1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- ----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
_______________ .
Commission File Number: 0-10004
NAPCO SECURITY SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2277818
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
333 Bayview Avenue
Amityville, New York 11701
(Zip Code)
(516) 842-9400
(Registrant's telephone number including area code)
NONE
(Former name, former address and former fiscal year
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
------- -------
Number of shares outstanding of each of the issuer's classes of common stock, as
of: MARCH 31, 1999
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,490,151
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
MARCH 31, 1999
Page
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets,
March 31, 1999 and June 30, 1998 3
Condensed Consolidated Statements of Income for the Nine
Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II: OTHER INFORMATION 12
SIGNATURE PAGE 13
INDEX TO EXHIBITS 14
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, June 30,
ASSETS 1999 1998
-------- --------
(in thousands, except share data)
Current Assets:
Cash and cash equivalents $ 1,983 $ 1,989
Accounts receivable, less allowance for doubtful accounts:
March 31, 1999 $ 1,092
June 30, 1998 $ 755 12,273 14,760
Inventories, net (Note 2) 24,693 25,438
Prepaid expenses and other current assets 847 674
Deferred income taxes, net 1,292 1,292
-------- --------
Total current assets 41,088 44,153
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
March 31, 1999 $ 11,953
June 30, 1998 $ 11,055 11,338 11,491
Goodwill, net 2,512 2,592
Other Assets 341 327
-------- --------
$ 55,279 $ 58,563
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,748 $ 1,667
Accounts payable 3,512 3,862
Accrued and other current liabilities 1,392 1,678
Accrued taxes 558 3,004
-------- --------
Total current liabilities 7,210 10,211
Long-Term Debt 17,512 18,644
Deferred Income Taxes 875 875
-------- --------
Total liabilities 25,597 29,730
Stockholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares
authorized, 5,908,602 shares issued; 3,490,151 and
3,489,651 shares outstanding, respectively 59 59
Additional paid-in capital 751 749
Retained earnings 33,321 32,474
Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449)
-------- --------
Total stockholders' equity 29,682 28,833
-------- --------
$ 55,279 $ 58,563
======== ========
See accompanying notes to Condensed consolidated Financial Statements.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
(in thousands, except share and per share data)
Net Sales $ 33,608 $ 35,687
Cost of Sales 25,591 26,895
----------- -----------
Gross profit 8,017 8,792
Selling, General and Administrative Expenses 7,970 6,886
----------- -----------
Operating income 47 1,906
----------- -----------
Interest Expense, net 1,047 811
Other Expense, net 59 112
----------- -----------
1,106 923
----------- -----------
Income (loss) before (benefit) provision for income taxes (1,059) 983
(Benefit) Provision for Income Taxes (1,906) 274
----------- -----------
Net income $ 847 $ 709
=========== ===========
Earnings Per Share (Note 5): Basic $ 0.24 $ 0.16
=========== ===========
Diluted $ 0.24 $ 0.16
=========== ===========
Weighted Average Number of Shares Outstanding (Note 5): Basic 3,480,401 4,374,477
=========== ===========
Diluted 3,505,824 4,441,177
=========== ===========
See accompanying notes to Condensed consolidated Financial Statements.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
(in thousands, except share and per share data)
Net Sales $ 11,672 $ 12,023
Cost of Sales 8,950 9,201
----------- -----------
Gross profit 2,722 2,822
Selling, General and Administrative Expenses 3,247 2,277
----------- -----------
Operating income (525) 545
----------- -----------
Interest Expense, net 327 282
Other Expense, net 150 100
----------- -----------
477 382
----------- -----------
Income (loss) before (benefit) provision for income taxes (1,002) 163
(Benefit) Provision for Income Taxes (1,345) 42
----------- -----------
Net income $ 343 $ 121
=========== ===========
Earnings Per Share (Note 5): Basic $ 0.10 $ 0.03
=========== ===========
Diluted $ 0.10 $ 0.03
=========== ===========
Weighted Average Number of Shares Outstanding (Note 5): Basic 3,480,401 4,377,477
=========== ===========
Diluted 3,491,250 4,396,477
=========== ===========
See accompanying notes to Condensed consolidated Financial Statements.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended
March 31,
--------------------
1999 1998
------- -------
(in thousands)
Net Cash Provided by (Used in) Operating Activities $ 1,790 $(1,679)
------- -------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (745) (238)
------- -------
Net cash used in investing activities (745) (238)
------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings -- 2,550
Principal payments on long-term debt (1,051) (450)
------- -------
Net cash (used in) provided by financing activities (1,051) 2,100
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (6) 183
Cash and Cash Equivalents at Beginning of Period 1,989 1,006
------- -------
Cash and Cash Equivalents at End of Period $ 1,983 $ 1,189
======= =======
Cash Paid During the Period for:
Interest $ 879 $ 663
======= =======
Income taxes $ 250 $ 85
======= =======
See accompanying notes to Condensed consolidated Financial Statements.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) Summary of Significant Accounting Policies and Other Disclosures
The information for the nine months ended March 31, 1999 and 1998 is
unaudited, but in the opinion of the Company, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the results of operations for such periods have been
included. The results of operations for the periods may not necessarily
reflect the annual results of the Company.
The Company has adopted all recently effective accounting standards which
have an impact on its condensed financial statements.
2.) Inventories
Inventories consist of: March 31, June 30,
1999 1998
------- -------
(in thousands)
Component parts $ 9,932 $10,200
Work-in-process 3,958 4,056
Finished products 10,903 11,182
------- -------
$24,693 $25,438
======= =======
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of: March 31, June 30,
1999 1998
------- -------
(in thousands)
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 3,065 2,819
Furniture and fixtures 928 912
Machinery and equipment 9,427 8,944
Building improvements 56 56
------- -------
23,291 22,546
Less: Accumulated depreciation and amortization 11,953 11,055
------- -------
$11,338 $11,491
======= =======
4.) In August 1995, the Internal Revenue Service ("IRS") informed the Company
that it had completed the audit of the Company's Federal tax returns for
fiscal years 1986 through 1993. The IRS had issued a report to the Company
proposing adjustments that would result in taxes due of approximately $4.3
million excluding interest charges. The primary adjustments presented by
the IRS related to intercompany pricing and royalty charges, DISC earnings
and charitable contributions. The Company disagreed with the IRS and began
the process of vigorously appealing this assessment using all remedies and
procedural actions available under the law. The Company had provided a
reserve to reflect its estimate of the ultimate resolution of this matter,
so that the outcome of this matter would not have a material adverse
effect on the Company's consolidated financial statements.
During fiscal 1999, the Company both continued to discuss the assessment
with the IRS Appeals Office and concluded an IRS examination of fiscal
years 1994 through 1997. In July 1998 the Company received a revised audit
report which eliminated the original assessment for the fiscal years 1986
through 1993. In April 1999 the Company favorably resolved the IRS
examination of fiscal years 1994 through 1997. The Company has accepted
both audit reports and the final government approvals have been received.
Accordingly, the benefit for income taxes for the three and nine months
ended March 31, 1999 reflects the favorable effect of the reversal of
previously recorded reserves.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.) Net Income Per Common Share
Effective December 31, 1997, the Company adopted 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. Net income per share amounts for the same prior-year
periods have been restated to conform to the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net income is as follows:
Nine Months Ended
March 31, 1999
(in thousands, except per share data)
----------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----- ----- -----
Net income $ 847 -- --
-----
BASIC EPS
Net income attributable to
common stock $ 847 3,480 $0.24
-----
EFFECT OF DILUTIVE SECURITIES
Options -- 26 0.00
----- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 847 3,506 $0.24
----- ===== =====
Three Months Ended
March 31, 1999
(in thousands, except per share data)
----------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----- ----- -----
Net income $ 343 -- --
-----
BASIC EPS
Net income attributable to
common stock $ 343 3,480 $0.10
-----
EFFECT OF DILUTIVE SECURITIES
Options -- 11 --
----- ----- -----
DILUTED EPS
Net income attributable to
common stock and assumed
option exercises $ 343 3,491 $0.10
----- =====
Options to purchase 11,220 shares of common stock in the nine months and
68,870 in the three months ended March 31, 1999 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.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Sales for the nine months ended March 31, 1999 decreased by 6% to $33,608,000 as
compared to $35,687,000 for the same period a year ago. For the quarter ended
March 31, 1999 net sales decreased by 3% to $11,672,000 from $12,023,000 for the
same period in fiscal 1998. During the three and nine months ended March 31,
1999 net sales were affected by two of the Company's customers tightening their
levels of the Company's product in their inventory. In January 1999 this major
customer announced that it had acquired substantially all of the assets of one
of the customers discussed above. In the Company's opinion, the reduction of
inventory by these two customers was due in part to their anticipation of this
acquisition. In addition, the Company's sales were affected by the recent
economic problems in Latin America. The Company is assisting its customers
closely in keeping its products readily available while maintaining an
acceptable credit risk and cash flows.
The Company's gross margin for the nine months ended March 31, 1999 decreased by
$775,000 to $8,017,000 or 23.9% of sales as compared to $8,792,000 or 24.6% of
sales for the same period a year ago. Gross margin for the three months ended
March 31, 1999 was $2,722,000 or 23.3% of sales as compared to $2,822,000 or
23.5% of sales for the same period a year ago. This decrease was primarily due
to the same issues resulting in the decreased sales volume as discussed above.
Selling, general and administrative expenses for the nine months ended March 31,
1999 increased by $1,084,000 to $7,970,000 as compared to $6,886,000 a year ago.
For the three months ended March 31, 1999 selling, general and administrative
expenses increased by $970,000 to $3,247,000 from $2,246,000 for the same period
a year ago. These increases were primarily related to the Company's increased
selling and marketing focus in the international marketplace. In addition, the
Company increased its allowance for doubtful accounts reserve in light of the
economic uncertainty in Latin America.
Interest and other expense for the nine months ended March 31, 1999 increased by
$183,000 to $1,106,000 from $923,000 for the same period a year ago. For the
three months ended March 31, 1999 interest and other expenses increased by
$95,000 to $477,000 from $382,000 for the same period in fiscal 1998. These
increases were primarily due to the additional debt incurred in the fourth
quarter of fiscal 1998.
Provision for income taxes for the nine months ended March 31, 1999 decreased by
$2,180,000 to a benefit of $1,906,000 as compared to a provision of $274,000 for
the same period a year ago. For the three months ended March 31, 1999 provision
for income taxes decreased by $1,387,000 to a benefit of $1,345,000 as compared
to a provision of $42,000 for the same period a year ago. These decreases were
primarily due to the favorable effect of the reversal of previously recorded
reserves no longer required with respect to IRS audits of fiscal years 1986
through 1997 as well as the decrease in income before provision for income
taxes.
Net income increased by $138,000 to $847,000 or $.24 per share for the
nine months ended March 31, 1999 as compared to $709,000 or $.16 per share for
the same period a year ago. For the three months ended March 31, 1999 net income
increased by $222,000 to $343,000 or $.10 per share from $121,000 or $.03 per
share for the same period in fiscal 1998. These increases were primarily due to
the items discussed above as well as the reduction in the number of common
shares outstanding by the Company's purchase of 889,576 shares of Treasury stock
in the fourth quarter of fiscal 1998.
Liquidity and Capital Resources
During the nine months ended March 31, 1999 the Company utilized virtually all
of its cash generated from operations to reduce its outstanding borrowings and
to purchase property and equipment. This resulted in a decrease in outstanding
debt to $19,260,000 at March 31, 1999 from $20,311,000 at June 30, 1998 while
cash and cash equivalents remained relatively constant at $1,983,000 as of March
31, 1999 as compared to $1,989,000 at June 30, 1998.
Accounts Receivable at March 31, 1999 decreased $2,487,000 to $12,273,000 as
compared to $14,760,000 at June 30, 1998. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 1998 as compared to
the quarter ended March 31, 1999. In addition, the Company provided for
additional reserves for doubtful accounts in response to the recent economic
problems in Latin America.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Inventory at March 31, 1999 decreased by $745,000 to $24,793,000 as compared to
$25,438,000 at June 30, 1998. This decrease was primarily the result of the
Company's operational efforts at streamlining its planning and procurement
processes to reduce its onhand inventory requirements while improving delivery
response to its customers.
In May of 1998 the Company repurchased 889,576 shares of Napco common stock for
$5.00 per share from one of its co-founders. $2.5 million was paid at closing
with the balance of the purchase price to be paid over a four (4) year period.
The portion of the purchase price paid at closing was financed by the Company's
primary bank and is to be repaid over a five (5) year period.
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,
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. These agreements replaced the existing $11,000,000 and $2,000,000
credit agreements with another bank. 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 Company's Amityville
facility. The revolving credit agreement will expire in May, 2000 and any
outstanding borrowings are to be repaid on or before that time.
On April 26, 1993 the Company's foreign subsidiary entered into a 99 year lease
of approximately four acres of land in the Dominican Republic, at an annual cost
of approximately $272,000. The foreign subsidiary relocated its operations to
this site at the end of fiscal 1995.
The Company has entered into employment agreements with Richard Soloway,
Chairman of the Board and President, and Jorge Hevia, Vice President of
Corporate Sales and Marketing (see Exhibit 10(Q) and 10(R) respectively).
As of March 31, 1999 the Company had no material commitments for capital
expenditures.
Year 2000 Date Conversion
As the century turns from 1900 to 2000, date-sensitive systems may recognize the
year 2000 as 1900 or not at all. This results primarily because of the
conventional use of a two digit date field in most software applications. The
inability to properly recognize the year 2000 may cause systems to process
financial and operational information incorrectly.
The Company believes that virtually all of the Company's systems are now fully
compliant. Due to the fact that the Company's software manufacturer includes the
year 2000 upgrade as part of its ongoing maintenance, the Company expects to
expend a minimal amount of its resources in this area.
Although the Company expects its critical systems to be compliant, there is no
guarantee that these results will be achieved. Specific factors that give rise
to this uncertainty include a possible failure to identify all susceptible
systems, noncompliance by third parties whose systems and operations impact the
Company, and other similar uncertainties.
In addition to internal Year 2000 remediation activities, the Company is in
contact with key suppliers and customers to reduce the likelihood of any
significant interruption in the business between the Company and these important
third parties relating to the Year 2000 issue. A comprehensive survey of all
vendors and customers has not been made and is not presently planned. The
Company's efforts thus far have been focused on key vendors and customers. If
these third parties do not convert their systems in a timely manner and in a way
that is compatible with the Company's systems, the Year 2000 issue could have a
material adverse effect on the Company's operations. The Company believes that
its actions with key suppliers and customers will minimize these risks. The vast
majority of the Company's products are not date-sensitive. The Company has
collected information on current and discontinued date-sensitive products.
At this time, the Company does not have in place a comprehensive, global
contingency plan relative to potential Year 2000 disruptions. Rather, each
significant system with a potential problem either has been repaired and tested
or is being updated. Contingency plans for certain types of unforseen problems
are being developed.
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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, 1998. These
include risks and uncertainties relating to competition and technological
change, intellectual property rights, capital spending, international
operations, and the Company's acquisition strategies.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In August 1995, the Internal Revenue Service ("IRS") informed the Company
that it had completed the audit of the Company's Federal tax returns for
fiscal years 1986 through 1993. The IRS had issued a report to the Company
proposing adjustments that would result in taxes due of approximately $4.3
million excluding interest charges. The primary adjustments presented by
the IRS related to intercompany pricing and royalty charges, DISC earnings
and charitable contributions. The Company disagreed with the IRS and began
the process of vigorously appealing this assessment using all remedies and
procedural actions available under the law. The Company had provided a
reserve to reflect its estimate of the ultimate resolution of this matter,
so that the outcome of this matter would not have a material adverse
effect on the Company's consolidated financial statements.
During fiscal 1999, the Company both continued to discuss the assessment
with the IRS Appeals Office and concluded an IRS examination of fiscal
years 1994 through 1997. In July 1998 the Company received a revised audit
report which eliminated the original assessment for the fiscal years 1986
through 1993. In April 1999 the Company favorably resolved the IRS
examination of fiscal years 1994 through 1997. The Company has accepted
both audit reports and the final government approvals have been received.
Accordingly, the benefit for income taxes for the three and nine months
ended March 31, 1999 reflects the favorable effect of the reversal of
previously recorded reserves.
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
On April 21, 1999, the Company's board of directors adopted amendments to
by-laws relating to: (1) Section 11, Article 1 replacing the provision on
written consent of shareholders in lieu of meeting with a notice provision
relating to shareholder proposals; and (2) the amendment of Article 11 to
provide that shareholders may amend the by-laws by an eighty percent
(80%) vote, all as described in Exhibit 3(ii)(A).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(ii)(A) Amendments to by-laws
10(Q) Employment agreement; Richard Soloway
10(R) Employment agreement; Jorge Hevia
22 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the Company's fiscal
quarter ended March 31, 1999.
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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, 1999
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
- --------
3(ii)(A) Amendments to by-laws
10(Q) Employment agreement: Richard Soloway
10(R) Employment agreement: Jorge Hevia
22 Financial Data Schedule
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