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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, 1998
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 (I.R.S. Employer I.D.
of incorporation or Number)
organization)
333 Bayview Avenue, Amityville, New York 11701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(516) 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 18, 1998, 3,490,151 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
$14,833,142.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement in connection with its 1998 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. [ ]
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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
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 predesignated 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 "Magnum Alert(TM)" followed by a numerical designation.
Combination Control Panels/Digital Communicators and Digitkey 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
microcomputer technology.
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Door Security Devices. The Company manufactures a variety of exit alarm
locks ranging from simple dead bolt locks to door alarms.
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.
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, 1998, 1997, and 1996, the
Company expended approximately $3,817,000, $3,340,000 and $3,296,000,
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 1998,
1997 and 1996 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, 1998, the Company had approximately 1,000 full-time
employees.
Marketing and Major Customers
The Company's staff of 43 sales and marketing support employees
located at the Company's headquarters 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, 1998. 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
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shows in major United States cities. Some of the Company's products are marketed
under the "private label" of certain customers.
Sales to A.D.I., A.D.T., and KingAlarm, each unaffiliated with the
Company, together accounted for approximately 32% and 38% of the Company's total
sales for the fiscal years ended June 30, 1998 and 1997 (see Note 9 to
Consolidated Financial Statements as to percentage breakdown). With respect to a
customer that accounted for approximately 9% of the Company's sales in fiscal
year 1997, there was a significant reduction in the sales to such customer to 1%
in fiscal 1998. However, the Company does not believe that such reduction had a
material adverse effect on the results of operations or financial condition of
the Company. The loss of either of the other two customers could have a material
adverse effect on the Company's business.
Competition
The security alarm products industry is highly competitive. The
Company's primary competitors are comprised of approximately 30 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 price 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, 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 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.
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In general, orders for the Products are processed by the Company from
inventory. A backlog of approximately $1,240,000 existed as of June 30, 1998.
This compared to a backlog of approximately $3,467,000 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 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
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.
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.
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Financial Information Relating to Foreign
and Domestic Operations and Export Sales(1)
1998 1997 1996
---- ---- ----
(in thousands)
Sales to unaffiliated customers:
United States $50,269 $53,302 $49,088
Foreign 0 0 0
Identifiable assets:
United States $39,783 $41,242 $33,084
Foreign 18,780 16,002 24,235
Export sales:
United States(2) $12,101 $10,355 $ 7,994
ITEM 2. PROPERTIES.
The Company has 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 constructed this facility with
the proceeds from an industrial revenue bond financing in 1985.
The Company's foreign subsidiary, NAPCO/Alarm Lock Grupo International, S.A.
(formerly known as NSS Caribe, S.A.), is located in the Dominican Republic where
it owns a building of approximately 167,000 square feet of production and
warehousing space. That subsidiary also leases the land associated with this
building under a 99-year lease expiring in the year 2092. As of June 30, 1998,
most of the Company's sales related to labor on assemblies, goods and
subassemblies at these sites, utilizing U.S. quality control standards.
Management believes that these facilities are more than adequate to
meet the needs of the Company in the foreseeable future.
- --------
(1) Certain prior year amounts have been reclassified to conform to current
year presentation.
(2) Export sales from the United States in fiscal year 1998 included sales of
approximately $6,966,000, $1,070,000 and $2,094,000 to Europe, North America,
and South America respectively. Export sales from the United States in fiscal
year 1997 included sales of approximately $6,046,000, $1,608,000, and $1,127,000
to Europe, North America, and South America respectively.
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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, other than as
follows:
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,
that is subject to final government administrative approval, which reduces the
original assessment for the years covered by the IRS audit. The Company has
accepted the revised audit report and the final government approval is pending.
Accordingly, the Company has determined that $900,000 of previously recorded
reserves should be reversed through the current year income tax provision to
reflect the expected final settlement with respect to this IRS audit.
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.
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Quarter Ended
----------------------------------------------------------
Fiscal 1998
----------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
Common Stock
High $6.88 $6.75 $6.25 $8.25
Low $3.75 $5.50 $5.25 $4.75
Quarter Ended
----------------------------------------------------------
Fiscal 1997
----------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
Common Stock
High $4.38 $4.25 $5.63 $5.63
Low $3.50 $3.38 $3.75 $4.75
Approximate Number of Security Holders
The number of holders of record of NAPCO's Common Stock as of September
18, 1998 was 204 (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.
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ITEM 6. SELECTED FINANCIAL DATA.
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
Years Ended June 30
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except for per share data)
Operations
Net Sales $50,269 $53,302 $49,088 $48,078 $46,873
Gross Profit 11,785 12,778 11,302 11,325 11,068
(Benefit) provision
for Income Taxes (525) 605 515 532 37
Net Income 2,038 1,639 1,014 512 1,254
Earnings per
Share:
Basic .48 .38 .23 .12 .29
Diluted .48 .37 .23 .12 .29
Cash Dividends per Share(3) 0 0 0 0 0
As of June 30
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except for per share data)
Financial Condition
Total Assets $58,563 $57,244 $57,319 $55,739 $53,810
Long-term Debt 18,644 13,313 14,150 15,275 13,690
Working Capital 33,942 30,136 28,676 28,660 28,033
Stockholders' Equity 28,833 31,218 29,574 28,560 28,048
Stockholders' Equity
Per Outstanding Share 8.28 7.14 6.77 6.54 6.42
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(3) The Company has never declared or paid a cash dividend on its common
stock. It is the policy of the Board of Directors to retain earnings for use in
the Company's business.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Liquidity and Capital Resources
The Company's cash on hand combined with proceeds from operating
activities during fiscal 1998 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 $16,000,000 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, 1998, the
Company's unused sources of funds consisted principally of $1,989,000 in cash
and approximately $1,487,000, which represents the unused portion of its
secured revolving credit facility.
In fiscal 1988, the Company completed construction of a new
manufacturing and administrative facility in Amityville, New York financed by a
$3.9 million industrial revenue bond issue bearing interest at a variable rate
determined weekly by the underwriting bank based upon market conditions. The
bonds had a maturity date of April 1, 2000, subject to quarterly sinking fund
payments. Such bonds were retired in May 1997 as part of the Company's debt
refinancing with its new primary bank as discussed below.
On April 26, 1993, the Company's foreign subsidiary entered into a
99-year land lease of approximately 4 acres of land near its former facility 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, 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. The revolving credit agreement will
expire in May 2000 and any outstanding borrowings are to be repaid on or before
that time.
In addition, a subsidiary of the Company maintains a $4,500,000 line of
credit with another bank, $1,350,000 of which was outstanding as of June 30,
1998 (see Note 5 to Consolidated Financial Statements).
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, 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. The portion of the purchase price paid at closing
was financed by the Company's primary bank
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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.
The Company takes into consideration a number of factors in measuring its
liquidity, including the ratios set forth below:
1998 1997 1996
---- ---- ----
Current Ratio 4.3 to 1 3.5 to 1 3.2 to 1
Sales to Receivables 3.4 to 1 3.8 to 1 3.6 to 1
Total Debt to Equity 1.0 to 1 .8 to 1 .9 to 1
As of June 30, 1998, the Company had no material commitments for
purchases or capital expenditures.
Working Capital. Working capital increased by $3,806,000 to $33,942,000
at June 30, 1998 from $30,136,000 at June 30, 1997. The additional working
capital was generated primarily from additional borrowings and a decrease in
Income Taxes Payable resulting from the benefit from income taxes as discussed
below.
Accounts Receivable. Accounts receivable increased by $823,000 to
$14,760,000 at June 30, 1998 from $13,937,000 at June 30, 1997. This increase
resulted primarily from more favorable payment terms granted by the Company in
certain growing markets.
Inventory. Inventory remained relatively constant at $25,438,000 at
June 30, 1998 as compared to $25,702,000 at June 30, 1997. The Company generated
a significant reduction in its inventory during the quarter ended June 30, 1998
due in part to its efforts at improving various planning and forecasting
techniques.
Accounts Payable and Accrued Expenses. Accounts payable and accrued
expenses decreased by $1,826,000 to $4,887,000 at June 30, 1998 from $6,713,000
at June 30, 1997. This decrease is primarily the result of decreased component
part purchases during the quarter ended June 30, 1998 as compared to the same
period ended June 30, 1997.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales in fiscal 1998 decreased approximately $3,033,000
or 5.7% to $50,269,000 from $53,302,000 in fiscal 1997. This decrease was
primarily the result of pricing pressures and the decreased sales to one major
customer, as previously disclosed. These decreases were offset, in part, by
increased export sales as well as the markets continued favorable reception of
the Company's hybrid hard-wired/wireless products and digital locks.
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Gross Profit. The Company's gross profit decreased $993,000 to
$11,785,000 or 23.4% of net sales in fiscal 1998 as compared to $12,778,000 or
24.0% of net sales in fiscal 1997. The decrease in gross profit was primarily
due to the pricing pressures and reduction in net sales as discussed above as
partially offset by reduced material and freight costs.
Expenses. Selling, general and administrative expenses in fiscal 1998
increased slightly to $9,289,000 or 18.5% of net sales from $9,133,000 or 17.1%
of net sales in fiscal 1997. This increase is primarily due to the Company's
expansion of its international sales operations and related informational
systems as partially offset by continuing cost saving efforts.
Other Expenses. Other Expenses in fiscal 1998 decreased by $418,000 to
$983,000 as compared to $1,401,000 in fiscal 1997. This decrease was primarily
due to decreased interest expense resulting from more favorable interest rates
available to the Company as well as more favorable foreign currency transaction
rates realized by the Company during the year as partially offset by increased
borrowings.
Income Taxes. Provision for income taxes decreased $1,130,000 to a
benefit of $525,000 during fiscal 1998. This compared to a provision of $605,000
or approximately 27% of income before provision for income taxes during fiscal
1997. The decrease in the provision for fiscal 1998 is primarily attributable to
the reversal of $900,000 of reserves no longer required with respect to an IRS
audit of fiscal years 1986 through 1993.
Effects of Inflation. During the three-year period ended June 30,
1998, inflation and changing prices did not have a significant impact on the
Company's operations.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales in fiscal 1997 increased approximately $4,214,000
or 8.6% to $53,302,000 from $49,088,000 in fiscal 1996. This increase was
primarily the result of increased export sales as well as the markets favorable
reception of the Company's new hybrid hard-wired/wireless products and new
digital locks that more than offset the decrease in sales of hard-wired only
products, decreased sales to one major customer, and continued price pressure in
the industry.
Gross Profit. The Company's gross profit increased $1,476,000 to
$12,778,000 or 24.0% of net sales in fiscal 1997 as compared to $11,302,000 or
23% of net sales in fiscal 1996. The increase in gross profit as a percentage of
net sales was primarily due to improvements in the Company's manufacturing
efficiency as well as efficiencies of scale resulting from the higher sales
volume mentioned above.
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Expenses. Selling, general and administrative expenses in fiscal 1997
increased 9% or $759,000 to $9,133,000 or 17.1% of net sales from $8,374,000 or
17.1% of net sales in fiscal 1996. This increase was primarily due to the
Company's additional marketing efforts relating to several new products
introduced during the year.
Other Expenses. Other Expenses in fiscal 1997 remained relatively
constant at $1,401,000 as compared to $1,399,000 in fiscal 1996.
Income Taxes. Provision for income taxes increased $90,000 to $605,000
or approximately 27% of income before provision for income taxes during fiscal
1997. This compared to a provision of $515,000 or approximately 34% of income
before provision for income taxes during fiscal 1996. The decrease in the
provision as a percentage of income before provision for income taxes was
primarily attributable to lower reserve requirements.
Effects of Inflation. During the three-year period ended June 30,
1997, inflation and changing prices did not have a significant impact on the
Company's operations.
Year 2000 Date Conversion
As the century turns from 1900 to 2000, date-sensitive systems may
recognize the year 2000 as 1900 or not at all. This results primarily because of
the conventional use of a two digit date field in most software applications.
The inability to properly recognize the year 2000 may cause systems to process
financial and operational information incorrectly.
Virtually all of the Company's systems are fully compliant. Due to
the fact that the Company's software manufacturer includes the Year 2000
upgrade as part of its ongoing maintenance, the Company expects to expend a
minimal amount of its resources in this area.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
Page
----
Report of Independent Public Accountants
as of June 30, 1998 and 1997 and for
each of the 3 Years in the Period
Ended June 30, 1998......................................................................15
Consolidated Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 and 1997..................................................................16
Consolidated Statements of Income
for the Years Ended June 30,
1998, 1997 and 1996.....................................................................17
Consolidated Statements of
Stockholders' Equity for the
Years Ended June 30, 1998, 1997
and 1996................................................................................18
Consolidated Statements of Cash
Flows for the Years Ended
June 30, 1998, 1997 and 1996............................................................19
Notes to Consolidated Financial
Statements, June 30, 1998, 1997 and 1996................................................20
Schedules:
I. Condensed Financial Information on
Parent Company..............................................................30
II. Valuation and Qualifying Accounts............................................32
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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, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1998.
These consolidated financial statements and the schedules referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
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 24, 1998
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NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997
ASSETS 1998 1997
------ ---- ----
(in thousands, except share data)
CURRENT ASSETS:
Cash $ 1,989 $ 1,006
Accounts receivable, less reserve for doubtful accounts of $755 and $805,
respectively 14,760 13,937
Inventories, net 25,438 25,702
Prepaid expenses and other current assets 674 390
Deferred income taxes 1,292 986
----------- -----------
Total current assets 44,153 42,021
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of approximately $11,055 and $10,344, respectively 11,491 12,088
GOODWILL, net of accumulated amortization of approximately $1,149 and
$1,042 respectively 2,592 2,699
OTHER ASSETS 327 436
----------- -----------
$ 58,563 $ 57,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,667 $ 900
Accounts payable 3,862 5,500
Accrued expenses 1,025 1,213
Accrued salaries and wages 653 595
Accrued income taxes 3,004 3,677
----------- -----------
Total current liabilities 10,211 11,885
LONG-TERM DEBT 18,644 13,313
DEFERRED INCOME TAXES 875 828
----------- -----------
Total liabilities 29,730 26,026
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 21,000,000 shares authorized;
5,908,102 and 5,898,602 shares issued, respectively; 3,489,651 and
4,367,727 shares outstanding, respectively 59 59
Additional paid-in capital 749 724
Retained earnings 32,474 30,436
Less: Treasury stock, at cost (2,418,451 and 1,528,875 shares, respectively) (4,449) (1)
----------- -----------
Total stockholders' equity 28,833 31,218
----------- -----------
$ 58,563 $ 57,244
=========== ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
16
17
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
(in thousands, except share and per share data)
NET SALES $ 50,269 $ 53,302 $ 49,088
COST OF SALES 38,484 40,524 37,786
----------- ----------- -----------
Gross profit 11,785 12,778 11,302
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,289 9,133 8,374
----------- ----------- -----------
Operating income 2,496 3,645 2,928
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (1,130) (1,081) (1,278)
Other, net 147 (320) (121)
----------- ----------- -----------
(983) (1,401) (1,399)
----------- ----------- -----------
Income before (benefit) provision for
income taxes 1,513 2,244 1,529
(BENEFIT) PROVISION FOR INCOME TAXES (525) 605 515
----------- ----------- -----------
Net income $ 2,038 $ 1,639 $ 1,014
=========== =========== ===========
EARNINGS PER SHARE (Note 1):
Basic $ .48 $ .38 $ .23
=========== =========== ===========
Diluted $ .48 $ .37 $ .23
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
(Note 1):
Basic 4,263,000 4,369,000 4,368,000
=========== =========== ===========
Diluted 4,285,000 4,383,000 4,373,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
17
18
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(in thousands except share data)
Common Stock
---------------------
Number Additional
of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ------- -------- ----- -----
BALANCE AT JUNE 30, 1995 5,898,602 $ 59 $ 719 $27,783 $ (1) $28,560
Net income -- -- -- 1,014 -- 1,014
--------- ---- ----- ------- -------- -------
BALANCE AT JUNE 30, 1996 5,896,602 59 719 28,797 (1) 29,574
Exercise of employee stock
options 2,000 -- 5 -- -- 5
Net income -- -- -- 1,639 -- 1,639
--------- ---- ----- ------- -------- -------
BALANCE AT JUNE 30, 1997 5,898,602 59 724 30,436 (1) 31,218
Purchase of treasury stock -- -- -- -- (4,448) (4,448)
Exercise of employee stock
options 9,500 -- 25 -- -- 25
Net income -- -- -- 2,038 -- 2,038
--------- ---- ----- ------- -------- -------
BALANCE AT JUNE 30, 1998 5,908,102 $ 59 $ 749 $32,474 $(4,449) $28,833
========= ==== ===== ======= ======== =======
The accompanying notes are an integral part of these consolidated statements.
18
19
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,038 $ 1,639 $ 1,014
Adjustments to reconcile net income to net cash (used in) provided by
operating activities-
Depreciation and amortization 1,289 1,440 1,425
Provision for doubtful accounts 50 55 202
Deferred income taxes (259) (11) 351
Changes in operating assets and liabilities resulting from increases and
decreases in:
Accounts receivable (873) (233) (314)
Inventories 264 242 (1,766)
Prepaid expenses and other current assets (284) 99 (44)
Other assets 109 (105) (112)
Accounts payable, accrued expenses, accrued salaries and wages
and accrued income taxes (2,441) (368) 2,779
-------- -------- --------
Net cash (used in) provided by operating activities (107) 2,758 3,535
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (585) (746) (1,170)
-------- -------- --------
Net cash used in investing activities (585) (746) (1,170)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable to bank 2,500 -- --
Principal payments on notes payable to bank -- -- (500)
Principal payments on capital lease obligation -- -- (7)
Principal payments on long-term debt (900) (13,400) (1,800)
Proceeds from long-term debt 2,550 11,963 --
Purchase of treasury stock (2,500) -- --
Proceeds from exercise of employee stock options 25 5 --
-------- -------- --------
Net cash provided by (used in) financing activities 1,675 (1,432) (2,307)
-------- -------- --------
NET INCREASE IN CASH 983 580 58
CASH, beginning of year 1,006 426 368
-------- -------- --------
CASH, end of year $ 1,989 $ 1,006 $ 426
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,289 $ 1,076 $ 1,155
======== ======== ========
Income taxes paid $ 108 $ 35 $ 144
======== ======== ========
NON-CASH FINANCING ACTIVITIES:
Issuance of note payable for purchase of treasury stock $ 1,948 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
19
20
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
1. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Napco Security
Systems, Inc. and all of its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
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. Actual
results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. 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.
Goodwill
Goodwill is being amortized on a straight-line basis over 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 remaining life of the goodwill in measuring whether it is recoverable.
In the years ended June 30, 1998 and 1997, there were no adjustments to the
carrying value of goodwill, other than the straight-line amortization.
Revenue
Revenue is recognized upon shipment of the Company's products to its customers.
20
21
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 provision for income taxes represents U.S. Federal and state
taxes on income generated from U.S. operations. Income generated by the
Company's foreign subsidiary in the Dominican Republic is non-taxable. The
Company accounts for the research and development credit as a reduction of
income tax expense in the year in which such credits are allowable for tax
purposes.
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
totalling $2,031,000 must now be reported as taxable income over a ten-year
period in the Company's future tax returns. The respective tax liability was
recorded in fiscal 1995.
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. As of June 30, 1998 and 1997, approximately
$19,085,000 and $18,328,000 in cumulative earnings of this foreign subsidiary
are included in consolidated retained earnings.
Earnings Per Share
In March, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of income. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution; Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock and is similar to the currently-required fully diluted
EPS. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and earlier
application is not permitted. The Company has adopted SFAS No. 128 and, as such,
has restated its EPS data for all prior periods presented.
A reconciliation between the numerators and denominators of the Basic and
Diluted EPS computations for net income is as follows:
Net Income - Numerator Shares - Denominator Per Share Amounts
------------------------- ------------------------ ----------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Net income $2,038 $1,639 $1,014 -- -- -- $ -- $ -- $ --
Basic EPS
Net income attributable to
common stock 2,038 1,639 1,014 4,263 4,369 4,368 0.48 0.38 0.2
------ ------ ------ ----- ----- ----- -------- -------- --------
Effect of Dilutive Securities
Options -- -- -- 22 14 5 -- -- --
------ ------ ------ ----- ----- ----- -------- -------- --------
Diluted EPS
Net income attributable to
common stock and assumed
option exercises $2,038 $1,639 $1,014 4,285 4,383 4,373 $ 0.48 $ 0.37 $ 0.23
------ ------ ------ ----- ----- ----- -------- -------- --------
21
22
Options to purchase 4,400, 4,200 and 12,600 shares of common stock for the three
years ended June 30, 1998, 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. These options were still outstanding
at the end of the respective periods.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of SFAS
No. 123 "Accounting for Stock-Based Compensation". The Company adopted this
standard in fiscal 1997, and 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 6).
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 " Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
reporting of operating segments in interim and annual financial statements, as
well as requiring related disclosures about products and services, geographic
areas and major customers. This standard is effective for the Company's fiscal
1999 financial statements. Initial adoption of this standard may take place on
an interim or year end basis.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The Company's consolidated financial statements will be required to include
comprehensive income disclosures beginning with the first quarter of fiscal
1999. Restatement of prior period information will be made for comparative
purposes.
SFAS No.'s 131 and 130 expand and modify financial statement disclosures and,
accordingly, will have no impact on the Company's results of operations or
financial position.
2. INVENTORIES:
Inventories, net, consist of the following:
June 30,
1998 1997
---- ----
(in thousands)
Component parts $10,200 $12,197
Work-in-process 4,056 3,374
Finished products 11,182 10,131
------- -------
$25,438 $25,702
======= =======
22
23
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
Depreciation/
June 30, amortization-
1998 1997 annual rates
---- ---- ------------
(in thousands)
Land $ 904 $ 904 -
Building 8,911 8,911 3%
Molds and dies 2,819 2,554 20% to 33%
Furniture and fixtures 912 977 10% to 20%
Machinery and equipment 8,944 8,660 10% to 15%
Leasehold improvements 56 426 Shorter of the lease
------- ------- term or life of asset
22,546 22,432
Less: Accumulated depreciation
and amortization 11,055 10,344
------- -------
$11,491 $12,088
======= =======
Depreciation and amortization expense on property, plant and equipment was
approximately $1,182,000, $1,332,000 and $1,222,000 for the three years ended
June 30, 1998, respectively.
4. 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, that is subject
to final government administrative approval, which reduces the original
assessment for the years covered by the IRS audit. The Company has accepted the
revised audit report and the final government approval is pending. Accordingly,
the Company has determined that $900,000 of previously recorded reserves should
be reversed through the current year's income tax provision to reflect the
expected final settlement with respect to this IRS audit.
23
24
(Benefit) provision for income taxes consists of the following:
For the Years Ended June 30,
1998 1997 1996
---- ---- ----
(in thousands)
Taxes currently payable:
Federal $(210) $340 $104
State (56) 120 19
----- ---- ----
(266) 460 123
Taxes on DISC earnings and other - 156 41
Deferred income tax (benefit) provision (259) (11) 351
----- ---- ----
(Benefit) provision for income taxes $(525) $605 $515
====== ==== ====
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:
1998 1997 1996
---------------------- --------------------- --------------------
% of % of % of
Pre-tax pre-tax pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(in thousands, except percentages)
Tax at Federal statutory rate $ 514 34.0% $ 763 34.0% $ 520 34.0%
Increases (decreases) in taxes resulting from:
State income taxes, net of Federal income tax
benefit 38 2.5 96 4.3 44 2.9
Amortization of non-deductible goodwill 36 2.4 36 1.6 36 2.4
Non-taxable foreign source income (257) (17.0) (382) (17.0) (260) (17.0)
Adjustment to reflect IRS settlement (900) (59.5) -- -- -- --
Other, net 44 2.9 92 4.1 175 11.4
----- ----- ----- ---- ----- ----
(Benefit) provision for income taxes $(525) (34.7)% $ 605 27.0% $ 515 33.7%
===== ===== ===== ==== ===== ====
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.
The deferred tax assets and deferred tax liabilities at June 30, 1998 and 1997
are as follows (in thousands):
Deferred Net Deferred
Deferred Tax Assets Tax Liabilities Tax Assets (Liabilities)
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Current:
Accounts receivable $ 314 $ 322 $ -- $ -- $ 314 $ 322
Inventories 902 548 -- -- 902 548
Accrued liabilities 194 180 -- -- 194 180
Other 29 29 147 93 (118) (64)
------- ------- ------- ------- ------- -------
1,439 1,079 147 93 1,292 986
Noncurrent:
Fixed assets -- -- 875 828 (875) (828)
------- ------- ------- ------- ------- -------
Total deferred taxes $ 1,439 $ 1,079 $ 1,022 $ 921 $ 417 $ 158
======= ======= ======= ======= ======= =======
24
25
As a result of the Company's U.S. operations generating income in each of the
three years in the period ended June 30, 1998, management now believes it is
more likely than not that the Company will realize the benefit of the net
deferred tax assets existing at June 30, 1998 and 1997. Accordingly, the Company
has not reflected any valuation allowance against the deferred tax assets at
June 30, 1998 and 1997. Furthermore, management believes that the existing net
deductible temporary differences will reverse during periods in which the
Company generates net taxable income. There can be no assurance, however, that
the Company will generate taxable earnings or any specific level of continuing
earnings in the future.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
June 30,
1998 1997
---- ----
(in thousands)
Revolving credit and term loan facility (a) $14,513 $11,963
Notes payable (b) 5,798 2,250
------- -------
20,311 14,213
Less: Current portion 1,667 900
------- -------
$18,644 $13,313
======= =======
(a) On May 13, 1997, the Company refinanced the majority of its bank debt
with a new primary bank and entered into a $16,000,000 secured revolving
credit agreement, a $3,000,000 line of credit to be used in connection
with commercial and standby letters of credit, and replaced the $2,500,000
standby letter of credit securing an earlier loan from another bank in
connection with the Company's international operations. The revolving
credit agreement and the letters of credit are 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, as well as common stock of two of the Company's
subsidiaries. The revolving credit agreement bears interest at either the
bank's prime rate (8.5% at June 30, 1998) or an alternate rate based on
LIBOR as described in the agreement. 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. The revolving credit agreement will expire in May 2000 and any
outstanding borrowings are to be repaid 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. As of June 30, 1998, the Company was in
compliance with all of these financial covenants.
(b) In November 1991, a subsidiary of the Company entered into a $4,500,000
line of credit agreement with a bank in connection with the Company's
international operations. The line is secured by a letter of credit from
the Company's primary bank. Interest on amounts outstanding under this line
is payable quarterly at a rate determined periodically based on a number of
options available to the Company. The balance outstanding under the line as
of December 31, 1994 automatically converted to a term loan payable in 20
equal quarterly installments commencing on that date. At June 30, 1998 and
1997, the amounts outstanding ($1,350,000 and $2,250,000, respectively)
bore interest at rates of 6.19% and 5.94%, respectively.
25
26
Under the terms of the agreement, all advances under the line must be used
to pay for certain specified costs incurred by this subsidiary. In
addition, the terms of the agreement limit, among other things, the amount
of additional debt or liens that may be incurred and prohibit the payment
of dividends by this subsidiary.
In May 1997, the Company entered into an agreement with its primary bank to
replace a previous $2,500,000 standby letter of credit agreement which
expired in February 1997 with a new $2,500,000 standby letter of credit, as
described above, for the purpose of providing additional collateral for the
line of credit agreement.
In connection with the stock purchase agreement described in Note 7, 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 issued a four-year term loan in the amount of
$1,947,880 to its former president in connection with the stock purchase
agreement. This note bears interest at 8% and calls for payments to begin
in April 1999, with a final maturity June 2003.
Maturities of long-term debt are as follows (in thousands):
Year ending June 30,
--------------------
1999 $ 1,667
2000 15,914
2001 1,070
2002 1,118
2003 542
-------
$20,311
=======
6. 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 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, 1998, 72,800 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 options on the grant date. Had compensation cost for all stock
option grants in fiscal years 1998, 1997 and 1996 been determined consistent
with SFAS No. 123, the Company's net income and earnings per share would have
been:
26
27
1998 1997 1996
---- ---- ----
NET INCOME AS REPORTED $2,038 $1,639 $1,014
PRO FORMA 1,901 1,629 1,005
BASIC EPS AS REPORTED 0.48 0.38 0.23
PRO FORMA 0.45 0.37 0.23
DILUTED EPS AS REPORTED 0.48 0.37 0.23
PRO FORMA 0.44 0.37 0.23
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to option awards
granted prior to fiscal year 1996.
The following table reflects activity under the plan for the years ended:
June 30, 1998 June 30, 1997 June 30, 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 75,750 3.08 76,000 $3.02 81,000 $3.07
Granted 209,000 4.11 3,250 3.59 35,000 2.52
Exercised (9,500) 2.61 (2,000) 2.25 - -
Forfeited (34,500) 3.76 - - (2,400) 3.25
Canceled/Lapsed (4,500) 2.97 (1,500) 2.25 (37,600) 2.63
------- ------- ------- ------- -------- -------
Outstanding at end of year 236,250 3.91 75,750 3.08 76,000 3.02
Exercisable at end of year 72,800 3.71 46,750 3.21 35,100 3.14
====== ====== ======
Weighted average fair value of options
granted $3.04 $1.76 $1.24
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:
1998 1997 1996
---- ---- ----
Risk-Free Interest Rates 6.10% 5.99% 6.05%
Expected Lives 5 years 5 years 5 years
Expected Volatility 46% 47% 47%
Expected Dividend Yields 0% 0% 0%
27
28
The following table summarizes information about stock options outstanding at
June 30, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise at Contractual Exercise at Exercise
Prices 6/30/98 Life Price 6/30/98 Price
------ ------- ---- ----- ------- -----
$2.50 - $3.75 35,750 2.28 2.56 21,500 2.55
3.76 - 5.63 200,500 3.84 4.15 51,300 4.20
------- ---- ---- ------ ----
2.50 - 5.63 236,250 3.60 3.91 72,800 3.71
======= ==== ==== ====== ====
Effective October 1990, the Company established a non-employee stock option plan
(the "1990 Plan") to encourage non-employee directors and consultants of the
Company to invest in the Company's stock. The 1990 Plan provides for the
granting of non-qualified 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 1990 Plan provides that the option price
shall 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 non-employee directors and consultants, under
which a compensation cost is recognized for the fair value of the options
granted as of the date of grant. As of June 30, 1998, no shares have been
granted under this plan.
7. 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 a consulting and non-compete agreement for a period
of ten years each. Upon closing, $2,500,000 of the purchase price was paid to
the former president with the proceeds of the term loan discussed in Note 5 (b).
The remaining purchase price is to be paid according to the terms of note issued
over a 4 year period. The common stock purchased is included in treasury stock
as of June 30, 1998.
8. 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 $53,000, $47,000 and $48,000 for the three years ended
June 30, 1998, respectively.
9. BUSINESS AND CREDIT CONCENTRATIONS:
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 (net of intercompany receivables and payables) relating to
the Company's foreign operations were approximately $18,780,000 and $16,002,000
at June 30, 1998 and 1997, respectively.
28
29
Export sales amounted to $12,101,000, $10,355,000 and $7,994,000 for the three
years ended June 30, 1998, respectively. At June 30, 1998 and 1997, the Company
had three customers with accounts receivable balances that aggregated 36% and
40% of the Company's accounts receivable, respectively. Revenues from the three
largest customers are summarized as follows:
Percentage of Net Sales
--------------------------------------
For the Years Ended June 30,
--------------------------------------
1998 1997 1996
---- ---- ----
Customer 1 23% 21% 21%
Customer 2 8% 8% 9%
Customer 3 1% 9% 12%
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Company is committed under various operating leases which do not extend
beyond fiscal 2001. 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):
Year ending June 30,
1999 $544
2000 302
2001 97
----
$943
====
Rent expense totaled approximately $866,000, $736,000 and $389,000 for the three
years ended June 30, 1998, respectively.
Land Lease
On April 26, 1993, the Company's foreign subsidiary 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 main production facility
is located.
Letters of Credit
At June 30, 1998, the Company was committed for approximately $2,284,000 under
open commercial letters of credit and steamship guarantees.
Litigation
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.
29
30
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY
CONDENSED BALANCE SHEETS
As of June 30
ASSETS 1998 1997
---- ----
(in thousands)
CASH $ 1,825 $ 872
ACCOUNTS RECEIVABLE, net 12,905 11,735
INVENTORIES, net 12,656 16,890
PREPAID EXPENSES AND OTHER CURRENT ASSETS 533 279
DEFERRED INCOME TAXES 1,292 986
------- -------
Total current assets 29,211 30,762
INVESTMENT IN SUBSIDIARIES, on equity basis 25,102 24,345
PROPERTY, PLANT AND EQUIPMENT, net 5,744 5,808
OTHER ASSETS 146 240
------- -------
$60,203 $61,155
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 8,917 $10,516
DUE TO SUBSIDIARIES 3,384 6,630
LONG-TERM DEBT 18,194 11,963
DEFERRED INCOME TAXES 875 828
------- -------
Total liabilities 31,370 29,937
STOCKHOLDERS' EQUITY 28,833 31,218
------- -------
$60,203 $61,155
======= =======
This schedule should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
30
31
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
For the Years Ended June 30,
1998 1997 1996
---- ---- ----
(in thousands)
NET SALES $ 41,610 $ 43,921 $ 40,482
COST OF SALES 32,022 33,733 30,319
-------- -------- --------
Gross profit 9,588 10,188 10,163
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,934 7,826 7,277
-------- -------- --------
Operating income 1,654 2,362 2,886
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES 757 1,122 (184)
OTHER EXPENSE, net (898) (1,240) (1,173)
-------- -------- --------
Income before (benefit) provision for income taxes 1,513 2,244 1,529
(BENEFIT) PROVISION FOR INCOME TAXES (525) 605 515
-------- -------- --------
Net income $ 2,038 $ 1,639 $ 1,014
======== ======== ========
This schedule should be read in conjunction with
the accompanying consolidated financial statements and notes thereto.
31
32
NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
Balance at Charged to Balance
Beginning Costs and Deductions at End of
Description of Period Expenses Describe(1) Period
----------- --------- -------- ----------- ------
For the year ended June 30, 1996:
Allowance for doubtful accounts
(deducted from accounts receivable) $662 $202 $ -- $864
==== ==== ===== ====
For the year ended June 30, 1997:
Allowance for doubtful accounts
(deducted from accounts receivable) $864 $ 55 $ 114 $805
==== ==== ===== ====
For the year ended June 30, 1998:
Allowance for doubtful accounts
(deducted from accounts receivable) $805 $ 50 $ 100 $755
==== ==== ===== ====
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
This schedule should be read in conjunction with
the accompanying consolidated financial statements and notes thereto.
32
33
[THIS PAGE INTENTIONALLY LEFT BLANK]
33
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
34
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Part III (Items 10, 11, 12 and 13) is
incorporated herein by reference from the Company's definitive proxy statement
for the 1998 annual meeting of stockholders which the Company intends to file
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the end of the Company's 1998 fiscal year, and, accordingly,
items 10, 11, 12 and 13 are omitted pursuant to General Instruction G(3).
35
36
PART IV
ITEM 14. 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:
Page
----
Report of Independent Public Accountants as of
June 30, 1998 and 1997 and for each of the
3 Years in the Period Ended June 30, 1998......................................15
Consolidated Balance Sheets as of
June 30, 1998 and 1997.........................................................16
Consolidated Statements of Income for the Years
Ended June 30, 1998, 1997 and 1996.............................................17
Consolidated Statements of Stockholders' Equity
for the Years Ended June 30, 1998, 1997
and 1996.......................................................................18
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1998, 1997 and 1996.......................................19
Notes to Consolidated Financial Statements,
June 30, 1998, 1997 and 1996...................................................20
(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.........................................................30
II: Valuation and Qualifying Accounts.........................................32
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.
36
37
(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) By-Laws...............................................................Exhibit 3b to
Report on Form
10-K for fiscal
year ended June
30, 1988
Ex-10.A 1992 Amended and Restated Incentive
Stock Option Plan (extending 1982 Plan)...............................Exhibit
4(a) of Form
S-8 of the
Registrant
filed October
24, 1996
Ex-10.B 1990 Non-Employee Stock Option Plan...................................Exhibit 10c to
Report on Form
10-K for fiscal
year ended June 30,
1991
Ex-10.C Defined Contribution Pension Plan
Basic Plan Document...................................................Exhibit 10d to
Report 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
37
38
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 Construction Contract dated June 5,
1993..................................................................Exhibit 10-l
to Report on
Form 10-K for
fiscal year
ended June 30,
1993
Ex-10.H 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.I 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.J 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.K 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.L Promissory Note to Marine Midland Bank
dated as of May 12, 1997..............................................Exhibit 10-L to
Report on Form
10K for fiscal
year ended June
30, 1997
38
39
Ex-10.M Amendment No. 1 to the Loan and Security
Agreement with Marine Midland Bank
dated as of May 28, 1998.................................................E-1
Ex.-10.N Term Loan Note to Marine Midland Bank dated as of
May 28, 1998.............................................................E-6
Ex-10.0 Promissory Note to Kenneth Rosenberg dated as of
May 28, 1998............................................................E-11
Ex-10.P Consulting Agreement with Kenneth Rosenberg
dated as of May 28, 1998................................................E-17
Ex-11 Computation of earnings per share ......................................E-20
Ex-12 Computation of ratios ..................................................E-21
Ex-21 Subsidiaries of the Registrant .........................................E-22
Ex-23 Consent of Independent Public Accountants...............................E-23
Ex-27 Financial Data Schedule ................................................E-24
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, 1998, except those filed on May 15, 1998 and May 29, 1998 relating to the
Company's purchase of shares of the Company owned by Kenneth Rosenberg, the
Company's former president, and his resignation as an officer and director of
the Company.
39
40
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.
September 28, 1998
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
- ----------------------------- Board of Directors September 28, 1998
Richard Soloway
/s/ KEVIN S. BUCHEL
- -----------------------------
Kevin S. Buchel Director September 28, 1998
/s/RANDY B. BLAUSTEIN
- -----------------------------
Randy B. Blaustein Director September 28, 1998
/s/ANDREW J. WILDER
- -----------------------------
Andrew J. Wilder Director September 28, 1998
40
41
INDEX TO EXHIBITS
Ex-10.M Amendment No. 1 to the Loan and Security
Agreement with Marine Midland Bank
Dated as of May 28, 1998...................................E-1
Ex-10.N Term Loan Note to Marine Midland Bank
Dated as of May 28, 1998...................................E-6
Ex-10.0 Promissory Note to Kenneth Rosenberg
Dated as of May 28, 1998..................................E-11
Ex-10.P Consulting Agreement with Kenneth Rosenberg
Dated as of May 28, 1998..................................E-17
Ex-11 Computation of earnings per share.........................E-20
Ex-12 Computation of ratios.....................................E-21
Ex-21 Subsidiaries of the Registrant............................E-22
Ex-23 Consent of Independent Public Accountants.................E-23
Ex-27 Financial Data Schedule...................................E-24
i