing July 30, 2005 and continued through June 30, 2009.  Interest under the Term Loan was 6.75%.
 
The Company is required to maintain certain financial and reporting covenants and is restricted from paying dividends under the terms of the Loan Agreement.  The company was not in compliance with one of the covenants at December 31, 2009. The Company received a waiver from TD Bank on March 12, 2010.
 
Long-term debt included the following balances:
 
   
December 31,
 
   
2009
   
2008
 
Term loan at 6.75% interest payable in monthly installments
           
     of $19,730 thru June 01, 2009
  $ -     $ 103,410  
                 
Revolving line at the prime rate of interest, payable in monthly
               
     installments thru June 30, 2011
    4,335,898       4,335,898  
                 
Corporate insurance financed at 5.99% payable in monthly
               
     installments thru September 01, 2010
    194,665       268,992  
                 
Capitalized lease obligations due in monthly installments,
               
      with interest ranging from 6.4% to 12.7%
    836,506       777,104  
      5,367,069       5,485,404  
Less: Current Portion
    (536,552 )     (629,742 )
    $ 4,830,517     $ 4,855,662  
 
The weighted average prime interest rate was 3.25% and 4.8% for the years ended December 31, 2008 and 2009, respectively.
 
F-15

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
Aggregate maturities of all outstanding debt at December 31, 2009:
 
2010
  $ 481,165  
2011
    4,623,654  
2012
    184,959  
2013
    77,291  
    $ 5,367,069  

Future minimum lease payments for assets under capital leases outstanding at December 31, 2009:
 
2010
  $ 347,018  
2011
    358,332  
2012
    218,595  
2013
    87,386  
   
    1,011,331  
Less: Amount representing interest
    (174,825 )
Present value of net minimum lease payments
  $ 836,506  
 
F-16

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

9.           INCOME TAXES
 The tax provision consists of the following:

   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Federal:
                 
Current
  $ (281,705 )   $ 821,398     $ 5,869  
Deferred
    84,844       138,507       24,465  
      (196,861 )     959,905       30,334  
State:
                       
Current
    138,890       464,027       63,934  
Deferred
    (60,421 )     (49,612 )     30,987  
      78,469       414,415       32,947  
    $ (118,392 )   $ 1,374,320     $ 63,281  
 
The components of the deferred tax asset (liability) as of December 31, 2009 and 2008 are as follows:

   
2009
   
2008
 
Deferred Tax Asset: 
           
Allowance for doubtful accounts
  $ 279,917     $ 331,330  
Accrued absences
    218,298       237,991  
Accrued warranty
    183,463       219,514  
Bonus accrual
    99,647       276,120  
Inventory
    183,693       321,479  
Deferred rent
    63,372       43,436  
Stock compensation
    67,385       93,542  
Accrued commissions
    249,723       -  
Net operating loss / charitable contribution carry forward
    566,505       624,694  
  Less: valuation allowance
    (85,108 )     (159,102 )
Total deferred tax asset
  $ 1,826,895     $ 1,989,004  
                 
Deferred Tax Liability:
               
Deferred revenue
    -     $ (66,561 )
Depreciation
    (508,527 )     (503,838 )
Goodwill
    (82,702 )     (83,228 )
Intangible assets
    (303,073 )     (378,485 )
Total deferred tax liability
  $ (894,302 )   $ (1,032,112 )
                 
Net deferred tax asset
  $ 932,593     $ 956,892  
                 
Net short-term asset
  $ 1,251,443     $ 1,363,309  
Net long-term (liability) asset
  $ (318,850 )   $ (406,417 )
 
F-17

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
 The Company has approximately $1.0 million and $5.7 million of federal and state net operating loss carryforwards as of December 31, 2009.  Some of the net operating loss carryforwards were acquired and are subject to limitation under Internal Revenue Code Section 382.
 
A valuation allowance is provided when it is more likely than not that some portion of deferred tax assets will not be realized.  The Company has a valuation allowance of approximately $85,000 as of December 31, 2009 to account for a portion of the Company’s State deferred tax assets including State net operating loss carryforwards that are not more likely than not to be realized.  The valuation allowance decreased by approximately $74,000 for the year ended December 31, 2009 due to the utilization of State net operating loss carryforwards that were previously deemed unrealizable.
 
The provision for income taxes differs from that computed using the United States statutory tax rate of 34% due to the following:
 
   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Provision (benefit) for taxes using statutory rate
  $ (320,275 )   $ 996,906     $ (81,608 )
State taxes, net of federal tax benefit
    159,769       218,412       10,823  
FIN 48 state additional exposure (reduction)
    (6,203 )     7,766       8,539  
Change in valuation allowance
    (73,994 )     -       -  
State taxes, net of federal tax benefit-change in estimated rate
    -       -       1,841  
Change in prior year deferred tax estimates - State
    -       6,880       5,280  
Change in prior year deferred tax estimates - Federal
    -       31,397       23,076  
Permanent differences:
                       
Goodwill impairment
    -       -       14,960  
Goodwill tax amortization
    -       -       (8,651 )
Qualified stock based compensation
    78,779       91,602       66,585  
Other non-deductible expenses
    43,532       21,357       22,435  
Provision (benefit) for income taxes
  $ (118,392 )   $ 1,374,320     $ 63,280  
 
The Company adopted FASB provisions for accounting for uncertainty in income taxes as of January 1, 2007.  As a result of this adoption, the Company recognized an approximate $38,561 increase in the liability for unrecognized tax benefits and a decrease to the January 1, 2007 balance of retained earnings.  There were no additional tax liabilities identified in 2008 or 2009, except for the potential additional interest on those liabilities recognized at December 31, 2007.   As of December 31, 2009 and 2008, the Company had $48,663 and $54,866, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits as of and during the years ended December 31, 2009 and 2008 follows: 
 
   
Years Ended December 31,
 
   
2009
   
2008
 
Gross unrecognized income tax benefits beginning of year
  $ 54,866     $ 47,100  
Reductions for tax positions due to statute of limitations expiration
    (7,247 )     -  
Additions for the tax positions of prior years
    1,044       7,766  
Gross unrecognized income tax benefits at end of year
  $ 48,663     $ 54,866  
 
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal consolidated tax return and its state tax returns in New York, New Jersey and California as major tax jurisdictions, as defined. The only periods subject to examination for the Company’s federal return are the 2006 through 2009 tax years. The periods subject to examination for the Company’s state returns in New York, New Jersey and California are years 2005 through 2009. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  At December 31, 2009 and 2008, the Company recognized approximately $1,044 and $9,224, respectively, in potential interest and penalties associated with uncertain tax positions.  The change in the unrecognized tax benefit within the next 12 months is not expected to be material to the financial statements.

 
F-18

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
10.           INCENTIVE STOCK OPTION PLAN
 
The Company has a Stock Option Plan (the “1999 Plan”), for the benefit of employees of the Company, under which options to purchase up to a maximum of 500,000 shares of its common stock may be issued. The maximum term of any option is ten years, and the option price per share may not be less than the fair market value of the Company’s shares at the date the option is granted.  However, options granted to persons owning more than 10% of the voting shares will have a term not to exceed five years, and the option price will not be less than 110% of fair market value.  Options granted to an optionee will usually vest 33 1/3% annually, beginning on the first anniversary of the option grant, subject to the discretion of the Compensation Committee of the Board of Directors.  The 1999 Plan terminated on December 23, 2009 .  Any option outstanding at the termination date remains outstanding until it expires or is exercised in full, whichever occurs first.
 
On May 10, 2002, the Board of Directors approved the 2002 Incentive Stock Option Plan (the “2002 Plan”), which the shareholders subsequently approved on October 28, 2002.  On August 2, 2006, the Board of Directors approved the 2006 Stock Option Plan (the 2006 Plan”), which the shareholders subsequently approved on November 1, 2006.  On November 8, 2007, the Board of Directors approved the 2007 Stock Option Plan (the “2007 Plan”), which the shareholders subsequently approved on November 12, 2007.
 
The 2002, 2006 and 2007 Plans (collectively “the Plans”) allow the granting of incentive stock options or non-qualified stock options to the Company’s employees, directors and consultants, up to a maximum of 230,000, 250,000 and 250,000 shares of its common stock for the 2002, 2006 and 2007 Plans, respectively.  All stock options granted under the Plans will be exercisable at such time or times and in such installments, if any, as our Compensation Committee or the Board may determine and expire no more than ten years from the date of grant.  The 2002 Plan will terminate on May 9, 2012, the 2006 Plan will terminate on August 2, 2016, and the 2007 Plan will terminate on November 8, 2017, or such earlier date as the Board of Directors may determine.  Any option outstanding at the termination date will remain outstanding until it expires or is exercised in full, whichever occurs first.  The exercise price of the stock option will be at fair market value.  Vesting is at the discretion of the Compensation Committee.  The Plans allow for immediate vesting if there is a change of control. As of December 31, 2009, in total, 245,485 options are available for future grant under the 2002, 2006 and 2007 Plans.  The Company charged $362,361, $281,938, and $227,839 to operations for the years ended December 31, 2009, 2008 and 2007, respectively, for the fair value of those options granted subsequent to January 1, 2003.
 
A summary of stock option activity under the Plan’s follows:
 
   
Number of Shares
   
Price
 
   
Outstanding
   
Exercisable
   
Outstanding
   
Exercisable
 
December 31, 2006
    670,600       290,435     $ 5.17     $ 6.37  
Granted at market
    309,800               4.32          
Exercised
    -                          
Terminated
    (63,500 )             5.39          
December 31, 2007
    916,900       354,620       4.87       5.68  
Granted at market
    128,000               5.56          
Exercised
    (21,218 )             5.07          
Terminated
    (39,167 )             5.03          
December 31, 2008
    984,515       496,856       4.97       5.44  
Granted at market
    88,000               5.31          
Exercised
    (43,783 )             4.65          
Forfeited or expired
    (30,933 )             6.49          
December 31, 2009
    997,799       628,866     $ 4.96     $ 5.17  
 
F-19

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
 A summary of the status of the Company’s nonvested shares as of December 31, 2009 and changes during the year ended December 31, 2009 is presented below:
 
     
       
Grant Date
 
Nonvested Shares
 
Shares
   
Fair Value
 
     
           
Nonvested at December 31, 2007
    562,280     $ 1.91  
     
               
Granted
    128,000       2.56  
     
               
Vested
    (237,918 )     1.75  
     
               
Forfeited (nonvested)
    (35,297 )     2.03  
     
               
Nonvested at December 31, 2008
    417,065       2.00  
     
               
Granted
    88,000       2.42  
     
               
Vested
    (122,799 )     1.93  
     
               
Forfeited (nonvested)
    (13,333 )     2.07  
     
               
Nonvested at December 31, 2009
    368,933     $ 2.11  
 
As of December 31, 2009, there was $552,460 of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the Plan.  That cost is expected to be recognized over a weighted-average period of 2.8 years.

The aggregate fair value of options outstanding at December 31, 2009, was $1,739,886 and had a weighted-average remaining contractual life of 2.7 years. Of these options outstanding, 628,866 were exercisable and 368,933 were expected to vest, and had an aggregate fair value of $759,547 with a weighted-average remaining contractual life of 3.7 years. The following table provides information related to options exercised during the years ended December 31:
 
   
2009
   
2008
   
2007
 
Total intrinsic value
  $ 59,421     $ 146,701       -  
Cash received upon exercise
    203,669       119,258       -  
Related tax benefits realized
    12,784       11,391       -  

Stock based compensation is being amortized over the vesting period of up to five years. The fair value of the Company’s stock option awards was estimated assuming no expected dividends and the following weighted-average assumptions for the years ended December 31:

   
2009
   
2008
   
2007
 
Expected Life (years)
    5.4       4.3       4.0  
Expected volatility
    49.4 %     42.9 %     51.9 %
Risk-free interest rates
    1.7 %     2.9 %     4.1 %
Dividend yield
    -       -       -  
Weighted-average grant-date fair value
  $ 2.42     $ 2.56     $ 2.16  
 
F-20

 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)

The assumptions above are based on multiple factors, including historical exercise patterns of employees with respect to exercise and post-vesting employment termination behaviors, expected future exercise patterns for these employees and the historical volatility of our stock price.  The expected term of options granted is derived using company-specific, historical exercise information and represents the period of time that the options granted are expected to be outstanding.  The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
 
11.
STOCKHOLDERS’ EQUITY
 
In connection with the acquisition of all the capital stock of CIS Security Systems Corp. (“CIS”) on October 2, 2006, the Company issued an aggregate of 20,000 shares of its common stock, valued at $67,200.  The Company issued an additional 55,000 shares of its restricted common stock in 2009, 2008 and 2007 to CIS’s selling shareholder after CIS met certain performance targets. The issuance of the shares of restricted stock in connection with the aforementioned acquisition was made in reliance upon the exemption provided in section 4(2) of the Securities Act of 1933, as amended.  In addition, the selling shareholder may earn an additional 25,000 shares of the Company’s common stock if CIS achieves certain performance targets through December, 2011.
 
In connection with the acquisition of Securus, Inc. on October 10, 2005, the Company issued an aggregate of 150,001 shares of its common stock, all of which are being held in escrow pursuant to the stock purchase escrow agreement between the Company and the selling shareholders of Securus, Inc. These shares held in escrow may be earned out through December 31, 2010 based upon the aggregate value of the earnings before interest and tax (“EBIT”) to $2,960,000.
 
The issuance of the shares of restricted stock, in connection with the aforementioned acquisition, was made in reliance upon the exemption provided in section 4(2) of the Securities Act of 1933, as amended.
 
 Holders of common stock are entitled to one vote for each share held on all matters submitted for a vote of stockholders and do not have cumulative voting rights.  Apart from preferences that may be applicable to any shares of preferred stock outstanding at the time, holders of our common stock are entitled to receive dividends ratably, if any, as may be declared from time to time by our board of directors out of funds legally available.  Upon the liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to receive ratably the net assets available after the payment of all liabilities and liquidation preferences on any outstanding preferred stock.  Holders of common stock have no preemptive, subscription, redemption or conversion rights, and there are no redemption or sinking fund provisions applicable to the common stock.
 
Preferred Stock – Our board of directors is authorized, without stockholder approval, to issue up to 2,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of these series.  These shares may have rights senior to our common stock. The issuance of preferred stock may have the effect of delaying or preventing a change in control. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock.  At present, we have no plans to issue preferred stock in the foreseeable future.
 
A total of 166,400 common shares are available for issuance of employee stock options and warrants as of December 31, 2009.

 
F-21

 

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
12.
COMMITMENTS
 
Leases - The Company leases its office and warehouse facilities under operating leases that expire through 2016.  Future minimum rental payments, under non-cancelable leases as of December 31, 2009, are as follows:

            2010
  $ 602,877  
            2011
    540,059  
            2012
    364,995  
            2013
    263,800  
            2014
    245,181  
Thereafter
    439,903  
    $ 2,456,815  

Rent expense under operating leases was $820,817, $890,778, and $754,258 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
13.
EMPLOYEE BENEFIT PLAN
 
As of January 1, 2003, the Company sponsored a 401-K plan, including discretionary profit sharing (the “401-K Plan”). As of September 1, 2003, the Company decided to discontinue matching employee contributions to the 401-K Plan, but resumed discretionary matches in 2008. The Company has implemented a match for 2008 and 2009 whereby the Company matched 25% of employee’s contributions, up to 10% of the employee’s salary, with a maximum match of $750.  An expense of $76,483 and $73,879 was recorded for the years ended December 31, 2009 and 2008, respectively, associated with the Company matching contribution. The Company plans to continue the same discretionary match in 2010. The Company’s contributions to the employees' accounts vest equally over three years and the employee contribution to their own account vests immediately. There were no Company matching contributions to the 401-K plan during 2007.
 
14.
RELATED PARTY TRANSACTIONS
 
Joseph P. Ritorto, a member of our Board of Directors since January 2002, was co-founder of First Aviation Services, Inc. (“First Aviation”).  Mr. Ritorto sold First Aviation to a group led by Goldman Sachs in May 2008. In 2007 the Company had revenues of $546,375  principally associated with an integrated security systems project with First Aviation.  During the period in 2008 that the business was owned by Mr. Ritorto, the Company had no revenues from First Aviation.  There are no outstanding accounts receivable due from First Aviation at December 31, 2009 related to the period that the business was owned by Mr. Ritorto.
 
Richard D. Rockwell, a member of the Board of Directors since November 2007, has been Owner and Chairman of Professional Security Technologies LLC, a full service security systems integrator since 1996.  The Company had revenues of $120,130, $51,447 and $4,787 for the years 2009, 2008 and 2007, respectively.  These revenues were principally related to the sale of equipment.  There was a balance of $39,192 in accounts receivable as of December 31, 2009.
 
15.
CONTINGENT LIABILITIES

We know of no material litigation or proceeding, pending or threatened, to which we are or may become a party.

From time to time, the Company is subject to various claims with respect to matters arising out of the normal course of business. In management’s opinion, none of these claims is likely to have a material effect on the Company’s consolidated financial statements.

 
F-22

 

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
16.           SEGMENT DATA
 
Selected information by business segment is presented in the following tables for the years ended December 31:
 
   
For the year ended December 31,
 
   
2009
   
2008
   
2007
 
Revenue
                 
Integration
  $ 53,089,756     $ 60,843,182     $ 56,332,837  
Specialty
    2,283,713       1,514,284       2,147,355  
Inter-segment
    (268,000 )     -       (627,976 )
Total revenue
  $ 55,105,469     $ 62,357,466     $ 57,852,216  
                         
Operating Profit
                       
Integration
  $ 2,267,910     $ 7,019,073     $ 3,159,353  
Specialty
    703,468       (625,431 )     (544,471 )
Corporate
    (3,700,311 )     (3,299,100 )     (2,578,300 )
Total operating profit
  $ (728,933 )   $ 3,094,542     $ 36,582  

 Selected balance sheet information by business segment is presented in the following table as of December 31:

   
December 31,
 
   
2009
   
2008
 
Total Assets:
           
Integration
  $ 27,309,364     $ 33,304,890  
Specialty
    1,454,812       1,756,730  
Corporate
    3,928,119       1,548,488  
Total assets
  $ 32,692,295     $ 36,610,108  
 
17.
ACQUISITIONS

On October 2, 2006, the Company consummated the acquisition of all the capital stock of CIS Security Systems Corp. (“CIS”), a privately-held security systems integrator with offices in Baltimore, Maryland and Newington, Virginia, for an aggregate purchase price of $1,545,973 ($850,000 in cash to the selling shareholder, the assumption and subsequent repayment of CIS debt in the amount of $603,364, the issuance of 20,000 shares of the Company’s $0.01 par value common stock valued at $67,200 and $25,409 in transaction costs). In addition, the selling shareholder may earn an additional amount up to $250,000 in cash and 80,000 additional shares of the Company’s common stock if CIS achieves certain performance targets through December, 2011. As of December 31, 2009, on a cumulative basis the selling shareholder has earned $137,500 in cash and 55,000 additional shares (valued at $297,400) of the Company’s common stock through the achievement of certain performance targets, which resulted in the$193,400, $213,050 and $62,500 additional goodwill during each of the years ended December 31, 2009, 2008 and 2007, respectively.
 
Established in 1987, CIS provides design, engineering and installation services for integrated electronic security systems for both commercial and government clients in the Washington-Baltimore metropolitan area. CIS also provides design-build services for large-scale security systems for malls, shopping centers and stadiums throughout the country.

 
F-23

 

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
 
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
 
Presented below is a schedule of selected quarterly operating results:

   
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
 
   
Ended March 31
   
Ended June 30
   
Ended Sept. 30
   
Ended Dec. 31 (1)
 
Year Ended December 31, 2009
                       
Revenue
  $ 15,308,212     $ 13,971,980     $ 12,109,037     $ 13,716,240  
Gross profit
    4,222,014       3,890,109       3,022,057       3,122,736  
Net income
    166,122       55,253       (357,382 )     (687,950 )
                                 
Earnings per share
                               
Basic
  $ 0.03     $ 0.01     $ (0.06 )   $ (0.12 )
Diluted
    0.03       0.01       (0.06 )     (0.12 )
                                 
Year Ended December 31, 2008
                               
Revenue
  $ 15,906,046     $ 15,123,950     $ 12,262,372     $ 19,065,098  
Gross profit
    3,689,108       3,841,951       3,612,452       4,748,761  
Net income
    283,957       337,261       210,782       725,756  
                                 
Earnings per share
                               
Basic
  $ 0.05     $ 0.06     $ 0.04     $ 0.12  
Diluted
    0.05       0.06       0.04       0.12  

Earnings (loss) per share are computed independently for each of the quarters presented, on the basis described in Note 1.  The sum of the quarters may not be equal to the full year earnings per share amount.

(1) The Company’s decrease in net income (loss) is principally the result of the overall declines in revenues due to the protracted credit freeze and economic downturn, which is having a significant negative impact on construction markets and capital spending patterns of commercial businesses.
 
 
F-24

 
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
 
SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007

Column A
 
Column B
   
Column C
   
Column D
   
Column E
   
Column F
 
         
Additions
             
Description
 
Balance at
Beginning of
Period
   
Charged to
Costs and
Expenses
   
Charged to
Other
Accounts-
Describe
   
Deductions-
Describe
   
Balance at End
of Period
 
Year ended December 31, 2009
                             
Deducted from asset accounts:
                             
Allowance for doubtful accounts
  $ 801,306     $ 316,181     $ -     $ 405,281     $ 712,206  
Inventory allowance
    775,539       8,305       -       326,663       457,181  
Warranty reserve
    404,406       102,357       -       41,377       465,386  
Year ended December 31, 2008
                                       
Deducted from asset accounts:
                                       
Allowance for doubtful accounts
    810,587       346,602       -       355,883       801,306  
Inventory allowance
    595,539       180,000       -       -       775,539  
Warranty reserve
    392,220       40,155       -       27,969       404,406  
Year ended December 31, 2007
    -                                  
Deducted from asset accounts:
                                       
Allowance for doubtful accounts
    983,791       41,123       -       214,327       810,587  
Inventory allowance
    415,539       180,000       -       -       595,539  
Warranty reserve
    392,307       44,868       -       44,955       392,220  
 
 
S-1

 

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES

EXHIBIT INDEX

The following exhibits are filed herewith as part of this Report on Form 10-K:

Exhibit
Number
 
Description of Document
Method
of Filing
       
3.1 —
 
Certificate of Incorporation of the Company
(1)
3.2 —
 
By-laws of the Company
(1)
3.3 —
 
Certificate of Amendment of the Certificate of Incorporation of the Company, filed on July 5, 2001
(2)
3.4 —
 
Certificate of Amendment of the Certificate of Incorporation of the Company, filed on August 28, 2001
(2)
3.5 —
 
Certificate of Amendment of the Certificate of Incorporation of the Company, filed on August 9, 2005
(3)
3.6 —
 
Amended and Restated By-laws of the Company, filed on August 9, 2005
(3)
3.7 —
 
Certificate of Amendment of the Certificate of Incorporation of the Company, filed on November 12, 2009
(*)
4.1 —
 
Specimen Common Stock Certificate of the Company
(4)
10.1 —
 
2002 Stock Option Plan
(*)
10.5 —
 
1999 Incentive Stock Option Plan and form of Stock Option Agreement
(1)
10.11 —
 
Agreement between the Company and Administaff, Inc.
(6)
10.12 —
 
Loan Agreement between the Company and Hudson United Bank
(7)
10.13 —
 
Stock Purchase Agreement between the Company and Securus, Inc.
(8)
10.14 —
 
Office Lease between the Company and C.K. Bergen Holdings, LLC
(9)
10.15 —
 
Stock Purchase Agreement between the Company and CIS Security Systems, Corporation
(10)
10.16 —
 
2006 Stock Option Plan
(11)
10.17 —
 
2007 Stock Option Plan
(14)
14.1 —
 
Code of Ethics
(*)
14.2 —
 
Nominating Committee Charter
(13)
14.3 —
 
Audit Committee Charter
(14)
21.1 —
 
List of Subsidiaries
(*)
23.1 —
 
Consent of Amper, Politziner & Mattia, LLP
(*)
24 —
 
Power of Attorney (included on signature page hereto)
(*)
31.1 —
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*)
31.2 —
 
Certification of Chief Operating Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*)
31.3 —
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*)
32 —
 
Section 1350 Compliance
(*)
99 —
 
Audit Committee Report
(*)
 
 
 

 

HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
 
(1)   Incorporated by reference to the Registration Statement on Form SB-2 File No. 333-94477, filed with the Securities and Exchange Commission on January 12, 2002 (The “Registration Statement”).
 
(2)    Incorporated by reference to Amendment No. 4 to the Registration Statement filed with the Securities and Exchange Commission on September 25, 2001.
 
(3)   Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 9, 2005.
 
(4)    Incorporated by reference to Amendment No. 6 to the Registration Statement filed with the Securities and Exchange Commission on November 13, 2001.
 
(5)    Incorporated by reference to the Company’s Definitive Proxy on Form 14A, filed with the Securities and Exchange Commission on September 27, 2002 for the 2002 Stock Option Plan and on November 9, 2007 for the 2007 Stock Option Plan.
 
(6)    Incorporated by reference to the Company’s Annual Report on 10-KSB for the Company for the Year Ended December 31, 2004 filed with the Securities and Exchange Commission on March 28, 2005.
 
(7)   Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 7, 2005.
 
(8)  Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 14, 2005.
 
(9)  Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 2, 2006.
 
(10) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 5, 2006.
 
(11) Incorporated by reference to the Company’s Definitive Proxy on Form 14A, filed with the Securities and Exchange Commission on September 22, 2006.
 
(12) Incorporated by reference to the Company’s Annual Report on 10-KSB for the Company for the Year Ended December 31, 2003 filed with the Securities and Exchange Commission on April 1, 2004.
 
(13) Incorporated by reference to the Company’s Definitive Proxy on Form 14A, filed with the Securities and Exchange Commission on July 5, 2005.
 
(14) Incorporated by reference to the Company’s Definitive Proxy on Form 14A, filed with the Securities and Exchange Commission on November 9, 2007.

(*)    Filed herewith.