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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 THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 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 of principal executive offices) (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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes [ ] No [X]
Number of shares outstanding of each of the issuer's classes of common stock, as
of: NOVEMBER 1, 2004 (as restated for stock dividend - Note 1)
COMMON STOCK, $.01 PAR VALUE PER SHARE 8,508,710
1
Page
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
INDEX - SEPTEMBER 30, 2004
Condensed Consolidated Balance Sheets, September 30, 2004 and
June 30, 2004 3
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 14
ITEM 4. Controls and Procedures 14
PART II: OTHER INFORMATION 15
SIGNATURE PAGE 16
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 17
2
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
September 30, June 30,
2004 2004
------------- --------
(in thousands, except share data)
ASSETS
Current Assets:
Cash $ 1,540 $ 796
Accounts receivable, less allowance for doubtful accounts:
September 30, 2004 $ 320
June 30, 2004 $ 355 17,477 19,927
Inventories, net 15,213 14,594
Prepaid expenses and other current assets 778 760
Deferred income taxes 1,763 1,763
------- -------
Total current assets 36,771 37,840
Property, Plant and Equipment, net 8,865 8,987
Goodwill 9,686 9,686
Other assets 174 159
------- -------
$55,496 $56,672
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,488 $ 1,900
Accounts payable 3,863 3,789
Accrued expenses 1,032 963
Accrued salaries and wages 1,908 1,911
Accrued income taxes 147 285
------- -------
Total current liabilities 8,438 8,848
Long-term debt 4,838 6,400
Accrued income taxes 2,520 2,243
Deferred income taxes 1,277 1,277
------- -------
Total liabilities 17,073 18,768
------- -------
Stockholders' Equity (Note 1) *:
Common stock, par value $.01 per share; 21,000,000 shares authorized,
8,507,750 and 8,503,670 shares issued and outstanding, respectively 85 85
Additional paid-in capital 137 131
Stock dividend distributable 11,202 -
Retained earnings 26,999 37,688
------- -------
Total stockholders' equity 38,423 37,904
------- -------
$55,496 $56,672
======= =======
* The 20% stock dividend declared on November 8, 2004 (see Note 1), has been
retroactively reflected in Stockholders' Equity.
See accompanying notes to condensed consolidated financial statement
3
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended
September 30,
---------------------------
2004 2003
----------- -----------
(in thousands, except share and per share data)
Net Sales $ 13,440 $ 9,835
Cost of Sales 9,167 6,852
----------- -----------
Gross profit 4,273 2,983
Selling, General and Administrative Expenses 3,372 3,277
----------- -----------
Operating income (loss) 901 (294)
----------- -----------
Interest Expense, net 68 128
Other Expenses, net 43 12
----------- -----------
Other expenses 111 140
----------- -----------
Income (loss) before provision (benefit) for income taxes 790 (434)
Provision (benefit) for income taxes 277 (152)
----------- -----------
Net income (loss) $ 513 $ (282)
=========== ===========
Net income (loss) per share (Note 1 and Note 4)*: Basic $ 0.06 $ (0.04)
=========== ===========
Diluted $ 0.06 $ (0.04)
=========== ===========
Weighted average number of shares
outstanding (Note 1 and Note 4)*: Basic 8,506,568 7,684,574
=========== ===========
Diluted 8,967,492 7,684,574
=========== ===========
* The 20% stock dividend declared on November 8, 2004 (see Note 1), has been
retroactively reflected in all share and per share data.
See accompanying notes to condensed consolidated financial statements
4
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
September 30,
--------------------
2004 2003
------- -------
(in thousands)
Cash Flows from Operating Activities:
Net income (loss) $ 513 $ (282)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 292 275
Provision for doubtful accounts (35) 32
Changes in operating assets and liabilities:
Accounts receivable 2,485 5,236
Inventories (619) (2,035)
Prepaid expenses and other current assets (18) (639)
Other assets (45) 76
Accounts payable, accrued expenses, accrued salaries and
wages, and accrued income taxes 279 (999)
------- -------
Net Cash Provided by Operating Activities 2,852 1,664
------- -------
Cash Flows used in Investing Activities:
Net purchases of property, plant and equipment (140) (83)
------- -------
Cash Flows from Financing Activities:
Proceeds from exercise of employee stock options 6 25
Principal payments on long-term debt (1,974) (1,974)
------- -------
Net cash used in financing activities (1,968) (1,949)
------- -------
Net Increase (Decrease) in Cash 744 (368)
Cash, Beginning of Period 796 1,794
------- -------
Cash, End of Period $ 1,540 $ 1,426
======= =======
Cash Paid During the Period for:
Interest $ 75 $ 129
======= =======
Income taxes $ 131 $ 95
======= =======
See accompanying notes to condensed consolidated financial statement.
5
NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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 results of operations for the quarterly period ended September
30, 2004 are not necessarily indicative of results that may be expected
for any other interim period or for the full year.
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, 2004. The
accounting policies used in preparing these unaudited Condensed
Consolidated Financial Statements are consistent with those described in
the June 30, 2004 Consolidated Financial Statements, except as disclosed.
Advertising and Promotional Costs
Advertising and promotional costs are included in "Selling, General and
Administrative" expenses in the Condensed Consolidated Statements of
Operations and are expensed as incurred. Advertising expense for the three
months ended September 30, 2004 and 2003 was $385,000 and $381,000,
respectively.
Research and Development Costs
Research and development costs incurred by the Company are charged to
expense in the period incurred. Research and Development expense for the
three months ended September 30, 2004 and 2003 was $1,445,000 and
$1,284,000, respectively. These expenses are included in "Cost of sales"
in the Condensed Consolidated Statements of Operations.
Business Concentration and 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. The Company has two major customers with Sales and Accounts
Receivable as follows (in thousands):
Sales for the three months ended September 30,
-----------------------------------------------
2004 2003
--------------------- -----------------------
$ % $ %
------- ------ ------ -------
Customer A 1,112 8% 55 1%
Customer B 979 7% 692 7%
----- ---- ----- -----
2,091 15% 747 8%
===== ==== ===== =====
Accounts Receivable as of:
-------------------------------------------
September 30, 2004 June 30, 2004
------------------- -------------------
$ % $ %
----- ----- ----- -----
Customer A 2,471 14% 2,071 10%
Customer B 4,167 23% 4,197 21%
----- -- ----- ----
6,638 37% 6,268 31%
===== == ===== ====
6
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 $320,000 and
$355,000 as of September 30, 2004 and June 30, 2004, respectively. The
allowance for doubtful accounts is a subjective critical estimate that has
a direct impact on reported net earnings. This allowance is based upon the
evaluation of accounts receivable aging, specific exposures and historical
trends.
Stock Options
During the three months ended September 30, 2004 the Company granted no
stock options under its 2002 Employee Incentive Stock Option Plan. 3,400
options were exercised under this plan during the three months ended
September 30, 2004.
Stock Dividend and Stock Split
In November 2004, the Company's Board of Directors approved a twenty
percent (20%) stock dividend of the Company's common stock payable to
stockholders of record on November 22, 2004. The effect of the stock
dividend has been retroactively reflected in all share and per share data.
The additional shares are to be distributed on December 6, 2004. There is
no net effect on total stockholders' equity as a result of the stock
dividend.
In March 2004, the Company's Board of Directors approved a two-for-one
stock split in the form of a 100% stock dividend of the Company's common
stock payable to stockholders of record on April 13, 2004. The additional
shares were distributed on April 27, 2004. The Company utilized all
2,871,056 of its shares held as Treasury stock as of April 27, 2004 plus
an additional 609,260 shares in paying this stock dividend. There was no
net effect on total stockholders' equity as a result of the stock split.
2.) Employee Stock-based Compensation
The Company has established a number of share incentive programs as
discussed in more detail in our annual report on Form 10-K for the year
ended June 30, 2004. The Company applies the intrinsic value method as
outlined in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for
stock options and share units granted under these programs. Under the
intrinsic value method, no compensation expense is recognized if the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant. Accordingly, no
compensation cost has been recognized. The Company adopted the disclosure
portion of Statement of Financial Accounting Standard ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"
requiring quarterly SFAS No. 123 pro forma disclosure. The following table
illustrates the effect on earnings and earnings per share as if the fair
value method had been applied to all outstanding and unvested awards in
each period presented.
Three Months
Ended September 30,
--------------------------
2004 2003
---------- ------------
(unaudited)
(in thousands, except per share data)
Net income (loss), as reported $ 513 $ (282)
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects (74) (53)
---------- -----------
Pro forma net earnings, attributable to common stock $ 439 $ (335)
========== ===========
Earnings per common share (1):
Basic - as reported $ 0.06 $ (0.04)
========== ===========
Basic - pro forma $ 0.05 $ (0.04)
========== ===========
Diluted - as reported $ 0.06 $ (0.04)
========== ===========
Diluted - pro forma $ 0.05 $ (0.04)
========== ===========
(1) Information reflects stock dividend and stock split. See Note 1
7
3.) Inventories
Inventories consist of:
September 30, June 30,
2004 2004
---------- ----------
(in thousands)
Component parts $ 9,822 $ 9,423
Work-in-process 1,409 1,352
Finished products 3,982 3,819
---------- ----------
$ 15,213 $ 14,594
========== ==========
For interim financial statements, inventories are calculated using a gross
profit percentage.
4.) Earnings Per Common Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share".
In accordance with SFAS No. 128, earnings per common share amounts ("Basic
EPS") were computed by dividing earnings by the weighted average number of
common shares outstanding for the period. Earnings 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 earnings is as follows (Information reflects
the stock dividend and stock split as described in Note 1):
Three months ended September 30, 2004
(in thousands, except per share data)
-------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
------------ ------------- ----------
Net income $ 513 - -
------------ ----- --------
BASIC EPS
Net income attributable to common stock $ 513 8,507 $ 0.06
EFFECT OF DILUTIVE SECURITIES
Options $ - 460 -
------------ ----- --------
DILUTED EPS
Net income attributable to common stock
and assumed option exercises $ 513 8,967 $ 0.06
============ ===== ========
No options to purchase shares of common stock in the three months ended
September 30, 2004 were excluded in the computation of Diluted EPS because
the option price was in excess of the average market price for the three
months ended September 30, 2004.
8
Three months ended September 30, 2003 (as restated)
(in thousands, except per share data)
---------------------------------------------------
Net Income Shares Per Share
(numerator) (denominator) Amounts
------------ ------------- ----------
Net loss $ (282) - -
------------ ----- ------
BASIC EPS
Net income attributable to common stock $ (282) 7,685 ($0.04)
EFFECT OF DILUTIVE SECURITIES
Options $ - - -
------------ ----- ------
DILUTED EPS
Net loss attributable to common stock
and assumed option exercises $ (282) 7,685 ($0.04)
============ ===== ======
Options to purchase 1,147,000 shares of common stock in the three months
ended September 30, 2003 (as restated - Note 1) were not included in the
computation of Diluted EPS because the Company incurred a loss for the
three months, therefore the impact would have been anti-dilutive. These
options were still outstanding at the end of the period.
5) Long Term Debt
In May 2001, the Company amended its secured revolving credit agreement with its
primary bank. The Company's borrowing capacity under the amended agreement was
increased to $18,000,000. The amended revolving credit agreement is secured by
all the accounts receivable, inventory, the Company's headquarters in
Amityville, New York, common stock of three of the Company's subsidiaries and
certain other assets of Napco Security Systems, Inc. The revolving credit
agreement bears interest at either the Prime Rate less 1/4% or an alternate rate
based on LIBOR as described in the agreement. In September 2004 the Company's
bank approved an extension of the expiration date of the secured revolving
credit agreement from April 2005 to July 2005 and any outstanding borrowings are
to be repaid or refinanced on or before that time. The agreement contains
various restrictions and covenants including, among others, restrictions on
payment of dividends, restrictions on borrowings, restrictions on capital
expenditures, the maintenance of minimum amounts of tangible net worth, and
compliance with other certain financial ratios, as defined in the agreement. In
October 2004 the Company renegotiated this secured revolving credit agreement at
essentially the same terms and conditions with a new expiration date of
September 2008.
6.) Geographical Data
The revenues attributable to the Company's domestic and foreign operations
for the periods presented are summarized in the following tabulation (in
thousands):
Three Months
Ended September 30,
------------------------
2004 2003
------- --------
Sales to external customers(1):
Domestic $11,463 $ 7,974
Foreign 1,977 1,861
------- --------
Total Net Sales $13,440 $ 9,835
======= ========
(1) All of the Company's sales occur in the United States and are shipped
primarily from the Company's facilities in the United States and United
Kingdom. There were no sales into any one foreign country in excess of 10%
of Net Sales.
9
7) Commitments and Contingencies
In August 2001, the Company became a defendant in a product related
lawsuit, in which the plaintiff seeks damages of approximately
$17,000,000. This action is being defended by the Company's insurance
company on behalf of the Company. Management believes that the action is
without merit and plans to have this action vigorously defended.
In the normal course of business, the Company is a party to claims and/or
litigation. Management believes that the settlement of such claims and/or
litigation, considered in the aggregate, will not have a material adverse
effect on the Company's financial position and results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Napco Security Systems, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This Quarterly Report on Form 10-Q and the information incorporated by reference
may include "Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The
Company intends the Forward-Looking Statements to be covered by the Safe Harbor
Provisions for Forward-Looking Statements. All statements regarding the
Company's expected financial position and operating results, its business
strategy, its financing plans and the outcome of any contingencies are
Forward-Looking Statements. The Forward-Looking Statements are based on current
estimates and projections about our industry and our business. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such Forward-Looking Statements. The Forward-Looking Statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth or implied by any Forward-Looking Statements. Factors that
could cause actual results to differ materially from the Forward-Looking
Statements include, but are not limited to, inability to refinance, adverse tax
consequences of offshore operations, distribution problems, unforeseen
environmental liabilities and the uncertain military, political and economic
conditions in the world. These and other risks are detailed in Part I, Item 1
and elsewhere in this Form 10-Q. The Company assumes no obligation to update
publicly the Forward-Looking Statements contained herein, whether as a result of
new information, future events or otherwise, except as may be required by law.
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
which require, in some cases, that certain estimates and assumptions be made
that affect the amounts and disclosures reported in the those financial
statements and the related accompanying notes. Estimates are based on current
facts and circumstances, prior experience and other assumptions believed to be
reasonable. Management uses its best judgment in valuing these estimates and
may, as warranted, solicit external advice. Actual results could differ from
these estimates, assumptions and judgments and these differences could be
material. The following critical accounting policies, some of which are impacted
significantly by estimates, assumptions and judgments, affect the Company's
consolidated financial statements. Our most critical accounting policies relate
to revenue recognition; concentration of credit risk; inventory; goodwill and
other intangible assets; and income taxes.
Revenue Recognition
Revenues from merchandise sales are recorded at the time the product is shipped
or delivered to the customer pursuant to the terms of purchase. 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 and allowances.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales. This accrual is calculated based on a history of
gross sales and actual sales returns, as well as management's estimate of
anticipated returns and allowances.
Business Concentration and 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. The
Company has two major customers with Sales and Accounts receivable as follows
(in thousands):
Sales for the three months ended September 30,
----------------------------------------------
2004 2003
-------------------- -----------------
$ % $ %
------ ----- ----- -----
Customer A 1,112 8% 55 1%
Customer B 979 7% 692 7%
----- -- --- -
2,091 15% 747 8%
===== == === =
11
Accounts Receivable as of:
------------------------------------------
September 30, 2004 June 30, 2004
------------------ ---------------
$ % $ %
----- -- ----- --
Customer A 2,471 14% 2,071 10%
Customer B 4,167 23% 4,197 21%
----- -- ----- --
6,638 37% 6,268 31%
===== == ===== ==
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 $320,000 and $355,000 as of September 30,
2004 and June 30, 2004, 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.
Inventories
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. For interim financial statements, inventories are calculated using a
gross profit percentage.
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 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. We
evaluate 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 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.
Stock Dividend
In November 2004, the Company's Board of Directors approved a twenty percent
(20%) stock dividend of the Company's common stock payable to stockholders of
record on November 22, 2004. The additional shares are to be distributed on
December 6, 2004. The effect of the stock dividend has been retroactively
reflected in all share and per share data. As a result, all references to
numbers of shares have been increased by 20%, and there has been a corresponding
decrease to all per share amounts, throughout this entire document for all
periods presented. This resulted in a reduction in earnings per share due to the
increase in the weighted average number of shares outstanding as a result of the
20% stock dividend. Retroactive adjustment to all share and per share data is
necessary to assure such information is comparable for all periods presented.
There is no net effect on total stockholders' equity as a result of the stock
dividend. The following table shows the effect of retroactively reflecting this
20% stock dividend on earnings per share for the three months ended September
30, 2004 and September 30, 2003 (in thousands except share and per share data):
Three months ended September 30,
--------------------------------
2004 2003
------------ ------------
Net income (loss) ..................................... $ 513 $ (282)
Earnings (loss) per share before retroactive effect
of 20% stock dividend:
Basic ............................................... $ 0.07 $ (0.04)
Diluted ............................................. $ 0.07 $ (0.04)
Weighted average number of shares outstanding before
retroactive effect of 20% stock dividend:
Basic ............................................... 7,088,807 6,403,812
Diluted.............................................. 7,472,910 6,403,812
Earnings (loss) per share as reported (after giving
effect of 20% stock dividend):
Basic ............................................... $ 0.06 $ (0.04)
Diluted.............................................. $ 0.06 $ (0.04)
Weighted average number of shares outstanding as
reported (after giving effect of 20% stock dividend):
Basic ............................................... 8,506,568 7,684,574
Diluted.............................................. 8,967,492 7,684,574
Results of Operations
Sales for the three months ended September 30, 2004 increased by 37% to
$13,440,000 as compared to $9,835,000 for the same period a year ago. The
increase in net sales for the three months ended September 30, 2004 was
primarily due to increased sales of the Company's burglar alarm products. Sales
in the first fiscal quarter of last year were adversely affected by a major
distributor's introduction of its company-wide inventory reduction program.
During the quarter ended December 31, 2003, the Company began the process of
realigning its burglar alarm products distribution network which culminated in
the termination of the aforementioned major burglar alarm distributor. The
Company reallocated its burglar alarm products business across its extensive
national network of
12
independent distributors. Management believes that this realignment of its
distribution network resulted in increased sales during the first quarter of
fiscal 2005.
The Company's gross profit for the three months ended September 30, 2004
increased by $1,290,000 to $4,273,000 or 31.8% of sales as compared to
$2,983,000 or 30.3% of sales for the same period a year ago. The increase was
due primarily to the increase in sales as discussed above as well as to lower
manufacturing overhead costs due, in part, to a favorable change in the exchange
rate relating to the Company's Dominican Republic manufacturing facility as
compared to the same period a year ago.
Selling, general and administrative expenses for the three months ended
September 30, 2004 increased slightly to $3,372,000, or 25% of sales, as
compared to $3,277,000, or 33% of sales a year ago. The decline in Selling,
general and administrative expenses as a percentage of sales for the three
months ended September 30, 2004 was due primarily to net sales increasing as
described above while expenses remained relatively constant.
Interest expense for the three months ended September 30, 2004 decreased by
$60,000 to $68,000 from $128,000 for the same period a year ago. The change for
the three months resulted primarily from the reduction in the Company's average
outstanding debt.
Other Income/expense for the three months ended September 30, 2004 increased by
$31,000 to $43,000 from $12,000 for the same period a year ago. This increase
resulted primarily from expenses related to the Company's joint venture in the
Middle East which was formed in April of 2004.
The Company had a provision for income taxes for the three months ended
September 30, 2004 of $277,000 as compared to a benefit of ($152,000), for the
same period a year ago. The tax provision and benefit are calculated using an
estimated effective tax rate of 35%.
Net income increased by $795,000 to $513,000 or $0.06 per share for the three
months ended September 30, 2004 as compared to a loss of ($282,000) or ($0.04)
per share, as restated, for the same period a year ago. These changes were
primarily due to the items discussed above.
Liquidity and Capital Resources
During the three months ended September 30, 2004 the Company utilized a portion
of its cash generated from operations to reduce certain of its outstanding
borrowings (by $1,974,000), purchase property, plant and equipment ($140,000)and
invest in additional inventory ($619,000) as discussed below. 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 2006.
Accounts Receivable at September 30, 2004 decreased $2,450,000 to $17,477,000 as
compared to $19,927,000 at June 30, 2004. This decrease is primarily the result
of the higher sales volume during the quarter ended June 30, 2004 as compared to
the quarter ended September 30, 2004.
Inventory at September 30, 2004 increased by $619,000 to $15,213,000 as compared
to $14,594,000 at June 30, 2004. 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.
In January 2003, the Company repurchased 500,000 shares of its common stock from
two stockholders, unaffiliated with the Company, at $4.07 per share, a discount
from its then current trading price of $4.17. The transaction was approved by
the Board of Directors and the purchase price of $2,442,000 (including fees of
$5,000), was financed through the Company's revolving line of credit and a new
five year term loan from its primary bank for $1,250,000. The term loan is being
repaid in 60 equal monthly installments commencing on April 30, 2003.
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.
Other than the $8,250,000 and $1,250,000 loans described above, the Company's
credit facilities consist of an $18,000,000 secured revolving credit agreement.
In April 2004 the Company's bank approved an extension of the expiration date of
the secured revolving credit agreement from January 2005 to April 2005. In
October 2004 the Company renegotiated this secured revolving credit agreement at
essentially the same terms and conditions with a new expiration date of
September 2008. As of September 30, 2004 there was $13,787,000 available under
this secured revolving credit facility.
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As of September 30, 2004 the Company had no material commitments for capital
expenditures or inventory purchases other than purchase orders used in the
normal course of business.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
The Company's principal financial instrument is long-term debt (consisting of a
revolving credit and term loan facilities) 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 September 30, 2004 an aggregate amount of
approximately $6,300,000 was outstanding under these facilities. If these
borrowings 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 $63,000 in interest that year.
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.
ITEM 4: Controls and Procedures
At the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13 a - 15(e). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. During the third quarter of fiscal year
2004, there were no changes in the Company's internal control over financial
reporting that have materially affected, or are reasonable likely to materially
affect, the Company's internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended and Restated Loan and Security Agreement dated October
21, 2004
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Richard
L. Soloway, Chairman of the Board and President
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Kevin S.
Buchel, Senior Vice President of Operations and Finance
32.1 Section 1350 Certifications
(b) Form 8-K Filings
(i) On September 28, 2004 the Company filed an 8-K reporting under
item 2, Results of Operations and Financial Condition, and Item 9,
Financial Statements
(ii) On September 15, 2004 the Company filed an 8-K reporting under
Item 9, Financial Statements and Exhibits.
(iii) On August 10, 2004 the Company filed an 8-K reporting under
Item 5, Other Events, and Item 7, Financial Statements and Exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 8, 2004
NAPCO SECURITY SYSTEMS, INC
(Registrant)
By: /s/ Richard L. Soloway
----------------------------------------------------------
Richard L. 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)
16