<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, 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
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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, 1998
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,490,151
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
SEPTEMBER 30, 1998
Page
----
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
September 30, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
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
-2-
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1998 1998
---- ----
Current Assets: (in thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 2,241 $ 1,989
Accounts receivable, less allowance for doubtful accounts:
September 30, 1998 $ 779
June 30, 1998 $ 755 13,653 14,760
Inventories, net (Note 2) 25,218 25,438
Prepaid expenses and other current assets 703 674
Deferred income taxes, net 1,292 1,292
-------------- -------------
Total current assets 43,107 44,153
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
September 30, 1998 $ 11,339
June 30, 1998 $ 11,055 11,395 11,491
Goodwill, net 2,566 2,592
Other Assets 244 327
-------------- -------------
$ 57,312 $ 58,563
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,667 $ 1,667
Accounts payable 3,376 3,862
Accrued and other current liabilities 1,431 1,678
Accrued taxes 2,562 3,004
-------------- -------------
Total current liabilities 9,036 10,211
Long-Term Debt 18,294 18,644
Deferred Income Taxes 875 875
-------------- -------------
Total liabilities 28,205 29,730
Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000
shares authorized, 5,908,102 shares issued;
3,490,151 and 3,489,651 shares outstanding,
respectively. 59 59
Additional paid-in capital 751 749
Retained earnings 32,746 32,474
Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449)
-------------- -------------
Total stockholders' equity 29,107 28,833
-------------- -------------
$ 57,312 $ 58,563
============== =============
</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,
-------------
1998 1997
---- ----
(in thousands, except share and per share data)
<S> <C> <C>
Net Sales $ 11,090 $ 12,253
Cost of Sales 8,382 9,081
----------- -----------
Gross Profit 2,708 3,172
Selling, General and Administrative Expenses 2,228 2,363
----------- -----------
Operating income 480 809
----------- -----------
Interest Expense, net 368 261
Other (Income) Expense, net 5 25
----------- -----------
373 286
----------- -----------
Income before (benefit) provision for income taxes 107 523
(Benefit) Provision for Income Taxes (165) 141
----------- ------------
Net income $ 272 $ 382
=========== ============
Earnings Per Share (Note 5): Basic $ 0.08 $ 0.09
=========== ===========
Diluted $ 0.08 $ 0.09
=========== ===========
Weighted Average Number of Shares Outstanding (Note 5): Basic 3,489,901 4,370,727
=========== ===========
Diluted 3,524,825 4,397,929
=========== ===========
</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,
-------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Net Cash Provided by (Used in) Operating Activities $ 790 $(1,347)
------- -------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (188) (111)
------- -------
Net cash used in investing activities (188) (111)
------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings -- 1,000
Principal payments on long-term debt (350) --
------- -------
Net cash (used in) provided by financing activities (350) 1,000
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 252 (458)
Cash and Cash Equivalents at Beginning of Period 1,989 1,006
------- -------
Cash and Cash Equivalents at End of Period $ 2,241 $ 548
======= =======
Cash Paid During the Period for:
Interest $ 335 $ 347
======= =======
Income taxes $ 242 $ 13
======= =======
</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, 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
<TABLE>
<CAPTION>
Inventories consist of: September 30, June 30,
1998 1998
---- ----
(in thousands)
<S> <C> <C>
Component parts $10,112 $10,200
Work-in-process 4,021 4,056
Finished products 11,085 11,182
======= =======
$25,218 $25,438
======= =======
</TABLE>
3.) Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, Plant and Equipment consists of: September 30, June 30,
1998 1998
---- ----
(in thousands)
<S> <C> <C>
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 2,883 2,819
Furniture and fixtures 912 912
Machinery and equipment 9,068 8,944
Building improvements 56 56
------- -------
22,734 22,546
Less: Accumulated depreciation and amortization 11,339 11,055
======= =======
$11,395 $11,491
======= =======
</TABLE>
4.) In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it had completed the audit of the Company's Federal tax
returns for fiscal years 1986 through 1993. The IRS had issued a report
to the Company proposing adjustments that 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 disagreed with the IRS and began the process of vigorously
appealing this assessment using all remedies and procedural actions
available under the law. The Company had provided a reserve to reflect
its estimate of the ultimate resolution of this matter, so that the
outcome of this matter would not have a material adverse effect on the
Company's consolidated financial statements.
During fiscal 1998, the Company continued to discuss the assessment
with the IRS Appeals Office and in July, 1998 received a revised audit
report, that is subject to final government administrative approval,
which reduces the original assessment for the years covered by the IRS
audit. The Company has accepted the revised audit report and the final
government approval is pending. The benefit for income taxes for the
fiscal quarter ended September 30, 1998 reflects the pro-rata impact of
reversals of previously recorded reserves which the Company expects to
occur during fiscal 1999.
-6-
<PAGE> 7
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>
Three Months Ended
September 30, 1998
(in thousands, except per share data)
-------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
<S> <C> <C> <C>
Net income $ 272 -- --
----- ----- --------
BASIC EPS
Net income attributable to
common stock $ 272 3,490 $ 0.08
------ ----- --------
EFFECT OF DILUTIVE SECURITIES
Options -- 35 --
----- ----- --------
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 272 3,525 $ 0.08
===== ===== ========
</TABLE>
Options to purchase 5,800 shares of common stock in the quarter ended
September 30, 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.
-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 three months ended September 30, 1998 decreased by 9% to
$11,090,000 as compared to $12,253,000 for the same period a year ago. During
the fiscal quarter ended September 30, 1998 the Company was adversely affected
by Hurricane Georges. Although the Company's manufacturing plant in the
Dominican Republic sustained virtually no damage, the timing of the hurricane,
during what are typically the Company's heaviest weeks of production and sales
during the quarter, had a negative effect on sales and earnings. The factory
lost several days of production at the end of the quarter and shipping of
finished goods from the factory was suspended due to the temporary interruption
of transportation in and out of the country. While the effects of the hurricane
carried over into the beginning of the second quarter of fiscal 1999, the
Company is confident that these effects will not be a factor in the second half
of the year. In addition to the effects of Hurricane Georges, during the
quarter ended September 30, 1998, two of the Company's customers each began to
tighten levels of the Company's product in their inventory, further affecting
sales for the quarter.
The Company's gross margin for the three months ended September 30, 1998
decreased by $464,000 to $2,708,000 or 24.4% of sales as compared to $3,172,000
or 25.9% of sales for the same period a year ago. This decrease was primarily
due to the same issues resulting in the decreased sales volume as discussed
above.
Selling, general and administrative expenses for the three months ended
September 30, 1998 decreased by 6% to $2,228,000 as compared to $2,363,000 a
year ago. This decrease is primarily due to the savings on variable expenses
relating to the change in net sales.
Interest and other expense for the three months ended September 30, 1998
increased slightly to $373,000 from $286,000 for the same period a year ago due
primarily to the additional debt relating to the Company's purchase of 889,576
shares of Treasury Stock during fiscal 1998.
Provision for income taxes for the three months ended September 30, 1998
decreased by $306,000 to a benefit of $165,000 as compared to a provision
of $141,000 for the same period a year ago. This change is primarily the result
of the pro-rata reversal of reserves no longer required with respect to the
expected favorable outcome of an IRS audit of fiscal years 1986 through 1993.
Net income declined approximately $110,000 to $272,000 or $.08 per share for the
three months ended September 30, 1998 as compared to $382,000 or $.09 per share
for the same period a year ago. These changes are due to the items described
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 three months ended September 30, 1998 the Company utilized its cash
generated from operations, in part, to reduce it's outstanding borrowings and to
purchase property and equipment. This resulted in a decrease in outstanding debt
to $19,961,000 at September 30, 1998 from $20,311,000 at June 30, 1998. The
remaining cash flows from operations resulted in an increase in cash and cash
equivalents to $2,241,000 at September 30, 1998 from $1,989,000 as of June 30,
1998.
Accounts Receivable at September 30, 1998 decreased $1,107,000 to $13,653,000 as
compared to $14,760,000 at June 30, 1998. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 1998 as compared to
the quarter ended September 30, 1998.
Inventory at September 30, 1998 was $25,218,000, decreasing slightly from
$25,438,000 at June 30, 1998. This decrease is predominantly the result of the
Company's focused efforts on reducing it's inventory levels as partially offset
by the decrease in sales.
In May of 1998 the Company repurchased 889,576 shares of Napco common stock for
$5.00 per share from one of its co-founders. $2.5 million was paid at closing
with the balance of the purchase price to be paid over a four (4) year period.
The portion of the purchase price paid at closing was financed by the Company's
primary bank and is to be repaid over a five (5) year period.
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 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, 1998 the Company had no material commitments for capital
expenditures.
-9-
<PAGE> 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In August 1995, the Internal Revenue Service ("IRS") informed the
Company that it had completed the audit of the Company's Federal tax
returns for fiscal years 1986 through 1993. The IRS had issued a report
to the Company proposing adjustments that 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
disagreed with the IRS and began the process of vigorously appealing
this assessment using all remedies and procedural actions available
under the law. The Company had provided a reserve to reflect its
estimate of the ultimate resolution of this matter, so that the outcome
of this matter would not have a material adverse effect on the Company's
consolidated financial statements.
During fiscal 1998, the Company continued to discuss the assessment with
the IRS Appeals Office and in July, 1998 received a revised audit
report, that is subject to final government administrative approval,
which reduces the original assessment for the years covered by the IRS
audit. The Company has accepted the revised audit report and the final
government approval is pending.
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
(22) financial Data Schedule
(b)No reports on Form 8-K have been filed during the Company's fiscal
quarter ended September 30, 1998.
-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.
November 13, 1998
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By:/s/ Richard Soloway
-----------------------------
Richard Soloway
Chairman of the Board of Directors,
President and Secretary
(Principal Executive Officer)
By: /s/ Kevin S. Buchel
-----------------------------
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer
(Principal Financial and Accounting
Officer)
-11-
<PAGE> 12
INDEX TO EXHIBITS
Exhibits
22 Financial Data Schedule
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,241
<SECURITIES> 0
<RECEIVABLES> 14,432
<ALLOWANCES> 779
<INVENTORY> 25,218
<CURRENT-ASSETS> 43,107
<PP&E> 22,734
<DEPRECIATION> 11,339
<TOTAL-ASSETS> 57,312
<CURRENT-LIABILITIES> 9,036
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> (3,698)
<TOTAL-LIABILITY-AND-EQUITY> 67,312
<SALES> 11,090
<TOTAL-REVENUES> 11,090
<CGS> 8,382
<TOTAL-COSTS> 8,382
<OTHER-EXPENSES> 2,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 373
<INCOME-PRETAX> 107
<INCOME-TAX> (165)
<INCOME-CONTINUING> 272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 272
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
