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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2002
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
Commission File number: 0-10004
NAPCO SECURITY SYSTEMS, INC
(Exact name of Registrant as specified in its charter)
Delaware 11-2277818
(State or other jurisdiction of (IRS Employer Identification
incorporation of organization) Number)
333 Bayview Avenue
Amityville, New York 11701
(Address) (Zip Code)
(631) 842-9400
(Registrant's telephone number including area code)
None
(Former name, former address and former fiscal year if
changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes |X| No | |
Number of shares outstanding of each of the issuer's classes of common stock, as
of: DECEMBER 31, 2002
COMMON STOCK, $.01 PAR VALUE PER SHARE 3,425,696
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
INDEX
DECEMBER 31, 2002
Page
----
PART I: FINANCIAL INFORMATION (unaudited)
Condensed Consolidated Balance Sheets, December 31, 2002 and
June 30, 2002 3
Condensed Consolidated Statements of Operations for the Three
Months ended December 31, 2002 and 2001 4
Condensed Consolidated Statements of Operations for the Six
Months ended December 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the Six
Months ended December 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II: OTHER INFORMATION 16
SIGNATURE PAGE 17
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 18
INDEX TO EXHIBITS 21
2
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
December 31, June 30,
ASSETS 2002 2002
------------ --------
(in thousands, except share data)
Current Assets:
Cash $ 1,863 $ 1,500
Accounts receivable, less reserve for doubtful accounts:
December 31, 2002 $436
June 30, 2002 $393 13,712 18,313
Inventories, net (Note 2) 19,139 17,931
Prepaid expenses and other current assets 1,008 1,213
-------- --------
Total current assets 35,722 38,957
Property, Plant and Equipment, net of accumulated depreciation
and amortization (Note 3):
December 31, 2002 $17,319
June 30, 2002 $16,696 9,797 9,964
Goodwill 9,686 9,686
Deferred income taxes 1,032 1,032
Other assets 205 229
-------- --------
$ 56,442 $ 59,868
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,900 $ 2,664
Accounts payable 2,499 2,994
Accrued and other current liabilities 2,149 2,693
Accrued income taxes 129 96
-------- --------
Total current liabilities 6,677 8,447
Long-term debt 14,763 16,588
Deferred income taxes 539 539
-------- --------
Total liabilities 21,979 25,574
-------- --------
Shareholders' Equity:
Common stock, par value $.01 per share; 21,000,000 shares
authorized, 6,058,652 and 6,004,252 shares issued, respectively;
3,425,696 and 3,383,196 shares outstanding, respectively 61 60
Additional paid-in capital 1,318 1,082
Retained earnings 38,501 38,569
Less: Treasury stock, at cost (2,621,056 shares) (5,417) (5,417)
-------- --------
Total stockholders' equity 34,463 34,294
-------- --------
$ 56,442 $ 59,868
======== ========
See accompanying notes to condensed consolidated financial statements
3
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended
December 31, 2002
----------------------------
2002 2001
---------- ----------
(in thousands, except share and per share data)
Net Sales $ 13,859 $ 13,308
Cost of Sales 10,290 9,987
---------- ----------
Gross profit 3,569 3,321
Selling, General and Administrative Expenses 3,145 2,772
---------- ----------
Operating income 424 549
---------- ----------
Interest Expense, net 187 412
Other Expense, net 13 13
---------- ----------
200 425
---------- ----------
Income before provision for income taxes 224 124
Provision for income taxes 5 --
---------- ----------
Net income $ 219 $ 124
========== ==========
Net income per share (Note 4): Basic $ 0.06 $ 0.04
========== ==========
Diluted $ 0.06 $ 0.04
========== ==========
Weighted average number of shares outstanding (Note 4): Basic 3,423,346 3,328,046
========== ==========
Diluted 3,654,569 3,466,025
========== ==========
See accompanying notes to condensed consolidated financial statements
4
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Six Months Ended
December 31, 2002
----------------------------
2002 2001
---------- ----------
(in thousands, except share and per share data)
Net Sales $ 25,584 $ 23,391
Cost of Sales 18,967 17,314
----------- -----------
Gross profit 6,617 6,077
Selling, General and Administrative Expenses 6,426 5,715
----------- -----------
Operating income 191 362
----------- -----------
Interest Expense, net 436 809
Other (Income) Expense, net (187) 25
----------- -----------
249 834
----------- -----------
Loss before provision for income taxes (58) (472)
Provision for income taxes 10 --
----------- -----------
Net loss $ (68) $ (472)
=========== ===========
Net loss per share (Note 4): Basic $ (0.02) $ (0.14)
=========== ===========
Diluted $ (0.02) $ (0.14)
=========== ===========
Weighted average number of shares outstanding (Note 4): Basic 3,404,429 3,384,998
=========== ===========
Diluted 3,404,429 3,384,998
=========== ===========
See accompanying notes to condensed consolidated financial statements
5
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
December 31, 2002
-----------------------
2002 2001
------- -------
(in thousands)
Net Cash Provided by Operating Activities $ 3,132 $ 3,667
------- -------
Cash Flows from Investing Activities:
Net purchases of property, plant and equipment (456) (362)
------- -------
Net cash used in investing activities (456) (362)
------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt 500 200
Proceeds from exercise of employee stock options 237 73
Principal payments on long-term debt (3,050) (1,628)
Payments for purchase of treasury sock -- (243)
------- -------
Net cash used in financing activities (2,313) (1,598)
------- -------
Net Increase in Cash 363 1,707
Cash, Beginning of Period 1,500 1,037
------- -------
Cash, End of Period $ 1,863 $ 2,744
======= =======
Cash Paid During the Period for:
Interest $ 438 $ 788
======= =======
Income taxes $ 12 $ 9
======= =======
See accompanying notes to condensed consolidated financial statements
6
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) Summary of Significant Accounting Policies and Other Disclosures
The accompanying Condensed Consolidated Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation have been
made.
The Unaudited Condensed Consolidated Financial Statements include the
accounts of the Company after elimination of all material inter-company
balances and transactions. The Company has made a number of estimates and
assumptions relating to the assets and liabilities, the disclosure of
contingent assets and liabilities and the reporting of revenues and
expenses to prepare these financial statements in conformity with
accounting principles generally accepted in the United States. Actual
results could differ from those estimates. The Unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the
consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
2.) Inventories
Inventories consist of: December 31, June 30,
2002 2002
------------ --------
(in thousands)
Component parts $10,194 $ 9,551
Work-in-process 3,531 3,308
Finished products 5,414 5,072
------- -------
$19,139 $17,931
======= =======
3.) Property, Plant and Equipment
Property, Plant and Equipment consists of: December 31, June 30,
2002 2002
------------ --------
(in thousands)
Land $ 904 $ 904
Building 8,911 8,911
Molds and dies 4,256 4,197
Furniture and fixtures 1,184 1,141
Machinery and equipment 11,674 11,316
Building improvements 187 191
------- -------
27,116 26,660
Less: Accumulated depreciation
and amortization 17,319 16,696
------- -------
$ 9,797 $ 9,964
======= =======
7
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.) Net Income Per Common Share
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". In accordance with SFAS
No. 128, net income per common share amounts ("Basic EPS") were computed
by dividing net income by the weighted average number of common shares
outstanding for the period. Net income per common share amounts, assuming
dilution ("Diluted EPS"), were computed by reflecting the potential
dilution from the exercise of stock options. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the
consolidated statements of operations.
A reconciliation between the numerators and denominators of the Basic and
Diluted EPS computations for net income is as follows:
Three months ended December 31, 2002
(in thousands, except per share data)
-------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- ---------
Net income $219 -- --
---- ----- -----
BASIC EPS
Net income attributable to common stock $219 3,423 $0.06
EFFECT OF DILUTIVE SECURITIES
Options $ -- 231 --
---- ----- -----
DILUTED EPS
Net income attributable to common stock
and assumed option exercises $219 3,655 $0.06
==== ===== =====
Three months ended December 31, 2001
(in thousands, except per share data)
-------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- ---------
Net income $124 -- --
---- ----- -----
BASIC EPS
Net income attributable to common stock $124 3,328 $0.04
EFFECT OF DILUTIVE SECURITIES
Options $ -- 138 --
---- ----- -----
DILUTED EPS
Net income attributable to common stock
and assumed option exercises $124 3,466 $0.04
==== ===== =====
Options to purchase 500 shares of common stock in the three months ended
December 31, 2001 were not included in the computation of Diluted EPS
because the exercise prices exceeded the average market price of the
common shares for this period. These options were still outstanding at the
end of the period.
8
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended December 31, 2002
(in thousands, except per share data)
---------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- ---------
Net loss $(68) -- --
----- ----- ------
BASIC EPS
Net loss attributable to common stock $(68) 3,404 ($0.02)
EFFECT OF DILUTIVE SECURITIES
Options $ -- -- --
----- ----- ------
DILUTED EPS
Net loss attributable to common stock
and assumed option exercises $(68) 3,404 ($0.02)
===== ===== ======
Options to purchase 372,660 shares of common stock in the six months ended
December 31, 2002 were not included in the computation of Diluted EPS
because the Company incurred a loss for the six months, therefore the
impact would have been anti-dilutive. These options were still outstanding
at the end of the period.
Six months ended December 31, 2001
(in thousands, except per share data)
---------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
----------- ------------- ---------
Net loss $(472) -- --
----- ----- ------
BASIC EPS
Net loss attributable to common stock $(472) 3,385 ($0.14)
EFFECT OF DILUTIVE SECURITIES
Options $ -- -- --
----- ----- ------
DILUTED EPS
Net loss attributable to common stock
and assumed option exercises $(472) 3,385 ($0.14)
===== ===== ======
Options to purchase 377,880 shares of common stock in the six months ended
December 31, 2001 were not included in the computation of Diluted EPS
because the Company incurred a loss for the six months, therefore the
impact would have been anti-dilutive. These options were still outstanding
at the end of the period.
9
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Sales for the three months ended December 31, 2002 increased by 4.1% to
$13,859,000 as compared to $13,308,000 for the same period a year ago. Sales for
the six months ended December 31, 2002 increased by 9.4% to $25,584,000 as
compared to $23,391,000 for the same period a year ago. The increases in net
sales for the three and six months were primarily due to increases in sales
volume to several of the Company's larger, domestic alarm customers as well as
one of the Company's major customers that had streamlined its on-hand inventory
during the first half of fiscal 2002.
The Company's gross profit for the three months ended December 31, 2002
increased by $248,000 to $3,569,000 or 25.8% of sales as compared to $3,321,000
or 25.0% of sales for the same period a year ago. The Company's gross profit for
the six months ended December 31, 2002 increased by $540,000 to $6,617,000 or
25.9% of sales as compared to $6,077,000 or 26.0% of sales for the same period a
year ago. These increases in dollars are due primarily to the increase in sales
as discussed above. In addition, gross profit, both in dollars and as a
percentage of net sales, was impacted by a shift in product mix to lower margin
products.
Selling, general and administrative expenses for the three months ended December
31, 2002 increased by $373,000 to $345,000, or 22.7% of sales, as compared to
$2,772,000, or 20.8% of sales a year ago. Selling, general and administrative
expenses for the six months ended December 31, 2002 increased by $711,000 to
$6,426,000, or 25.1% of sales, as compared to $5,715,000, or 24.4% of sales, a
year ago. These increases for the three and six months are due primarily to
additions to the Company's sales force and investor relations expenses as well
as increases in the Company's property and liability insurance rates.
Interest and other expense for the three months ended December 31, 2002
decreased by $225,000 to $200,000 from $425,000 for the same period a year ago.
Interest and other expense for the six months ended December 31, 2002 decreased
by $585,000 to $249,000 from $834,000 for the same period a year ago. These
decreases for the three and six months resulted from a decrease in interest
expense during the six months ended December 31, 2002 resulting from the
continued reduction of the Company's outstanding debt as well as a decline in
the interest rates available to the Company. In addition, during the quarter
ended September 30, 2002, the Company settled litigation which it had initiated
as the plaintiff and realized a gain of approximately $210,000. This gain was
recorded as Other Income during the quarter ended September 30, 2002.
The Company had a provision for income taxes for the three months ended December
31, 2002 of $5,000 as compared to no provision for the same period a year ago.
The Company had a provision for income taxes for the six months ended December
31, 2002 of $10,000 as compared to no provision for the same period a year ago.
These provisions relate to income taxes on the Company's United Kingdom
subsidiary.
Net income increased by $95,000 to $219,000 or $0.06 per share for the three
months ended December 31, 2002 as compared to $124,000 or $0.04 per share for
the same period a year ago. Net income improved by $404,000 to a net loss of
$(68,000) or $(0.02) per share for the six months ended December 31, 2002 as
compared to a net loss of $(472,000) or $(0.14) per share for the same period a
year ago. These changes were primarily due to the items discussed above.
Liquidity and Capital Resources
During the six months ended December 31, 2002 the Company utilized a portion of
its cash generated from operations to reduce certain of its outstanding
borrowings, purchase property, plant and equipment and invest in additional
inventory as discussed below. During the first quarter of fiscal 2001, the
Company entered into an $8,250,000 term loan agreement, payable over 60 equal
monthly installments, in order to purchase the assets of Continental
Instruments, LLC. 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.
Accounts Receivable at December 31, 2002 decreased $4,601,000 to $13,712,000 as
compared to $18,313,000 at June 30, 2002. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 2002 as compared to
the quarter ended December 31, 2002.
Inventory at December 31, 2002 increased by $1,208,000 to $19,139,000 as
compared to $17,931,000 at June 30, 2002. This increase was primarily the result
of the Company's level-loading its production schedule in anticipation of its
historical sales cycle where a larger portion of the Company's sales occur in
the latter fiscal quarters as compared to the earlier quarters.
10
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In May of 1998 the Company repurchased 889,576 shares of Napco common stock for
$5.00 per share from one of its co-founders. $2.5 million was paid at closing
and the balance of the purchase price was paid over a four (4) year period. The
portion of the purchase price paid at closing was financed by the Company's
primary bank and is being repaid over a five (5) year period.
In November 2000 the Company adopted a stock repurchase program. Under this
program, the Company is authorized to repurchase from time to time, 205,000
shares of its common stock. As of December 31, 2002 the Company had repurchased
202,605 shares under this program for a total cash amount of $968,000.
In January 2003, the Company repurchased 250,000 shares of its common stock from
two shareholders, unaffiliated with the Company, at $9.75 per share, a discount
from its then current trading price of $10.01. The transaction was approved by
the board of directors and the purchase price of $2,437,500 was financed through
the Company's revolving line of credit. The Company intends to obtain a five (5)
year term loan from its primary bank for approximately 50% of the purchase
price, or $1,250,000, during the third quarter of fiscal 2003.
Other than the $8,250,000 loan described above, the Company's bank debt
consisted of a $16,000,000 secured revolving credit agreement and a $3,000,000
line of credit to be used in connection with commercial and standby letters of
credit. The revolving credit agreement, previously expiring in January 2002, has
been renewed with an $18,000,000 line of credit, at the same terms and
conditions and with an expiration date of July 2004. As of December 31, 2002,
the Company was in compliance with all covenants related to the agreements
described above.
As of December 31, 2002 the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders used in the
normal course of business.
Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets", which
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 but retains
fundamental provisions of SFAS No. 121 for (a) recognition/measurement of
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 also supercedes the
accounting/reporting provisions of Accounting Principles Board Opinion No. 30
for segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reports to a component of an entity that either has been disposed of or is
classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The effect of the adoption of SFAS No.
144 effective July 1, 2002 was not material.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of SFAS
No. 146 are effective for exit or disposal activities initiated after December
31, 2002 and thus will become effective for the Company on January 1, 2003. The
Company will continue to apply the provisions of EITF Issue 94-3 to any exit
activities that have been initiated under an exit plan that met the criteria of
EITF Issue No. 94-3 before the adoption of SFAS No. 146. The adoption of SFAS
No. 146 did not have a material effect on the financial position, results of
operations or cash flows of the Company upon adoption.
In December 2001, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 01-6, "Accounting by Certain Entities (Including
Entities with Trade Receivables) That Lend to or Finance the Activities of
Others." The SOP applies to any entity that lends to or finances the activities
of others, and specifies accounting and disclosure requirements for entities
that extend trade credit to customers and also provides specific guidance for
other types of transactions specific to certain financial institutions. The SOP
is effective for the Company beginning July 1, 2003 and the Company does not
believe the recognition and measurement provisions within this SOP will result
in a change in practice for its trade receivables or any other activities of the
Company. The SOP also provides certain presentation and disclosure changes for
entities with trade receivables as part of the objective of requiring consistent
accounting and reporting for like transactions, which the Company intends to
include in its disclosures upon adoption.
11
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements
This quarterly report, other than historical financial information, contains
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that involve a number of risks and uncertainties. Important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements are set forth in Item 1 of the
Company's annual report on Form 10-K for the year ended June 30, 2002. These
include risks and uncertainties relating to competition and technological
change, intellectual property rights, capital spending international operations,
and the Company's acquisition strategies.
Quantitative and Qualitative Disclosures About Market Risk
The Company's principle 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 December 31, 2002 an aggregate amount of approximately
$16,600,000 was outstanding under this facility remained at this quarter-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
$166,000 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 expired on October 30, 2002. This transaction met the
requirements for cash flow hedge accounting. Accordingly, any gain or loss
associated with the difference between interest rates was included as a
component of interest expense. The fair value of this instrument was not
material. The Company has not entered into any new interest rate swaps and 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 many of its foreign customers. As a result, if exchange
rates move against foreign customers, the Company could experience difficulty
collecting unsecured accounts receivable, the cancellation of existing orders or
the loss of future orders. The foregoing could materially adversely affect the
Company's business, financial condition and results of operations. In addition,
the Company transacts certain sales in Europe in British Pounds Sterling,
therefore exposing itself to a certain amount of foreign currency risk.
Management believes that the amount of this exposure is immaterial.
Critical Accounting Policies
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 amount of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments 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 our customer. We report our sales levels on a net sales basis,
which is computed by 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 returns by region and product category. In addition, as
necessary, specific accruals for sales returns may be established for known or
anticipated events.
12
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 are manifest differently,
depending on the nature of the concentration, and vary in significance. We have
two major customers that accounted for approximately $3,052,000, or 23%, of our
consolidated net sales for the three months ended December 31, 2002, $5,714,000,
or 22%, of our consolidated net sales for the six months ended December 31, 2002
and $5,970,000, or 44%, of our accounts receivable as of December 31, 2002. The
largest of these two customers accounted for $2,049,000, or 15%, and $3,833,000,
or 15% of sales for the three and six months ended December 31, 2002,
respectively, and $2,300,000, or 17%, of accounts receivable. These customers
sell primarily within North America. Although management believes that these
customers are 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. In the ordinary course of business, we
have established an allowance for doubtful accounts and customer deductions in
the amount of $436,000 and $393,000 as of December 31, 2002 and June 30, 2002,
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 aging, 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 fair market
value, based on various product sales projections. This reserve is calculated
using an estimated obsolescence percentage based on age, historical trends and
requirements to support forecasted sales. In addition, and as necessary, we may
establish specific inventory obsolescence 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.
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 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 December 31, 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
carry-forwards 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 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.
13
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
and Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission. The Chief Executive Officer and the Chief Financial Officer have
reviewed the effectiveness of our disclosure controls and procedures within the
last ninety days and have concluded that the disclosure controls and procedures
(as defined in Rules 13(a)-14(c) and 15(d)-14(e) promulgated under the
Securities Exchange Act of 1934) are effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the last day they were evaluated by our
Chief Executive Officer and Chief Financial Officer nor were any corrective
actions required with regard to significant accounting deficiencies or material
weaknesses.
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
assumption 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 that 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 assets, the operating and
manufacturing costs outside of the United States;
viii changes in global or 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 our 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
14
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In August 2001, the Company became a defendant in a product-related
lawsuit, in which the plaintiff seeks damages of approximately
seventeen million dollars ($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.
During the quarter ended September 30, 2002, the Company settled
litigation which it had initiated as the plaintiff and realized a
gain of approximately $210,000. This gain was recorded as Other
Income during the quarter ended September 30, 2002
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders ("the Annual Meeting") was
held on December 4, 2002.
(b) At the Annual Meeting, Andrew J. Wilder and Arnold Blumenthal
were re-elected as Directors through 2005.
(c) Also at the Annual meeting, the Company's 2002 Employee Stock
Option Plan was approved.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 13, 2003
NAPCO SECURITY SYSTEMS, INC
(Registrant)
By: /s/ Richard Soloway
------------------------------------------------
Richard Soloway
Chairman of the Board of Directors, President
and Secretary
(Chief Executive Officer)
By: /s/ Kevin S. Buchel
------------------------------------------------
Kevin S. Buchel
Senior Vice President of Operations and Finance
and Treasurer
(Principal Financial and Accounting Officer)
17
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, RICHARD SOLOWAY, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Napco Security
Systems, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows for the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report ("Evaluation date");
and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 2/13/03
/s/ RICHARD SOLOWAY
----------------------------------------------
Chairman of the Board, President and Secretary
18
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, KEVIN S. BUCHEL, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Napco Security
Systems, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows for the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report ("Evaluation date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 2/13/03
/s/ KEVIN S. BUCHEL
----------------------------------------------
Senior Vice President of Operations and Finance
19
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Napco Security Systems, Inc. (the "Company") on
Form 10-Q for the period ending December 31, 2002 filed herewith (the "Report"),
I, RICHARD SOLOWAY, Chief Executive Officer of the Company, certify, that to the
best of my knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of the Company.
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Dated: as of February 13, 2003
/s/ RICHARD SOLOWAY
- ----------------------------------------------
Richard Soloway, Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Napco Security Systems, Inc. (the "Company") on
Form 10-Q for the period ending December 31, 2002 filed herewith (the "Report"),
I, KEVIN S. BUCHEL, Chief Financial Officer of the Company, certify, that to the
best of my knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of the Company.
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Dated: as of February 13, 2003
/s/ KEVIN S. BUCHEL
- ----------------------------------------------
Kevin S. Buchel, Chief Financial Officer
20
INDEX TO EXHIBITS
Exhibits Page
- -------- ----
10.Y 2002 Employee Stock Option Plan 22
21