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, 2001 ______ 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 ------ ------ <TABLE> <S> <C> Number of shares outstanding of each of the issuer's classes of common stock, as of: MARCH 31,:2001 COMMON STOCK, $.01 PAR VALUE PER SHARE 3,446,867 </TABLE>
2 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES INDEX MARCH 31, 2001 <TABLE> <CAPTION> Page ---- <S> <C> PART I: FINANCIAL INFORMATION (unaudited) Condensed Consolidated Balance Sheets, March 31, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Income for the Nine Months Ended March 31, 2001 and 2000 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II: OTHER INFORMATION 12 SIGNATURE PAGE 13 INDEX TO EXHIBITS 14 </TABLE> -2-
3 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> March 31, June 30, ASSETS 2001 2000 ------ ---------------- ---------------- (in thousands, except share data) <S> <C> <C> Current Assets: Cash and cash equivalents $ 2,396 $ 2,384 Accounts receivable, less reserve for doubtful accounts: March 31, 2001 $ 765 June 30, 2000 $ 622 12,030 18,027 Inventories (Note 2) 26,019 19,478 Prepaid expenses and other current assets 896 1,086 ---------------- ---------------- Total current assets 41,341 40,975 Property, Plant and Equipment, net of accumulated depreciation and amortization (Note 3): March 31, 2001 $ 14,876 June 30, 2000 $ 13,713 10,937 11,105 Goodwill, net of accumulated amortization 9,938 2,379 Deferred income taxes 716 716 Other Assets 406 354 ---------------- ---------------- $ 63,338 $ 55,529 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Current portion of long-term debt $ 3,129 $ 1,023 Accounts payable 4,678 2,551 Accrued and other current liabilities 1,677 2,075 Accrued income taxes 19 46 ---------------- ---------------- Total current liabilities 9,503 5,695 Long-Term Debt 20,938 16,183 Deferred Income Taxes 292 292 ---------------- ---------------- Total liabilities 30,733 22,170 ---------------- ---------------- Stockholders' Equity: Common stock, par value $.01 per share; 21,000,000 shares authorized, 5,935,852 and 5,917,352 shares issued, respectively; 3,446,867 and 3,498,901 shares outstanding respectively 59 59 Additional paid-in capital 824 772 Retained earnings 36,486 36,977 Less: Treasury stock, at cost (2,488,985 and 2,418,451 shares respectively) (4,764) (4,449) ---------------- ---------------- Total stockholders' equity 32,605 33,359 ---------------- ---------------- $ 63,338 $ 55,529 ================ ================ </TABLE> The accompanying notes are an integral part of these condensed consolidated balance sheets -3-
4 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, -------------------------------------- 2001 2000 ---------------- ---------------- (in thousands, except share and per share data) <S> <C> <C> Net Sales $ 12,478 $ 14,085 Cost of Sales 9,429 10,479 ---------------- ---------------- Gross profit 3,049 3,606 Selling, General and Administrative Expenses 3,201 2,610 ---------------- ---------------- Operating income (loss) (152) 996 ---------------- ---------------- Interest Expense, net 445 337 Other Income, net 1 15 ---------------- ---------------- 446 352 ---------------- ---------------- Income (loss) before provision for income taxes (598) 644 Provision for Income Taxes - 127 ---------------- ---------------- Net income (loss) $ (598) $ 517 ================ ================ Net income (loss) per share (Note 4): Basic $ (0.17) $ 0.15 ================ ================ Diluted $ (0.17) $ 0.15 ================ ================ Weighted average number of shares outstanding (Note 4): Basic 3,477,539 3,495,851 ================ ================ Diluted 3,477,539 3,538,859 ================ ================ </TABLE> The accompanying notes are an integral part of these condensed consolidated statements -4-
5 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> March 31, -------------------------------------- 2001 2000 ---------------- ---------------- (in thousands, except share and per share data) <S> <C> <C> Net Sales $ 37,311 $ 36,748 Cost of Sales 27,295 27,508 ---------------- ---------------- Gross profit 10,016 9,240 Selling, General and Administrative Expenses 9,303 7,870 ---------------- ---------------- Operating income 713 1,370 ---------------- ---------------- Interest Expense, net 1,357 991 Other (Income) Expense, net (153) 45 ---------------- ---------------- 1,204 1,036 ---------------- ---------------- Income (loss) before provision for income taxes (491) 334 Provision for Income Taxes - 68 ---------------- ---------------- Net income (loss) $ (491) $ 266 ================ ================ Net income (loss) per share (Note 4): Basic $ (0.14) $ 0.08 ================ ================ Diluted $ (0.14) $ 0.08 ================ ================ Weighted average number of shares outstanding (Note 4): Basic 3,488,220 3,494,301 ================ ================ Diluted 3,488,220 3,510,189 ================ ================ </TABLE> The accompanying notes are an integral part of these condensed consolidated statements -5-
6 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> Nine Months Ended March 31, -------------------------------------- 2001 2000 ---------------- ---------------- (in thousands) <S> <C> <C> Net Cash Provided by Operating Activities $ 3,336 $ 1,307 ---------------- ---------------- Cash Flows from Investing Activities: Acquisition of business, net of cash acquired $ (7,633) $ - Net purchases of property, plant and equipment (963) (887) ---------------- ---------------- Net cash used in investing activities (8,596) (887) ---------------- ---------------- Cash Flows from Financing Activities: Proceeds from acquisition financing $ 8,250 - Proceeds from long-term borrowings 1,000 - Principal payments on long-term debt (3,715) (1,162) Proceeds from sale of Common stock 52 - Payments for purchase of Treasury stock (315) - ---------------- ---------------- Net cash provided by (used in) financing activities 5,272 (1,162) ---------------- ---------------- Net Increase (Decrease) in Cash and Cash Equivalents 12 (742) Cash and Cash Equivalents at Beginning of Period 2,384 2,230 ---------------- ---------------- Cash and Cash Equivalents at End of Period $ 2,396 $ 1,488 ================ ================ Cash Paid During the Period for: - -------------------------------- Interest $ 1,695 $ 1,065 ================ ================ Income taxes $ 13 $ 159 ================ ================ Supplemental Non-cash Financing Activities: - ------------------------------------------- Deferred acquisition payments $ 1,325 $ - ================ ================ </TABLE> The accompanying notes are an integral part of these condensed consolidated statements -6-
7 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1.) Summary of Significant Accounting Policies and Other Disclosures The information for the three and nine months ended March 31, 2001 and 2000 is unaudited but, in the opinion of the Company, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations for such periods have been included. The results of operations for the periods may not necessarily reflect the annual results of the Company. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. The Company has adopted all recently effective accounting standards which are relevant to its condensed financial statements and there was no material effect. 2.) Inventories <TABLE> <CAPTION> Inventories consist of: March 31, June 30, 2001 2000 ---------------- ---------------- (in thousands) <S> <C> <C> Component parts $ 13,667 $ 10,231 Work-in-process 5,427 4,063 Finished products 6,925 5,184 ---------------- ---------------- $ 26,019 $ 19,478 ================ ================ </TABLE> 3.) Property, Plant and Equipment <TABLE> <CAPTION> Property, Plant and Equipment consists of: March 31, June 30, 2001 2000 ---------------- ---------------- (in thousands) <S> <C> <C> Land $ 904 $ 904 Building 8,911 8,911 Molds and dies 3,807 3,642 Furniture and fixtures 1,111 1,022 Machinery and equipment 10,906 10,283 Building improvements 174 56 ---------------- ---------------- 25,813 24,818 Less: Accumulated depreciation and amortization 14,876 13,713 ---------------- ---------------- $ 10,937 $ 11,105 ================ ================ </TABLE> -7-
8 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: <TABLE> <CAPTION> Three Months Ended March 31, 2001 (in thousands, except per share data) ------------------------------------------------------------- Net Loss Shares Per Share (numerator) (denominator) Amounts ----------- ------------- ------- <S> <C> <C> <C> Net loss $ (598) - - -------- -------- -------- BASIC EPS --------- Net loss attributable to common stock $ (598) 3,478 $ (0.17) EFFECT OF DILUTIVE SECURITIES ----------------------------- Options - - - -------- -------- -------- DILUTED EPS ----------- Net loss attributable to common stock and assumed option exercises $ (598) 3,478 $ (0.17) ======== ======== ======== <CAPTION> Nine Months Ended March 31, 2001 (in thousands, except per share data) ------------------------------------------------------------- Net Loss Shares Per Share (numerator) (denominator) Amounts ----------- ------------- ------- <S> <C> <C> <C> Net loss $ (491) - - -------- -------- -------- BASIC EPS --------- Net loss attributable to common stock $ (491) 3,488 $ (0.14) EFFECT OF DILUTIVE SECURITIES ----------------------------- Options - - - -------- -------- -------- DILUTED EPS ----------- Net loss attributable to common stock and assumed option exercises $ (491) 3,488 $ (0.14) ======== ======== ======== </TABLE> Options to purchase 323,210 shares of common stock in the three and nine months ended March 31, 2001 were not included in the computation of diluted EPS because the impact would have been anti-dilutive. These options were still outstanding at the end of the period. -8-
9 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5.) Acquisition of Business On July 27, 2000, Napco Security Systems, Inc. (the "Company") through a subsidiary, pursuant to an Asset Purchase Agreement dated July 2000 with Continental Instruments LLC ("Continental") of Edgewood, New York, acquired substantially all of the assets of Continental for consideration consisting of cash and deferred payments as described in the Asset Purchase Agreement as previously filed on Amendment No. 1 to Form 8-K. The Continental business involves the manufacturing and distribution of access control and security management systems. The Company plans to continue to use the equipment and other physical property acquired in the Company's access control business. The acquisition was financed by an $8,250,000 loan from the Company's primary lender, to be repaid over 60 equal monthly installments. The loan is secured by a mortgage, guarantees and other collateral. Approximately $7,800,000, which represents the excess of the purchase price over the cost of assets acquired, is being amortized on a straight-line basis over an estimated useful life of 20 years. Summarized below are the unaudited pro forma results of operations as though this acquisition had occurred at the beginning of fiscal 2000. Pro forma adjustments have been made for (1) excess purchase price over net assets acquired and related amortization expense, (2) initial $8,250,000 cash borrowings under a term loan, (3) cash used as initial consideration in the purchase transaction, (4) deferred financing costs associated with the term loan and related amortization, (5) additional salary expense for employees not previously included in salary expense and (6) additional interest expense for term loan. <TABLE> <CAPTION> Nine months ended Nine months ended March 31, 2001 March 31, 2000 ---------------- ---------------- (in thousands, except (in thousands,)except per share data) per share data) <S> <C> <C> Pro forma: Net sales $ 37,590 $ 40,826 Net income (loss) $ (569) $ 526 Net income (loss) per share: Basic $ (0.16) $ 0.15 Diluted $ (0.16) $ 0.15 </TABLE> -9-
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, 2001 decreased by 11% to $12,478,000 as compared to $14,085,000 for the same period a year ago. Sales for the nine months ended March 31, 2001 increased by 2% to $37,311,000 from $36,748,000 for the same period a year ago. For the nine months ended March 31, 2001, net sales increased primarily resulting from the Continental acquisition as partially offset by a change in ordering patterns of one of the Company's major customers during the third quarter of fiscal 2001. This change was the primary reason for the decrease in net sales for the three months ended March 31, 2001 and was partially offset by the increased revenues resulting from the Continental acquisition. During the third quarter of fiscal 2001the aforementioned major customer altered its ordering pattern in order to streamline its number of days supply onhand of the Company's products. The Company believes that this reduction in the number of days of inventory is due, in part, to streamlining efforts by the customer as a result of the recent acquisition of the customer's parent company by another company. The Company's gross margin for the three months ended March 31, 2001 decreased by $557,000 to $3,049,000 or 24.4% of sales as compared to $3,606,000 or 25.6% of sales for the same period a year ago. Gross margin for the nine months ended March 31, 2001 increased by $776,000 to $10,016,000 or 26.8% of sales from $9,240,000 or 25.1% of sales for the same period a year ago. The decrease in gross margin for the three months ended March 31, 2001 was due primarily to the lower sales volume as discussed above, which resulted in certain overhead costs being applied at a higher rate than the previous year. The increase in gross margin for the nine months ended March 31, 2001 resulted primarily from a more favorable product mix, specifically, increases in sales of the Company's locking hardware and access control product lines. Selling, general and administrative expenses for the three months ended March 31, 2001 increased by $591,000 to $3,201,000 as compared to $2,610,000 a year ago. For the nine months ended March 31, 2001 selling, general and administrative expenses increased by $1,433,000 to $9,303,000 from $7,870,000 for the same period a year ago. The increases in the three and nine month figures are due to the recently acquired Continental operation as partially offset by a slight reduction in the Company's non-Continental related expenses. Interest and other expense for the three months ended March 31, 2001 increased by $94,000 to $446,000 from $352,000 for the same period a year ago. For the nine months ended March 31, 2001 interest and other expenses increased by $168,000 to $1,204,000 from $1,036,000 for the same period a year ago. These changes resulted primarily from the increase in interest expense due to the financing used for the Continental acquisition, a partially offsetting decrease in interest expense resulting from the continued reduction of the outstanding principal on the Company's non-Continental related debt and an increase in other income as a result of an insurance settlement during the second quarter of fiscal 2001. The Company had a zero provision for income taxes for the three and nine months ended March 31, 2001 as compared to a provision of $127,000 and $68,000 for the three and nine months ended March 31, 2000, respectively. These changes resulted primarily from the adjustments made in fiscal 2000 relating to changes in certain of the Company's deferred tax items. Net income decreased by $1,115,000 to a net loss of $598,000 or ($0.17) per share for the three months ended March 31, 2001 as compared to net income of $517,000 or ($0.15) per share for the same period a year ago. For the nine months ended March 31, 2001 net income decreased by $757,000 to a net loss of $491,000 or $0.14 per share from net income of $266,000 or $0.08 per share for the same period a year ago. These changes are due primarily to the items discussed above. Liquidity and Capital Resources During the nine months ended March 31, 2001 the Company utilized most 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 5 to the financial statements). Accounts Receivable at March 31, 2001 decreased $5,997,000 to $12,030,000 as compared to $18,027,000 at June 30, 2000. This decrease is primarily the result of the higher sales volume during the quarter ended June 30, 2000 as compared to the quarter ended March 31, 2001 as partially offset by the Continental acquisition. Inventory at March 31, 2001 increased by $6,541,000 to $26,019,000 as compared to $19,478,000 at June 30, 2000. This increase was primarily the result of the Company increasing production of certain of its existing products in preparation for the rollout of several new products during the fiscal year as well as in anticipation of the historical increase of sales during the fiscal year. The Company's inventory levels also increased as a result of the purchase of Continental as well as the reduction in purchases by one of the Company's customers during the quarter ended March 31, 2001. -10-
11 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) In May of 1998 the Company repurchased 889,576 shares of Napco common stock for $5.00 per share from one of its co-founders. $2.5 million was paid at closing with the balance of the purchase price to be paid over a four (4) year period. The portion of the purchase price paid at closing was financed by the Company's primary bank and is being repaid over a five (5) year period. In November 2000 the Company adopted a stock repurchase program authorizing the Company from time to time to repurchase up to 200,000 shares of its common stock. As of March 31, 2001, the Company had repurchased 70,533 shares under this program. 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, 2001 the Company had no material commitments for capital expenditures. Forward-looking Statements This quarterly report, other than historical financial information, contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended June 30, 2000. These include risks and uncertainties relating to competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. Quantitative and Qualitative Disclosures About Market Risk The Company's principal financial instrument is long-term debt (consisting of a revolving credit and term loan facility) that provides for interest at the prime rate. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit facility. A significant rise in the prime rate could materially adversely affect the Company's business, financial condition and results of operations. At March 31, 2001 an aggregate amount of approximately $13,500,000 was outstanding under this credit facility with a weighted average interest rate of 6.7%. 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 $168,750 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. -11-
12 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) On February 28, 2001, the Board of Directors of the Company expanded the Board of Directors to six (6) directors and elected Arnold Blumenthal and Donna A. Soloway to be directors. -12-
13 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 15, 2001 NAPCO SECURITY SYSTEMS, INC. (Registrant) By: /s/ Richard Soloway ---------------------------------- Richard Soloway Chairman of the Board of Directors, President and Secretary (Principal Executive Officer) By: /s/ Kevin S. Buchel ---------------------------------- Kevin S. Buchel Senior Vice President of Operations and Finance and Treasurer (Principal Financial and Accounting Officer) -13-
14 INDEX TO EXHIBITS Exhibits None -14-