<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, 2000
[ ] 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 SEPTEMBER 30, 2000
issuer's classes of common stock, as of:
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,498,901
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Income for the Three
Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
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>
September 30, June 30,
ASSETS 2000 2000
------------- --------
<S> <C> <C>
Current Assets: (in thousands, except share data)
Cash and cash equivalents $ 3,296 $ 2,384
Accounts receivable, less reserve for doubtful accounts:
September 30, 2000 $ 676
June 30, 2000 $ 622 16,734 18,027
Inventories (Note 2) 22,036 19,478
Prepaid expenses and other current assets 1,373 1,086
-------- --------
Total current assets 43,439 40,975
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
September 30, 2000 $ 14,132
June 30, 2000 $ 13,712 10,961 11,105
Goodwill, net of accumulated amortization 10,108 2,379
Deferred income taxes 716 716
Other Assets 427 354
-------- --------
$ 65,651 $ 55,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 3,106 $ 1,023
Accounts payable 3,665 2,551
Accrued and other current liabilities 1,814 2,075
Accrued income taxes 46 46
-------- --------
Total current liabilities 8,631 5,695
Long-Term Debt 23,696 16,183
Deferred Income Taxes 292 292
-------- --------
Total liabilities 32,619 22,170
-------- --------
Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares authorized,
5,917,352 shares issued; 3,498,901
shares outstanding 59 59
Additional paid-in capital 772 772
Retained earnings 36,650 36,977
Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449)
-------- --------
Total stockholders' equity 33,032 33,359
-------- --------
$ 65,651 $ 55,529
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets
-3-
<PAGE> 4
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
2000 1999
---- ----
(in thousands, except share and per share data)
<S> <C> <C>
Net Sales $ 11,035 $ 10,449
Cost of Sales 7,904 7,858
----------- -----------
Gross profit 3,131 2,591
Selling, General and Administrative Expenses 2,986 2,719
----------- -----------
Operating income (loss) 145 (128)
----------- -----------
Interest Expense, net 465 321
Other Expense, net 7 32
----------- -----------
472 353
----------- -----------
(Loss) before (benefit) for income taxes (327) (481)
(Benefit) for Income Taxes -- (85)
----------- -----------
Net (loss) $ (327) $ (396)
=========== ===========
Net (loss) Per Share (Note 4): Basic $ (0.09) $ (0.11)
=========== ===========
Diluted $ (0.09) $ (0.11)
=========== ===========
Weighted Average Number of Shares Outstanding (Note 4):Basic 3,498,901 3,492,751
=========== ===========
Diluted 3,498,901 3,492,751
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements
-4-
<PAGE> 5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities $ 961 $ 112
------- -------
Cash Flows from Investing Activities:
Acquisition of business, net of cash acquired $(7,633) $ --
Net purchases of property, plant and equipment (174) (230)
------- -------
Net cash used in investing activities (7,807) (230)
------- -------
Cash Flows from Financing Activities:
Proceeds from acquisition financing $ 8,250 --
Principal payments on long-term debt (492) (424)
------- -------
Net cash provided by (used in) financing activities 7,758 (424)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 912 (542)
Cash and Cash Equivalents at Beginning of Period 2,384 2,230
------- -------
Cash and Cash Equivalents at End of Period $ 3,296 $ 1,688
======= =======
Cash Paid During the Period for:
Interest $ 626 $ 315
======= =======
Income taxes $ 9 $ 6
======= =======
Supplemental Non-cash Financing Activities:
Deferred acquisition payments $ 1,700 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
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, 2000 and
1999 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. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2000. 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,
2000 2000
----------- -----------
(in thousands)
<S> <C> <C>
Component parts $ 11,575 $ 10,231
Work-in-process 4,597 4,063
Finished products 5,864 5,184
----------- -----------
$ 22,036 $ 19,478
=========== ===========
</TABLE>
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------------- -------------------
(in thousands)
<S> <C> <C>
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 3,690 3,642
Furniture and fixtures 1,065 1,022
Machinery and equipment 10,467 10,283
Building improvements 56 56
---------------- ----------------
25,093 24,818
Less: Accumulated depreciation and amortization 14,132 13,713
---------------- ----------------
$ 10,961 $ 11,105
================ ================
</TABLE>
-6-
<PAGE> 7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.) Net Income Per Common Share
The Company follows the provisions of 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.
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,
(in thousands, except per share data)
-------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- -------
<S> <C> <C> <C>
Net income (loss) $(327) -- --
----- ----- ------
BASIC EPS
Net income attributable to
common stock $(327) 3,499 $(0.09)
EFFECT OF DILUTIVE SECURITIES
Options -- -- --
----- ----- ------
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $(327) 3,499 $(0.09)
===== ===== ======
</TABLE>
Options to purchase 259,240 shares of common stock in the three months
ended September 30, 2000 were not included in the computation of diluted
EPS because the exercise prices of 137,040 of the options exceeded the
average market price of the common shares for this period and the
inclusion of the remaining 122,200 options would have been anti-dilutive.
These options were still outstanding at the end of the period.
5.) Acquisition of Business
On July 27, 2000, Napco Security Systems, Inc. (the "Company")
through a subsidiary, pursuant to an Asset Purchase Agreement dated
July 2000 with Continental Instruments LLC ("Continental") of
Edgewood, New York, acquired substantially all of the assets of
Continental for consideration consisting of cash and deferred
payments as described in the Asset Purchase Agreement as previously
filed on Amendment No. 1 to Form 8-K.
The Continental business involves the manufacturing and distribution
of access control and security management systems. The Company plans
to continue to use the equipment and other physical property
acquired in the Company's access control business.
The acquisition was financed by an $8,250,000 loan from the
Company's primary lender, to be repaid over 60 equal monthly
installments. The loan is secured by a mortgage, guarantees and
other collateral. Approximately $7,800,000, which represents the
excess of the purchase price over the cost of assets acquired, is
being amortized on a straight-line basis over an estimated useful
life of 20 years.
-7-
<PAGE> 8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized below are the unaudited pro forma results of operations as though
this acquisition had occurred at the beginning of fiscal 2000. Pro forma
adjustments have been made for (1) excess purchase price over net assets
acquired and related amortization expense, (2) initial $8,250,000 cash
borrowings under a term loan, (3) cash used as initial consideration in the
purchase transaction, (4) deferred financing costs associated with the term loan
and related amortization, (5) additional salary expense for employees not
previously included in salary expense, (6) additional interest expense for
term loan.
<TABLE>
<CAPTION>
Three months ended Fiscal Year ended
September 30, 2000 June 30, 2000
----------------------- --------------------
(in thousands, except per (in thousands, except
share data) share data)
<S> <C> <C>
Pro forma:
Net sales $ 11,314 $ 59,115
Net income (loss) $ (405) $ 2,357
Net income (loss) per share:
Basic $ (0.12) $ 0.69
Diluted $ (0.12) $ 0.69
</TABLE>
-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 three months ended September 30, 2000 increased by 6% to
$11,035,000 as compared to $10,449,000 for the same period period a year ago.
The increase in net sales for the three months ended September 30, 2000 resulted
primarily from the Continental acquisition, partially offset by a decrease in
sales to a major customer due to a reduction in their inventory position.
The Company's gross margin for the three months ended September 30, 2000
increased by $540,000 to $3,131,000 or 28.4% of sales as compared to $2,591,000
or 24.8% of sales for the same period a year ago. The increase in dollars and as
a percentage of sales were both primarily due to the increased sales as
discussed above as well as to the larger profit margins associated with the
Continental products.
Selling, general and administrative expenses for the three months ended
September 30, 2000 increased by $267,000 to $2,986,000 as compared to $2,719,000
a year ago. The increase reflects the additional expenses associated with the
Continental operations.
Interest and other expense for the three months ended September 30, 2000
increased by $119,000 to $472,000 from $353,000 for the same period a year ago.
This increase is primarily the result of the interest expense resulting from the
financing of the Continental acquisition as partially offset by the Company's
continued reduction in certain of its other outstanding debt.
Provision for income taxes for the three months ended September 30, 2000
increased by $85,000 to no provision as compared to a benefit of $85,000
for the same period a year ago. This increase was primarily due to the favorable
effect in fiscal 2000 of the reversal of previously recorded reserves no longer
required with respect to IRS audits of fiscal years 1986 through 1997.
Net loss decreased by $69,000 to a loss of $327,000 or $(0.09) per share for
the three months ended September 30, 2000 as compared to a loss of $396,000 or
$(0.11) per share for the same period a year ago. These changes were the result
of the items described above.
Liquidity and Capital Resources
During the three months ended September 30, 2000 the Company utilized all of its
cash generated from operations and a portion of its cash on hand to reduce its
outstanding borrowings, purchase property and equipment and invest in additional
inventory as discussed below. During the quarter, the Company entered into an
$8,250,000 term loan agreement, payable over 60 equal monthly installments, in
order to purchase the assets of Continental Instruments, LLC (see note 5 to the
financial statements).
Accounts Receivable at September 30, 2000 decreased $1,293,000 to $16,734,000 as
compared to $18,027,000 at June 30, 2000. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 2000 as compared to
the quarter ended September 30, 2000.
Inventory at September 30, 2000 increased by $2,558,000 to $22,036,000 as
compared to $19,478,000 at June 30, 2000. This increase was primarily the result
of the Company increasing production of certain of its existing products in
preparation for the rollout of several new products during the fiscal year as
well as in anticipation of the historical increase of sales during the fiscal
year. The Company's inventory levels also increased as a result of the purchase
of Continental.
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.
Other than the $8,250,000 loan described above, the Company's bank debt consists
of a $16,000,000 secured revolving credit agreement and a $3,000,000 line of
credit to be used in connection with commercial and standby letters of credit.
The revolving credit agreement was amended to expire in October 2001 and any
outstanding borrowings are to be repaid on or before that time.
As of September 30, 2000 the Company had no material commitments for capital
expenditures.
-9-
<PAGE> 10
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Year 2000 Date Conversion
To date, the Company has not experienced any failures or disruptions in its
internal operating systems, in its products or in the services provided by its
vendors and suppliers. It is possible that the Company's computerized systems
could be affected in the future by the Year 2000 issue. The Company has not
incurred any significant expenses relating to the Year 2000 issue.
Forward-looking Statements
This quarterly report, other than historical financial information, contains
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that involve a number of risks and uncertainties. Important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements are set forth in Item 1 of the
Company's annual report on Form 10-K for the year ended June 30, 2000. These
include risks and uncertainties relating to competition and technological
change, intellectual property rights, capital spending, international
operations, and the Company's acquisition strategies.
Quantitative and Qualitative Disclosures About Market Risk
The Company's principal financial instrument is long-term debt (consisting of a
revolving credit and term loan facility) that provides for interest at a spread
above the prime rate. The Company is affected by market risk exposure primarily
through the effect of changes in interest rates on amounts payable by the
Company under this credit facility. A significant rise in the prime rate could
materially adversely affect the Company's business, financial condition and
results of operations. At September 30, 2000 an aggregate amount of
approximately $15,000,000 was outstanding under this credit facility with a
weighted average interest rate of 7.8%. If principal amounts outstanding under
this facility remained at this quarter-end level for an entire year and the
prime rate increased or decreased, respectively, by 1.25% the Company would pay
or save, respectively, an additional $187,500 in interest in that year. The
Company does not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose. Where appropriate, the
Company requires that letters of credit be provided on foreign sales. In
addition, a significant number of transactions by the Company are denominated in
U.S. dollars. As such, the Company has shifted foreign currency exposure onto
its foreign customers. As a result, if exchange rates move against foreign
customers, the Company could experience difficulty collecting unsecured accounts
receivable, the cancellation of existing orders or the loss of future orders.
The foregoing could materially adversely affect the Company's business,
financial condition and results of operations.
-10-
<PAGE> 11
-10-
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
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
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the Company's
fiscal quarter ended September 30, 2000 other than the following: A
report on Form 8-K was filed on September 27, 2000 with respect to
the acquisition of substantially all of the assets of Continental
Instruments LLC on July 27, 2000.
-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.
November 13, 2000
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)
-12-
<PAGE> 13
INDEX TO EXHIBITS
Exhibits
27 Financial Data Schedule
-13-
