<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1997
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________
TO _______________ .
Commission File Number: 0-10004
NAPCO SECURITY SYSTEMS, INC.
----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2277818
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
333 Bayview Avenue
Amityville, New York 11701
- ------------------------------- -----------------------------------
(Zip Code)
(516) 842-9400
-------------------------------------------------------------------
(Registrant's telephone number including area code)
NONE
-------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or 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
------ ------
Number of shares outstanding of each of the issuer's classes of
common stock, as of: MARCH 31, 1997
4,367,727
COMMON STOCK, $.01 PAR VALUE PER SHARE
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
MARCH 31, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
March 31, 1997 and June 30, 1996 3
Condensed Consolidated Statements of Income for the Nine
Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II: OTHER INFORMATION 10
SIGNATURE PAGE 11
INDEX TO EXHIBITS 12
Computation of Earnings Per Share E-1
</TABLE>
-2-
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1997 1996
------ --------- ---------
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,456 $ 426
Accounts receivable, less allowance for doubtful accounts:
March 31, 1997 $ 628,000
June 30, 1996 $ 662,000 12,169 13,759
Inventories, net (Note 2) 26,919 25,944
Prepaid expenses and other current assets 678 489
Deferred income taxes, net 911 911
-------- --------
Total current assets 42,133 41,529
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
March 31, 1997 $10,057,000
June 30, 1996 $ 9,137,000 12,160 12,549
Excess of Cost Over Fair Value of Assets Acquired, net 2,726 2,806
Other Assets 186 435
-------- --------
$ 57,205 $ 57,319
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,575 $ 1,500
Accounts payable 6,559 5,986
Accrued and other current liabilities 1,176 2,216
Accrued taxes 3,578 3,151
-------- --------
Total current liabilities 13,888 12,853
Long-Term Debt 11,875 14,150
Deferred Income Taxes 742 742
-------- --------
Total liabilities 26,505 27,745
Stockholders' Equity:
Common stock: par value $.01 per share; 21,000,000 shares
authorized, 5,896,602 shares issued 59 59
Additional paid-in capital 724 719
Retained earnings 29,918 28,797
Less: Treasury stock, at cost (1,528,875 shares) (1) (1)
-------- --------
Total stockholders' equity 30,700 29,574
-------- --------
$ 57,205 $ 57,319
======== ========
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements
-3-
<PAGE> 4
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------
1997 1996
---------- ----------
(in thousands, except
per share data)
<S> <C> <C>
Net Sales $ 38,067 $ 35,360
Cost of Sales 28,621 26,511
---------- ----------
Gross Profit 9,446 8,849
Selling, General and Administrative Expenses 6,873 6,539
---------- ----------
Operating income 2,573 2,310
---------- ----------
Interest Expense, net 820 938
Other Expense, net 181 137
---------- ----------
1,001 1,075
---------- ----------
Income before provision for income taxes 1,572 1,235
Provision for Income Taxes 451 500
---------- ----------
Net income $ 1,121 $ 735
========== ==========
Earnings Per Share $ 0.26 $ 0.17
========== ==========
Weighted Average Number of Shares Outstanding 4,383,616 4,386,960
========== ==========
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-4-
<PAGE> 5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
---------- ----------
(in thousands, except
per share data)
<S> <C> <C>
Net Sales $ 13,583 $ 12,084
Cost of Sales 10,428 9,126
---------- ----------
Gross Profit 3,155 2,958
Selling, General and Administrative Expenses 2,487 2,385
---------- ----------
Operating income 668 573
---------- ----------
Interest Expense, net 262 355
Other Expense, net 63 34
---------- ----------
325 389
---------- ----------
Income before provision for income taxes 343 184
Provision for Income Taxes 128 75
---------- ----------
Net income $ 215 $ 109
========== ==========
Earnings Per Share $ 0.05 $ 0.02
========== ==========
Weighted Average Number of Shares Outstanding 4,386,859 4,392,103
========== ==========
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-5-
<PAGE> 6
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities $ 2,706 $ 2,876
------- -------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (476) (920)
------- -------
Net cash used in investing activities (476) (920)
------- -------
Cash Flows from Financing Activities:
Principal payments on short-term debt -- (500)
Proceeds from long-term debt borrowings -- --
Principal payments on long-term debt (1,200) (1,657)
------- -------
Net cash used in financing activities (1,200) (2,157)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 1,030 (201)
Cash and Cash Equivalents at Beginning of Period 426 368
------- -------
Cash and Cash Equivalents at End of Period $ 1,456 $ 167
======= =======
Cash Paid During the Period for:
Interest $ 793 $ 952
======= =======
Income taxes $ 30 $ 129
======= =======
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-6-
<PAGE> 7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) Summary of Significant Accounting Policies and Other Disclosures
The information for the three and nine months ended March 31, 1997
and 1996 is unaudited, but in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the results of
operations for such periods have been included. The results of
operations for the periods may not necessarily reflect the annual
results of the Company.
The Company has adopted all recently effective accounting standards
which have an impact on its condensed financial statements.
2.) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Component parts $18,281 $17,908
Work-in-process 4,516 4,449
Finished products 4,122 3,587
------- -------
$26,919 $25,944
======= =======
</TABLE>
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
(in thousands)
------- -------
<S> <C> <C>
Land $ 904 $ 904
Building 8,882 8,807
Molds and dies 2,506 2,339
Furniture and fixtures 970 942
Machinery and equipment 8,474 8,268
Building improvements 426 426
------- -------
22,162 21,686
Less: Accumulated depreciation and amortization 10,002 9,137
------- -------
$12,160 $12,549
======= =======
</TABLE>
4.) The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes", effective July 1, 1993. SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the estimated future tax
effects of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it is proposing adjustments to the Company's Federal
tax returns for fiscal years 1987 through 1992. The IRS has issued a
report to the Company that the proposed adjustments would result in
taxes due of approximately $4.3 million excluding interest charges.
The primary adjustments presented by the IRS relate to intercompany
pricing and royalty charges, DISC earnings and charitable
contributions. The Company disagrees with the IRS and intends to
vigorously appeal this assessment using all remedies and
procedural actions available under the law. In October 1996, the
Company gave the IRS additional information supporting its position.
As a result, the Appeals Division of the IRS has advised the Company
that the case will be returned to the Audit Division for further
consideration. The Company believes that it has provided adequate
reserves at March 31, 1997 to address the ultimate resolution of
this matter, so that it will not have a material adverse effect on
the Company's consolidated financial statements.
-7-
<PAGE> 8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Sales for the nine months ended March 31, 1997 increased 8% to $38,067,000 as
compared to $35,360,000 for the same period a year ago. For the three months
ended March 31, 1997 sales increased 12% to $13,583,000 from $12,084,000 a year
ago. These increases were primarily due to the introduction of new products and
increased availability of finished goods due to improvements in production
efficiency.
The Company's gross profit margin for the nine months ended March 31, 1997
increased to $9,446,000 or 24.8% of sales as compared to $8,849,000 or 25.0% of
sales for the same period a year ago. For the three months ended March 31, 1997,
gross profit increased to $3,155,000 or 23.2% of sales as compared to $2,958,000
or 24.5% of sales for the same period a year ago. These increases are primarily
the result of increased net sales and cost savings being generated by the
Company's offshore facility in the Dominican Republic. The decrease in the
gross profit percentage during the three months ended March 31, 1997 is
primarily the result of general pricing pressures in the industry.
Selling, general and administrative expenses for the nine months ended March 31,
1997 increased by 5% to $6,873,000 as compared to $6,539,000 a year ago. For the
three months ended March 31, 1997, selling, general and administrative expenses
increased by 7% to $2,487,000 from $2,385,000 last year. These increases are due
to the Company's aggresive marketing of its recently introduced product lines as
partially offset by its continued efforts towards cost containment.
Interest and other expense for the nine months ended March 31, 1997 decreased
slightly to $1,001,000 from $1,075,000 for the same period a year ago. For the
three months ended March 31, 1997, interest and other expenses also decreased
$64,000 as compared to the same period in fiscal 1995 due primarily by the
Company's continued reduction in its outstanding debt.
Provision for income taxes decreased $49,000 to $451,000 or an effective rate
of 29% for the nine months ended March 31, 1997 as compared to $500,000 or 40%
a year ago. The decrease in the effective rate in 1997 as compared to 1996 is
the result of lower levels of permanent non-deductible expenses and lower
reserve requirements. For the three months ended March 31, 1997 the provision
for income taxes increased to $128,000 or an effective rate of 37% as compared
to $75,000 or 41% for the same period a year ago. The higher effective tax rate
in the current fiscal quarter as compared to the prior two quarters reflects an
increase of non-deductible permanent differences between book and tax income in
the three months ended March 31, 1997.
Net income increased by 53% to $1,121,000 or $.26 per share for the nine months
ended March 31, 1997 from $735,000 or $.17 per share for the same period a year
ago. For the three months ended March 31, 1997 net income increased by 97% to
$215,000 or $.05 per share as compared to $109,000 or $.02 per share for the
same quarter a year ago. These increases are primarily the result of the items
discussed above.
-8-
<PAGE> 9
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
During the nine months ended March 31, 1997 the Company utilized a large portion
of its cash generated from operations to make principal payments on its debt as
well as to purchase property, and equipment. The remaining cash provided by
operations resulted in an increase in cash and cash equivalents to $1,456,000 at
March 31, 1997 from $426,000 as of June 30, 1996.
Accounts Receivable at March 31, 1997 decreased by $1,590,000 to $12,169,000 as
compared to $13,759,000 at June 30, 1996. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 1996 as compared to
the quarter ended March 31, 1997 as well as improved collection procedures.
Inventory at March 31, 1997 was $26,919,000, increasing by $975,000 from
$25,944,000 at June 30, 1996. This increase is predominantly the result of the
Company's build-up of resources in connection with the production of several new
product lines.
On July 27, 1994, the Company entered into an $11,000,000 secured revolving
credit and term loan facility with two banks, with the Company's primary bank
acting as agent. In conjunction with this agreement, the banks have received as
collateral all accounts receivable and inventory located in the United States.
The revolving credit loan, which bears interest based on a number of options
available to the Company, converts to a term loan on June 30, 1997 payable in
sixteen (16) equal quarterly installments beginning on September 30, 1997. The
agreement contains various covenants and restrictions on the Company. As of
March 31, 1997 the Company was not in compliance with certain of these financial
covenants for which they anticipate receiving the appropriate waivers from the
banks. On March 31, 1995, the Company amended its existing revolving credit and
term loan facility to provide for an additional $2,000,000 secured line of
credit. The balance under this line was fully paid in October 1995.
On July 28, 1994 the Company entered into a separate $2,000,000 line of credit
with its primary bank to be used in connection with commercial and standby
letters of credit.
On May 13, 1997, the Company refinanced the majority of its bank debt with a new
primary bank and entered into a $16,000,000 secured revolving credit agreement,
a $3,000,000 line of credit to be used in connection with commercial and standby
letters of credit, and the replacement of the $2,500,000 standby letter of
credit securing an earlier loan from another bank in connection with the
Company's international operations. These agreements replaced the $11,000,000
and $2,000,000 credit agreements described above. The Company restructured its
debt to allow for future growth and expansion as well as to obtain terms more
favorable to the Company. As part of the debt restructuring, the Company retired
the outstanding Industrial Revenue Bonds relating to the financing of the
construction of the Company's Amityville facility. The revolving credit
agreement will expire in May, 2000 and any outstanding borrowings are to be
repaid on or before that time.
On April 26, 1993 the Company's foreign subsidiary entered into a 99 year land
lease of approximately four acres of land in the Dominican Republic, at an
annual cost of approximately $272,000. The foreign subsidiary relocated its
operations to this site at the end of fiscal 1995.
As of March 31, 1997 the Company had no material committments for capital
expenditures.
-9-
<PAGE> 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending or threatened material legal proceedings to
which NAPCO or its subsidiaries or any of their property is subject
other than as follows:
In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it is proposing adjustments to the Company's Federal
tax returns for fiscal years 1987 through 1992. The IRS has issued a
report to the Company that the proposed adjustments would result in
taxes due of approximately $4.3 million excluding interest charges.
The primary adjustments presented by the IRS relate to intercompany
pricing and royalty charges, DISC earnings and charitable
contributions. The Company disagrees with the IRS and intends to
vigorously appeal this assessment using all remedies and procedural
actions available under the law. In October 1996, the Company gave
the IRS additional information supporting its position. As a result,
the Appeals Division of the IRS has advised the Company that the
case will be returned to the Audit Division for further
consideration. The Company believes that it has provided adequate
reserves at March 31, 1997 to address the ultimate resolution of
this matter, so that it will not have a material adverse effect on
the Company's consolidated financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Earnings Per Share
(b) No reports on Form 8-K have been filed during the Company's fiscal
quarter ended March 31, 1997.
-10-
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 13, 1997
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ Richard Soloway By: /s/ Kenneth Rosenberg
----------------------------------- -------------------------------
Richard Soloway Kenneth Rosenberg
Chairman of the Board of Directors President and Treasurer
and Secretary (Co-Principal Executive Officer)
(Co-Principal Executive Officer)
By: /s/ Kevin S. Buchel
-------------------------------
Kevin S. Buchel
Senior Vice President of
Operations and Finance
(Principal Financial and
Accounting Officer)
-11-
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Page
- -------- ----
<S> <C> <C>
11 Computation of Earnings Per Share E-1
27 Financial Data Schedule
</TABLE>
-12-
<PAGE> 1
Exhibit (11)
NAPCO SECURITY SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------
1997 1996
------ ------
(in thousands, except
per share data)
<S> <C> <C>
Average Shares Outstanding 4,368 4,368
Add: Common Stock Equivalents 16 19
------ ------
Weighted Average Shares Outstanding 4,384 4,387
====== ======
Net Income $1,121 $ 735
====== ======
Earnings Per Share $ 0.26 $ 0.17
====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
------ ------
(in thousands, except
per share data)
<S> <C> <C>
Average Shares Outstanding 4,368 4,368
Add: Common Stock Equivalents 19 24
------ ------
Weighted Average Shares Outstanding 4,387 4,392
====== ======
Net Income $ 215 $ 109
====== ======
Earnings Per Share $ 0.05 $ 0.02
====== ======
</TABLE>
Primary earnings per share computations are based on the weighted average number
of shares outstanding plus common stock equivalents calculated at the monthly
average market price per share.
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,456
<SECURITIES> 0
<RECEIVABLES> 12,169
<ALLOWANCES> 628
<INVENTORY> 26,919
<CURRENT-ASSETS> 42,133
<PP&E> 12,160
<DEPRECIATION> 10,057
<TOTAL-ASSETS> 57,205
<CURRENT-LIABILITIES> 13,888
<BONDS> 0
59
0
<COMMON> 0
<OTHER-SE> 723
<TOTAL-LIABILITY-AND-EQUITY> 57,205
<SALES> 38,067
<TOTAL-REVENUES> 38,067
<CGS> 28,621
<TOTAL-COSTS> 28,621
<OTHER-EXPENSES> 6,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,001
<INCOME-PRETAX> 1,572
<INCOME-TAX> 451
<INCOME-CONTINUING> 1,121
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,121
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
