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
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EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: DECEMBER 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
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NAPCO SECURITY SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 11-2277818
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
333 Bayview Avenue
Amityville, New York 11701
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(Zip Code)
(631) 842-9400
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(Registrant's telephone number including area code)
NONE
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(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
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Number of shares outstanding of each of the
issuer's classes of common stock, as of: DECEMBER 31, 2000
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,508,210
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
DECEMBER 31, 2000
Page
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
December 31, 2000 and June 30, 2000 ............................... 3
Condensed Consolidated Statements of Income for the Three
Months Ended December 31, 2000 and 1999 ........................... 4
Condensed Consolidated Statements of Income for the Six
Months Ended December 31, 2000 and 1999 ........................... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2000 and 1999 ........................... 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
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
December 31, June 30,
ASSETS 2000 2000
--------- --------
Current Assets: (in thousands, except share data)
Cash and cash equivalents $ 1,689 $ 2,384
Accounts receivable, less reserve for doubtful accounts:
December 31, 2000 $ 721
June 30, 2000 $ 622 14,359 18,027
Inventories (Note 2) 23,521 19,478
Prepaid expenses and other current assets 1,637 1,086
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Total current assets 41,206 40,975
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
December 31, 2000 $ 14,492
June 30, 2000 $ 13,712 10,880 11,105
Goodwill, net of accumulated amortization 9,984 2,379
Deferred income taxes 716 716
Other Assets 419 354
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$ 63,205 $ 55,529
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of long-term debt $ 3,117 $ 1,023
Accounts payable 3,624 2,551
Accrued and other current liabilities 1,656 2,075
Accrued income taxes 29 46
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Total current liabilities 8,426 5,695
Long-Term Debt 21,006 16,183
Deferred Income Taxes 292 292
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Total liabilities 29,724 22,170
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Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares authorized,
5,934,852 and 5,917,352 shares issued respectively,
3,508,210 and 3,498,901 shares outstanding respectively 59 59
Additional paid-in capital 816 772
Retained earnings 37,084 36,977
Less: Treasury stock, at cost (2,426,642 and 2,418,451 shares respectively) (4,478) (4,449)
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Total stockholders' equity 33,481 33,359
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$ 63,205 $ 55,529
======== ========
The accompanying notes are an integral part of these condensed consolidated
balance sheets
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
December 31,
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2000 1999
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(in thousands, except share and per share data)
Net Sales $ 13,798 $ 12,214
Cost of Sales 9,962 9,171
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Gross profit 3,836 3,043
Selling, General and Administrative Expenses 3,116 2,541
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Operating income 720 502
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Interest Expense, net 447 333
Other Income, net (161) (2)
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286 331
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Income before provision for income taxes 434 171
Provision for Income Taxes -- 26
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Net Income $ 434 $ 145
=========== ===========
Net Income per share (Note 4): Basic $ 0.12 $ 0.04
=========== ===========
Diluted $ 0.12 $ 0.04
=========== ===========
Weighted average number of shares outstanding (Note 4): Basic 3,503,556 3,495,351
=========== ===========
Diluted 3,524,706 3,505,482
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
statements
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Six Months Ended
December 31,
-------------------------------
2000 1999
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(in thousands, except share and per share data)
Net Sales $ 24,833 $ 22,663
Cost of Sales 17,866 17,029
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Gross profit 6,967 5,634
Selling, General and Administrative Expenses 6,102 5,260
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Operating income 865 374
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Interest Expense, net 912 654
Other (Income) Expense, net (154) 30
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758 684
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Income (loss) before benefit for income taxes 107 (310)
Benefit for Income Taxes -- (59)
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Net Income (loss) $ 107 $ (251)
=========== ===========
Net Income (loss) per share (Note 4): Basic $ 0.03 $ (0.07)
=========== ===========
Diluted $ 0.03 $ (0.07)
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Weighted average number of shares outstanding (Note 4): Basic 3,502,004 3,493,618
=========== ===========
Diluted 3,522,544 3,493,618
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The accompanying notes are an integral part of these condensed consolidated
statements
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
December 31,
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2000 1999
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(in thousands)
Net Cash Provided by Operating Activities $ 2,260 $ 789
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Cash Flows from Investing Activities:
Acquisition of business, net of cash acquired $(7,633) $ --
Net purchases of property, plant and equipment (554) (472)
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Net cash used in investing activities (8,187) (472)
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Cash Flows from Financing Activities:
Proceeds from acquisition financing $ 8,250 --
Principal payments on long-term debt (3,033) (904)
Proceeds from sale of common stock 44 --
Payments for purchase of Treasury stock (29) --
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Net cash provided by (used in) financing activities 5,232 (904)
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Net Decrease in Cash and Cash Equivalents (695) (587)
Cash and Cash Equivalents at Beginning of Period 2,384 2,230
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Cash and Cash Equivalents at End of Period $ 1,689 $ 1,643
======= =======
Cash Paid During the Period for:
Interest $ 1,217 $ 725
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Income taxes $ -- $ 129
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Supplemental Non-cash Financing Activities:
Deferred acquisition payments $ 1,700 $ --
======= =======
The accompanying notes are an integral part of these condensed consolidated
statements
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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, 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
Inventories consist of: December 31, June 30,
2000 2000
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(in thousands)
Component parts $12,355 $10,231
Work-in-process 4,906 4,063
Finished products 6,260 5,184
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$23,521 $19,478
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3.) Property, Plant and Equipment
Property, Plant and Equipment consists of: December 31, June 30,
2000 2000
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(in thousands)
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 3,757 3,642
Furniture and fixtures 1,098 1,022
Machinery and equipment 10,646 10,283
Building improvements 56 56
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25,372 24,818
Less: Accumulated depreciation and amortization 14,492 13,713
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$10,880 $11,105
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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:
Three Months Ended December 31, 2000
(in thousands, except per share data)
-------------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
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Net income $ 434 -- --
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BASIC EPS
Net income attributable to
common stock $ 434 3,504 $ 0.12
EFFECT OF DILUTIVE SECURITIES
Options -- 21 --
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DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 434 3,525 $ 0.12
=========== =========== ===========
Six Months Ended December 31, 2000
(in thousands, except per share data)
-------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- -----------
Net income $ 107 -- --
----------- ----------- -----------
BASIC EPS
Net income attributable to
common stock $ 107 3,502 $ 0.03
EFFECT OF DILUTIVE SECURITIES
Options -- 21 --
----------- ----------- -----------
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 107 3,523 $ 0.03
=========== =========== ===========
Options to purchase 150,560 shares of common stock in the three and six
months ended December 31, 2000 were not included in the computation of
diluted EPS because the exercise prices of the options exceeded the
average market price of the common shares for these periods. These
options were still outstanding at the end of the period.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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
and (6) additional interest expense for term loan.
Six months ended Six months ended
December 31, 2000 December 31, 1999
--------------------- ---------------------
(in thousands, except (in thousands, except
per share data) per share data)
Pro forma:
Net sales $ 25,112 $ 25,429
Net income (loss) $ 29 $ (67)
Net income (loss) per share:
Basic $ 0.01 $ (.02)
Diluted $ 0.01 $ (.02)
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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 December 31, 2000 increased by 13.0% to
$13,798,000 as compared to $12,214,000 for the same period a year ago. Sales for
the six months ended December 31, 2000 increased by 9.6% to $24,833,000 from
$22,663,000 for the same period a year ago. The increase in net sales for the
three and six months ended December 31, 2000 resulted primarily from the
Continental acquisition. In addition, net sales for the three months ended
December 31, 2000 increased, in part, due to a general increase in sales of the
Company's burglar alarm and door locking products.
The Company's gross margin for the three months ended December 31, 2000
increased by $793,000 to $3,836,000 or 27.8% of sales as compared to $3,043,000
or 24.9% of sales for the same period a year ago. Gross margin for the six
months ended December 31, 2000 increased by $1,333,000 to $6,967,000 or 28.1% of
sales from $5,634,000 or 24.9% of sales for the same period a year ago. The
increases in dollars and as a percentage of sales are due primarily to the
increased sales as discussed above as well as to the increase in sales of some
of the Company's newer, higher-margin products.
Selling, general and administrative expenses for the three months ended December
31, 2000 increased by $575,000 to $3,116,000 as compared to $2,541,000 a year
ago. For the six months ended December 31, 2000 selling, general and
administrative expenses increased by $842,000 to $6,102,000 from $5,260,000 for
the same period a year ago. The increases in the three and six month figures are
due to the recently acquired Continental operation as partially offset by a
slight reduction in the Company's non-Continental related expenses.
Interest and other expense for the three months ended December 31, 2000
decreased by $45,000 to $286,000 from $331,000 for the same period a year ago.
For the six months ended December 31, 2000 interest and other expenses increased
by $74,000 to $758,000 from $684,000 for the same period a year ago. These
changes resulted primarily from the increase in Interest expense due to the
financing used for the Continental acquisition, a partially offsetting decrease
in Interest expense resulting from the continued reduction of the outstanding
principal on the Company's non-Continental related debt and an increase in Other
income as a result of an insurance settlement during the second quarter of
fiscal 2001.
The Company had a zero provision for income taxes for the three and six months
ended December 31, 2000 as compared to a provision of $26,000 and a benefit of
$59,000 for the three and six months ended December 31, 1999. These changes
resulted primarily from the adjustments made in fiscal 2000 relating to changes
in certain of the Company's deferred tax items.
Net income increased by $289,000 to $434,000 or $0.12 per share for the three
months ended December 31, 2000 as compared to $145,000 or $0.04 per share for
the same period a year ago. For the six months ended December 31, 2000 net
income increased by $358,000 to $107,000 or $0.03 per share from a loss of
$251,000 or $(0.07) per share for the same period a year ago. These changes were
due primarily to the items discussed above.
Liquidity and Capital Resources
During the six months ended December 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. During the first 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 December 31, 2000 decreased $3,668,000 to $14,359,000 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 December 31, 2000 as partially offset by the Continental
acquisition.
Inventory at December 31, 2000 increased by $4,043,000 to $23,521,000 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 being repaid over a five (5) year period.
In November 2000 the Company adopted a stock repurchase program authorizing the
Company from time to time to repurchase up to 200,000 shares of its common
stock. As of December 31, 2000, the Company had repurchased 8,191 shares under
this program.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 January 2002 and any
outstanding borrowings are to be repaid on or before that time.
As of December 31, 2000 the Company had no material commitments for capital
expenditures.
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 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
December 31, 2000 an aggregate amount of approximately $12,500,000 was
outstanding under this credit facility with a weighted average interest rate of
8%. If principal amounts outstanding under this facility remained at this
quarter-end level for an entire year and the interest rate increased or
decreased, respectively, by 1.25% the Company would pay or save, respectively,
an additional $156,250 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 many of 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.
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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
(a) The annual meeting of the stockholders of the Company (the "Annual
Meeting") was held on December 7, 2000.
(b) At the Annual Meeting, Randy B. Blaustein was re-elected as director
through 2003.
(c) At the Annual Meeting, a proposal to extend the 1990 Non-Employee
Stock Option Plan was passed.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) No reports on Form 8-K have been filed during the Company's fiscal
quarter ended December 31, 2000.
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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, 2001
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)
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INDEX TO EXHIBITS
Exhibits
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None
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