SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____________ TO ____________ .
Commission File Number: 0-10004
----------------------------------
NAPCO SECURITY SYSTEMS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2277818
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
333 Bayview Avenue
Amityville, New York 11701
- ------------------------------------ ------------------------------------
(Zip Code)
(631) 842-9400
--------------------------------------------------------------
(Registrant's telephone number including area code)
NONE
--------------------------------------------------------------
(Former name, former address and former fiscal year
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
------ ------
Number of shares outstanding of each of the issuer's classes of common stock, as
of: MARCH 31, 2002
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,347,296
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
MARCH 31, 2002
PAGE
----
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
March 31, 2002 and June 30, 2001 3
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Income for the Nine
Months Ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II: OTHER INFORMATION 14
SIGNATURE PAGE 15
INDEX TO EXHIBITS 16
-2-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, June 30,
ASSETS 2002 2001
------ ------------------ -------------------
(in thousands, except share data)
Current Assets:
Cash and cash equivalents $ 1,953 $ 1,037
Accounts receivable, less reserve for doubtful accounts:
March 31, 2002 $ 584
June 30, 2001 $ 700 14,123 16,940
Inventories (Note 2) 22,315 23,234
Prepaid expenses and other current assets 669 895
------------------- -------------------
Total current assets 39,060 42,106
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
March 31, 2002 $ 16,317
June 30, 2001 $ 15,288 10,191 10,663
Goodwill, net of accumulated amortization 9,686 9,686
Deferred Income Taxes 785 785
Other Assets 399 437
------------------- -------------------
$ 60,121 $ 63,677
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of long-term debt $ 2,867 $ 3,533
Accounts payable 3,483 3,361
Accrued and other current liabilities 1,724 1,925
Accrued income taxes 89 55
------------------- -------------------
Total current liabilities 8,163 8,874
Long-Term Debt 19,125 21,567
Deferred Income Taxes 292 292
------------------- -------------------
Total liabilities 27,580 30,733
------------------- -------------------
Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares authorized,
5,968,352 and 5,938,852 shares issued, respectively;
3,347,296 and 3,366,596 shares outstanding respectively 60 59
Additional paid-in capital 935 831
Retained earnings 36,963 37,228
Less: Treasury stock, at cost (2,621,056 and 2,572,256 shares respectively) (5,417) (5,174)
------------------- -------------------
Total stockholders' equity 32,541 32,944
------------------- -------------------
$ 60,121 $ 63,677
=================== ===================
The accompanying notes are an integral part of these condensed consolidated
balance sheets
-3-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
March 31,
---------------------------------------------
2002 2001
------------------- -------------------
(in thousands, except share and per share data)
Net Sales $ 13,321 $ 12,545
Cost of Sales 9,861 9,579
------------------- -------------------
Gross profit 3,460 2,966
Selling, General and Administrative Expenses 2,913 3,118
------------------- -------------------
Operating income (loss) 547 (152)
------------------- -------------------
Interest Expense, net 328 445
Other Expense, net 12 1
------------------- -------------------
340 446
------------------- -------------------
Income (loss) before provision for income taxes 207 (598)
Provision for Income Taxes - -
------------------- -------------------
Net income (loss) $ 207 $ (598)
=================== ===================
Net income (loss) per share (Note 4): Basic $ 0.06 $ (0.17)
=================== ===================
Diluted $ 0.06 $ (0.17)
=================== ===================
Weighted average number of shares outstanding (Note 4): Basic 3,342,796 3,477,539
=================== ===================
Diluted 3,507,289 3,477,539
=================== ===================
The accompanying notes are an integral part of these condensed consolidated
statements
-4-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended
March 31,
---------------------------------------------
2002 2001
------------------- -------------------
(in thousands, except share and per share data)
Net Sales $ 36,712 $ 37,510
Cost of Sales 27,175 27,742
------------------- -------------------
Gross profit 9,537 9,768
Selling, General and Administrative Expenses 8,628 9,055
------------------- -------------------
Operating income 909 713
------------------- -------------------
Interest Expense, net 1,137 1,357
Other Expense (Income), net 37 (153)
------------------- -------------------
1,174 1,204
------------------- -------------------
Loss before provision for income taxes (265) (491)
Provision for Income Taxes - -
------------------- -------------------
Net loss $ (265) $ (491)
=================== ===================
Net loss per share (Note 4): Basic $ (0.08) $ (0.14)
=================== ===================
Diluted $ (0.08) $ (0.14)
=================== ===================
Weighted average number of shares outstanding (Note 4): Basic 3,375,697 3,488,220
=================== ===================
Diluted 3,375,697 3,488,220
=================== ===================
The accompanying notes are an integral part of these condensed consolidated
statements
-5-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
March 31,
---------------------
2002 2001
------- -------
(in thousands)
Net Cash Provided by Operating Activities $ 4,719 $ 3,336
------- -------
Cash Flows from Investing Activities:
Acquisition of business, net of cash acquired $ -- $(7,633)
Net purchases of property, plant and equipment (557) (963)
------- -------
Net cash used in investing activities (557) (8,596)
------- -------
Cash Flows from Financing Activities:
Proceeds from acquisition financing $ -- 8,250
Proceeds from long-term borrowings 200 1,000
Proceeds from sale of Common stock due to the exercise of stock options 105 52
Principal payments on long-term debt (3,308) (3,715)
Payments for purchase of Treasury stock (243) (315)
------- -------
Net cash provided by (used in) financing activities (3,246) 5,272
------- -------
Net Increase in Cash and Cash Equivalents 916 12
Cash and Cash Equivalents at Beginning of Period 1,037 2,384
------- -------
Cash and Cash Equivalents at End of Period $ 1,953 $ 2,396
======= =======
CASH PAID DURING THE PERIOD FOR:
- --------------------------------
Interest $ 1,130 $ 1,695
======= =======
Income taxes $ 11 $ 13
======= =======
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
- -------------------------------------------
Deferred acquisition payments $ 517 $ 1,325
======= =======
The accompanying notes are an integral part of these condensed consolidated
statements
-6-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER DISCLOSURES
The information for the three and nine months ended March 31, 2002
and 2001 is unaudited but, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the results of
operations for such periods have been included. The results of
operations for the periods may not necessarily reflect the annual
results of the Company. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2001.
The Company has adopted all recently effective accounting standards
which are relevant to its condensed financial statements and there
was no material effect.
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 standard
required a restatement of prior periods for changes in
classification. Beginning in the fourth quarter of 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.
2.) INVENTORIES
Inventories consist of: March 31, June 30,
2002 2001
------------------- -------------------
(in thousands)
Component parts $ 12,001 $ 12,495
Work-in-process 3,398 3,538
Finished products 6,916 7,201
------------------ -------------------
$ 22,315 $ 23,234
================== ===================
3.) PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consists of: March 31, June 30,
2002 2001
------------------ -------------------
(in thousands)
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 4,150 3,867
Furniture and fixtures 1,143 1,112
Machinery and equipment 11,214 10,979
Building improvements 186 178
------------------ -------------------
26,508 25,951
Less: Accumulated depreciation
and amortization 16,317 15,288
------------------ -------------------
$ 10,191 $ 10,663
================== ===================
-7-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.) NET INCOME PER COMMON SHARE
The Company follows the provisions of Statement of Financial
Accounting standards ("SFAS") No. 128, "Earnings per share". In
accordance with SFAS No. 128, net income per common share amounts
("Basic EPS") were computed by dividing net income by the weighted
average number of common shares outstanding for the period. Net
income per common share amounts, assuming dilution ("Diluted EPS"),
were computed by reflecting the potential dilution from the exercise
of stock options. SFAS No. 128 requires the presentation of both
Basic EPS and Diluted EPS on the face of the income statement.
A reconciliation between the numerators and denominators of the
Basic and Diluted EPS computations for net income is as follows:
Three Months Ended March 31, 2002
(in thousands, except per share data)
---------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) amounts
----------- ------------- -------
Net income $ 207 -- --
----- ----- -----
BASIC EPS
---------
Net income attributable to
common stock $ 207 3,343 $0.06
EFFECT OF DILUTIVE SECURITIES
-----------------------------
Options -- 164 --
----- ----- -----
DILUTED EPS
-----------
Net income attributable to
common stock and assumed
option exercises $ 207 3,507 $0.06
===== ===== =====
All options to purchase shares of common stock in the three months
ended March 31, 2002 were included in the computation of diluted EPS
because the exercise prices did not exceed the average market price
of the common shares for this period. These options were still
outstanding at the end of the period.
Nine Months Ended March 31, 2002
(in thousands, except per share data)
------------------------------------------------------
Net Loss Shares Per Share
(numerator) (denominator) amounts
----------- ------------- -------
Net loss $(265) -- --
----- ----- ------
BASIC EPS
---------
Net loss attributable to
common stock $(265) 3,376 $(0.08)
EFFECT OF DILUTIVE SECURITIES
-----------------------------
Options -- -- --
----- ----- ------
DILUTED EPS
-----------
Net loss attributable to
common stock and assumed
option exercises $(265) 3,376 $(0.08)
===== ===== ======
Options to purchase 418,080 shares of common stock in the nine
months ended March 31, 2002 were not included in the computation of
diluted EPS because the impact would have been anti-dilutive.
Options to purchase 3,500 shares of common stock in the nine months
ended March 31, 2002 were not included in the computation of diluted
EPS because the exercise prices exceeded the average market price of
the common shares for this period. These options were still
outstanding at the end of the period.
-8-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.) GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". These statements established financial accounting and
reporting standards for acquired goodwill and other intangible
assets. Specifically, the standard addresses 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. In accordance with SFAS No. 142,
intangible assets, including purchased goodwill, must be evaluated
for impairment. Those intangible assets that will continue to be
classified as goodwill or as other intangibles with indefinite lives
are no longer amortized. Based on the results of the Company's
transitional impairment testing, there was no material impact on the
consolidated financial results related to intangible assets or
purchased goodwill.
The following table presents pro forma net income and earnings per
share data restated to include the retroactive impact of the
adoption of SFAS No. 142.
Three months Nine months
Pro forma: ended March 31, 2001 ended March 31, 2001
------------------------------------------------------------------------- -------------------- --------------------
(in thousands, except (in thousands, except
per share data) per share data)
Reported Net (Loss) Attributable to Common Stock $ (598) $ (491)
Add back: Goodwill amortization, net of tax 92 245
------- -------
Pro forma Net (Loss) $ (506) $ (246)
======= =======
Basic net earnings per common share:
Reported Net (Loss) Attributable to Common Stock before SFAS No. 142 $ (0.17) $ (0.14)
SFAS No. 142 effect, net of tax 0.02 0.07
------- -------
Pro forma Net (Loss) attributable to Common Stock $ (0.15) $ (0.07)
======= =======
Diluted net earnings per common share:
Reported Net (Loss) Attributable to Common Stock before SFAS No. 142 $ (0.17) $ (0.14)
SFAS No. 142 effect, net of tax 0.02 0.07
------- -------
Pro forma Net (Loss) attributable to Common Stock $ (0.15) $ (0.07)
======= =======
6.) ACQUISITION OF BUSINESS
On July 27, 2000, Napco Security Systems, Inc. (the "Company")
through a subsidiary, pursuant to an Asset Purchase Agreement dated
July 2000 with Continental Instruments LLC ("Continental") of
Edgewood, New York, acquired substantially all of the assets of
Continental for consideration consisting of cash and deferred
payments as described in the Asset Purchase Agreement as previously
filed on Amendment No. 1 to Form 8-K.
The Continental business involves the manufacturing and distribution
of access control and security management systems. The Company plans
to continue to use the equipment and other physical property
acquired in the Company's access control business.
The acquisition was financed by an $8,250,000 loan from the
Company's primary lender, to be repaid over 60 equal monthly
installments. The loan is secured by a mortgage, guarantees and
other collateral. Approximately $7,800,000, which represents the
excess of the purchase price over the cost of assets acquired, was
being amortized on a straight-line basis over an estimated useful
life of 20 years, prior to the adoption of SFAS No. 141 and No. 142
as discussed in Note 5.
-9-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized below are the unaudited pro forma results of operations
as though this acquisition had occurred at the beginning of fiscal
2001 after the effect of SFAS No. 141 and 142 as discussed in Note
5. Pro forma adjustments have been made for (1) initial $8,250,000
cash borrowings under a term loan, (2) cash used as initial
consideration in the purchase transaction, (3) deferred financing
costs associated with the term loan and related amortization, (4)
additional salary expense for employees not previously included in
salary expense and (5) additional interest expense for the term
loan.
Nine months ended
Adjusted Pro forma: March 31, 2001
------------------------------------------------------------------- --------------------
(in thousands, except
per share data)
Net sales $ 37,789
========
Net (Loss) Attributable to Common Stock $ (569)
========
Basic net earnings per common share:
Net (Loss) Attributable to Common Stock $ (0.16)
========
Diluted net earnings per common share:
Net (Loss) Attributable to Common Stock $ (0.16)
========
No pro-forma presentation is required for the Continental
acquisition for the quarter ended March 31, 2001 because
Continental's results for the entire three months are included in
the Consolidated Statement of Income for that period as reported.
7.) RECENTLY ISSUED ACCOUNTING STANDARDS
The financial accounting Standards Board recently issued SFAS No.
144, which addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supercedes
SFAS No. 121 but retains fundamental provisions of SFAS No. 121 for
(a) recognition/measurement of impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be
disposed of by sale. SFAS No. 144 also supercedes the
accounting/reporting provisions of Accounting Principles Board
Opinion No. 30 for segments of a business to be disposed of but
retains APB 30's requirement to report discontinued operations
separately from continuing operations and extends that reporting to
a component of an entity that either has been disposed of or is
classified as held for sale. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within
those fiscal years, with early application encouraged. The Company
does not believe the adoption of SFAS No. 144 will be material.
-10-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the three months ended March 31, 2002 increased by 6.2% to $13,321,000
as compared to $12,545,000 for the same period a year ago. Sales for the nine
months ended March 31, 2002 decreased by 2.1% to $36,712,000 as compared to
$37,510,000 for the same period a year ago. The increase in net sales for the
three months was primarily due to one of the Company's major customers
streamlining its on-hand inventory during fiscal 2001 as partially offset by a
decrease in sales of certain of the Company's hardware products. The decrease in
net sales for the nine months was primarily due to a decrease in purchases from
certain of the Company's domestic customers as partially offset by increases in
sales of the Company's access control products and in sales overseas.
The Company's gross margin for the three months ended March 31, 2002 increased
by $494,000 to $3,460,000 or 26.0% of sales as compared to $2,966,000 or 23.6%
of sales for the same period a year ago. Gross margin for the nine months ended
March 31, 2002 decreased by $231,000 to $9,537,000 or 26.0% of sales as compared
to $9,768,000 or 26.0% for the same period a year ago. The increase in gross
margin for the three months ended March 31, 2002 was primarily due to the
increase in net sales for the three months ended March 31, 2002 and a change in
product mix during the same period, both as discussed above. The decrease in
gross margin for the nine months ended March 31, 2002 was primarily due to the
decrease in net sales as discussed above and the resulting increase in overhead
application rates.
Selling, general and administrative expenses for the three months ended March
31, 2002 decreased by $205,000 to $2,913,000 as compared to $3,118,000 a year
ago. Selling, general and administrative expenses for the nine months ended
March 31, 2002 decreased by $427,000 to $8,628,000 as compared to $9,055,000 a
year ago. The decrease in both the three and nine months was primarily due to
the elimination of amortization of Goodwill resulting from the Company's
adoption of SFAS No. 142 as discussed in Note 5.
Interest and other expense for the three months ended March 31, 2002 decreased
by $106,000 to $340,000 from $446,000 for the same period a year ago. Interest
and other expense for the nine months ended March 31, 2002 decreased by $30,000
to $1,174,000 from $1,204,000 period a year ago. The decrease for the three and
nine months resulted primarily from a decrease in interest expense during the
three and nine months ended March 31, 2002 resulting from the continued
reduction of the Company's outstanding debt as well as a slight decline in
interest rates available to the Company.
The Company had a zero provision for income taxes for the three and nine months
ended March 31, 2002 as well as for the same period a year ago.
Net income increased by $805,000 to $207,000 or $0.06 per share for the three
months ended March 31, 2002 as compared to a net loss of $(598,000) or $(0.17)
per share for the same period a year ago. For the nine months ended March 31,
2002 net income increased to a loss of $(265,000) or $(0.08) per share as
compared to a net loss of $(491,000) or $(0.14) per share for the same period a
year ago. These decreases were primarily the result of the items discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 2002 the Company utilized a portion of
its cash generated from operations to reduce certain of its outstanding
borrowings, purchase property and equipment and invest in additional inventory
as discussed below. During the first quarter of fiscal 2001, the Company entered
into an $8,250,000 term loan agreement, payable over 60 equal monthly
installments, in order to purchase the assets of Continental Instruments, LLC
(see note 6 to the financial statements). 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 at least
the fourth quarter of fiscal 2003.
Accounts Receivable at March 31, 2002 decreased $2,817,000 to $14,123,000 as
compared to $16,940,000 at June 30, 2001. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 2001 as compared to
the quarter ended March 31, 2002.
Inventory at March 31, 2002 decreased by $919,000 to $22,315,000 as compared to
$23,234,000 at June 30, 2001. This decrease was primarily the result of the
Company's production planning and forecasting techniques.
In May of 1998 the Company repurchased 889,576 shares of Napco common stock for
$5.00 per share from one of its co-founders. $2.5 million was paid at closing
with the balance of the purchase price to be paid over a four (4) year period.
The portion of the purchase price paid at closing was financed by the Company's
primary bank and is being repaid over a five (5) year period.
-11-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In November 2000 the Company adopted a stock repurchase program. Under this
program, the Company is authorized to repurchase from time to time, 205,000
shares of its common stock. As of March 31, 2002 the Company had repurchased
202,605 shares under this program for a total cash amount of $968,000.
Other than the $8,250,000 loan described above, the Company's bank debt
consisted of a $16,000,000 secured revolving credit agreement and a $3,000,000
line of credit to be used in connection with commercial and standby letters of
credit. The revolving credit agreement, previously expiring in January 2002, has
been renewed with an $18,000,000 line of credit, at the same terms and
conditions and with an expiration date of July 2004. Any outstanding borrowings
are to be repaid on or before such time.
As of March 31, 2002 the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders used in the
normal course of business.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets". These statements established financial accounting
and reporting standards for acquired goodwill and other intangible assets.
Specifically, the standard addresses 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. In accordance with SFAS
No. 142, intangible assets, including purchased goodwill, must be evaluated for
impairment. Those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives are no longer amortized.
Based on the results of the Company's transitional impairment testing, there was
no material impact on the consolidated financial results related to intangible
assets or purchased goodwill.
The following table presents pro forma net income and earnings per share data
restated to include the retroactive impact of the adoption of SFAS No. 142.
Three months Nine months
Pro forma: ended March 31, 2001 ended March 31, 2001
- ------------------------------------ --------------------- ---------------------
(in thousands, except (in thousands, except
per share data) per share data)
Reported Net (Loss) Attributable to Common Stock $ (598) $ (491)
Add back: Goodwill amortization, net of tax 92 276
------- -------
Pro forma Net (Loss) $ (506) $ (215)
======= =======
Basic net earnings per common share:
Reported Net (Loss) Attributable to Common Stock before SFAS No. 142 $ (0.17) $ (0.14)
SFAS No. 142 effect, net of tax 0.02 0.07
------- -------
Pro forma Net (Loss) attributable to Common Stock $ (0.15) $ (0.07)
======= =======
Diluted net earnings per common share:
Reported Net (Loss) Attributable to Common Stock before SFAS No. 142 $ (0.17) $ (0.14)
SFAS No. 142 effect, net of tax 0.02 0.07
------- -------
Pro forma Net (Loss) attributable to Common Stock $ (0.15) $ (0.07)
======= =======
RECENTLY ISSUED ACCOUNTING STANDARDS
The financial accounting Standards Board recently issued SFAS No. 144, which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 but retains
fundamental provisions of SFAS No. 121 for (a) recognition/measurement of
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 also supercedes the
accounting/reporting provisions of Accounting Principles Board Opinion No. 30
for segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The Company does not believe the
adoption of SFAS No. 144 will be material.
-12-
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 standard will require a restatement of prior
periods for changes in classification. Beginning in the fourth quarter of 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.
FORWARD-LOOKING STATEMENTS
This quarterly report, other than historical financial information, contains
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that involve a number of risks and uncertainties. Important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements are set forth in Item 1 of the
Company's annual report on Form 10-K for the year ended June 30, 2001. These
include risks and uncertainties relating to competition and technological
change, intellectual property rights, capital spending, international
operations, and the Company's acquisition strategies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt (consisting of a
revolving credit and term loan facility) that provides for interest at the prime
rate. The Company is affected by market risk exposure primarily through the
effect of changes in interest rates on amounts payable by the Company under this
credit facility. A significant rise in the prime rate could materially adversely
affect the Company's business, financial condition and results of operations. At
March 31, 2002 an aggregate amount of approximately $15,000,000 was outstanding
under this credit facility with an interest rate of 3.5%. If principal amounts
outstanding under this facility remained at this quarter-end level for an entire
year and the interest rate increased or decreased, respectively, by 1.25% the
Company would pay or save, respectively, an additional $187,500 in interest in
that year. The Company does not utilize derivative financial instruments to
hedge against changes in interest rates or for any other purpose. Where
appropriate, the Company requires that letters of credit be provided on foreign
sales. In addition, a significant number of transactions by the Company are
denominated in U.S. dollars. As such, the Company has shifted foreign currency
exposure onto many of its foreign customers. As a result, if exchange rates move
against foreign customers, the Company could experience difficulty collecting
unsecured accounts receivable, the cancellation of existing orders or the loss
of future orders. The foregoing could materially adversely affect the Company's
business, financial condition and results of operations.
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PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 14, 2002
NAPCO SECURITY SYSTEMS, INC.
(Registrant)
By: /s/ Richard Soloway
-----------------------------------
Richard Soloway
Chairman of the Board of Directors,
President and Secretary
(Principal Executive Officer)
By: /s/ Kevin S. Buchel
-----------------------------------
Kevin S. Buchel
Senior Vice President of Operations
and Finance and Treasurer
(Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
EXHIBITS
None
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