<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, 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 issuer's classes
of common stock, as of: MARCH 31, 2000
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,496,351
<PAGE> 2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
MARCH 31, 2000
Page
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
March 31, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Income for the Nine
Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2000 and 1999 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
-2-
<PAGE> 3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 2000 1999
-------- --------
(in thousands, except share data)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,488 $ 2,230
Accounts receivable, less allowance for doubtful accounts:
March 31, 2000 $ 650
June 30, 1999 $ 887 14,589 16,446
Inventories, net (Note 2) 23,020 21,495
Prepaid expenses and other current assets 761 809
Deferred income taxes, net 716 716
-------- --------
Total current assets 40,574 41,696
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
March 31, 2000 $13,314
June 30, 1999 $12,316 11,169 11,280
Goodwill, net 2,405 2,485
Other Assets 297 326
-------- --------
$ 54,445 $ 55,787
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,058 $ 1,433
Accounts payable 3,527 3,651
Accrued and other current liabilities 1,335 1,582
Accrued taxes 20 110
-------- --------
Total current liabilities 5,940 6,776
Long-Term Debt 16,454 17,241
Deferred Income Taxes 442 442
-------- --------
Total liabilities 22,836 24,459
Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares
authorized, 5,914,802 and 5,908,602 shares issued; 3,496,351 and 3,490,151
shares outstanding, respectively 59 59
Additional paid-in capital 766 751
Retained earnings 35,233 34,967
Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449)
-------- --------
Total stockholders' equity 31,609 31,328
-------- --------
$ 54,445 $ 55,787
======== ========
</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
March 31,
-----------------------------
2000 1999
----------- -----------
(in thousands, except share and per share data)
<S> <C> <C>
Net Sales $ 14,085 $ 11,672
Cost of Sales 10,479 8,950
----------- -----------
Gross profit 3,606 2,722
Selling, General and Administrative Expenses 2,610 3,247
----------- -----------
Operating income 996 (525)
----------- -----------
Interest Expense, net 337 327
Other Expense, net 15 150
----------- -----------
352 477
----------- -----------
Income (loss) before provision (benefit) for income taxes 644 (1,002)
Provision (benefit) for Income Taxes 127 (1,345)
----------- -----------
Net income $ 517 $ 343
=========== ===========
Earnings Per Share (Note 5): Basic $ 0.15 $ 0.10
=========== ===========
Diluted $ 0.15 $ 0.10
=========== ===========
Weighted Average Number of Shares Outstanding (Note 5): Basic 3,495,851 3,480,401
=========== ===========
Diluted 3,538,859 3,491,250
=========== ===========
</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>
Nine Months Ended
March 31,
-----------------------------
2000 1999
----------- -----------
(in thousands, except share and per share data)
<S> <C> <C>
Net Sales $ 36,748 $ 33,608
Cost of Sales 27,508 25,591
----------- -----------
Gross profit 9,240 8,017
Selling, General and Administrative Expenses 7,870 7,970
----------- -----------
Operating income 1,370 47
----------- -----------
Interest Expense, net 991 1,047
Other Expense, net 45 59
----------- -----------
1,036 1,106
----------- -----------
Income (loss) before provision (benefit) for income taxes 334 (1,059)
Provision (benefit) for Income Taxes 68 (1,906)
----------- -----------
Net income $ 266 $ 847
=========== ===========
Earnings Per Share (Note 5): Basic $ 0.08 $ 0.24
=========== ===========
Diluted $ 0.08 $ 0.24
=========== ===========
Weighted Average Number of Shares Outstanding (Note 5): Basic 3,494,301 3,480,401
=========== ===========
Diluted 3,510,189 3,505,824
=========== ===========
</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,
----------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Net Cash Provided by Operating Activities $ 1,307 $ 1,790
------- -------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (887) (745)
------- -------
Net cash used in investing activities (887) (745)
------- -------
Cash Flows from Financing Activities:
Principal payments on long-term debt (1,162) (1,051)
------- -------
Net cash (used in) financing activities (1,162) (1,051)
------- -------
Net (Decrease) in Cash and Cash Equivalents (742) (6)
Cash and Cash Equivalents at Beginning of Period 2,230 1,989
------- -------
Cash and Cash Equivalents at End of Period $ 1,488 $ 1,983
======= =======
Cash Paid During the Period for:
Interest $ 1,065 $ 879
======= =======
Income taxes $ 159 $ 250
======= =======
</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 nine months ended March 31, 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.
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,
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Component parts $10,809 $10,093
Work-in-process 5,305 4,954
Finished products 6,905 6,448
======= =======
$23,020 $21,495
======= =======
</TABLE>
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 3,583 3,180
Furniture and fixtures 1,018 964
Machinery and equipment 10,011 9,581
Building improvements 56 56
------- -------
24,483 23,596
Less: Accumulated depreciation
and amortization 13,314 12,316
======= =======
$11,169 $11,280
======= =======
</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 related 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, which was subject to final government administrative approval,
and which reduced the original assessment for the years covered by the
IRS audit. The Company accepted the revised audit report and the final
government approval was pending as of June 30, 1998. Accordingly, the
Company determined that $900,000 of previously recorded reserves should
be reversed through the 1998 income tax provision to reflect the
expected final settlement with respect to the IRS audit.
In fiscal 1999, the Company received the final government approval on
the IRS audit related to fiscal years 1986 through 1993. In addition,
the IRS completed its audits of fiscal years 1994 through 1997. As a
result of the favorable outcome from the audits, the Company reversed
an additional $1,896,000 of previously recorded reserves through the
income tax provision in fiscal 1999.
-7-
<PAGE> 8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.) 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
March 31, 2000
(in thousands, except per share data)
---------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
<S> <C> <C> <C>
Net income $ 517 -- --
----- ----- -----
BASIC EPS
Net income attributable to
common stock $ 517 3,496 $0.08
EFFECT OF DILUTIVE SECURITIES
Options -- 43 --
----- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 517 3,539 $0.08
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31, 2000
(in thousands, except per share data)
----------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
<S> <C> <C> <C>
Net income $ 266 -- --
----- ----- -----
BASIC EPS
Net income attributable to
common stock $ 266 3,494 $0.15
EFFECT OF DILUTIVE SECURITIES
Options -- 16 --
----- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 266 3,510 $0.15
===== ===== =====
</TABLE>
Options to purchase 103,040 and 91,040 shares of common stock in the three and
nine months ended March 31, 2000 respectively, 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 three months ended March 31, 2000 increased by 21% to $14,085,000
as compared to $11,672,000 for the same period period a year ago. For the nine
months ended March 31, 2000 net sales increased by 9% to $36,748,000 from
$33,608,000 for the same period in fiscal 1999. The increase in net sales for
the three and nine months ended March 31, 2000 occurred primarily from an
increase in overall demand for the Company's products as well as from the
effects of one of the Company's customers being acquired in the quarter ended
March 31, 1999 which did not affect the three and nine months ended March 31,
2000.
The Company's gross margin for the three months ended March 31, 2000 increased
by $884,000 to $3,606,000 or 25.6% of sales as compared to $2,722,000 or 23.3%
of sales for the same period a year ago. Gross margin for the nine months ended
March 31, 2000 was $9,240,000 or 25.1% of sales as compared to $8,017,000 or
23.9% of sales for the same period a year ago. These increases were primarily
due to the increased sales as discussed above as well as increased efficiencies
in the procurement of component parts.
Selling, general and administrative expenses for the three months ended March
31, 2000 decreased by $637,000 to $2,610,000 as compared to $3,247,000 a year
ago. For the nine months ended March 31, 2000 selling, general and
administrative expenses decreased by $100,000 to $7,870,000 as compared to
$7,970,000 for the same period a year ago. The decrease in the three and nine
months resulted primarily from the Company's increased reserves related to its
Latin America customers in the three and nine months ended March 31, 1999 that
did not impact the three and nine months ended March 31, 2000.
Interest and other expense for the three months ended March 31, 2000 decreased
by $125,000 to $352,000 from $477,000 for the same period a year ago. For the
nine months ended March 31, 2000 interest and other expenses decreased by
$70,000 to $1,036,000 from $1,106,000 for the same period in fiscal 1999. These
decreases were primarily due to the Company's continuing reduction in its
outstanding debt.
Provision for income taxes for the three months ended March 31, 2000 increased
by $1,472,000 to a provision of $127,000 as compared to a benefit of $1,345,000
for the same period a year ago. For the nine months ended March 31, 2000
provision for income taxes increased by $1,974,000 to a provision of $68,000 as
compared to a benefit of $1,906,000 for the same period a year ago. These
increases were primarily due to the favorable effect in fiscal 1999 of the
reversal of previously recorded reserves no longer required with respect to IRS
audits of fiscal years 1986 through 1997.
Net income increased by $174,000 to $517,000 or $.15 per share for the three
months ended March 31, 2000 as compared to $343,000 or $.10 per share for the
same period a year ago. For the nine months ended March 31, 2000 net income
decreased by $581,000 to $266,000 or $.08 per share as compared to $847,000 or
$.24 per share for the same period in fiscal 1999. These changes were primarily
due to the items discussed above.
Liquidity and Capital Resources
During the nine months ended March 31, 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. The Company reduced its outstanding debt to
$17,512,000 at March 31, 2000 from $18,674,000 at June 30, 1999 while cash and
cash equivalents decreased to $1,488,000 from $2,230,000 over the same period.
Accounts Receivable at March 31, 2000 decreased $1,857,000 to $14,589,000 as
compared to $16,446,000 at June 30, 1999. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 1999 as compared to
the quarter ended March 31, 2000.
Inventory at March 31, 2000 increased by $1,525,000 to $23,020,000 as compared
to $21,495,000 at June 30, 1999. This increase was primarily the result of the
Company increasing production of certain of its existing products as well as
preparing for the rollout of several new products during the fiscal year.
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.
-9-
<PAGE> 10
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 May 2001 and any outstanding borrowings are to be repaid on
or before that time.
As of March 31, 2000 the Company had no material commitments for capital
expenditures.
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, 1999. 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 March 31, 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
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
22 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the Company's fiscal
quarter ended March 31, 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.
May 11, 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
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
22 Financial Data Schedule
</TABLE>
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,488
<SECURITIES> 0
<RECEIVABLES> 14,589
<ALLOWANCES> 650
<INVENTORY> 23,020
<CURRENT-ASSETS> 761
<PP&E> 24,483
<DEPRECIATION> 13,314
<TOTAL-ASSETS> 54,445
<CURRENT-LIABILITIES> 5,940
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 31,550
<TOTAL-LIABILITY-AND-EQUITY> 54,445
<SALES> 36,748
<TOTAL-REVENUES> 36,748
<CGS> 27,508
<TOTAL-COSTS> 27,508
<OTHER-EXPENSES> 7,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,036
<INCOME-PRETAX> 334
<INCOME-TAX> 68
<INCOME-CONTINUING> 266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 266
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
