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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [No Fee Required]
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 (I.R.S. Employer I.D. Number)
incorporation or organization)
333 Bayview Avenue, Amityville, New York 11701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(631) 842-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 Exchange Act of
1934 during the preceding 12 months (or for 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 [ ]
As of September 20, 2001, 3,317,796 shares of Common Stock were
outstanding, and the aggregate market value of the stock (based upon the last
sale price of the stock on such date) held by non-affiliates was approximately
$16,456,268.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement in connection with its 2001 Annual Meeting of Stockholders are
incorporated by reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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PART I
ITEM 1. BUSINESS.
NAPCO Security Systems, Inc. ("NAPCO") was incorporated in December 1971
in the State of Delaware for the purpose of acquiring National Alarm Products
Co., Inc., a New Jersey corporation founded in 1969 ("National"). In December
1971, NAPCO issued an aggregate of 300,000 shares of its common stock, par value
$.01 per share ("Common Stock"), to the stockholders of National in exchange for
all of the issued and outstanding capital stock of National, after which
National was merged into NAPCO.
NAPCO and its subsidiaries (collectively, the "Company") are engaged in
the development, manufacture, distribution and sale of security alarm products
and door security devices (the "Products") for commercial and residential
installations.
Products
Access Control Systems. Access control systems consists of one or more of
the following: various types of identification readers (e.g. card readers, hand
scanners, etc.), a control panel, a PC-based computer and electronically
activated door-locking devices. When an identification card or other identifying
information is entered into the reader, the information is transmitted to the
control panel/PC which then validates the data and determines whether to grant
access or not by electronically deactivating the door locking device. An
electronic log is kept which records various types of data regarding access
activity.
The Company designs, engineers and markets the software and control panels
discussed above. It also buys and resells various identification readers,
PC-based computers and various peripheral equipment for access control systems.
Alarm Systems. Alarm systems usually consist of various detectors, a
control panel, a digital keypad and signaling equipment. When a break-in occurs,
an intrusion detector senses the intrusion and activates a control panel via
hard-wired or wireless transmission that sets off the signaling equipment and,
in most cases, causes a bell or siren to sound. Communication equipment such as
a digital communicator may be used to transmit the alarm signal to a central
station or another person selected by a customer.
The Company manufactures and markets the following products for alarm
systems:
Automatic Communicators. When a control panel is activated by a signal
from an intrusion detector, it activates a communicator that can automatically
dial one or more pre-designated telephone numbers. If programmed to do so, a
digital communicator dials the telephone number of a central monitoring station
and communicates in computer language to a digital communicator receiver, which
prints out an alarm message.
Control Panels. A control panel is the "brain" of an alarm system. When
activated by any one of the various types of intrusion detectors, it can
activate an audible alarm and/or
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various types of communication devices. For marketing purposes, the Company
refers to its control panels by the trade name, generally "Gemini(TM)" and
"Magnum Alert(TM)" followed by a numerical designation.
Combination Control Panels/Digital Communicators and Digital Keypad
Systems. A combination control panel, digital communicator and a digital keypad
(a plate with push button numbers as on a telephone, which eliminates the need
for mechanical keys) has continued to grow rapidly in terms of dealer and
consumer preference. Benefits of the combination format include the cost
efficiency resulting from a single microcomputer function, as well as the
reliability and ease of installation gained from the simplicity and
sophistication of micro-computer technology.
Door Security Devices. The Company manufactures a variety of exit alarm
locks including simple dead bolt locks, door alarms and microprocessor-based
electronic door locks with push button and card reader operation.
Fire Alarm Control Panel. Multi-zone fire alarm control panels, which
accommodate an optional digital communicator for reporting to a central station,
are also manufactured by the Company.
Area Detectors. The Company's area detectors are both passive infrared
heat detectors and combination microwave/passive infrared detectors that are
linked to alarm control panels. Passive infrared heat detectors respond to the
change in heat patterns caused by an intruder moving within a protected area.
Combination units respond to both changes in heat patterns and changes in
microwave patterns occurring at the same time.
Peripheral Equipment
The Company also markets peripheral and related equipment manufactured by
other companies. Revenues from peripheral equipment have not been significant.
Research and Development
The Company's business involves a high technology element. A substantial
amount of the Company's efforts are expended to develop and improve the
Products. During the fiscal years ended June 30, 2001, 2000, and 1999, the
Company expended approximately $4,220,000, $4,234,000, and $4,008,000,
respectively, on Company-sponsored research and development activities conducted
by its engineering department and outside consultants. Substantially all of the
Company's research and development activities during fiscal 2001, 2000, and 1999
were conducted by its engineering department. The Company intends to continue to
conduct a significant portion of its future research and development activities
internally.
Employees
As of June 30, 2001, the Company had approximately 800 full-time
employees.
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Marketing and Major Customers
The Company's staff of 48 sales and marketing support employees located at
the Company's headquarters sells and markets the Products directly to
independent distributors and wholesalers of security alarm and security hardware
equipment. Management estimates that these channels of distribution represented
approximately 80% of the Company's total sales for the fiscal year ended June
30, 2001. The Company's sales representatives periodically contact existing and
potential customers to introduce new products and create demand for those as
well as other Company Products. These sales representatives, together with the
Company's technical personnel, provide training and other services to
wholesalers and distributors so that they can better service the needs of their
customers. In addition to direct sales efforts, the Company advertises in
technical trade publications and participates in trade shows in major United
States cities. Some of the Company's products are marketed under the "private
label" of certain customers.
Sales to one customer unaffiliated with the Company accounted for
approximately 18%, 27% and 27% of the Company's total sales for the fiscal years
ended June 30, 2001, 2000, and 1999, respectively (see Note 3 to Consolidated
Financial Statements). The loss of this customer could have a material adverse
effect on the Company's business.
Competition
The security alarm products industry is highly competitive. The Company's
primary competitors are comprised of approximately 25 other companies that
manufacture and market security equipment to distributors, dealers, central
stations and original equipment manufacturers. The Company believes that no one
of these competitors is dominant in the industry. Certain of these companies may
have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the features, quality,
reliability and pricing of, and the incorporation of the latest innovative and
technological advances into, its Products. The Company also competes by offering
technical support services to its customers. In addition, the Company competes
on the basis of its expertise, its proven products, reputation and its ability
to provide Products to customers without delay. The inability of the Company to
compete with respect to any one or more of the aforementioned factors could have
an adverse impact on the Company's business. Relatively low-priced
"do-it-yourself" alarm system products have become available in recent years and
are available to the public at retail stores. The Company believes that these
products compete with the Company only to a limited extent because they appeal
primarily to the "do-it-yourself" segment of the market. Purchasers of such
systems do not receive professional consultation, installation, service or the
sophistication that the Company's Products provide.
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Raw Materials and Sales Backlog
The Company prepares specifications for component parts used in the
Products and purchases the components from outside sources or fabricates the
components itself. These components, if standard, are generally readily
available; if specially designed for the Company, there is usually more than one
alternative source of supply available to the Company on a competitive basis.
The Company generally maintains inventories of all critical components. The
Company for the most part is not dependent on any one source for its raw
materials.
In general, orders for the Products are processed by the Company from
inventory. A sales backlog of approximately $851,000 existed as of June 30,
2001. This compared to a sales backlog of approximately $665,000 a year ago.
Government Regulation
The Company's telephone dialers, microwave transmitting devices utilized
in its motion detectors and any new communication equipment that may be
introduced from time to time by the Company must comply with standards
promulgated by the Federal Communications Commission ("FCC") in the United
States and similar agencies in other countries where the Company offers such
products, specifying permitted frequency bands of operation, permitted power
output and periods of operation, as well as compatibility with telephone lines.
Each new Product of the Company that is subject to such regulation must be
tested for compliance with FCC standards or the standards of such similar
governmental agencies. Test reports are submitted to the FCC or such similar
agencies for approval.
Patents and Trademarks
The Company has been granted several patents and trademarks relating to
the Products. While the Company obtains patents and trademarks as it deems
appropriate, the Company does not believe that its current or future success is
dependent on its patents or trademarks.
Foreign Sales
The revenues, operating income and identifiable assets attributable to the
foreign and domestic operations of the Company for its last three fiscal years,
and the amount of export sales in the aggregate, are summarized in the following
tabulation.
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Financial Information Relating to Foreign
and Domestic Operations and Export Sales
2001 2000 1999
---- ---- ----
(in thousands)
Sales to unaffiliated customers:
United States $54,771 $53,946 $50,875
Foreign 0 0 0
Identifiable assets:
United States $38,282 $32,584 $33,067
Foreign 25,395 22,945 22,720
Export sales:
United States(1) $ 9,952 $10,143 $10,713
ITEM 2. PROPERTIES.
The Company has executive offices and production and warehousing
facilities at 333 Bayview Avenue, Amityville, New York. This facility consists
of a fully-utilized 90,000 square foot building on a six acre plot. This
six-acre plot provides the Company with space for expansion of office,
manufacturing and storage capacities. The Company completed construction on this
facility in 1988 with the proceeds from industrial revenue bonds that have since
been retired. The Company also leases approximately 3,000 square feet of
warehouse space in Sparks, Nevada. This lease expires in June 2003.
The Company's foreign subsidiary located in the Dominican Republic,
NAPCO/Alarm Lock Grupo International, S.A. (formerly known as NSS Caribe, S.A.),
owns a building of approximately 167,000 square feet of production and
warehousing space in the Dominican Republic. That subsidiary also leases the
land associated with this building under a 99-year lease expiring in the year
2092. As of June 30, 2001, most of the Company's sales related to labor on
assemblies, goods and subassemblies produced at these sites, utilizing U.S.
quality control standards.
The Company's foreign subsidiary located in the United Kingdom, Napco
Group Europe Ltd, leases office and warehouse space of approximately 10,000
square feet. This lease expires in June 2005.
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(1) Export sales from the United States in fiscal year 2001 included sales of
approximately $6,727,000, $603,000, $1,524,000 and $1,098,000 to Europe, North
America, South America and other areas, respectively. Export sales from the
United States in fiscal year 2000 included sales of approximately $6,675,000,
$741,000, $1,118,000 and $1,609,000 to Europe, North America, South America and
other areas, respectively. Export sales from the United States in fiscal year
1999 included sales of approximately $6,730,000, $869,000, $1,653,000, and
$1,461,000 to Europe, North America, South America and other areas,
respectively.
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Management believes that these facilities are more than adequate to meet
the needs of the Company in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending or threatened material legal proceedings to which
NAPCO or its subsidiaries or any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS.
Principal Market
NAPCO's Common Stock became publicly traded in the over-the-counter
("OTC") market in 1972. In December 1981, the Common Stock was approved for
reporting by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol "NSSC", and in November 1984 the Common Stock
was designated by NASDAQ as a National Market System Security, which has
facilitated the development of an established public trading market for the
Common Stock.
The tables set forth below reflect the range of high and low sales of the
Common Stock in each quarter of the past two fiscal years as reported by the
NASDAQ National Market System.
Quarter Ended
--------------------------------------------
Fiscal 2001
--------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- -------- -------- --------
Common Stock
------------
High $ 5.69 $ 4.50 $ 5.25 $ 5.74
Low $ 3.25 $ 3.16 $ 3.38 $ 3.55
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Quarter Ended
--------------------------------------------
Fiscal 2000
--------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- -------- -------- --------
Common Stock
High $ 4.00 $ 4.13 $ 4.94 $ 4.63
Low $ 3.13 $ 2.88 $ 3.06 $ 3.19
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of September
20, 2001 was 175 (such number does not include beneficial owners of stock held
in nominee name).
Dividend Information
NAPCO has declared no cash dividends during the past three years with
respect to its Common Stock, and the Company does not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The table below summarizes selected financial information. For further
information, refer to the audited consolidated financial statements and the
notes thereto beginning on page 36 of this report.
Year Ended or at June 30
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
Statement of Earnings Data:
---------------------------
Net sales $ 54,771 $ 53,946 $ 50,875 $ 50,636 $ 53,705
Gross profit 14,317 13,198 11,777 11,420 12,385
Income from operations 1,859 3,122 1,911 2,496 3,645
Net income 251 2,010 2,493 2,038 1,639
Cash Flow Data:
---------------
Net cash flows provided by (used in)
operating activities $ 1,326 $ 2,822 $ 2,926 $ (107) $ 2,758
Net cash flows used in investing
activities (8,283) (1,221) (1,050) (585) (746)
Net cash flows (used in) provided
by financing activities 5,610 (1,447) (1,635) 1,675 (1,432)
Other Data:
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Earnings before interest, taxes, depreciation
and amortization (EBITDA) (1) $ 4,074 $ 4,676 $ 3,295 $ 3,932 $ 4,765
Per Share Data:
---------------
Net earnings per common share:
Basic $ .07 $ .57 $ .71 $ .48 $ .38
Diluted $ .07 $ .57 $ .71 $ .48 $ .37
Weighted average common shares outstanding:
Basic 3,463,000 3,495,000 3,493,000 4,263,000 4,369,000
Diluted 3,527,000 3,513,000 3,512,000 4,285,000 4,383,000
Cash dividends declared per
common share (2) $ .00 $ .00 $ .00 $ .00 $ .00
Balance Sheet Data:
Working capital $ 33,232 $ 35,280 $ 34,920 $ 33,942 $ 30,136
Total assets 63,677 55,529 55,787 58,563 57,244
Long-term debt 21,567 16,183 17,241 18,644 13,313
Stockholders' equity 32,944 33,359 31,328 28,833 31,218
Stockholders' equity per outstanding share 9.79 9.53 8.98 8.26 7.14
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(1) EBITDA is an additional measure of operating performance used by management.
While the components of EBITDA may vary from company to company, we exclude all
interest expense, all income tax provisions or benefits, all depreciation
charges related to property, plant and equipment and all amortization charges,
including amortization of goodwill, leasehold improvements and other intangible
assets. While we consider EBITDA useful in analyzing our operating results, it
is not intended to replace, or act as a substitute for, any presentation
included in the consolidated financial statements prepared in conformity with
generally accepted accounting principles.
(2) The Company has never paid a dividend on its common stock. It is the policy
of the Board of Directors to retain earnings for use in the Company's business.
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Quarterly Results and Seasonality
The following table sets forth unaudited financial data for each of the
Company's last eight fiscal quarters (in thousands except for per share data):
Year Ended June 30, 2001
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net Sales $ 11,094 $ 13,872 $ 12,545 $ 17,260
Gross Profit 3,058 3,744 2,966 4,549
Income (Loss) from
Operations 145 720 (152) 1,146
Net Income (Loss) (327) 434 (598) 742
Net Income (Loss) Per Share
Basic (.09) .12 (.17) .21
Diluted (.09) .12 (.17) .21
Year Ended June 30, 2000
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net Sales $ 10,501 $ 12,275 $ 14,155 $ 17,015
Gross Profit 2,524 2,964 3,515 4,195
Income (Loss) from
Operations (128) 502 996 1,752
Net Income (Loss) (396) 145 517 1,744
Net Income (Loss) Per Share
Basic (.11) .04 .15 .49
Diluted (.11) .04 .15 .49
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating
activities during fiscal 2001 were adequate to meet the Company's capital
expenditure needs and short and long-term debt obligations. The primary source
of financing related to borrowings under a $18,000,000 secured revolving credit
facility. The Company expects that cash generated from operations and cash
available under the Company's bank line of credit will be adequate to meet its
short-term liquidity requirements. The Company's primary internal source of
liquidity is the cash flow generated from operations. As of June 30, 2001, the
Company's unused sources of funds consisted principally of $1,037,000 in cash
and approximately $2,687,000, which represents the unused portion of its secured
revolving credit facility. The Company's management believes that current
working capital, cash flows from operations and its revolving credit agreement
will be sufficient to fund the Company's operations through the first quarter of
fiscal 2003.
On April 26, 1993, the Company's foreign subsidiary entered into a 99-year
land lease of approximately 4 acres of land in the Dominican Republic, at an
annual cost of approximately $272,000.
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 and 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. 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, New York facility.
In May 2001, the Company amended its secured revolving credit
agreement with its primary bank. The Company's borrowing capacity under the
amended agreement was increased to $18,000,000. The amended revolving credit
agreement is secured by all the accounts receivable, inventory and certain other
assets of Napco Security Systems, Inc., a first and second mortgage on the
Company's headquarters in Amityville, New York and common stock of two of the
Company's subsidiaries. The revolving credit agreement bears interest at either
the Prime Rate less 1/4 % or an alternate rate based on LIBOR as described in
the agreement. The revolving credit agreement will expire in July 2004 and any
outstanding borrowings are to be repaid on or before that time. The agreement
contains various restrictions and covenants including, among others,
restrictions on payment of dividends, restrictions on borrowings, restrictions
on capital expenditures, the maintenance of minimum amounts of tangible net
worth, and compliance with other certain financial ratios, as defined in the
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agreement. As of June 30, 2001, the Company was not in compliance with all of
these financial covenants, and accordingly received a waiver from the bank.
In addition, a subsidiary of the Company maintained a $4,500,000 line of
credit with another bank, which was fully repaid as of June 30, 2000 (see Note 7
to Consolidated Financial Statements).
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, Kenneth Rosenberg. $2.5
million was paid at closing with the balance of the purchase price to be paid
over a four (4) year period pursuant to an interest-bearing note. 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. At the closing, Mr. Rosenberg
retired as President and Director of the Company but will be available to the
Company pursuant to a consulting agreement. The repurchase agreement also
provides that Mr. Rosenberg will not compete with the Company for a ten (10)
year period.
In November 2000 the Company adopted a stock repurchase program
authorizing the Company to repurchase up to 200,000 shares of its common stock.
As of June 30, 2001 the Company had repurchased 153,805 shares under this
program.
The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:
2001 2000 1999
---- ---- ----
Current Ratio 4.7 to 1 7.2 to 1 6.2 to 1
Sales to Receivables 3.2 to 1 3.0 to 1 3.1 to 1
Total Debt to Equity .8 to 1 .5 to 1 .6 to 1
As of June 30, 2001, the Company had no material commitments for purchases
or capital expenditures, except as discussed below.
On July 27, 2000, the Company signed an Asset Purchase Agreement to
acquire the net assets of Continental Instruments, LLC ("Continental") for an
initial purchase price of $7,500,000, with additional payments, subject to
adjustment based on a closing balance sheet and certain other contingent events,
of up to $1,700,000 (the "Deferred Payments"). The Company financed the
transaction with borrowings under a term loan of $8,250,000. Continental designs
and sells access control and other security control systems to dealers and
distributors worldwide.
The acquisition described above has been accounted for as a purchase and
was valued based on management's estimate of the fair value of the assets
acquired and liabilities assumed. Any increases or decreases in the Deferred
Payments will be recorded as adjustments to the
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purchase price and related goodwill prospectively from the date of the change in
payment. Costs in excess of net assets acquired of approximately $7,768,000 has
been allocated to goodwill and is being amortized on a straight-line basis over
an estimated useful life of 20 years.
Working Capital. Working capital decreased by $2,048,000 to $33,232,000 at
June 30, 2001 from $35,280,000 at June 30, 2000. The decrease in working capital
was primarily the result of the increase in current portion of long-term debt as
of June 30, 2001 as compared to June 30, 2000, which resulted primarily from the
debt utilized to acquire Continental in July 2000. In addition, the Company used
$725,000 of working capital in repurchasing its common stock under the
repurchase plan discussed above.
Accounts Receivable. Accounts receivable decreased by $1,087,000 to
$16,940,000 at June 30, 2001 from $18,027,000 at June 30, 2000. This decrease
resulted primarily from the decreased sales to a major customer as discussed
below as partially offset by the acquisition of Continental Instruments and the
related accounts receivable.
Inventory. Inventory increased by $3,756,000 to $23,234,000 at June 30,
2001 as compared to $19,478,000 at June 30, 2000. The increase in inventory
levels was primarily the result of a temporary reduction in purchases of the
Company's products by a major customer in the last four months of fiscal 2001.
The Company was able to reschedule some deliveries of component parts in
response to this but delivery of certain items could not be rescheduled. The
increase in inventory was also due, in part, to the acquisition of Continental
and the related inventories.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses increased by $612,000 to $4,244,000 at June 30, 2001 from $3,632,000 at
June 30, 2000. This increase was due primarily to the acquisition of
Continental's assets and liabilities as well as extended payment terms from
certain vendors in response to the excess inventory position discussed above.
Fiscal 2001 Compared to Fiscal 2000
Net Sales. Net sales in fiscal 2001 increased by 2% to $54,771,000 from
$53,946,000 in fiscal 2000. The Company's sales growth was due primarily to the
acquisition of Continental in July 2000. In addition, net sales was impacted by
an increase in sales of the Company's electronic door locking products through
its Alarm Lock subsidiary and a significant decrease in other domestic sales,
the majority of which was due to the reduction in purchases by a major customer
as discussed above.
Gross Profit. The Company's gross profit increased $1,119,000 to $14,317,000 or
26.1% of net sales in fiscal 2001 as compared to $13,198,000 or 24.5% of net
sales in fiscal 2000. The increase in gross profit in both absolute dollars and
as a percentage of net sales was due primarily to the acquisition of Continental
and the resulting increase in net sales as well as a positive shift in product
mix due to the higher margins, in general, of the Continental product lines.
Gross profit was also positively impacted by cost reductions of certain of the
Company's raw material costs.
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Expenses. Selling, general and administrative expenses increased by 23.6% to
$12,458,000 in fiscal 2001 from $10,076,000 in fiscal 2000. This increase was
due primarily to the addition of expenses relating to the Company's newly
acquired Continental subsidiary.
Other Expenses. Other expenses increased $258,000 to $1,633,000 in fiscal 2001
as compared to $1,375,000 in fiscal 2000. This increase was due primarily to the
increase in interest expense due to the financing used for the Continental
acquisition, a partially offsetting decrease in interest expense resulting from
the Company's continued reduction of the outstanding principal on its
non-Continental related debt and an increase in other income as a result of an
insurance settlement during the second quarter of fiscal 2001.
Income Taxes Benefit for income taxes changed by $238,000 to a benefit of
$25,000 in fiscal 2001 as compared to a benefit of $263,000 in fiscal 2000. This
change was primarily the result of a decrease in the deferred tax benefit in
fiscal 2001 as compared to the benefit in fiscal 2000.
EBITDA. EBITDA, as defined on page 9 above, decreased by $602,000 to $4,074,000
or 7.4% of net sales in fiscal 2001 as compared with $4,676,000 or 8.7% of net
sales in fiscal 2000. The decrease in EBITDA was primarily attributable to an
increase in selling, general and administrative expenses arising from the
Continental acquisition and the resulting decrease in income from operations.
Effects of Inflation During the three-year period ended June 30, 2001, inflation
and changing prices did not have a significant impact on the Company's
operations.
Fiscal 2000 Compared to Fiscal 1999
Net Sales. Net sales in fiscal 2000 increased by 6% to $53,946,000 from
$50,875,000 in fiscal 1999. The Company's sales growth was due primarily to a
significant increase in demand for the Company's door locking products as well
as from the effects of one of the Company's customers being acquired during
fiscal 1999. This acquisition, while impacting the results for fiscal 1999, did
not have any significant effect on the results for fiscal 2000.
Gross Profit. The Company's gross profit increased $1,421,000 to $13,198,000 or
24.5% of net sales as compared to $11,777,000 or 23.1% of net sales in fiscal
1999. The increase both in absolute dollars and as a percentage of net sales was
due primarily to the increase in net sales as well as cost reductions of certain
of the Company's raw material costs.
Expenses. Selling, general and administrative expenses increased by 2% to
$10,076,000 in fiscal 2000 as compared to $9,866,000 in fiscal 1999. The
increase was due primarily to the 6% increase in net sales as discussed above as
well as the Company's increased activities in identifying potential acquisition
candidates.
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Other Expenses. Other expenses increased by $32,000 to $1,375,000 in fiscal 2000
as compared to $1,343,000 in fiscal 1999. This slight increase was due primarily
to increased borrowing rates as mostly offset by reductions in the Company's
outstanding debt.
Income Taxes. The benefit for income taxes decreased $1,662,000 to a benefit of
$263,000 as compared to a benefit of $1,925,000 in fiscal 1999. This change was
primarily due to the large benefit in fiscal 1999 that resulted from the
favorable outcome of the IRS audits of fiscal years 1986 through 1997 and the
resulting reduction in related reserve requirements.
EBITDA. EBITDA increased by $1,381,000 to $4,676,000 or 8.7% of net sales in
fiscal 2000 as compared with $3,295,000 or 6.5% of net sales in fiscal 1999. The
increase in EBITDA was primarily attributable an increase in net sales and the
resulting increase in gross profit.
Effects of Inflation. During the three-year period ended June 30, 2000,
inflation and changing prices did not have a significant impact on the Company's
operations.
Goodwill. In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets" were issued. These Statements establish financial accounting and
reporting standards for acquired goodwill and other intangible assets.
Specifically, the standards address how acquired intangible assets should be
accounted for both at the time of acquisition and after they have been
recognized in the financial statements. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, early
application is permitted for entities with fiscal years beginning after March
15, 2001. The Company has adopted this standard effective July 1, 2001 and,
accordingly, those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives will no longer be
amortized. This could result in the exclusion of approximately $467,000 in
amortization expense for the fiscal year ending June 30, 2002. In accordance
with SFAS No. 142, intangible assets, including purchased goodwill, will be
evaluated periodically for impairment. The Company's initial evaluations are
expected to be completed by September 30, 2001.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt (consisting
of a
15
16
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 June 30, 2001, an aggregate principal amount of
approximately $15,300,000 was outstanding under the Company's credit facility
and term loan with a weighted average interest rate of approximately 6%. If
principal amounts outstanding under the Company's credit facility remained at
this year-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 $191,250 in interest that year. In October 2000, the Company
entered into an interest rate swap to maintain the value-at-risk inherent in its
interest rate exposures. This transaction meets the requirements for cash flow
hedge accounting as the instrument is designated to a specific debt balance.
Accordingly, any gain or loss associated with this interest rate swap is
included as a component of interest expense. The Company does not hold or enter
into derivative financial instruments for trading or speculative purposes.
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.
16
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND 2000
Page
Report of Independent Public Accountants....................................18
Consolidated Financial Statements:
Consolidated Balance Sheets as of
June 30, 2001 and 2000....................................................19
Consolidated Statements of Income
for the Fiscal Years Ended June 30,
2001, 2000 and 1999.......................................................20
Consolidated Statements of
Stockholders' Equity for the Fiscal
Years Ended June 30, 2001, 2000
and 1999..................................................................21
Consolidated Statements of Cash
Flows for the Fiscal Years Ended
June 30, 2001, 2000 and 1999..............................................22
Notes to Consolidated Financial
Statements, June 30, 2001, 2000 and 1999..................................23
Schedules:
I. Condensed Financial Information on
Parent Company....................................................34
II. Valuation and Qualifying Accounts.................................36
17
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Napco Security Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Napco Security
Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended June 30,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Napco Security Systems, Inc.
and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 2001 in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index to consolidated financial statements are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Melville, New York
September 28, 2001
18
19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND 2000
(in thousands, except share data)
ASSETS 2001 2000
------ ---- ----
CURRENT ASSETS:
Cash $ 1,037 $ 2,384
Accounts receivable, less reserve for doubtful accounts of $700 and $622, respectively 16,940 18,027
Inventories 23,234 19,478
Prepaid expenses and other current assets 895 1,086
-------- --------
Total current assets 42,106 40,975
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of $15,288 and $13,712, respectively 10,663 11,105
GOODWILL, net of accumulated amortization of $1,824 and $1,363, respectively 9,686 2,379
DEFERRED INCOME TAXES 785 716
OTHER ASSETS 437 354
-------- --------
Total assets $ 63,677 $ 55,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,533 $ 1,023
Accounts payable 3,361 2,551
Accrued expenses 883 1,081
Accrued salaries and wages 1,042 994
Accrued income taxes 55 46
-------- --------
Total current liabilities 8,874 5,695
LONG-TERM DEBT 21,567 16,183
DEFERRED INCOME TAXES 292 292
-------- --------
Total liabilities 30,733 22,170
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 21,000,000 shares authorized;
5,938,852 and 5,917,352 shares issued, respectively; 3,366,596 and
3,498,901 shares outstanding, respectively 59 59
Additional paid-in capital 831 772
Retained earnings 37,228 36,977
Less: Treasury stock, at cost; 2,572,256 and 2,418,451 shares, respectively (5,174) (4,449)
-------- --------
Total stockholders' equity 32,944 33,359
-------- --------
Total liabilities and stockholders' equity $ 63,677 $ 55,529
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
19
20
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data and per share data)
For the Fiscal Year Ended June 30,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
NET SALES $ 54,771 $ 53,946 $ 50,875
COST OF SALES 40,454 40,748 39,098
----------- ----------- -----------
Gross profit 14,317 13,198 11,777
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,458 10,076 9,866
----------- ----------- -----------
Operating income 1,859 3,122 1,911
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (1,816) (1,375) (1,359)
Other, net 183 -- 16
----------- ----------- -----------
(1,633) (1,375) (1,343)
----------- ----------- -----------
Income before for income taxes 226 1,747 568
BENEFIT FOR INCOME TAXES (25) (263) (1,925)
----------- ----------- -----------
Net income $ 251 $ 2,010 $ 2,493
=========== =========== ===========
EARNINGS PER SHARE (Note 1):
Basic $ .07 $ .57 $ .71
=========== =========== ===========
Diluted $ .07 $ .57 $ .71
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 1):
Basic 3,443,000 3,495,000 3,493,000
=========== =========== ===========
Diluted 3,527,000 3,513,000 3,512,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
20
21
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(in thousands, except share data)
Common Stock
------------
Number Additional Retained Treasury
of Shares Amount Paid-in Capital Earnings Stock Total
--------- ------ --------------- -------- ----- -----
BALANCE AT JUNE 30, 1998 5,908,102 $ 59 $ 749 $ 32,474 $ (4,449) $ 28,833
Exercise of employee stock options 500 -- 2 -- -- 2
Net income -- -- -- 2,493 -- 2,493
--------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 1999 5,908,602 59 751 34,967 (4,449) 31,328
Exercise of employee stock options 8,750 -- 21 -- -- 21
Net income -- -- -- 2,010 -- 2,010
--------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2000 5,917,352 59 772 36,977 (4,449) 33,359
Purchase of treasury shares -- -- -- -- (725) (725)
Exercise of employee stock options 21,500 -- 59 -- -- 59
Net income -- -- -- 251 -- 251
--------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2001 5,938,852 $ 59 $ 831 $ 37,228 $ (5,174) $ 32,944
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
21
22
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Years Ended June 30,
-----------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 251 $ 2,010 $ 2,493
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,032 1,554 1,368
Provision for doubtful accounts 78 (265) 230
Deferred income taxes (69) (150) 143
Changes in operating assets and liabilities, net of affect from
acquisition of business, resulting from increases and decreases in:
Accounts receivable 1,702 (1,316) (1,916)
Inventories (3,159) 2,017 3,943
Prepaid expenses and other current assets 217 (277) (135)
Other assets (77) (79) 1
Accounts payable, accrued expenses, accrued salaries and wages and
accrued income taxes 351 (672) (3,201)
-------- -------- --------
Net cash provided by operating activities 1,326 2,822 2,926
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (7,248) -- --
Net purchases of property, plant and equipment (1,035) (1,221) (1,050)
-------- -------- --------
Net cash used in investing activities (8,283) (1,221) (1,050)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (4,774) (1,468) (1,637)
Proceeds from long-term debt 11,050 -- --
Purchase of treasury stock (725) -- --
Proceeds from exercise of employee stock options 59 21 2
-------- -------- --------
Net cash provided by (used in) financing activities 5,610 (1,447) (1,635)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (1,347) 154 241
CASH, beginning of year 2,384 2,230 1,989
-------- -------- --------
CASH, end of year $ 1,037 $ 2,384 $ 2,230
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,121 $ 1,123 $ 1,301
======== ======== ========
Income taxes paid $ 21 $ 101 $ 259
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
22
23
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Napco Security Systems, Inc. and subsidiaries (the "Company") is engaged
principally in the development, manufacture and distribution of security alarm
products and door security devices for commercial and residential use.
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security
Systems, Inc. and all of its wholly - owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent gains and losses at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market.
Property, Plant and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to expense as incurred;
costs of major renewals and improvements are capitalized. At the time property
and equipment are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the asset and accumulated depreciation accounts
and the profit or loss on such disposition is reflected in income.
Depreciation is recorded over the estimated service lives of the related assets
using primarily the straight-line method. Amortization of leasehold improvements
is calculated by using the straight-line method over the estimated useful life
of the asset or lease term, whichever is shorter.
Goodwill
Goodwill is being amortized on a straight-line basis over periods from 20 to 35
years. Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of the goodwill may warrant revision or that the remaining
balance may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the
undiscounted cash flows over the remaining life of the goodwill in measuring
whether it is recoverable. In the years ended June 30, 2001, 2000 and 1999,
there were no adjustments to the carrying value of goodwill, other than
straight-line amortization.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements," the Company recognizes revenue when the following
criteria are met: (i) pervasive evidence of an agreement exists, (ii) there is a
fixed and determinable price for the Company's product, (iii) shipment and
passage of title occurs, and (iv) collectibility is reasonably assured. The
Company reports its sales levels on a net sales basis, with net sales
23
24
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
being computed by deducting from gross sales the amount of actual sales returns
and the amount of reserves established for anticipated sales returns.
Research and Development Costs
Research and development costs incurred by the Company are charged to expense in
the year incurred. Approximately $4,220,000, $4,234,000 and $4,008,000 of
Company-sponsored research and development costs are included within selling,
general and administrated expenses for the fiscal years ended June 30, 2001,
2000, and 1999, respectively.
Income Taxes
Deferred income taxes are recognized for the expected future tax consequences of
temporary differences between the amounts reflected for financial reporting and
tax purposes. The benefit for income taxes represents U.S. Federal and state
taxes on income generated from U.S. operations and local taxes on income
generated from United Kingdom operations. Income generated by the Company's
foreign subsidiary in the Dominican Republic is non-taxable. The Company
accounts for the research and development credit as a reduction of income tax
expense in the year in which such credits are allowable for tax purposes.
In prior years, the Company did not provide for income taxes on the
undistributed earnings of its Domestic International Sales Corporation ("DISC")
subsidiary because it was the Company's intent to continue the subsidiary's
qualification for tax deferral. Due to the shifting of manufacturing outside the
U.S., management determined in fiscal 1995 that the DISC no longer qualified for
continued tax deferral. As a result, previously deferred earnings of the DISC
totaling $2,031,000 must be reported as taxable income over a ten-year period in
the Company's tax returns, starting with the June 30, 1992 tax year.
The Company does not provide for income taxes on the undistributed earnings of
its foreign subsidiary in the Dominican Republic because such earnings are
reinvested abroad and it is the intention of management that such earnings will
continue to be reinvested abroad. As of June 30, 2001 and 2000, approximately
$20,461,000 and $20,243,000 in cumulative earnings of this foreign subsidiary
are included in consolidated retained earnings.
Earnings Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Basic net income per common
share ("Basic EPS") is computed by dividing net income by the weighted average
number of common shares outstanding. Diluted net income per common share
("Diluted EPS") is computed by dividing net income by the weighted average
number of common shares and dilutive common share equivalents and convertible
securities then outstanding. SFAS No. 128 requires the presentation of both
Basic EPS and Diluted Basic EPS on the face of the consolidated statements of
income.
The following provides a reconciliation of information used in calculating the
per share amounts for the fiscal years ended June 30 (in thousands):
Net Income Shares Net Income Per Share
----------- ------ --------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Basic EPS
Net income $ 251 $2,010 $2,493 3,464 3,495 3,493 $ .07 $ .57 $ 0.71
------ ------ ------ ------ ------ ------ ------ ------ ------
Effect of Dilutive Securities
Employee stock options -- -- -- 63 18 19 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Diluted EPS
Net income $ 251 $2,010 $2,493 3,527 3,513 3,512 $ .07 $ .57 $ 0.71
====== ====== ====== ====== ====== ====== ====== ====== ======
24
25
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase 149,500, 90,240, and 10,620 shares of common stock for the
three fiscal years ended June 30, 2001, 2000 and 1999 respectively, were not
included in the computation of Diluted EPS because the exercise prices exceeded
the average market price of the common shares for the respective periods and
accordingly their inclusion would be anti-dilutive. These options were still
outstanding at the end of the respective periods.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of SFAS
No. 123 "Accounting for Stock-Based Compensation." Accordingly, the Company has
elected to continue the accounting set forth in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and to
provide the necessary pro-forma disclosures (Note 8).
Foreign Currency
All assets and liabilities of foreign subsidiaries are translated into U.S.
Dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
realized and unrealized gains and losses associated with foreign currency
translation, as well as related other comprehensive income were not material for
the three years ending June 30, 2001.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which established rules for the reporting of comprehensive income
and its components. The adoption of this statement had no impact on the
Company's net income or stockholders' equity. For the fiscal years ended 2001,
2000 and 1999, the Company's operations did not give rise to items includable in
comprehensive income which were not already included in net income. Accordingly,
the Company's comprehensive income is the same as its net income for all periods
presented.
Segment Reporting
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Pursuant to this pronouncement, the
reportable operating segments are determined based on the Company's management
approach. The management approach, as defined by SFAS No. 131, is based on the
way that the chief operating decision maker organizes the segments within an
enterprise for making operating decisions and assessing performance. The
Company's results of operations are reviewed by the chief operating decision
maker on a consolidated basis and the Company operates in only one segment. The
Company has presented required geographical segment data in Note 12 and no
additional segment data has been presented.
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and includes this
additional information in the notes to the financial statements where the fair
value is different than the book value of those financial instruments. When the
fair value approximates book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At June 30, 2001 and
2000, management of the Company believes the carrying value of all financial
instruments approximated fair value.
Shipping and Handling Revenues and Costs
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus with
respect to EITF Issue No. 00-10, "Accounting for Shipping and Handling Revenues
and Costs." The purpose of this issue discussion was to clarify the
classification of shipping and handling revenues and costs. The consensus
reached was that all shipping and handling billed to customers is revenue and
the costs associated with these revenues classified as either cost of sales, or
selling, general, and administrative costs, with footnote disclosure as to
classification of these costs. This
25
26
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
standard will require a restatement of prior periods for changes in
classification. Beginning fiscal 2001, the Company records the amount billed to
customers in net revenues and classifies the costs associated with these
revenues in cost of sales. The Company has retroactively restated prior year
financial information to give effect to this new statement.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Pursuant to
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 - an
Amendment of FASB Statement No. 133," SFAS No. 133 was effective for all fiscal
quarters of fiscal years beginning after June 15, 2000 and does not require
retroactive restatement of prior period financial statements. This Statement
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position measured at fair value.
Generally, increases or decreases in the fair value of derivative instruments
will be recognized as gains or losses in earnings in the period of change. If
certain conditions are met, where the derivative instrument has been designated
as a fair value hedge, the hedged item may also be marked to market through
earnings thus creating an offset. If the derivative is designed and qualifies as
a cash flow hedge, the changes in fair value of the derivative instrument may be
recorded in comprehensive income. There was no material impact on the Company's
financial position or results of operations upon adoption on July 1, 2000.
In October 2000, the Company entered into an interest rate swap to maintain the
value-at-risk inherent in its interest rate exposures. This transaction meets
the requirements for cash flow hedge accounting, as the instrument is designated
to a specific debt balance. Accordingly, any gain or loss associated with this
interest rate swap is included as a component of interest expense. The Company
does not hold or enter into derivative financial instruments for trading or
speculative purposes.
New Accounting Pronouncements
In June 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets" were issued. These Statements establish financial
accounting and reporting standards for acquired goodwill and other intangible
assets. Specifically, the standards address how acquired intangible assets
should be accounted for both at the time of acquisition and after they have been
recognized in the financial statements. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however, early
application is permitted for entities with fiscal years beginning after March
15, 2001. The Company has adopted this standard effective July 1, 2001 and,
accordingly, those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives will no longer be
amortized. This could result in the exclusion of approximately $467,000 in
amortization expense for the fiscal year ending June 30, 2002. In accordance
with SFAS No. 142, intangible assets, including purchased goodwill, will be
evaluated periodically for impairment. The Company's initial evaluations are
expected to be completed by September 30, 2001.
2. ACQUISITION OF BUSINESS
On July 27, 2000, the Company acquired Continental Instruments LLC
("Continental"), a manufacturer and distributor of access control and security
management systems. This acquisition was accounted for by the purchase method
and was valued based on management's estimate of the fair value of the assets
acquired and liabilities assumed at the date of the acquisition. The purchase
price was $7,522,500 in cash, less subsequent purchase price adjustments of
approximately $460,000, plus future deferred payments of $1,700,000 in cash to
be paid over a period of 24 months. The acquisition was financed by an
$8,250,000 loan from the Company's primary lender, to be repaid in 60 equal
monthly installments. The loan is secured by a mortgage, guarantees and other
collateral. The excess of the aggregate purchase price over the fair value of
net assets acquired of approximately $7,768,000 has been allocated to goodwill
and 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 amortization of goodwill and deferred financing
26
27
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
costs, additional salary expense for employees not previously included in salary
expense and additional interest expense for a term loan related to this
transaction:
June 30,
--------
2001 2000
---- ----
(in thousands, except per share data)
PRO FORMA:
Net Sales $ 55,120 $ 59,115
Net Income 232 2,299
NET INCOME PER SHARE:
Basic 0.07 0.66
Diluted 0.07 0.65
3. BUSINESS AND CREDIT CONCENTRATIONS
At June 30, 2001, the Company had two customers (Customer A and B) with accounts
receivable balances that aggregated 44% of the Company's accounts receivable. At
June 30, 2000, the Company had two customers (Customer A and B) with accounts
receivable balances that aggregated 55% of the Company's accounts receivable.
The Company had one customer (Customer A) that accounted for 18%, 27% and 27% of
the Company's net sales in fiscal 2001, 2000 and 1999, respectively. During the
past three fiscal years no other customer represented more than 10% of the
Company's net sales.
4. INVENTORIES
Inventories consist of the following:
June 30,
--------
2001 2000
---- ----
(in thousands)
Component parts $12,495 $10,231
Work-in-process 3,538 4,063
Finished products 7,201 5,184
------- -------
$23,234 $19,478
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
June 30, Depreciation/
-------- amortization-
2001 2000 annual rates
---- ---- ------------
(in thousands)
Land $ 904 $ 904 --
Building 8,911 8,911 3%
Molds and dies 3,867 3,642 20% to 33%
Furniture and fixtures 1,112 1,022 10% to 20%
Machinery and equipment 10,979 10,283 10% to 15%
Shorter of the lease
Leasehold improvements 178 55 term or life of asset
------- -------
27
28
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25,951 24,817
Less: Accumulated depreciation and
amortization 15,288 13,712
------- -------
$10,663 $11,105
======= =======
Depreciation and amortization expense on property, plant and equipment was
approximately $1,510,000, $1,397,000 and $1,261,000 for the three fiscal years
ended June 30, 2001, respectively.
6. INCOME TAXES
In August 1995, the Internal Revenue Service (the "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 this 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.
(Benefit) for income taxes consists of the following:
For the Fiscal Years Ended June 30,
-----------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Taxes currently payable:
Federal $ -- $ -- $(2,271)
State 21 1 (4)
Foreign 23 16 --
------- ------- -------
44 17 (2,275)
Deferred income tax (benefit) (69) (280) 350
------- ------- -------
(Benefit) for income taxes $ (25) $ (263) $(1,925)
======= ======= =======
The difference between the statutory U.S. Federal income tax rate and the
Company's effective tax rate as reflected in the consolidated statements of
income is as follows:
28
29
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended June 30,
-----------------------------------
2001 2000 1999
---- ---- ----
% of % of % of
Pre-tax pre-tax pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(in thousands, except percentages)
Tax at Federal statutory rate $ 77 34.0% $ 594 34.0% $ 193 34.0%
Increases (decreases) in taxes resulting from:
State income taxes, net of Federal income
tax benefit (202) (89.4) (155) (8.9) (2) (0.4)
Amortization of non-deductible goodwill 36 15.9 36 2.1 36 6.3
Non-taxable foreign source income (890) (393.8) (2,643) (151.3) (362) (63.7)
Adjustment to reflect IRS settlement -- -- -- -- (1,896) (333.8)
Valuation allowance - domestic NOL 830 367.3 1,794 102.7 -- --
Other, net 124 54.9 111 6.4 106 18.7
------- ------- ------- ------- ------- -------
(Benefit) for income taxes $ (25) (11.1)% $ (263) (15.0)% $(1,925) (338.9)%
======= ======= ======= ======= ======= =======
Foreign income taxes are not provided on income generated by the Company's
subsidiary in the Dominican Republic, as such income is presently exempt from
domestic income tax.
Deferred tax assets and deferred tax liabilities at June 30, 2001 and 2000 are
as follows (in thousands):
Deferred Net Deferred
Deferred Tax Assets Tax Liabilities Tax Assets (Liabilities)
------------------- --------------- ------------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Current:
Accounts receivable $ 166 $ 300 $ -- $ -- $ 166 $ 300
Inventories 428 782 -- -- 428 782
Accrued liabilities 366 198 -- -- 366 198
Net operating loss and other
carryforwards 2,453 1,167 -- -- 2,453 1,167
Other (4) 63 55 42 (59) 21
------- ------- ------- ------- ------- -------
3,409 2,510 55 42 3,354 2,468
Noncurrent:
Fixed assets -- -- 292 292 (292) (292)
------- ------- ------- ------- ------- -------
Total deferred taxes 3,409 2,510 347 334 3,062 2,176
Less: Valuation Allowance (2,624) (1,794) -- -- (2,624) (1,794)
------- ------- ------- ------- ------- -------
Net deferred taxes $ 785 $ 716 $ 347 $ 334 $ 438 $ 382
======= ======= ======= ======= ======= =======
As a result of the Company's U.S. operations not generating income in recent
years, management believes it is more likely than not that the Company will not
realize the benefit of a portion of the net deferred tax assets existing at June
30, 2001 and 2000. Therefore, the Company has reserved for a portion of deferred
income taxes as of June 30, 2001 due to uncertainty regarding the generation of
sufficient taxable income in the United States to realize deferred taxes
associated with net operating loss carryforwards.
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
--------
2001 2000
---- ----
(in thousands)
Revolving credit and term loan facility (a) $15,313 $14,513
Notes payable (b) 1,670 2,693
Term Loan (c) 6,875 --
Deferred acquisition costs, net (d) 1,242 --
------- -------
25,100 17,206
Less: Current portion 3,533 1,023
------- -------
$21,567 $16,183
======= =======
(a) In May 2001, the Company amended its secured revolving credit agreement
with its primary bank. The Company's borrowing capacity under the amended
agreement was increased to $18,000,000. The amended revolving credit
agreement is secured by all the accounts receivable, inventory and certain
other assets of Napco Security Systems, Inc., a first and second mortgage
on the Company's headquarters in Amityville, New York and common stock of
two of the Company's subsidiaries. The revolving credit agreement bears
interest at either the Prime Rate less -1/4 % or an alternate rate based on
LIBOR as described in the agreement. The revolving credit agreement will
expire in July 2004 and any outstanding borrowings are to be repaid on or
before that time. The
29
30
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement contains various restrictions and covenants including, among
others, restrictions on payment of dividends, restrictions on borrowings,
restrictions on capital expenditures, the maintenance of minimum amounts of
tangible net worth, and compliance with other certain financial ratios, as
defined in the agreement. As of June 30, 2001, the Company was not in
compliance with all of these financial covenants and, accordingly, received
a waiver from the bank.
(b) In connection with the stock purchase agreement described in Note 9, the
Company entered into a term-loan facility in May 1998 with its primary bank
for a $2,500,000 term loan. Under the terms of the note, the loan is to be
repaid in 60 equal monthly installments of $41,667, plus interest at 7.94%,
beginning on July 1, 1998.
In addition, the Company entered into a four-year term loan in the amount
of $1,947,880 to its former president in connection with the stock purchase
agreement. This note bears interest at 8% and payments began in April 1999,
with a final maturity June 2003.
(c) On July 27, 2000, the Company entered into a five year $8,250,000 secured
term loan with its primary bank in connection with the acquisition of
Continental. Under the agreement, the loan is to be repaid in 60 equal
monthly installments of $137,500, plus interest at a LIBOR based rate, as
defined in the agreement. The agreement contains various restrictions and
covenants including, among others, restrictions on payment of dividends,
restrictions on borrowings, restrictions on capital expenditures, the
maintenance of minimum amounts of tangible net worth, and compliance with
other certain financial ratios, as defined in the agreement. As of June 30,
2001, the Company was not in compliance with all of these financial
covenants, and accordingly received a waiver from the bank.
The Company has entered into an interest rate swap agreement to exchange
floating rate for fixed rate interest payments periodically over the life
of the agreement. The interest rate swap has been designated as a cash flow
hedge and is effective as of June 30, 2001. At June 30, 2001 there was an
outstanding interest rate swap contract totaling $3,162,500. The contract
bears a fixed interest rate of 8.68% and terminates on October 30, 2002.
The debt instrument bears interest at LIBOR plus 2%. At June 30, 2001 the
interest rate on the debt was 6.06%.
(d) In connection with the Continental acquisition described in Note 2, the
Company is required to make four scheduled future payments to the former
owner, beginning on January 27, 2001 with a final payment on July 27, 2002.
These payments are recorded at their present value using an interest rate
of 7%. The difference between the present value and face value of the
payments is accounted for as a debt discount and accreted to interest
expense over the term of the payments.
Maturities of long-term debt are as follows (in thousands):
Fiscal Year Ending June 30,
2002 $ 3,533
2003 2,679
2004 1,650
2005 16,963
2006 275
-------
$25,100
=======
8. STOCK OPTIONS
In November 1992, the stockholders approved a 10-year extension of the already
existing 1982 Incentive Stock Option Plan (the "1992 Plan"). The 1992 Plan
authorizes the granting of awards, the exercise of which would allow up to an
aggregate of approximately 815,000 shares of the Company's common stock to be
acquired by the holders of such awards. Under the 1992 Plan, the Company may
grant stock options, which are intended to qualify as incentive stock options
("ISOs"), to key employees, officers, and employee directors. Any plan
participant who is granted ISOs and possesses more than 10% of the voting rights
of the Company's outstanding common stock must be granted an option with a price
of at least 110% of the fair market value on the date of grant and the option
must be exercised within five years from the date of grant. Under the 1992 Plan,
stock options have been granted to employees and directors for terms of up to 5
years at an exercise price equal to the fair market value on the date of
30
31
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant and are exercisable in whole or in part at 20% per year from the date of
grant. At June 30, 2001, 312,610 stock options granted to employees and
directors were exercisable. The Company accounts for awards granted to
employees, directors and key employees under APB Opinion No. 25, under which
compensation cost is recognized for stock options granted at an exercise price
less than the market value of the options on the grant date.
Had compensation cost for all stock option grants in fiscal years 2001, 2000 and
1999 been determined according to SFAS No. 123, the Company's net income and
earnings per share would have been:
June 30
---------------------------------------
2001 2000 1999
------ ------ -----
(in thousands, except per share data)
NET INCOME: As reported $ 251 $2,010 $2,493
Pro forma (14) 1,790 2,279
BASIC EPS: As reported $ .07 $ .57 $ 0.71
Pro forma (.04) .51 0.65
DILUTED EPS: As reported $ .07 $ .57 $ 0.71
Pro forma (.04) .51 0.65
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to option awards
granted prior to fiscal year 1996.
The following table reflects activity under the 1992 Plan for the fiscal years
ended:
June 30,
--------
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 499,850 3.33 438,100 $ 3.39 236,250 $ 3.91
Granted 109,500 4.18 91,000 3.19 251,600 3.12
Exercised (19,500) 2.64 (8,750) 2.50 (500) 3.88
Forfeited (6,000) 3.79 (20,500) 4.29 (35,500) 4.66
Canceled/Lapsed (4,500) 2.64 -- -- (13,750) 4.28
-------- -------- -------- -------- -------- --------
Outstanding at end of year 579,350 3.51 499,850 3.33 438,100 3.39
======== ======== ======== ======== ======== ========
Exercisable at end of year 312,610 3.47 222,040 3.37 138,570 3.40
======== ======== ======== ======== ======== ========
Weighted average fair value of options
granted $ 1.76 $ 1.50 $ 4.25
The fair value of each stock option grant is estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
2001 2000 1999
---- ---- ----
Risk-Free Interest Rates 6.06% 6.24% 5.22%
Expected Lives 5 years 5 years 5 years
Expected Volatility 42% 44% 45%
Expected Dividend Yields 0% 0% 0%
31
32
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
June 30, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise At Exercise
Range of Exercise Prices 6/30/01 Contractual Life Price 6/30/01 Price
------------------------ ------- ---------------- ----- ------- -----
$ 2.50 - $3.75 318,750 2.83 3.08 173,150 3.06
3.76 - 5.63 260,600 2.42 4.05 139,460 3.98
------- ---- ---- ------- ----
2.50 - 5.63 579,350 2.65 3.51 312,610 3.47
======= ==== ==== ======= ====
In September 2000, the stockholders approved a 10 year extension of the already
existing 1990 non-employee stock option plan (the "2000 Plan") to encourage
non-employee directors and consultants of the Company to invest in the Company's
stock. The 2000 Plan provides for the granting of non-qualified stock options,
the exercise of which would allow up to an aggregate of 50,000 shares of the
Company's common stock to be acquired by the holders of the stock options. The
2000 Plan provides that the option price will not be less than 100% of the fair
market value of the stock at the date of grant. Options are exercisable at 20%
per year and expire five years after the date of grant. The Company has adopted
SFAS No. 123 to account for stock-based compensation awards granted to
non-employee consultants, under which a compensation cost is recognized for the
fair value of the options granted as of the date of grant. Under this plan there
were no options granted as of June 31, 2000. As of June 30, 2001, 40,000 options
were granted with a weighted average exercise price of $4.13 and there were no
options exercised, cancelled, or forfeited.
9. STOCK PURCHASE
On May 28, 1998, the Company entered into a stock purchase agreement with its
former president, which called for the purchase by the Company of all the shares
of the Company's common stock held by the former president (889,576 shares) at a
price of $5 per share, in connection with the former president's retirement. The
agreement also contained consulting and non-compete agreements, each with a
period of ten years. Upon closing, $2,500,000 of the purchase price was paid to
the former president with the proceeds of the term loan described in Note 7 (b).
The remaining purchase price is to be paid over a 4 year period according to the
terms of a note issued to the former president. The common stock purchased is
included in treasury stock as of June 30, 2000 and 2001.
10. 401(k) PLAN
The Company maintains a 401(k) plan covering all employees with one or more
years of service. The plan is qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code. The Company provides for matching contributions of 50% of
the first 2% of employee contributions. Company contributions to the plan
totaled approximately $ 63,000, $55,000 and $54,000 for the three fiscal years
ended June 30, 2001, respectively.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company is committed under various operating leases which do not extend
beyond fiscal 2005. Minimum lease payments through the expiration dates of these
leases, with the exception of the land lease referred to below, are as follows
(in thousands):
Fiscal Year Ending June 30,
2002 $242,322
2003 209,907
2004 53,738
2005 16,940
Thereafter --
Rent expense totaled approximately $704,000, $859,000 and $805,000 for the three
fiscal years ended June 30, 2001, 2000, and 1999, respectively.
32
33
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Land Lease
On April 26, 1993, one of the Company's foreign subsidiaries entered into a 99
year lease for approximately four acres of land in the Dominican Republic, at an
annual cost of approximately $272,000, on which the Company's main production
facility is located.
Letters of Credit
At June 30, 2001, the Company was committed for approximately $470,469 under
open commercial letters of credit and steamship guarantees.
Litigation
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
12. SEGMENT DATA
The Company is engaged in one major line of business - the development,
manufacture and distribution of security alarm products and door security
devices for commercial and residential use. Sales to unaffiliated customers are
primarily shipped from the United States. The Company has customers worldwide
with major concentrations in North America, Europe and South America.
Identifiable assets (net of intercompany receivables and payables) related to
the Company's foreign subsidiaries were approximately $25,395,000 and
$22,945,000 at June 30, 2001 and 2000, respectively.
The Company observes the provisions of SFAS No. 131. While the Company's results
of operations are primarily reviewed on a consolidated basis, the chief
operating decision maker also manages the enterprise in two geographic segments:
(i) United States and (ii) Foreign. The following represents selected
consolidated financial information for the Company's segments for the fiscal
years ended June 30, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
(in thousands)
Sales to unaffiliated customers:
United States $54,771 $53,946 $50,875
Foreign -- -- --
------- ------- -------
$54,771 $53,946 $50,875
======= ======= =======
Identifiable assets:
United States 38,282 32,584 33,067
Foreign 25,395 22,945 22,720
Export Sales:
United States 9,952 10,143 10,713
Export sales from the United States in fiscal year 2001 included sales of
approximately $6,727,000, $603,000, $1,524,000 and $1,098,000 to Europe, North
America, South America and other areas, respectively. Export sales from the
United States in fiscal year 2000 included sales of approximately $6,675,000,
$741,000, $1,118,000 and $1,609,000 to Europe, North America, South America and
other areas, respectively. Export sales from the United States in fiscal year
1999 included sales of approximately $6,730,000, $869,000, $1,653,000, and
$1,461,000 to Europe, North America, South America and other areas,
respectively.
33
34
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY
CONDENSED BALANCE SHEETS
As of June 30
-------------
ASSETS 2001 2000
------ ---- ----
(in thousands)
CASH $ 124 $ 971
ACCOUNTS RECEIVABLE, net 10,682 13,442
INVENTORIES 6,032 6,412
PREPAID EXPENSES AND OTHER CURRENT ASSETS 357 700
-------- --------
Total current assets 17,195 21,525
INVESTMENT IN SUBSIDIARIES, on equity basis 30,482 30,369
PROPERTY, PLANT AND EQUIPMENT, net 4,641 4,871
DEFERRED INCOME TAXES 785 716
OTHER ASSETS 309 227
-------- --------
$ 53,412 $ 57,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 4,865 $ 2,958
DUE TO (FROM) SUBSIDIARIES (554) 4,916
LONG-TERM DEBT 15,866 16,183
DEFERRED INCOME TAXES 292 292
-------- --------
Total liabilities 20,469 24,349
STOCKHOLDERS' EQUITY 32,943 33,359
-------- --------
$ 53,412 $ 57,708
======== ========
This schedule should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
34
35
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
For the Fiscal Years Ended June 30,
-----------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
NET SALES $ 28,592 $ 33,611 $ 35,733
COST OF SALES 18,201 24,020 26,325
-------- -------- --------
Gross profit 10,391 9,591 9,408
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,265 7,318 7,741
-------- -------- --------
Operating income 1,126 2,273 1,667
EQUITY IN EARNINGS OF SUBSIDIARIES 113 874 284
OTHER EXPENSE, net (1,014) (1,400) (1,383)
-------- -------- --------
Income before (benefit) for income taxes 225 1,747 568
(BENEFIT) FOR INCOME TAXES (25) (263) (1,925)
-------- -------- --------
Net income $ 250 $ 2,010 $ 2,493
======== ======== ========
This schedule should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
35
36
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions (1) Period
----------- --------- -------- -------------- ------
For the year ended June 30, 1999:
Allowance for doubtful accounts (deducted from accounts
receivable) $ 755 $ 230 $ 98 $ 887
========= ========= ========= =========
For the year ended June 30, 2000:
Allowance for doubtful accounts (deducted from accounts
receivable) $ 887 $ 110 $ 375 $ 622
========= ========= ========= =========
For the year ended June 30, 2001:
Allowance for doubtful accounts (deducted from accounts
receivable) $ 622 $ 78 $- $ 700
========= ========= ========= =========
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
This schedule should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
36
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated herein by reference from the Company's definitive proxy statement
for the 2001 annual meeting of stockholders which the Company intends to file
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the end of the Company's 2001 fiscal year, and, accordingly,
items 10, 11, 12 and 13 are omitted pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)1. Financial Statements
The following consolidated financial statements of NAPCO Security
Systems, Inc. and its subsidiaries are included in Part II, Item 8:
Page
----
Report of Independent Public Accountants as of
June 30, 2001 and 2000 and for each of the
3 Years in the Period Ended June 30, 2001........................................... 18
Consolidated Balance Sheets as of
June 30, 2001 and 2000.............................................................. 19
Consolidated Statements of Income for the Years
Ended June 30, 2001, 2000 and 1999.................................................. 20
37
38
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 2001, 2000
and 1999............................................................................ 21
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2001, 2000 and 1999............................................ 22
Notes to Consolidated Financial Statements,
June 30, 2001, 2000 and 1999........................................................ 23
(a)2. Financial Statement Schedules
The following consolidated financial statement schedules of NAPCO
Security Systems, Inc. and its subsidiaries are included in Part II, Item 8:
I: Condensed Financial Information
on Parent Company.............................................................. 34
II: Valuation and Qualifying Accounts.............................................. 36
Schedules other than those listed above are omitted because of the
absence of the conditions under which they are required or because the required
information is shown in the consolidated financial statements and/or notes
thereto.
(a)3 and (c). Exhibits
Exhibit
No. Title
--- -----
Ex-3.(i) Articles of Incorporation, as amended.............. Exhibit 3a to Report on Form
10-K for fiscal year ended June
30, 1988
Ex-3.(ii) Amended and Restated By-Laws ...................... Exhibit 3.(ii) to Report on Form
10-K for fiscal year ended June
30, 1999
Ex-10.A Amended and Restated 1992 Incentive
Stock Option Plan ................................ Exhibit 10.A to Report on Form
10-K for fiscal year ended June
30, 1999
38
39
Ex-10.B 2000 Non-Employee Stock Option Plan...................... E-1
Ex-10.C Defined Contribution Pension Plan
Basic Plan Document.............................. Exhibit 10d to Report on Form
10-K for fiscal year ended June
30, 1989
Ex-10.D Defined Contribution Pension Plan
401(k) Profit Sharing Plan
Adoption Agreement............................... Exhibit 10e to Report
on Form 10-K for fiscal
year ended June 30,
1989
Ex-10.E Promissory Note dated as of November 8,
1991 between Citibank, N.A. and
the Company...................................... Exhibit 10-i to
Report on Form 10-K
for fiscal year
ended June 30, 1992
Ex-10.F Credit Agreement dated November 8,
1991 between N.S.S. Caribe S.A. and
Citibank, N.A.................................... Exhibit 10.j to
Report on Form 10-K
for fiscal year
ended June 30, 1992
Ex-10.G First Amendment dated as of November 5,
1993 to Credit Agreement dated as of
November 8, 1991 with Citibank, N.A.............. Exhibit 10-0 to
Report on Form 10-K
for fiscal year
ended June 30, 1993
Ex-10.H Loan and Security Agreement with
Marine Midland Bank dated as of
May 12, 1997..................................... Exhibit 10.I to Rpt.
On Form 10K for
fiscal year ended
June 30, 1997
39
40
Ex-10.I Revolving Credit Note #1 to Marine
Midland Bank dated as of May 12, 1997............ Exhibit 10.J to
Report on Form 10-K
for Fiscal year
ended June 30, 1997
Ex-10.J Revolving Credit Note #2 to Marine
Midland Bank dated as of May 12, 1997............ Exhibit 10.K to
Report on Form 10-K
for fiscal year
ended June 30, 1997
Ex-10.K Promissory Note to Marine Midland Bank
dated as of May 12, 1997......................... Exhibit 10-L to
Report on Form 10-K
for fiscal year
ended June 30, 1997
Ex-10.L Amendment No. 1 to the Loan and Security
Agreement with Marine Midland Bank
dated as of May 28, 1998........................ Exhibit 10-M to
Report in Form 10-K
for fiscal year
ended June 30, 1998.
Ex.-10.M Term Loan Note to Marine Midland
Bank dated as of May 28, 1998.................... Exhibit 10-N to
Report in Form 10-K
For fiscal year
ended June 30, 1998.
Ex-10.N Promissory Note to Kenneth Rosenberg dated as of
May 28, 1998..................................... Exhibit 10.O to
Report in Form 10-K
for fiscal year
ended June 30, 1998.
Ex-10.O Consulting Agreement with Kenneth Rosenberg
dated as of May 28, 1998......................... Exhibit 10.P to
Report in Form 10-K
for fiscal year
ended June 30, 1998.
40
41
Ex-10.P Employment Agreement with Richard Soloway ....... Exhibit 10.Q to
Report in Form 10-Q
for period ended
March 31, 1999.
Ex-10.Q Employment Agreement with Jorge Hevia .......... Exhibit 10.R to
Report in Form 10-Q
for period ended
March 31, 1999.
Ex-10.R Amendment No. 2 to the Loan and Security Agreement
with HSBC Bank dated as of June 30, 1999 ........ Exhibit 10.S to
Report on Form 10-K
for fiscal year
ended June 30, 1999
Ex-10.S Employment Agreement with Michael Carrieri ...... Exhibit 10.U to
Report on Form 10-Q
For fiscal quarter
ended September 30, 1999
Ex-10.T Indemnification Agreement dated August 9, 1999 .. Exhibit 10.T to
Report on Form 10-K
For fiscal year ended
June 30, 1999
Ex-10.U Asset Purchase Agreement (1)..................... Exhibit 2.1 to
Report on Form 8-K
Filed July 27, 2000
Ex-10.V Amendment No. 4 to Loan and Security Agreement Exhibit 10.V to
Report on Form 8-K
Filed July 27, 2000
Ex-10.W Amendment No. 8 to Loan and Security Agreement .. E-6
Ex-10.X Note Modification Agreements .................... E-14
Ex-11 Computation of earnings per share ............... E-20
Ex-12 Computation of ratios ........................... E-21
Ex-21 Subsidiaries of the Registrant .................. E-22
Ex-23 Consent of Independent Public Accountants ....... E-23
41
42
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the registrant will be
provided with copies of these exhibits upon written request to the Company.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June 30,
2001.
42
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
September 28, 2001
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ RICHARD SOLOWAY By: /s/ KEVIN S. BUCHEL
Richard Soloway Kevin S. Buchel
Chairman of the Board of Senior Vice President of
Directors, President and Secretary Operations and Finance
(Principal Executive Officer) and Treasurer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and the dates indicated.
Signature Title Date
--------- ----- ----
/s/RICHARD SOLOWAY Chairman of the September 28, 2001
---------------------------- Board of Directors
Richard Soloway
/s/ KEVIN S. BUCHEL
----------------------------
Kevin S. Buchel Director September 28, 2001
/s/ANDREW J. WILDER
----------------------------
Andrew J. Wilder Director September 28, 2001
/s/ARNOLD BLUMENTHAL
----------------------------
Arnold Blumenthal Director September 28, 2001
/s/DONNA SOLOWAY
----------------------------
Donna Soloway Director September 28, 2001
43
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Index to Exhibits
-----------------
Ex-10.B 2000 Non-Employee Stock Option Plan, as amended ............. E-1
Ex-10.W Amendment No. 8 to Loan and Security Agreement .............. E-6
Ex-10.X Note Modification Agreements ................................ E-14
Ex-11 Computation of earnings per share ........................... E-20
Ex-12 Computation of ratios ....................................... E-21
Ex-21 Subsidiaries of the Registrant .............................. E-22
Ex-23 Consent of Independent Public Accountants ................... E-23
E-i