<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: SEPTEMBER 30, 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: SEPTEMBER 30, 1997
COMMON STOCK, $.01 PAR VALUE PER SHARE 4,375,727
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
September 30, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II: OTHER INFORMATION 9
SIGNATURE PAGE 10
INDEX TO EXHIBITS 11
Computation of Earnings Per Share E-1
</TABLE>
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1997 1997
------ ----------------- ----------------
<S> <C> <C>
Current Assets: (in thousands, except share data)
Cash and cash equivalents $ 548 $ 1,006
Accounts receivable, less allowance for doubtful accounts:
September 30, 1997 $768,000
June 30, 1997 $805,000 13,832 13,937
Inventories, net (Note 2) 27,029 25,702
Prepaid expenses and other current assets 345 390
Deferred income taxes, net 986 986
-------- --------
Total current assets 42,740 42,021
Property, Plant and Equipment, net of accumulated depreciation and
amortization (Note 3):
September 30, 1997 $10,613,000
June 30, 1997 $10,344,000 11,930 12,088
Goodwill, net 2,673 2,699
Other Assets 254 436
======== ========
$ 57,597 $ 57,244
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 900 $ 900
Accounts payable 4,424 5,500
Accrued and other current liabilities 1,712 1,808
Accrued taxes 3,805 3,677
-------- --------
Total current liabilities 10,841 11,885
Long-Term Debt 14,313 13,313
Deferred Income Taxes 828 828
-------- --------
Total liabilities 25,982 26,026
Stockholders' Equity:
Common stock: par value $.01 per share;
21,000,000 shares authorized;
5,904,602 and 5,896,602 shares
issued, respectively; 4,375,727 and
4,367,727 shares outstanding,
respectively 59 59
Additional paid-in capital 739 724
Retained earnings 30,818 30,436
Less: Treasury stock, at cost (1,528,875 shares) (1) (1)
-------- --------
Total stockholders' equity 31,615 31,218
======== ========
$ 57,597 $ 57,244
======== ========
</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>
Three Months Ended
September 30,
----------------------------
1997 1996
---------- ----------
(in thousands, except share and per
share data)
<S> <C> <C>
Net Sales $ 12,253 $ 12,156
Cost of Sales 9,081 9,021
---------- ----------
Gross Profit 3,172 3,135
Selling, General and Administrative Expenses 2,363 2,282
---------- ----------
Operating income 809 853
---------- ----------
Interest Expense, net 261 282
Other (Income) Expense, net 25 45
---------- ----------
286 327
---------- ----------
Income before provision for income taxes 523 526
Provision for Income Taxes 141 153
---------- ----------
Net income $ 382 $ 373
========== ==========
Earnings Per Share $ 0.09 $ 0.09
========== ==========
Weighted Average Number of Shares Outstanding 4,397,929 4,375,014
========== ==========
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-4-
<PAGE> 5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities $(1,347) $ 636
------- -------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (111) (153)
------- -------
Net cash used in investing activities (111) (153)
------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings 1,000 --
Principal payments on long-term debt -- (600)
------- -------
Net cash used in financing activities 1,000 (600)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (458) (117)
Cash and Cash Equivalents at Beginning of Period 1,006 426
------- -------
Cash and Cash Equivalents at End of Period $ 548 $ 309
======= =======
Cash Paid During the Period for:
Interest $ 347 $ 284
======= =======
Income taxes $ 13 $ 9
======= =======
</TABLE>
See accompanying notes to Condensed consolidated Financial Statements.
-5-
<PAGE> 6
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 months ended September 30, 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
<TABLE>
<CAPTION>
Inventories consist of: September 30, June 30,
1997 1997
------- -------
(in thousands)
<S> <C> <C>
Component parts $12,527 $12,197
Work-in-process 3,448 3,374
Finished products 11,054 10,131
------- -------
$27,029 $25,702
======= =======
</TABLE>
3.) Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, Plant and Equipment consists of: September 30, June 30,
1997 1997
------- -------
(in thousands)
<S> <C> <C>
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 2,565 2,554
Furniture and fixtures 982 977
Machinery and equipment 8,750 8,660
Building improvements 431 426
------- -------
22,543 22,432
Less: Accumulated depreciation and amortization 10,613 10,344
======= =======
$11,930 $12,088
======= =======
</TABLE>
4.) 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 advised the Company that the case had been
returned to the Audit Division for further consideration. Subsequently, the
case has again been returned to the Appeals Division of the IRS, with a
meeting with such division scheduled for November, 1997. The Company
believes that it has provided adequate reserves at September 30, 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.
-6-
<PAGE> 7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Sales for the three months ended September 30, 1997 remained constant at
$12,253,000 as compared to $12,156,000 for the same period a year ago. This
level of sales was maintained primarily due to the continued positive reception
to the Company's new product offerings as partially offset by the reduction in
sales to one of the Company's major customers and the ongoing market shift
towards low-cost, high value products.
The Company's gross margin for the three months ended September 30, 1997
remained relatively constant at $3,172,000 or 25.9% of sales as compared to
$3,135,000 or 25.8% of sales for the same period a year ago.
Selling, general and administrative expenses for the three months ended
September 30, 1997 increased by 4% to $2,363,000 as compared to $2,282,000 a
year ago. This increase is primarily due to the continued marketing efforts
relating to several new recently introduced products.
Interest and other expense for the three months ended September 30, 1997
decreased slightly to $286,000 from $327,000 for the same period a year ago due
primarily to lower average outstanding debt and lower interest rates.
Provision for income taxes for the three months ended September 30, 1997
remained relatively consistent at $141,000 as compared to $153,000 for the same
period a year ago due to similar pre-tax earnings and effective tax rates.
Net income remained constant at $382,000 or $.09 per share for the three months
ended September 30, 1997 as compared to $373,000 or $.09 per share for the same
period a year ago. These levels are due to the relative consistency in
performance in the areas described above.
-7-
<PAGE> 8
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 three months ended September 30, 1997 the Company utilized its cash
generated from operations as well as additional borrowings to increase its
investment in inventory and to purchase property and equipment. This investment
resulted in a decrease in cash and cash equivalents to $548,000 at September 30,
1997 from $1,006,000 as of June 30, 1997. and an increase in outstanding debt
of $1,000,000 to $15,213,000 at September 30, 1997 from $14,213,000 at June 30,
1997.
Accounts Receivable at September 30, 1997 decreased slightly to $13,832,000 as
compared to $13,937,000 at June 30, 1997. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 1997 as compared to
the quarter ended September 30, 1997.
Inventory at September 30, 1997 was $27,029,000, increasing by $1,327,000 from
$25,702,000 at June 30, 1997. This increase is predominantly the result of the
Company's stocking of two satellite warehouses that are intended to better
service the Company's customers by locating inventory closer to certain
international markets.
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 replaced 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 existing
$11,000,000 and $2,000,000 credit agreements with another bank. 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 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 September 30, 1997 the Company had no material commitments for capital
expenditures.
-8-
<PAGE> 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
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 advised the Company that the case had been
returned to the Audit Division for further consideration.
Subsequently, the case has again been returned to the Appeals Division
of the IRS, with a meeting with such division scheduled for November,
1997. The Company believes that it has provided adequate reserves at
September 30, 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 September 30, 1997.
-9-
<PAGE> 10
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.
November 12, 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)
-10-
3
<PAGE> 11
INDEX TO EXHIBITS
Exhibits Page
- -------- ----
11 Computation of Earnings Per Share E-1
27 Financial Data Schedule
-11-
4
<PAGE> 1
Exhibit (11)
NAPCO SECURITY SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1997 1996
------ ------
(in thousands, except per share data)
<S> <C> <C>
Average Shares Outstanding 4,371 4,368
Add: Common Stock Equivalents 27 7
------ ------
Weighted Average Shares Outstanding 4,398 4,375
====== ======
Net Income $ 382 $ 373
====== ======
Earnings Per Share $ 0.09 $ 0.09
====== ======
</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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 548
<SECURITIES> 0
<RECEIVABLES> 14,600
<ALLOWANCES> 768
<INVENTORY> 27,029
<CURRENT-ASSETS> 42,740
<PP&E> 22,543
<DEPRECIATION> 10,613
<TOTAL-ASSETS> 57,597
<CURRENT-LIABILITIES> 10,841
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 738
<TOTAL-LIABILITY-AND-EQUITY> 57,597
<SALES> 12,253
<TOTAL-REVENUES> 12,253
<CGS> 9,081
<TOTAL-COSTS> 9,081
<OTHER-EXPENSES> 2,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286
<INCOME-PRETAX> 523
<INCOME-TAX> 141
<INCOME-CONTINUING> 382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 382
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
