<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:
DECEMBER 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: DECEMBER 31, 1997
COMMON STOCK, $.01 PAR VALUE PER SHARE 4,379,227
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
December 31, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Income for the Six
Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Income for the Three
Months Ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II: OTHER INFORMATION 11
SIGNATURE PAGE 12
INDEX TO EXHIBITS 13
</TABLE>
-2-
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1997
------ ------------- ------------
<S> <C> <C>
Current Assets: (in thousands)
Cash and cash equivalents $ 1,189 $ 1,006
Accounts receivable, less allowance for doubtful accounts:
December 31, 1997 $ 663,000
June 30, 1997 $ 805,000 12,682 13,937
Inventories, net (Note 2) 28,649 25,702
Prepaid expenses and other current assets 1,126 390
Deferred income taxes, net 986 986
-------- --------
Total current assets 44,632 42,021
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
December 31, 1997 $ 10,895,000
June 30, 1997 $ 10,344,000 11,775 12,088
Excess of Cost Over Fair Value of Assets Acquired, net 2,646 2,699
Other Assets 324 436
-------- --------
$ 59,377 $ 57,244
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 900 $ 900
Accounts payable 4,759 5,500
Accrued and other current liabilities 1,822 1,808
Accrued taxes 3,824 3,677
-------- --------
Total current liabilities 11,305 11,885
Long-Term Debt 15,413 13,313
Deferred Income Taxes 828 828
-------- --------
Total liabilities 27,546 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 31,024 30,436
Less: Treasury stock, at cost (1,528,875 shares) (1) (1)
-------- --------
Total stockholders' equity 31,831 31,218
-------- --------
$ 59,377 $ 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>
Six Months Ended
December 31,
---------------------------
1997 1996
---------- ----------
(in thousands, except per share data)
<S> <C> <C>
Net Sales $ 23,664 $ 24,484
Cost of Sales 17,694 18,193
---------- ----------
Gross Profit 5,970 6,291
Selling, General and Administrative Expenses 4,609 4,386
---------- ----------
Operating income 1,361 1,905
---------- ----------
Interest Expense, net 529 558
Other Expense, net 12 118
---------- ----------
541 676
---------- ----------
Income before provision for income taxes 820 1,229
Provision for Income Taxes 232 323
---------- ----------
Net income $ 588 $ 906
========== ==========
Earnings Per Share: Basic $ 0.13 $ 0.21
========== ==========
Diluted $ 0.13 $ 0.21
========== ==========
Weighted Average Number of Shares Outstanding: Basic 4,374,477 4,367,489
========== ==========
Diluted 4,441,177 4,377,489
========== ==========
</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
December 31,
-----------------------------
1997 1996
----------- ----------
(in thousands, except per share data)
<S> <C> <C>
Net Sales $ 11,411 $ 12,328
Cost of Sales 8,613 9,172
----------- ----------
Gross Profit 2,798 3,156
Selling, General and Administrative Expenses 2,246 2,104
----------- ----------
Operating income 552 1,052
----------- ----------
Interest Expense, net 268 276
Other Expense (Income), net (13) 73
----------- ----------
255 349
----------- ----------
Income before provision for income taxes 297 703
Provision for Income Taxes 91 170
----------- ----------
Net income $ 206 $ 533
=========== ==========
Earnings Per Share: Basic $ 0.05 $ 0.12
=========== ==========
Diluted $ 0.05 $ 0.12
=========== ==========
Weighted Average Number of Shares Outstanding: Basic 4,377,477 4,367,379
=========== ==========
Diluted 4,396,477 4,377,379
=========== ==========
</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>
Six Months Ended
December 31,
----------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Net Cash Provided by (Used in) Operating Activities $(1,679) $ 1,729
------- -------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (238) (377)
------- -------
Net cash used in investing activities (238) (377)
------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings 2,550 --
Principal payments on long-term debt (450) (900)
------- -------
Net cash provided by (used in) financing activities 2,100 (900)
------- -------
Net Increase in Cash and Cash Equivalents 183 452
Cash and Cash Equivalents at Beginning of Period 1,006 426
------- -------
Cash and Cash Equivalents at End of Period $ 1,189 $ 878
======= =======
Cash Paid During the Period for:
Interest $ 663 $ 563
======= =======
Income taxes $ 85 $ 17
======= =======
</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 six months ended December 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
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Inventories consist of: December 31, June 30,
1997 1997
------------- ------------
(in thousands)
<S> <C> <C>
Component parts $ 13,296 $ 12,197
Work-in-process 3,661 3,374
Finished products 11,693 10,131
========= ========
$ 28,649 $ 25,702
========= ========
</TABLE>
3.) Property, Plant and Equipment
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Property, Plant and Equipment consists of: December 31, June 30,
1997 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 8,835 8,660
Building improvements 432 426
-------- --------
22,670 22,432
Less: Accumulated depreciation and amortization 10,895 10,344
-------- --------
$ 11,775 $ 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
December 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
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>
Six Months Ended
December 31, 1997
(In thousands, except per share data)
----------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
--------- --------- ---------
<S> <C> <C> <C>
Net income $588 -- --
BASIC EPS
Net income attributable to
common stock $588 4,374 $0.13
EFFECT OF DILUTIVE SECURITIES
Options -- 67 --
---- --------- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $588 4,441 $0.13
==== ========= =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1996
(In thousands, except per share data)
-----------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- -------
<S> <C> <C> <C>
Net income $906 -- --
-----
BASIC EPS
Net income attributable to
common stock 906 4,367 $0.21
EFFECT OF DILUTIVE SECURITIES
Options -- 10 --
---- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $906 4,377 $0.21
==== ===== =====
</TABLE>
Options to purchase 4,000 shares of common stock in the quarter ended
December 31, 1997 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ------------------------------------
Sales for the six months ended December 31, 1997 decreased 3% to $23,664,000 as
compared to $24,484,000 for the same period a year ago. For the three months
ended December 31, 1997 sales decreased 7% to $11,411,000 from $12,328,000 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 six months ended December 31, 1997
decreased to $5,970,000 or 25.2% of sales as compared to $6,291,000 or 25.7% of
sales for the same period a year ago. For the three months ended December 31,
1997, gross profit decreased to $2,798,000 or 24.5% of sales as compared to
$3,156,000 or 25.6% 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 six months ended December
31, 1997 increased by 5% to $4,609,000 as compared to $4,386,000 a year ago. For
the three months ended December 31, 1997, selling, general and administrative
expenses increased by 7% to $2,246,000 from $2,104,000 last year. These
increases are due to the Company's aggressive marketing of its recently
introduced product lines as well as its expansion into international markets.
Interest and other expense for the six months ended December 31, 1997 decreased
to $541,000 from $676,000 for the same period a year ago. For the three months
ended December 31, 1997, interest and other expenses also decreased to $255,000
as compared to the same period in fiscal 1996 due primarily to lower interest
rates.
Provision for income taxes decreased $91,000 to $232,000 for the six months
ended December 31, 1997 as compared to $323,000 a year ago. For the three months
ended December 31, 1997 the provision for income taxes decreased to $91,000 as
compared to $170,000 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 35% to $588,000 or $.13 per share for the six months
ended December 31, 1997 from $906,000 or $.21 per share for the same period a
year ago. For the three months ended December 31, 1997 net income decreased by
61% to $206,000 or $.05 per share as compared to $533,000 or $.12 per share for
the same quarter a year ago. These decreases are primarily the result of the
items discussed above.
-9-
<PAGE> 10
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 six months ended December 31, 1997 the Company utilized a substantial
portion of its cash generated from operations as well as additional borrowings
to increase its investment in inventory and to purchase property and equipment.
This resulted in an increase in cash and cash equivalents to $1,189,000 at
December 31, 1997 from $1,006,000 as of June 30, 1997 and a net increase in
outstanding debt of $2,100,000 to $16,313,000 at December 31, 1997 from
$14,213,000 at June 30, 1997.
Accounts Receivable at December 31, 1997 decreased by $1,255,000 to $12,682,000
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 December 31, 1997 and the decrease in net sales as
previously discussed as well as improved collection procedures.
Inventory at December 31, 1997 was $28,649,000, increasing by $2,947,000 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 December 31, 1997 the Company had no material commitments for capital
expenditures.
-10-
<PAGE> 11
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 December 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
(a) An annual meeting of the stockholders of the Company (the "Annual
Meeting") was held on November 25, 1997.
(b) The names of the directors elected at the Annual Meeting are: Richard
Soloway, Kenneth Rosenberg, Randy B. Blaustein, and Andrew J. Wilder.
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 December 31, 1997.
-11-
<PAGE> 12
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.
February 12, 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)
-12-
<PAGE> 13
INDEX TO EXHIBITS
Exhibits Page
- -------- ----
22 Financial Data Schedule
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,189
<SECURITIES> 0
<RECEIVABLES> 12,682
<ALLOWANCES> 663
<INVENTORY> 28,649
<CURRENT-ASSETS> 44,632
<PP&E> 11,775
<DEPRECIATION> 10,895
<TOTAL-ASSETS> 59,377
<CURRENT-LIABILITIES> 11,305
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 748
<TOTAL-LIABILITY-AND-EQUITY> 59,377
<SALES> 23,664
<TOTAL-REVENUES> 23,664
<CGS> 17,694
<TOTAL-COSTS> 17,694
<OTHER-EXPENSES> 4,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 541
<INCOME-PRETAX> 820
<INCOME-TAX> 232
<INCOME-CONTINUING> 588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
