<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, 1998
/ / 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, 1998
COMMON STOCK, $.01 PAR VALUE PER SHARE 4,379,227
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
MARCH 31, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
March 31, 1998 and June 30, 1997 3
Condensed Consolidated Statements of Income for the Nine
Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II: OTHER INFORMATION 12
SIGNATURE PAGE 13
INDEX TO EXHIBITS 14
</TABLE>
-2-
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1998 1997
-------- --------
Current Assets: (in thousands)
<S> <C> <C>
Cash and cash equivalents $ 2,014 $ 1,006
Accounts receivable, less allowance for doubtful accounts:
March 31, 1998 $ 735,000
June 30, 1997 $ 805,000 12,228 13,937
Inventories, net (Note 2) 27,949 25,702
Prepaid expenses and other current assets 605 390
Deferred income taxes, net 986 986
-------- --------
Total current assets 43,782 42,021
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
March 31, 1998 $ 10,800,000
June 30, 1997 $ 10,344,000 11,595 12,088
Excess of Cost Over Fair Value of Assets Acquired, net 2,619 2,699
Other Assets 387 436
-------- --------
$ 58,383 $ 57,244
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 900 $ 900
Accounts payable 4,020 5,500
Accrued and other current liabilities 1,636 1,808
Accrued taxes 3,859 3,677
-------- --------
Total current liabilities 10,415 11,885
Long-Term Debt 15,188 13,313
Deferred Income Taxes 828 828
-------- --------
Total liabilities 26,431 26,026
Stockholders' Equity:
Common stock: par value $.01 per share; 21,000,000 shares
authorized, 5,908,102 and 5,896,602 shares issued, respectively 59 59
Additional paid-in capital 749 724
Retained earnings 31,145 30,436
Less: Treasury stock, at cost (1,528,875 shares) (1) (1)
-------- --------
Total stockholders' equity 31,952 31,218
-------- --------
$ 58,383 $ 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>
Nine Months Ended
March 31,
---------------------------
1998 1997
---------- ----------
(in thousands, except per share data)
<S> <C> <C>
Net Sales $ 35,687 $ 38,067
Cost of Sales 26,895 28,621
---------- ----------
Gross Profit 8,792 9,446
Selling, General and Administrative Expenses 6,886 6,873
---------- ----------
Operating income 1,906 2,573
---------- ----------
Interest Expense, net 811 820
Other Expense, net 112 181
---------- ----------
923 1,001
---------- ----------
Income before provision for income taxes 983 1,572
Provision for Income Taxes 274 451
---------- ----------
Net income $ 709 $ 1,121
========== ==========
Earnings Per Share (Note 5): Basic $ 0.16 $ 0.26
========== ==========
Diluted $ 0.16 $ 0.26
========== ==========
Weighted Average Number of Shares Outstanding (Note 5): Basic 4,374,477 4,367,727
========== ==========
Diluted 4,398,293 4,383,616
========== ==========
</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,
---------------------------
1998 1997
---------- ----------
(in thousands, except per share data)
<S> <C> <C>
Net Sales $ 12,023 $ 13,583
Cost of Sales 9,201 10,428
---------- ----------
Gross Profit 2,822 3,155
Selling, General and Administrative Expenses 2,277 2,487
---------- ----------
Operating income 545 668
---------- ----------
Interest Expense, net 282 262
Other Expense, net 100 63
---------- ----------
382 325
---------- ----------
Income before provision for income taxes 163 343
Provision for Income Taxes 42 128
---------- ----------
Net income $ 121 $ 215
========== ==========
Earnings Per Share (Note 5): Basic $ 0.03 $ 0.05
========== ==========
Diluted $ 0.03 $ 0.05
========== ==========
Weighted Average Number of Shares Outstanding (Note 5): Basic 4,379,227 4,367,727
========== ==========
Diluted 4,403,651 4,386,859
========== ==========
</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,
----------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Net Cash (Used in) Provided by Operating Activities $ (904) $ 2,706
------- -------
Cash Flows from Investing Activities:
(Purchases) dispositions of property, plant and equipment 37 (476)
------- -------
Net cash provided by (used in) investing activities 37 (476)
------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings 2,550 --
Principal payments on long-term debt (675) (1,200)
------- -------
Net cash provided by (used in) financing activities 1,875 (1,200)
------- -------
Net Increase in Cash and Cash Equivalents 1,008 1,030
Cash and Cash Equivalents at Beginning of Period 1,006 426
------- -------
Cash and Cash Equivalents at End of Period $ 2,014 $ 1,456
======= =======
Cash Paid During the Period for:
Interest $ 663 $ 793
======= =======
Income taxes $ 85 $ 30
======= =======
</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, 1998
and 1997 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,
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Component parts $12,963 $12,197
Work-in-process 3,569 3,374
Finished products 11,417 10,131
------- -------
$27,949 $25,702
======= =======
</TABLE>
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 2,607 2,554
Furniture and fixtures 981 977
Machinery and equipment 8,560 8,660
Building improvements 432 426
------- -------
22,395 22,432
Less: Accumulated depreciation and amortization 10,800 10,344
------- -------
$11,595 $12,088
======= =======
</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. The Company believes that it has
provided adequate reserves at March 31, 1998 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.) Net Income Per Common Share
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting standards ("SFAS") No. 128, "Earnings per
share". In accordance with SFAS No. 128, net income per common share
amounts ("basic EPS") were computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Net income per common share amounts, assuming dilution ("diluted
EPS"), were computed by reflecting the potential dilution from the
exercise of stock options. SFAS No. 128 requires the presentation of
both basic EPS and diluted EPS on the face of the income statement.
Net income per share amounts for the same prior-year periods have
been restated to conform to the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the basic
and diluted EPS computations for net income is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
March 31, 1998
(in thousands, except per share data)
-------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
<S> <C> <C> <C>
Net income $709 -- --
----
BASIC EPS
Net income attributable to
common stock $709 4,374 $0.16
----
EFFECT OF DILUTIVE SECURITIES
Options -- 69 --
---- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $709 4,443 $0.16
==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
(in thousands, except per share data)
------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
<S> <C> <C> <C>
Net income $121 -- --
----
BASIC EPS
Net income attributable to
common stock 121 4,379 $0.03
EFFECT OF DILUTIVE SECURITIES
Options -- 69 --
---- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $121 4,448 $0.03
==== ===== =====
</TABLE>
Options to purchase 4,400 shares of common stock in the quarter
ended March 31, 1998 were not included in the computation of diluted
EPS because the exercise prices exceeded the average market price of
the common shares for this period. These options were still
outstanding at the end of the period.
-8-
<PAGE> 9
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.) Year 2000 Date Conversion
As the century turns from 1900 to 2000, date-sensitive systems may
recognize the year 2000 as 1900 or not at all. This results primarily
because of the conventional use of a two digit date field in most
software applications. The inability to properly recognize the year
2000 may cause systems to process financial and operational
information incorrectly.
The majority of the Company's systems are already Year 2000
compliant. The Company expects that virtually all of its systems
will be fully compliant by July 1998. Due to the fact that the
Company's software manufacturer includes the Year 2000 upgrade as
part of its ongoing maintenance, the Company expects to expend a
minimal amount of its resources in this area.
-9-
<PAGE> 10
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, 1998 decreased 6% to $35,687,000 as
compared to $38,067,000 for the same period a year ago. For the three months
ended March 31, 1998 sales decreased 11% to $12,023,000 from $13,583,000 a year
ago. These decreases were primarily due to the significant reduction in sales to
a major customer as disclosed in the Company's most recent Form 10-K and annual
report. Also, because of improved delivery response to the Company's customers,
the sales orders during the quarter are closer to a "just in time" basis even
though the "sell through" of product to the installer has increased. The effect
of these factors was partially offset by an increase in the Company's
international sales. During the second quarter, the Company announced that it
had reorganized its Sales and Marketing management team.
The Company's gross profit margin for the nine months ended March 31, 1998
decreased to $8,792,000 or 24.6% of sales as compared to $9,446,000 or 24.8% of
sales for the same period a year ago. For the three months ended March 31, 1998,
gross profit decreased to $2,822,000 or 23.5% of sales as compared to $3,155,000
or 23.2% of sales for the same period a year ago. These decreases are primarily
the result of the decrease in net sales as partially offset by cost savings
being generated by the Company's offshore facility in the Dominican Republic.
Selling, general and administrative expenses for the nine months ended March 31,
1998 remained relatively constant at $6,886,000 as compared to $6,873,000 a year
ago. For the three months ended March 31, 1998, selling, general and
administrative expenses decreased by 8% to $2,277,000 from $2,487,000 last year.
These levels were primarily the result of decreased variable expenses relating
to the Company's lower sales volume.
Interest and other expense for the nine months ended March 31, 1998 decreased to
$923,000 from $1,001,000 for the same period a year ago. For the three months
ended March 31, 1998, interest and other expenses increased to $382,000 as
compared to $325,000 for the same period in fiscal 1997. These changes were
primarily the result of lower interest rates as offset in the third quarter by
increased outstanding debt.
Provision for income taxes decreased $177,000 to $274,000 for the nine months
ended March 31, 1998 as compared to $451,000 a year ago. For the three months
ended March 31, 1998 the provision for income taxes decreased to $42,000 as
compared to $128,000 for the same period a year ago. These changes are primarily
the result of the decrease in income before income taxes resulting from the
items discussed above.
Net income decreased by 37% to $709,000 or $.16 per share for the nine months
ended March 31, 1998 from $1,121,000 or $.26 per share for the same period a
year ago. For the three months ended March 31, 1998 net income decreased by 44%
to $121,000 or $.03 per share as compared to $215,000 or $.05 per share for the
same quarter a year ago. These decreases are primarily the result of the items
discussed above.
-10-
<PAGE> 11
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, 1998 the Company utilized a substantial
portion of its cash generated from operations as well as additional borrowings
to increase its investment in inventory. This resulted in an increase in cash
and cash equivalents to $2,014,000 at March 31, 1998 from $1,006,000 as of June
30, 1997 and a net increase in outstanding debt of $1,875,000 to $16,088,000 at
March 31, 1998 from $14,213,000 at June 30, 1997.
Accounts Receivable at March 31, 1998 decreased by $1,709,000 to $12,228,000 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 March 31, 1998 and the decrease in net sales as previously
discussed.
Inventory at March 31, 1998 was $27,949,000, increasing by $2,247,000 from
$25,702,000 at June 30, 1997. This increase is predominantly the result of the
Company expanding its finished goods inventory levels at its locations that
service its international markets as well as in preparation for production of
several new product lines.
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 an $11,000,000 and
a $2,000,000 credit agreement previously available to the Company. 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.
As of March 31, 1998 the Company had no material commitments for capital
expenditures except as desscribed herein. In May of 1998 the Company announced
that it had reached an agreement in principle with Napco's co-founder Kenneth
Rosenberg to repurchase all of Mr. Rosenberg's 889,576 shares of Napco common
stock for $5.00 per share. The Company anticipates a Closing to occur shortly,
at which time $2.5 million of the purchase price will be paid. The balance will
be paid over a 4-year period. The portion of the purchase price payable at
Closing will be financed by the Company's primary bank. At the Closing, Mr.
Rosenberg, who has recently taken a less active role in the Company's business,
will retire as president and director of the Company, but will be available to
the Company pursuant to a consulting agreement. The agreement also
contemplates that Mr. Rosenberg will not compete with the Company for a 10-year
period.
-11-
<PAGE> 12
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. The Company believes that it has
provided adequate reserves at March 31, 1998 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
None
(b) No reports on Form 8-K have been filed during the Company's fiscal
quarter ended March 31, 1998.
-12-
<PAGE> 13
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, 1998
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)
-13-
<PAGE> 14
INDEX TO EXHIBITS
Exhibits
- --------
27 Financial Data Schedule
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,014
<SECURITIES> 0
<RECEIVABLES> 12,228
<ALLOWANCES> 735
<INVENTORY> 27,949
<CURRENT-ASSETS> 43,782
<PP&E> 11,595
<DEPRECIATION> 10,800
<TOTAL-ASSETS> 58,383
<CURRENT-LIABILITIES> 10,415
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 748
<TOTAL-LIABILITY-AND-EQUITY> 58,383
<SALES> 35,687
<TOTAL-REVENUES> 35,687
<CGS> 26,895
<TOTAL-COSTS> 26,895
<OTHER-EXPENSES> 6,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 923
<INCOME-PRETAX> 983
<INCOME-TAX> 274
<INCOME-CONTINUING> 709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 709
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
