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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, 2002
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, 2002, 3,436,696 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
$28,593,311.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement in connection with its 2002 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. [ ]
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "Forward-Looking Statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements include, without limitation, our expectations regarding sales,
earnings or other future financial performance and liquidity, product
introductions, entry into new geographic regions, information systems
initiatives, new methods of sale and future operations or operating results.
Although we believe that our expectations are based on reasonable assumptions
within the bounds of our knowledge of our business and operations, we cannot
assure that actual results will not differ materially from our expectations.
Factors that could cause actual results to differ from expectations are
described herein; in particular, see "Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Information".
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.
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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 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.
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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, 2002, 2001, and 2000, the
Company expended approximately $4,290,000, $4,220,000 and $4,234,000,
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 2002, 2001, and 2000
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, 2002, the Company had approximately 900 full-time
employees.
Marketing and Major Customers
The Company's staff of 52 sales and marketing support employees located
at the Company's Amityville and United Kingdom offices 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, 2002. 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 and European 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 17%, 18%, and 27% of the Company's total sales for the fiscal
years ended June 30, 2002, 2001, and 2000, respectively (see Note 3 to
Consolidated Financial Statements). The loss of this customer could have a
material adverse effect on the Company's business. The Company had two
customers (customer A and B) with accounts receivable balances that aggregated
43% and 44% of the Company's accounts receivable at June 30, 2002 and 2001
respectively.
4
Competition
The security alarm products industry is highly competitive. The
Company's primary competitors are comprised of approximately 20 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, its 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.
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 $1,055,000 existed as of June 30,
2002. This compared to a sales backlog of approximately $851,000 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
5
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.
Financial Information Relating to Foreign
and Domestic Operations and Export Sales
---------------------------------------------
2002 2001 2000
------- ------- -------
(in thousands)
Sales to unaffiliated
customers:
United States $55,836 $54,771 $53,946
Foreign -- -- --
Identifiable assets:
United States $40,071 $38,282 $32,584
Foreign(1) 19,797 25,395 22,945
Export sales:
United States(2) $ 9,184 $ 9,952 $10,143
(1) Foreign identifiable assets consists primarily of inventories and fixed
assets located at the Company's principal manufacturing facility in the
Dominican Republic.
(2) Export sales from the United States in fiscal year 2002 included sales of
approximately $6,122,000, $680,000, $1,394,000 and $988,000 to Europe, North
America, South America and other areas, respectively. 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.
6
ITEM 2. PROPERTIES.
The Company owns 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, 2002, a majority of the Company's products were
manufactured at this facility, 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.
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, except:
On or about August 27, 2001, a five-count Verified Complaint was filed
against NAPCO Security Group and Alarm Lock Systems, Inc. by Jose Ramirez and
Glenda Ramirez in the Supreme Court of State of New York, County of the Bronx.
The Verified Complaint seemingly seeks fifteen million dollars ($15,000,000) in
damages on behalf of Mr. Ramirez based on theories including strict liability in
tort, negligence, breach of warranty, failure to warn, etc. The Verified
Complaint also seeks damages in the amount of two million dollars ($2,000,000)
on behalf of Ms. Ramirez based on an allegation that she has been, and forever
will be, "deprived of the society, services, companionship consortium and
support of" Mr. Ramirez based on the personal injuries he suffered in a fire
which purportedly occurred on November 5, 1999. This case was consolidated with
the related case concerning the same incident, captioned Jose Ramirez and Glenda
Ramirez v. Mark T. Miller, Chelsea Gardens Owners Corp., Eichner Rudd Management
Associates, Ltd., Napco Security Group and Alarm Lock Systems, Inc., asserting
the same claims against the Company. The action is being defended by NAPCO's
insurance company on behalf of NAPCO. The Alarm Lock product in
7
question has been tested and still functions correctly, and the Company believes
that action is without merit. NAPCO plans to have this action vigorously
defended.
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 2002
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
Common Stock
- ------------
High $5.95 $6.91 $5.99 $7.22
Low $4.75 $5.00 $5.16 $5.62
8
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
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of September
20, 2002 was 180 (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. Any dividends must be authorized by the
Company's primary bank.
9
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 FS-1 of this report.
Year Ended or at June 30
-----------------------------------------------------------------------
(In thousands, except per share data)
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Statement of Earnings Data:
Net Sales $ 55,836 $ 54,771 $ 53,946 $ 50,875 $ 50,636
Gross Profit 14,717 14,317 13,198 11,777 11,420
Income from Operations 2,817 1,859 3,122 1,911 2,496
Net Income 1,341 251 2,010 2,493 2,038
Cash Flow Data:
Net cash flows provided by (used in) operating activities $ 7,091 $ 1,326 $ 2,822 $ 2,926 $ (107)
Net cash flows used in investing activities (709) (8,283) (1,221) (1,050) (585)
Net cash flows (used in) provided by financing activities (5,919) 5,610 (1,447) (1,635) 1,675
Other Data:
Earnings before interest, taxes, depreciation an
amortization (EBITDA) (1) $ 4,297 $ 4,074 $ 4,676 $ 3,295 $ 3,932
Per Share Data:
Net earnings per common share:
Basic $ .40 $ .07 $ .57 $ .71 $ .48
Diluted $ .38 $ .07 $ .57 $ .71 $ .48
Weighted average common shares outstanding:
Basic 3,342,000 3,464,000 3,495,000 3,493,000 4,263,000
Diluted 3,492,000 3,527,000 3,513,000 3,512,000 4,285,000
Cash Dividends declared per common share (2) $ .00 $ .00 $ .00 $ .00 $ .00
10
Year Ended or at June 30
-----------------------------------------------------------------------
(In thousands, except per share data)
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital $30,510 $33,232 $35,280 $34,920 $33,942
Total assets 59,868 63,677 55,529 55,787 58,563
Long-term debt 16,588 21,567 16,183 17,241 18,644
Stockholders' equity 34,294 32,944 33,359 31,328 28,833
Stockholders' equity per outstanding share 10.14 9.79 9.53 8.98 8.26
(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
United States 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.
Any dividends must be authorized by the Company's primary bank.
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, 2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net Sales $ 10,083 $ 13,308 $ 13,321 $ 19,124
Gross Profit 2,756 3,321 3,460 5,180
Income (Loss) from Operations (187) 549 547 1,908
Net Income (Loss) (596) 124 207 1,606
Net Income (Loss) Per Share
Basic (.17) .04 .06 .47
Diluted (.17) .04 .06 .45
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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 3,508 3,744 2,966 4,099
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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgements can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; goodwill and other
intangible assets; and income taxes.
REVENUE RECOGNITION
Generally, revenues from merchandise sales are recorded at the time the
product is shipped to the customer. We report our sales levels on a net sales
basis, which is computed by
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deducting from gross sales the amount of actual returns received and an amount
established for anticipated returns.
Our sales return accrual is a subjective critical estimate that has a
direct impact on reported net sales. This accrual is calculated based on a
history of gross sales and actual sales returns, as well as management's
estimate of anticipated returns. As a percentage of gross sales, sales returns
were 5.1%, 6.0% and 5.6% in fiscal 2002, 2001 and 2000, respectively.
CONCENTRATION OF CREDIT RISK
An entity is more vulnerable to concentrations of credit risk if it is
exposed to risk of loss greater than it would have had it mitigated its risk
through diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
We have one major customer that accounted for approximately $9,592,000,
or 17%, of our consolidated net sales in fiscal 2002 and $3,969,000, or 22%, of
our accounts receivable at June 30, 2002. This customer sells products primarily
within North America. Although management believes that this customer is sound
and creditworthy, a severe adverse impact on their business operations could
have a corresponding material adverse effect on our net sales, cash flows,
and/or financial condition. A second major customer accounted for approximately
$3,858,000, or 21% of our accounts receivable at June 30, 2002.
In the ordinary course of business, we have established an allowance
for doubtful accounts and customer deductions in the amount of $393,000 and
$700,000 as of June 30, 2002 and 2001, respectively. Our allowance for doubtful
accounts is a subjective critical estimate that has a direct impact on reported
net earnings. This reserve is based upon the evaluation of accounts receivable
agings, specific exposures and historical trends.
INVENTORY
We state our inventory at the lower of cost or fair market value, with
cost being determined on the first-in, first-out (FIFO) method. We believe FIFO
most closely matches the flow of our products from manufacture through sale. The
reported net value of our inventory includes finished saleable products,
work-in-process and raw materials that will be sold or used in future periods.
Inventory cost includes raw materials, direct labor and overhead.
We also record an inventory obsolescence reserve, which represents the
difference between the cost of the inventory and its estimated market value,
based on various product sales projections. This reserve is calculated using an
estimated obsolescence percentage applied to the
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inventory based on age, historical trends and requirements to support forecasted
sales. In addition, and as necessary, we may establish specific reserves for
known or anticipated events.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of purchased
businesses over the value of their underlying net assets. Goodwill is not
amortized. Other intangible assets are not material.
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, 2002; however, early
application is permitted for entities with fiscal years beginning after March
15, 2001. The Company 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 are no longer being
amortized. This resulted in the exclusion of approximately $503,000 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.
On an annual basis, we test goodwill and other intangible assets for
impairment. To determine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact the results of the
testing. We have the ability to influence the outcome and ultimate results based
on the assumptions and estimates we choose. To mitigate undue influence, we use
industry accepted valuation models and set criteria that are reviewed and
approved by various levels of management. Additionally, we evaluated our
recorded goodwill with the assistance of a third-party valuation firm.
INCOME TAXES
We have accounted for, and currently account for, income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." This Statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting of income
taxes.
As of June 30, 2002, we have net long-term deferred tax assets of
$493,000. These net deferred tax assets assume sufficient future taxable
earnings for their realization, as well as the continued application of current
tax rates in the respective jurisdictions. Included in net deferred tax assets
is a valuation allowance of $3,748,000 for deferred tax assets, which relates to
tax loss carryforwards not utilized to date, where management believes it is
more likely than not that the deferred tax assets will not be realized in the
relevant jurisdiction. Based on our assessments, no additional valuation
allowance is required. If we determine that a deferred tax asset will not be
realizable or that a previously reserved deferred tax asset will become
realizable, an adjustment to the deferred tax asset will result in a reduction
of, or an increase to, earnings at that time.
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating
activities during fiscal 2002 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
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$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, 2002, the Company's unused sources of funds consisted
principally of $1,500,000 in cash and approximately $4,500,000 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 at least the first quarter of fiscal 2004.
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 or refinanced 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 agreement. During fiscal 2002, at certain dates the Company was
not in compliance with certain covenants, but received waivers and amendments
from its bank. As of June 30, 2002, the Company was in compliance with all of
these financial covenants.
In addition, a subsidiary of the Company maintained a $4,500,000 line
of credit with another bank, which expired and was fully repaid as of June 30,
2002 (see Note 7 to Consolidated Financial Statements).
In May of 1998 the Company repurchased 889,576 shares of Napco common
stock for
15
$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. As
amended, this program authorizes the Company to repurchase up to 205,000 shares
of its common stock. As of June 30, 2002 the Company had repurchased 202,605
shares under this program.
The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:
2002 2001 2000
---- ---- ----
Current Ratio 4.6 to 1 4.7 to 1 7.2 to 1
Sales to Receivables 3.0 to 1 3.2 to 1 3.0 to 1
Total Debt to Equity .6 to 1 .8 to 1 .5 to 1
As of June 30, 2002, 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. Costs in excess of net assets acquired of
approximately $7,768,000 have been allocated to goodwill.
16
Working Capital. Working capital decreased by $2,722,000 to $30,510,000
at June 30, 2002 from $33,232,000 at June 30, 2001. The decrease in working
capital was primarily the result of the reduction in inventory and in the
current portion of long-term debt as of June 30, 2002 as compared to June 30,
2001. These reductions resulted primarily from Company's improved management of
its inventory and its continued repayment of its long-term debt, respectively.
In addition, the Company used $243,000 of working capital in repurchasing its
common stock under the repurchase plan discussed above.
Accounts Receivable. Accounts receivable increased by $1,373,000 to
$18,313,000 at June 30, 2002 from $16,940,000 at June 30, 2001. This increase
resulted primarily from the timing of payments from some of the Company's
customers and the increase in 4th quarter sales in fiscal 2002 as compared to
the same period in fiscal 2001.
Inventory. Inventory decreased by $5,303,000 to $17,931,000 at June 30,
2002 as compared to $23,234,000 at June 30, 2001. The decrease in inventory
levels was primarily the result of the Company's improvement in production and
delivery scheduling.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses remained relatively constant at $4,299,000 as of June 30, 2002 as
compared to $4,244,000 at June 30, 2001.
Fiscal 2002 Compared to Fiscal 2001
Net Sales. Net sales in fiscal 2002 increased by 2% to $55,836,000 from
$54,771,000 in fiscal 2001. The Company's sales growth was due primarily to
increased sales in the Company's Continental access control product line, which
was acquired in July 2000.
Gross Profit. The Company's gross profit increased $400,000 to
$14,717,000 or 26.4% of net sales in fiscal 2002 as compared to $14,317,000 or
26.1% of net sales in fiscal 2001. The increase in gross profit in both absolute
dollars and as a percentage of net sales was due primarily to the increase in
sales of the Continental access control products as well the positive shift in
product mix due to the higher margins associated with, in general, the
Continental product lines. Gross profit was also positively impacted by cost
reductions of certain of the Company's raw material costs.
Expenses. Selling, general and administrative expenses decreased by 5%
to $11,900,000 in fiscal 2002 from $12,458,000 in fiscal 2001. This decrease was
due primarily to the elimination of approximately $503,000 of amortization
expense relating to Goodwill as described above.
Other Expenses. Other expenses decreased $175,000 to $1,458,000 in
fiscal 2002 as
17
compared to $1,633,000 in fiscal 2001. This decrease was due primarily to the
decrease in interest expense resulting from the Company's continued reduction of
the outstanding principal on its outstanding debt. Other income in fiscal 2001
included an insurance settlement of approximately $175,000.
Income Taxes. Benefit for income taxes changed by $43,000 to a
provision of $18,000 in fiscal 2002 as compared to a benefit of $25,000 in
fiscal 2001. The current year income tax provision of $18,000 relates primarily
to the Company's foreign operations in the United Kingdom. The prior year income
tax benefit of $25,000 related primarily to revisions to the Company's
estimated valuation allowance on deferred income taxes.
EBITDA. EBITDA, as defined on page 11 above, increased by $223,000 to
$4,297,000 or 7.7% of net sales in fiscal 2002 as compared with $4,074,000 or
7.4% of net sales in fiscal 2001. The increase in EBITDA was primarily
attributable to the increase in sales and gross profit as discussed above.
Effects of Inflation and Foreign Currency. During the three-year period
ended June 30, 2002, inflation, changing prices and fluctuations in foreign
currency rates did not have a significant impact on the Company's operations.
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
18
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 temporary reduction in purchases of the
Company's products by a major customer during the last four months of fiscal
2001.
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.
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 of approximately $175,000 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. The fiscal 2000 tax
benefit relates primarily to the final evaluation of the Company's resolution of
a tax case.
EBITDA. EBITDA, as defined on page 11 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.
19
FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral
forward-looking statements, including statements contained in this and other
filings with the Securities and Exchange Commission, in our press releases and
in our reports to stockholders. The words and phrases "will likely result,"
"expect," "believe," "planned," "will," "will continue," "is anticipated,"
"estimates," "projects" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, our
expectations regarding sales, earnings or other future financial performance and
liquidity, product introductions, entry into new geographic regions, information
systems initiatives, new methods of sale and future operations or operating
results. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
actual results may differ materially from our expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
(i) increased competitive activity from companies in the industry,
some of which have greater resources than we do;
(ii) our ability to develop, produce and market new products on
which future operating results may depend;
(iii) consolidations, restructurings, bankruptcies and
reorganizations in the industry causing a decrease in the
number of customers sell our products, an increase in the
ownership concentration within the industry, ownership of
customers by our competitors and ownership of competitors by
our customers;
(iv) shifts in the preferences of installers as to where and how
they order the types of products we sell;
(v) social, political and economic risks to our foreign or
domestic manufacturing, distribution and retail operations,
including changes in foreign investment and trade policies and
regulations of the host countries and of the United States;
(vi) changes in the laws, regulations and policies, including
changes in accounting standards, tax and trade rules, and
legal or regulatory proceedings, that affect, or will affect,
our business;
(vii) foreign currency fluctuations affecting our results of
operations and the value of our foreign assets, the relative
prices at which we and our foreign competitors sell products
in the same markets and our operating and manufacturing costs
outside of the United States;
20
(viii) changes in global or local economic conditions that could
affect consumer purchasing, the financial strength of our
customers, the cost and availability of capital, which we may
need for new equipment, facilities or acquisitions, and the
assumptions underlying our critical accounting estimates;
(ix) shipment delays, depletion of inventory and increased
production costs resulting from disruptions of operations at
our Amityville or Dominican Republic facilities;
(x) changes in product mix to products which are less profitable;
(xi) our ability to capitalize on opportunities for improved
efficiency, such as globalization, and to integrate acquired
businesses and realize value therefrom; and
(xii) consequences attributable to the events that took place in New
York City and Washington, D.C. on September 11, 2001,
including further attacks, retaliation and the threat of
further attacks or retaliation.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
21
Item 7A: 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 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, 2002, an aggregate
principal amount of approximately $13,000,000 was outstanding under the
Company's credit facility and term loan with a weighted average interest rate of
approximately 4%. 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% the Company would pay or save,
respectively, an additional $130,000 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 instrument expires on October 30,
2002. This transaction meets the requirements for cash flow hedge accounting.
Accordingly, any gain or loss associated with the difference between interest
rates is included as a component of interest expense. The fair value of this
instrument is not material. 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 have a material adverse affect on
the Company's business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002 AND 2001
Page
----
Independent Auditors' Report.............................................. FS-1
Report of Independent Public Accountants.................................. FS-2
22
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 and 2001.................. FS-3
Consolidated Statements of Income for the Fiscal Years Ended June 30,
2002, 2001 and 2000..................................................... FS-4
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended June 30, 2002, 2001 and 2000................................ FS-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2002, 2001 and 2000............................................ FS-6
Notes to Consolidated Financial Statements, June 30, 2002, 2001 and 2000.. FS-7
Schedules:
I. Condensed Financial Information on Parent Company.................... FS-24
II. Valuation and Qualifying Accounts.................................... FS-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On July 9, 2002 the Board of Directors of Napco Security Systems, Inc.
(the "Company") dismissed Arthur Andersen LLP ("Andersen") as its independent
public accountants and appointed KPMG, LLP ("KPMG") to serve as its independent
public accountants. These actions were taken at the recommendation of the
Company's Audit Committee. Andersen had served as the Company's independent
public accountants since 1993. None of Andersen's reports on the Company's
consolidated financial statements for the fiscal years ended June 30, 2001 and
2000 contained an adverse opinion or disclaimer of opinion, nor was any such
report qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal years ended June 30, 2001, 2000 and 1999 and
through the date hereof, there were no disagreements between
23
the Company and Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to Andersen's satisfaction, would have caused them to make reference to
the subject matter in connection with their report on the Company's consolidated
financial statements for such years; and there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K. During the fiscal years ended
June 30, 2001 and 2000 and through the date hereof, the Company did not consult
KPMG with respect to either (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or (ii) any matter that was either the subject of a disagreement,
within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any "reportable
event," as that term is defined in Item 304(a)(1)(v) of Regulation S-K. We
provided Andersen with a copy of our report on Form 8-K on our change in
independent accountants and requested that Andersen furnish us with a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the statements made by us in this report, and if not, stating the respects
in which it does not agree. Andersen has indicated to the Company that Andersen
no longer issues such letters.
PART III
The information required by Item 10 (Directors and Executive Officers
of the Registrant), Item 11 (Executive Compensation), Item 12 (Security
Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain
Relationships and Related Transactions) of Form 10-K will be included in our
Proxy Statement for the 2002 Annual Meeting of Stockholders, which will be filed
within 120 days after the close of the fiscal year ended June 30, 2002, and such
information is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the last
date that they were evaluated by our Chief Executive Officer and Chief Financial
Officer.
PART IV
ITEM 15. 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:
24
Page
----
Independent Auditors' Report.................................... FS-1
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................................................... FS-2
Consolidated Balance Sheets as of June 30, 2002 and 2001........ FS-3
Consolidated Statements of Income for the Years Ended June 30,
2002, 2001 and 2000............................................. FS-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2002, 2001 and 2000.............................. FS-5
Consolidated Statements of Cash Flows for the Years Ended June 30,
2002, 2001 and 2000............................................. FS-6
Notes to Consolidated Financial Statements, June 30, 2002, 2001
and 2000........................................................ FS-7
(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.......... FS-24
II: Valuation and Qualifying Accounts.......................... FS-26
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.
25
(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, 2001
Ex-10.A Amended and Restated 1992 Incentive Exhibit 10.A to
Stock Option Plan Report on Form 10-K
for fiscal year ended
June 30, 2001
Ex-10.B 2000 Non-Employee Stock Option Plan Exhibit 10.B to
Report on Form 10-K
for fiscal year ended
June 30, 2001
Ex-10.C Defined Contribution Pension Plan Exhibit 10d to Report
Basic Plan Document 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
26
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
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.
27
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.
Ex-10.P Employment Agreement with Richard Soloway Exhibit 10.Q to
Report in Form 10-Q
for period ended
March 31, 2001.
Ex-10.Q Employment Agreement with Jorge Hevia Exhibit 10.R to
Report in Form 10-Q
for period ended
March 31, 2001.
Ex-10.R Amendment No. 2 to the Loan and Security
Agreement with HSBC Bank dated as of June 30,
2001 Exhibit 10.S to
report on Form 10-K
for fiscal year ended
June 30, 2001
28
Ex-10.S Employment Agreement with Michael Carrieri Exhibit 10.U to
Report on Form 10-Q
For fiscal quarter
ended September 30,
2001
Ex-10.T Indemnification Agreement dated August 9, 2001 Exhibit 10.T to
Report on Form 10-K
For fiscal year ended
June 30, 2001
Ex-10.U Asset Purchase Agreement Exhibit 2.1 to
Report on Form 8-K
Filed July 27, 2002
Ex-10.V Amendment No. 4 to Loan and Security Agreement Exhibit 10.V to
Report on Form 8-K
Filed July 27, 2002
Ex-10.W Amendment No. 8 to Loan and Security Agreement Exhibit 10.W to
Report on Form 10-K
for fiscal year ended
June 30, 2001
Ex-10.X Note Modification Agreement Exhibit 10.W to
Report on Form 10-K
for fiscal year ended
June 30, 2001
Ex-12 Computation of ratios E-1
Ex-21 Subsidiaries of the Registrant E-2
Ex-23.1 Consent of Independent Auditors E-3
Ex-23.2 Notice regarding consent of Arthur Andersen LLP E-4
Ex-24.1 Power of Attorney E-5
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.
29
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, 2002, except that filed on July 10, 2002 relating to a change in
accountants. See Item 9 above.
30
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.
October 3, 2002
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 October 3, 2002
- ---------------------- Board of Directors
Richard Soloway
/s/ KEVIN S. BUCHEL
- ----------------------
Kevin S. Buchel Director October 3, 2002
/s/ RANDY B. BLAUSTEIN
- ----------------------
Randy B. Blaustein Director October 3, 2002
/s/ARNOLD BLUMENTHAL*
- ----------------------
Arnold Blumenthal Director October 3, 2002
/s/DONNA SOLOWAY
- ----------------------
Donna Soloway Director October 3, 2002
/s/ANDREW J. WILDER
- ----------------------
Andrew J. Wilder Director October 3, 2002
31
* By signing his name hereto, Richard Soloway signs this document in the
capacities indicated above and on behalf of the persons indicated above pursuant
to powers of attorney duly executed by such persons and filed herewith.
October 3, 2002
By /s/ RICHARD SOLOWAY
-----------------------------
Richard Soloway
(Attorney-in-Fact)
32
CERTIFICATIONS
I, RICHARD SOLOWAY, certify that:
1. I have reviewed this annual report on Form 10-K of Napco Security Systems,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: 10/3/02
/s/ Richard Soloway
- -----------------------
[Signature]
Chairman of the Board, President and Secretary
CERTIFICATIONS
I, KEVIN S. BUCHEL, certify that:
1. I have reviewed this annual report on Form 10-K of Napco Security Systems,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: 10/3/02
/s/ Kevin S. Buchel
- -----------------------
[Signature]
Senior Vice President of Operations and Finance
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Napco Security Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Napco Security
Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2002, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. In connection with our audit of the consolidated
financial statements, we also have audited the financial statement schedules as
listed in the accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audit. The
2001 and 2000 consolidated financial statements and financial statement
schedules of Napco Security Systems, Inc. as listed in the accompanying index
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements and financial
statement schedules, before the revision described in Note 1 to the financial
statements, in their report dated September 28, 2001.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 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, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related 2002 financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed above, the 2001 and 2000 consolidated financial statements of Napco
Security Systems, Inc. as listed in the accompanying index were audited by other
auditors who have ceased operations. As described in Note 1, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", which was adopted by the Company as of July 1, 2001.
In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 financial statements of the Company other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 and 2000 consolidated financial statements taken
as a whole.
KPMG LLP
Melville, New York
September 30, 2002
FS-1
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
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with our filing on Form 10-K for the fiscal year ended June 30, 2001.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K. See Exhibit 23.2 for further discussion.
FS-2
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and 2001
(In thousands, except share data)
2002 2001
-------- --------
ASSETS
Current assets:
Cash $ 1,500 $ 1,037
Accounts receivable, less reserve for doubtful accounts of
$393 and $700, respectively 18,313 16,940
Inventories 17,931 23,234
Prepaid expenses and other current assets 1,213 895
-------- --------
Total current assets 38,957 42,106
Property, plant, and equipment, net of accumulated depreciation
and amortization of $16,696 and $15,288, respectively 9,964 10,663
Goodwill, net 9,686 9,686
Deferred income taxes 1,032 785
Other assets 229 437
-------- --------
Total assets $ 59,868 $ 63,677
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,664 $ 3,533
Accounts payable 2,994 3,361
Accrued expenses 1,305 883
Accrued salaries and wages 1,388 1,042
Accrued income taxes 96 55
-------- --------
Total current liabilities 8,447 8,874
Long-term debt 16,588 21,567
Deferred income taxes 539 292
-------- --------
Total liabilities 25,574 30,733
-------- --------
Commitments and contingencies (note 11)
Stockholders' equity:
Common stock, par value $0.01 per share.
Authorized 21,000,000 shares;
issued 6,004,252 and 5,938,852 shares,
respectively; outstanding 3,383,196
and 3,366,596 shares, respectively 60 59
Additional paid-in capital 1,082 831
Retained earnings 38,569 37,228
Less: Treasury stock, at cost; 2,621,056 and 2,572,256 shares,
respectively (5,417) (5,174)
-------- --------
Total stockholders' equity 34,294 32,944
-------- --------
Total liabilities and stockholders' equity $ 59,868 $ 63,677
======== ========
See accompanying notes to consolidated financial statements.
2
FS-3
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2002, 2001, and 2000
(In thousands, except share data and per share data)
2002 2001 2000
----------- ----------- -----------
Net sales $ 55,836 $ 54,771 $ 53,946
Cost of sales 41,119 40,454 40,748
----------- ----------- -----------
Gross profit 14,717 14,317 13,198
Selling, general, and administrative expenses 11,900 12,458 10,076
----------- ----------- -----------
Operating income 2,817 1,859 3,122
----------- ----------- -----------
Other income (expense):
Interest expense, net (1,409) (1,816) (1,375)
Other, net (49) 183 --
----------- ----------- -----------
(1,458) (1,633) (1,375)
----------- ----------- -----------
Income before for income taxes 1,359 226 1,747
Provision (Benefit) for income taxes 18 (25) (263)
----------- ----------- -----------
Net income $ 1,341 $ 251 $ 2,010
=========== =========== ===========
Earnings per share (note 1):
Basic $ 0.40 $ 0.07 $ 0.57
Diluted 0.38 0.07 0.57
Weighted average number of shares outstanding (note 1):
Basic 3,342,000 3,464,000 3,495,000
Diluted 3,492,000 3,527,000 3,513,000
See accompanying notes to consolidated financial statements.
3
FS-4
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2002, 2001, and 2000
(In thousands, except share data)
Common stock
------------------- Additional
Number of paid-in Retained Treasury
shares Amount capital earnings stock Total
--------- ------ ---------- -------- -------- --------
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
Purchase of treasury shares -- -- -- -- (243) (243)
Exercise of employee stock options 65,400 1 251 -- -- 252
Net income -- -- -- 1,341 -- 1,341
--------- ---- ------ -------- -------- -------
Balance at June 30, 2002 6,004,252 $ 60 $1,082 $ 38,569 $ (5,417) $34,294
========= ==== ====== ======== ======== =======
See accompanying notes to consolidated financial statements.
4
FS-5
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
------- -------- -------
Cash flows from operating activities:
Net income $ 1,341 $ 251 $ 2,010
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,529 2,032 1,554
Provision for doubtful accounts 45 78 (265)
Deferred income taxes -- (69) (150)
Changes in operating assets and liabilities, net of affect
from acquisition of business resulting from increases
and decreases in:
Accounts receivable (1,418) 1,702 (1,316)
Inventories 5,303 (3,159) 2,017
Prepaid expenses and other current assets (318) 217 (277)
Other assets 167 (77) (79)
Accounts payable, accrued expenses, accrued
salaries and wages, and accrued income taxes 442 351 (672)
------- -------- -------
Net cash provided by operating activities 7,091 1,326 2,822
------- -------- -------
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (7,248) --
Purchases of property, plant, and equipment (709) (1,035) (1,221)
------- -------- -------
Net cash used in investing activities (709) (8,283) (1,221)
------- -------- -------
Cash flows from financing activities:
Principal payments on long-term debt (6,128) (4,774) (1,468)
Proceeds from long-term debt 200 11,050 --
Purchase of treasury stock (243) (725) --
Proceeds from exercise of employee stock options 252 59 21
------- -------- -------
Net cash (used in) provided by financing activities (5,919) 5,610 (1,447)
------- -------- -------
Net increase (decrease) in cash 463 (1,347) 154
Cash, beginning of year 1,037 2,384 2,230
------- -------- -------
Cash, end of year $ 1,500 $ 1,037 $ 2,384
======= ======== =======
Supplemental cash flow information:
Interest paid, net $ 1,543 $ 2,121 $ 1,123
======= ======== =======
Income taxes paid $ -- $ 21 $ 101
======= ======== =======
See accompanying notes to consolidated financial statements.
5
FS-6
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(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.
(a) 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.
(b) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation.
(c) 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. Critical estimates include
management's judgments associated with revenue recognition,
concentration of credit risk, inventories, goodwill and other
intangible assets and income taxes. Actual results could differ from
those estimates.
(d) INVENTORIES
Inventories are valued at the lower of cost (using the first-in,
first-out method) or market.
(e) 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.
(f) GOODWILL
Prior to the adoption of a new accounting standard, goodwill was 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
(Continued)
6
FS-7
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
remaining life of the goodwill in measuring whether it is recoverable.
In the years ended June 30, 2002, 2001, and 2000, there were no
adjustments to the carrying value of goodwill, other than
straight-line amortization prior to June 30, 2001. Accumulated
amortization of goodwill was approximately $1,824,000 at June 30, 2002
and 2001.
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 resulted in
the exclusion of approximately $503,000 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 has performed the impairment
evaluation required by this new standard and determined that the
goodwill is not impaired.
The following table presents adjusted net earnings and earnings per
share data restated to include the retroactive impact of the adoption
of SFAS No. 142.
Year Ended June 30,
-----------------------------
(In thousands, except per share data) 2001 2000
--------- ---------
Reported Net Earnings Attributable to Common Stock 251 2,010
Add back: Goodwill amortization, net of tax 467 107
--------- ---------
Pro Forma Net Earnings 718 2,117
--------- ---------
Basic net earnings per common share:
Reported Net Earnings Attributable to Common Stock
Before SFAS No. 142 0.07 0.57
SFAS No. 142 effect, net of tax 0.14 0.03
--------- ---------
Pro forma Net Earnings Attributable to Common Stock 0.21 0.60
--------- ---------
Diluted net earnings per common share:
Reported Net Earnings Attributable to Common Stock
Before SFAS No. 142 0.07 0.57
SFAS No. 142 effect, net of tax 0.13 0.03
--------- ---------
Pro forma Net Earnings attributable to Common Stock 0.20 0.60
--------- ---------
Weighted average common shares outstanding:
Basic 3,443,000 3,495,000
Diluted 3,527,000 3,513,000
(Continued)
7
FS-8
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(g) 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) persuasive 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 being computed by
deducting from gross sales the amount of actual sales returns and the
amount of reserves established for anticipated sales returns.
(h) RESEARCH AND DEVELOPMENT COSTS
Research and development costs incurred by the Company are charged to
expense in the year incurred. Company-sponsored research and
development costs of $4,239,000, $4,220,000, and $4,234,000 were
charged to expense for the fiscal years ended June 30, 2002, 2001, and
2000, respectively.
(i) 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 nontaxable.
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
will 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.
(j) 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
(Continued)
8
FS-9
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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
-------------------------- ------------------------- -----------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
------ ---- ------ ----- ----- ----- -------- -------- --------
Basic EPS:
Net income $1,341 $251 $2,010 3,342 3,464 3,495 $ 0.40 $ 0.07 $ 0.57
Effect of Dilutive
Securities:
Employee stock
options -- -- -- 150 63 18 (.02) -- --
------ ---- ------ ----- ----- ----- -------- -------- --------
Diluted EPS:
Net income $1,341 $251 $2,010 3,492 3,527 3,513 $ 0.38 $ 0.07 $ 0.57
====== ==== ====== ===== ===== ===== ======== ======== ========
Options to purchase 25,000, 149,500, and 90,240 shares of common stock
for the three fiscal years ended June 30, 2002, 2001, and 2000,
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.
(k) 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).
(l) 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 ended June
30, 2002.
(m) 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. For the fiscal years ended
June 30, 2002, 2001, and 2000, the Company's operations did not give
rise to material 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.
(n) 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
(Continued)
9
FS-10
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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.
(o) 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,
2002 and 2001, management of the Company believes the carrying value of
all financial instruments approximated fair value.
(p) 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 required 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.
In fiscal 2001, the Company retroactively restated prior year
financial information for fiscal 2000 to give effect to this new
statement.
(q) 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
(Continued)
10
FS-11
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 financial instrument expires in October 2002. 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 the difference between interest rates is
included as a component of interest expense. The fair value of this
financial instrument is not material. The Company does not hold or
enter into derivative financial instruments for trading or speculative
purposes.
(r) NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and reporting
for the impairment or disposal f long-lived assets. SFAS No. 144 will
be effective for financial statements of fiscal years beginning after
December 15, 2001. The Company will adopt this statement for the
fiscal year ending June 30, 2003 and does not anticipate that it will
have a material impact on the Company's consolidated financial
results.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities." This statement covers restructuring-type activities
beginning with plans initiated after December 31, 2002. Should the
Company enter into activities covered by this standard after that
date, the provisions of SFAS No. 146 would be applied. As a result of
this standard, there is no impact on the Company's consolidated
financial position or results of operations for the periods presented.
(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.
(Continued)
11
FS-12
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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 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
The Company had two customers (Customer A and B) with accounts receivable
balances that aggregated 43% and 44% of the Company's accounts receivable
at June 30, 2002 and 2001, respectively. The Company had one customer
(Customer A) that accounted for 17%, 18%, and 27% of the Company's net
sales in fiscal 2002, 2001, and 2000, 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
-----------------------
2002 2001
------- -------
(In thousands)
Component parts $ 9,551 $12,495
Work-in-process 3,308 3,538
Finished products 5,072 7,201
------- -------
$17,931 $23,234
======= =======
(Continued)
12
FS-13
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(5) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
JUNE 30 DEPRECIATION/
--------------------- AMORTIZATION-
2002 2001 ANNUAL RATES
-------- -------- ---------------------
(In thousands)
Land $ 904 $ 904 --
Building 8,911 8,911 3%
Molds and dies 4,197 3,867 20% to 33%
Furniture and fixtures 1,141 1,112 10% to 20%
Machinery and equipment 11,316 10,979 10% to 15%
Shorter of the lease
Leasehold improvements 191 178 term or life of asset
-------- -------
26,660 25,951
Less: accumulated depreciation and
amortization 16,696 15,288
-------- -------
$ 9,964 $10,663
======== =======
Depreciation and amortization expense on property, plant, and equipment
was approximately $1,408,000, $1,510,000, and $1,397,000 for the three
fiscal years ended June 30, 2002, 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.
13 (Continued)
FS-14
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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.
Provision (benefit) for income taxes consists of the following:
FOR THE FISCAL YEARS ENDED JUNE 30
----------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Taxes currently payable:
Federal $ -- $ -- $ --
State -- 21 1
Foreign 18 23 16
---- ---- ----
18 44 17
Deferred income tax (benefit) -- (69) (280)
---- ---- ----
Provision (benefit) for income taxes $ 18 $(25) $(263)
==== ==== ====
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:
FOR THE FISCAL YEARS ENDED JUNE 30
--------------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
% OF % OF % OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- -------- ------- -------- ------- --------
(In thousands, except percentages)
Tax at Federal statutory rate $ 462 34.0% $ 77 34.0% $ 594 34.0%
Increases (decreases) in
taxes resulting from:
State income taxes, net
of Federal income tax
benefit (167) (12.3) (202) (89.4) (155) (8.9)
Amortization of
nondeductible goodwill -- -- 36 15.9 36 2.1
Nontaxable foreign
source income (1,516) (111.6) (890) (393.8) (2,643) (151.3)
Valuation allowance -
domestic NOL 1,124 82.7 830 367.3 1,794 102.7
Other, net 115 8.5 124 54.9 111 6.4
------- ------- ------- ------- ------- -------
Provision (benefit) for
income taxes $ 18 1.3% $ (25) (11.1)% $ (263) (15.0)%
======= ======= ======= ======= ======= =======
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. As of June 30, 2002 and 2001,
approximately $20,750,000 and $20,461,000 in cumulative earnings of this
foreign subsidiary are included in consolidated retained earnings.
14 (Continued)
FS-15
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
Deferred tax assets and deferred tax liabilities at June 30, 2002 and
2001 are as follows (in thousands):
NET DEFERRED TAX ASSETS
DEFERRED TAX ASSETS DEFERRED TAX LIABILITIES (LIABILITIES)
------------------- ------------------------ -----------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Accounts receivable $ 74 166 -- -- 74 166
Inventories 275 428 -- -- 275 428
Accrued liabilities 131 366 -- -- 131 366
Net operating loss and
other carryforwards 4,168 2,453 -- -- 4,168 2,453
Other 18 (4) -- 18 (4)
Fixed assets and other
long-term assets -- -- 539 292 (539) (292)
------- ------- ------- ------- ------- -------
Total deferred taxes 4,666 3,409 539 292 4,127 3,117
Less: valuation allowance (3,634) (2,624) -- -- (3,634) (2,624)
------- ------- ------- ------- ------- -------
Net deferred taxes $ 1,032 785 539 292 493 493
======= ======= ======= ======= ======= =======
As a result of the Company's U.S. operations not generating U.S. taxable
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, 2002 and 2001. Accordingly, the
Company has reserved for a portion of deferred income taxes as of June
30, 2002 due to uncertainty regarding the generation of sufficient
taxable income in the United States to realize deferred taxes associated
with net operating loss carryforwards which expire through 2017. If the
Company determines that a deferred tax asset will not be realizable or
that a previously reserved deferred tax asset will become realizable, an
adjustment to the deferred tax asset will result in a reduction of, or
increase to, earnings at that time.
15 (Continued)
FS-16
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(7) LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30
-------------------
2002 2001
-------- --------
(In thousands)
Revolving credit and term loan facility (a) $ 13,013 15,313
Notes payable (b) 500 1,670
Term Loan (c) 5,225 6,875
Deferred acquisition costs, net (d) 514 1,242
-------- ------
19,252 25,100
Less: current portion 2,664 3,533
-------- ------
$ 16,588 21,567
======== ======
(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 or refinanced 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
agreement. During fiscal 2002, at certain dates the Company was
not in compliance with certain covenants, but received waivers and
amendments from its bank. As of June 30, 2002, the Company was in
compliance with all of these financial covenants.
(b) In connection with the stock purchase agreement described in note
8, 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 with 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 in 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 Instruments Systems, LLC. Under the
agreement, the loan is to be repaid in 60 equal monthly
installments of $137,500, plus interest at a LIBOR base rate, as
defined in the agreement. The agreement contains various
restrictions and covenants including, among others, restrictions
on payment of dividends, restrictions on borrowings,
16 (Continued)
FS-17
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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,
2002, the Company was in compliance with all of these financial
covenants.
The Company has entered into an interest rate swap agreement to
exchange floating rate for fixed rate interest payments
periodically over the life of this agreement. The interest rate
swap has been designated as a cash flow hedge and is effective as
of June 30, 2001 and 2002. The difference between interest paid
and received is included as a component of interest expense. At
June 30, 2002 there was an outstanding interest rate swap
contract totaling $5,225,000. 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, 2002
the interest rate on the debt was 3.84%, the contract expires in
October 2002 and the fair value of this instrument was not
material.
(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, which was made 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 was 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:
2003 $ 2,664
2004 1,650
2005 14,663
2006 275
---------
$ 19,252
=========
(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 grant and are exercisable in whole or in part at 20% per year
from the date of grant. At June 30, 2002, 365,980 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
17 (Continued)
FS-18
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
options on the grant date. The Company did not record any compensation
expense for options granted during the year ended June 30, 2002.
Had compensation cost for the 1992 Plan been determined based upon the
fair value at the grant dates consistent with SFAS No. 123, the Company's
pro forma net earnings and net earnings per common share would have been
as follows:
2002 2001 2000
-------- -------- --------
(In thousands, except per share data)
Net income:
As reported $ 1,341 $ 251 $ 2,010
Pro forma 965 (14) 1,790
Basic EPS:
As reported $ 0.40 $ 0.07 $ 0.57
Pro forma 0.29 (0.04) 0.51
Diluted EPS:
As reported $ 0.38 $ 0.07 $ 0.57
Pro forma 0.28 (0.04) 0.51
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
The following table reflects activity under the 1992 Plan for the fiscal
years ended:
JUNE 30
----------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of
year 579,350 $ 3.51 499,850 $ 3.33 438,100 $ 3.39
Granted 56,000 5.95 109,500 4.18 91,000 3.19
Exercised (67,900) 3.85 (19,500) 2.64 (8,750) 2.50
Forfeited (2,000) 3.88 (6,000) 3.79 (20,500) 4.29
Canceled/lapsed (6,750) 3.87 (4,500) 2.64 -- --
-------- ------ -------- ------ ------- ------
Outstanding at end of year 558,700 3.71 579,350 3.51 499,850 3.33
======== ====== ======== ======= ======== =======
Exercisable at end of year 365,980 3.49 312,610 3.47 222,040 3.37
Weighted average fair value ======== ====== ======= ======= ======= =======
of options granted $ 2.45 $ 1.76 $ 1.50
18 (Continued)
FS-19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
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:
2002 2001 2000
------- ------- -------
Risk-free interest rates 3.5% 6.06% 6.24%
Expected lives 5 years 5 years 5 years
Expected volatility 43% 42% 44%
Expected dividend yields 0% 0% 0%
The following table summarizes information about stock options
outstanding at June 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT JUNE CONTRACTUAL EXERCISE AT JUNE EXERCISE
RANGE OF EXERCISE PRICES 30, 2002 LIFE PRICE 30, 2002 PRICE
------------------------ ----------- ----------- -------- ----------- --------
$ 3.00 - 3.63 315,500 1.83 $ 3.07 233,600 $ 3.06
3.64 - 3.99 106,100 1.50 3.88 74,900 3.88
4.00 - 6.38 137,100 3.22 5.05 57,480 4.70
------- ---- ---- ------- ----
$ 3.00 - 6.38 558,700 2.11 $ 3.71 365,980 $ 3.49
======= ==== ==== ======= ====
In September 2000, the stockholders approved a 10 year extension of the
already existing 1990 nonemployee stock option plan (the 2000 Plan) to
encourage nonemployee directors and consultants of the Company to invest
in the Company's stock. The 2000 Plan provides for the granting of
nonqualified 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
nonemployee 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 and 2002, 40,000 options were granted to directors with a
weighted average exercise price of $4.13 and there were no options
exercised, cancelled, or forfeited. No compensation expense was recorded
for stock options granted to directors.
(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 noncompete 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, 2001 and 2002.
19 (Continued)
FS-20
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 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 $70,000, $63,000, and
$55,000 for each of the three fiscal years ended June 30, 2002,
respectively.
(11) COMMITMENTS AND CONTINGENCIES
(a) 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:
2003 $250,819
2004 96,030
2005 47,650
2006 2,800
Rent expense totaled approximately $591,000, $704,000 and $859,000
for the three fiscal years ended June 30, 2002, 2001, and 2000,
respectively.
(b) 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 principal production facility is
located.
(c) LETTERS OF CREDIT
At June 30, 2002, the Company was committed for approximately
$500,000 under open commercial letters of credit and steamship
guarantees.
(d) LITIGATION
In August 2001, the Company became a defendant in a product
related lawsuit, in which the plaintiff seeks damages of
approximately seventeen million ($17,000,000). This action is
being defended by the Company's insurance company on behalf of the
Company. Management believes that the action is without merit and
plans to have this action vigorously defended.
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.
Subsequent to June 30, 2002, the Company settled litigation, which
the Company had commenced as a plaintiff and realized a gain of
approximately $210,000, which will be recorded in the Company's
first quarter of fiscal 2003.
20 (Continued)
FS-21
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(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 (excluding
intercompany receivables and payables) related to the Company's foreign
subsidiaries were approximately $19,797,000 and $25,395,000 at June 30,
2002 and 2001, 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, 2002, 2001, and 2000:
2002 2001 2000
-------- -------- --------
(In thousands)
Sales to unaffiliated customers:
United States $ 55,836 54,771 53,946
Foreign -- -- --
-------- -------- --------
$ 55,836 54,771 53,946
======== ======== ========
Identifiable assets:
United States $ 40,071 38,282 32,584
Foreign (1) 19,797 25,395 22,945
Export sales:
Unites States (2) 9,184 9,952 10,143
(1) Foreign identifiable assets consist primarily of inventories and fixed
assets, which are located at the Company's principal manufacturing
facility in the Dominican Republic.
21 (Continued)
FS-22
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
(2) Export sales from the United States in fiscal year 2002 included sales of
approximately $6,122,000, $680,000, $1,394,000, and $988,000 to Europe,
North America, South America, and other areas, respectively. 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.
22
FS-23
SCHEDULE I
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Financial Information on Parent Company
Condensed Balance Sheets
June 30, 2002 and 2001
(In thousands)
2002 2001
----------- -----------
ASSETS
Cash $ 988 $ 124
Accounts receivable, net 12,294 10,682
Inventories 4,644 6,032
Prepaid expenses and other current assets 981 357
----------- -----------
Total current assets 18,907 17,195
Investment in subsidiaries, on equity basis 34,601 30,482
Property, plant, and equipment, net 4,397 4,641
Deferred income taxes 493 785
Other assets 124 309
----------- -----------
$ 58,522 $ 53,412
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 3,662 $ 4,865
Due to (from) subsidiaries 7,554 (554)
Long-term debt 13,013 15,866
Deferred income taxes -- 292
----------- -----------
Total liabilities 24,229 20,469
Stockholders' equity 34,293 32,943
----------- -----------
$ 58,522 $ 53,412
=========== ===========
See accompanying independent auditors' report.
23
FS-24
SCHEDULE I -- continued
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Condensed Financial Information on Parent Company
Condensed Statements of Income
Years ended June 30, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
-------- -------- --------
Net sales $ 29,134 $ 28,592 $ 33,611
Cost of sales 21,443 18,201 24,020
-------- -------- --------
Gross profit 7,691 10,391 9,591
Selling, general, and administrative expenses 9,605 9,265 7,318
-------- -------- --------
Operating income (loss) (1,914) 1,126 2,273
Equity in earnings of subsidiaries 4,119 113 874
Other expense, net (864) (1,014) (1,400)
--------- -------- --------
Income before (benefit) for income
taxes 1,341 225 1,747
(Benefit) for income taxes -- (25) (263)
-------- -------- --------
Net income $ 1,341 $ 250 $ 2,010
======== ======== ========
See accompanying independent auditors' report
24
FS-25
SCHEDULE II
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended June 30, 2002, 2001, and 2000
(In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------- ------------ ---------- -------------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS (1) PERIOD
- ------------------------------------------- ------------ ---------- -------------- ----------
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
For the year ended June 30, 2002:
Allowance for doubtful accounts
(deducted from accounts receivable) $ 700 $ 45 $ 352 $ 393
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
See accompanying independent auditors' report.
25
FS-26
Index to Exhibits
Ex-12 Computation of ratios E-1
Ex-21 Subsidiaries of the Registrant E-2
Ex-23.1 Consent of Independent Auditors E-3
Ex-23.2 Notice regarding consent of Arthur Andersen LLP E-4
Ex 24.1 Power of Attorney E-5
E-i