-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JhzsecAoAVMiicM93sWjBDIqYTnOzlhVT3XpX1w2T/XaD2pOLnZ8EFSY897++MCn HSW8ktxGUq0RGL4JnZz6nw== 0000950123-03-006103.txt : 20030515 0000950123-03-006103.hdr.sgml : 20030515 20030515155201 ACCESSION NUMBER: 0000950123-03-006103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAPCO SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000069633 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112277818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10004 FILM NUMBER: 03704904 BUSINESS ADDRESS: STREET 1: 333 BAYVIEW AVE CITY: AMITYVILLE STATE: NY ZIP: 11701 BUSINESS PHONE: 5168429400 MAIL ADDRESS: STREET 1: C/O FORCHELLI CURTO SCHWARTZ ET AL, LLP STREET 2: 330 OLD COUNTRY RD. - 3RD FL. CITY: MINEOLA STATE: NY ZIP: 11501 10-Q 1 y86777e10vq.txt NAPCO SECURITY SYSTEMS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2003 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. Commission File number: 0-10004 NAPCO SECURITY SYSTEMS, INC (Exact name of Registrant as specified in its charter) Delaware 11-2277818 (State or other jurisdiction of (IRS Employer Identification incorporation of organization) Number) 333 Bayview Avenue Amityville, New York 11701 (Address) (Zip Code) (631) 842-9400 (Registrant's telephone number including area code) None (Former name, former address and former fiscal year if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Number of shares outstanding of each of the issuer's classes of common stock, as of: MARCH 31, 2003 COMMON STOCK, $.01 PAR VALUE PER SHARE 3,198,296 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES INDEX MARCH 31, 2003
Page ---- PART I: FINANCIAL INFORMATION (unaudited) Condensed Consolidated Balance Sheets, March 31, 2003 and June 30, 2002 3 Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2003 and 2002 4 Condensed Consolidated Statements of Operations for the Nine Months ended March 31, 2003 and 2002 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 31, 2003 and 2002 6 Notes to Condensed Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II: OTHER INFORMATION 17 SIGNATURE PAGE 18 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 19 INDEX TO EXHIBITS 22
2 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, June 30, ASSETS 2003 2002 ------ -------- -------- (in thousands, except share data) Current Assets: Cash $ 1,764 $ 1,500 Accounts receivable, less reserve for doubtful accounts: March 31, 2003 $ 408 June 30, 2002 $ 393 13,408 18,313 Inventories, net (Note 2) 19,220 17,931 Prepaid expenses and other current assets 595 1,213 -------- -------- Total current assets 34,987 38,957 Property, Plant and Equipment, net of accumulated depreciation and amortization (Note 3): March 31, 2003 $ 17,640 June 30, 2002 $ 16,696 9,626 9,964 Goodwill 9,686 9,686 Deferred income taxes 1,032 1,032 Other assets 217 229 -------- -------- $ 55,548 $ 59,868 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 2,025 $ 2,664 Accounts payable 2,698 2,994 Accrued and other current liabilities 2,155 2,693 Accrued income taxes 193 96 -------- -------- Total current liabilities 7,071 8,447 Long-term debt 16,100 16,588 Deferred income taxes 539 539 -------- -------- Total liabilities 23,710 25,574 -------- -------- Shareholders' Equity: Common stock, par value $.01 per share; 21,000,000 shares authorized, 6,069,352 and 6,004,252 shares issued, respectively; 3,198,296 and 3,383,196 shares outstanding, respectively 61 60 Additional paid-in capital 1,341 1,082 Retained earnings 38,295 38,569 Less: Treasury stock, at cost (2,871,056 and 2,621,056 shares, respectively) (7,859) (5,417) -------- -------- Total stockholders' equity 31,838 34,294 -------- -------- $ 55,548 $ 59,868 ======== ========
See accompanying notes to condensed consolidated financial statement 3 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, --------------------------- 2003 2002 --------- -------- (in thousands, except share and per share data) Net Sales $ 13,406 $ 13,321 Cost of Sales 9,910 9,861 --------- --------- Gross profit 3,496 3,460 Selling, General and Administrative Expenses 3,487 2,913 --------- --------- Operating income (loss) 9 547 --------- --------- Interest Expense, net 141 328 Other Expense, net 69 12 --------- --------- 210 340 --------- --------- Income (loss) before provision for income taxes (201) 207 Provision for income taxes 5 -- --------- --------- Net income (loss) $ (206) $ 207 ========= ========= Net income (loss) per share (Note 4): Basic $ (0.06) $ 0.06 ========= ========= Diluted $ (0.06) $ 0.06 ========= ========= Weighted average number of shares outstanding (Note 4): Basic 3,303,696 3,342,796 ========= ========= Diluted 3,303,696 3,507,289 ========= =========
See accompanying notes to condensed consolidated financial statements 4 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, ---------------------------- 2003 2002 ---------- --------- (in thousands, except share and per share data) Net Sales $ 38,990 $ 36,712 Cost of Sales 28,877 27,175 ---------- ---------- Gross profit 10,113 9,537 Selling, General and Administrative Expenses 9,913 8,628 ---------- ---------- Operating income 200 909 ---------- ---------- Interest Expense, net 577 1,137 Other (Income) Expense, net (118) 37 ---------- ---------- 459 1,174 ---------- ---------- Loss before provision for income taxes (259) (265) Provision for income taxes 15 -- ---------- ---------- Net loss $ (274) $ (265) ========== ========== Net loss per share (Note 4): Basic $ (0.08) $ (0.08) ========== ========== Diluted $ (0.08) $ (0.08) ========== ========== Weighted average number of shares outstanding (Note 4): Basic 3,348,746 3,375,697 ========== ========== Diluted 3,348,746 3,375,697 ========== ==========
See accompanying notes to condensed consolidated financial statements 5 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, ----------------------- 2003 2002 ------- ------- (in thousands) Net Cash Provided by Operating Activities $ 4,180 $ 4,719 ------- ------- Cash Flows from Investing Activities: Net purchases of property, plant and equipment (606) (557) ------- ------- Net cash used in investing activities (606) (557) ------- ------- Cash Flows from Financing Activities: Proceeds from long-term debt 4,250 200 Proceeds from exercise of employee stock options 259 105 Principal payments on long-term debt (5,377) (3,308) Payments for purchase of treasury stock (2,442) (243) ------- ------- Net cash used in financing activities (3,310) (3,246) ------- ------- Net Increase in Cash 264 916 Cash, Beginning of Period 1,500 1,037 ------- ------- Cash, End of Period $ 1,764 $ 1,953 ======= ======= Cash Paid During the Period for: Interest $ 586 $ 1,130 ======= ======= Income taxes $ 14 $ 11 ======= =======
See accompanying notes to condensed consolidated financial statement. 6 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 Unaudited Condensed Consolidated Financial Statements include the accounts of the Company after elimination of all material inter-company balances and transactions. The Company has made a number of estimates and assumptions relating to the assets and liabilities, the disclosure of contingent assets and liabilities and the reporting of revenues and expenses to prepare these financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended June 30, 2002. 2.) Inventories Inventories consist of:
March 31, June 30, 2003 2002 ------- ------- (in thousands) Component parts $10,184 $ 9,551 Work-in-process 3,527 3,308 Finished products 5,509 5,072 ------- ------- $19,220 $17,931 ======= =======
3.) Property, Plant and Equipment Property, Plant and Equipment consists of:
March 31, June 30, 2003 2002 ------- ------- (in thousands) Land $ 904 $ 904 Building 8,911 8,911 Molds and dies 4,302 4,197 Furniture and fixtures 1,217 1,141 Machinery and equipment 11,746 11,316 Building improvements 186 191 ------- ------- 27,266 26,660 Less: Accumulated depreciation and amortization 17,640 16,696 ------- ------- $ 9,626 $ 9,964 ======= =======
7 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED STATEMENTS 4.) Net Income Per Common Share The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In accordance with SFAS No. 128, net income per common share amounts ("Basic EPS") were computed by dividing net income by the weighted average number of common shares outstanding for the period. Net income per common share amounts, assuming dilution ("Diluted EPS"), were computed by reflecting the potential dilution from the exercise of stock options. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statements of operations. A reconciliation between the numerators and denominators of the Basic and Diluted EPS computations for net income is as follows:
Three months ended March 31, 2003 (in thousands, except per share data) ------------------------------------- Net Income Shares Per Share (numerator) (denominator) Amounts ----------- ------------- ------- Net loss $(206) -- -- ----- ----- ----- BASIC EPS Net loss attributable to common stock $(206) 3,304 ($0.06) EFFECT OF DILUTIVE SECURITIES Options $-- -- -- ----- ----- ----- DILUTED EPS Net loss attributable to common stock and assumed option exercises $(206) 3,304 ($0.06) ===== ===== =====
Options to purchase 421,860 shares of common stock in the three months ended March 31, 2003 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.
Three months ended March 31, 2002 (in thousands, except per share data) ---------------------------------------- Net Income Shares Per Share (numerator) (denominator) Amounts ----------- ------------- ------- Net income $ 207 -- -- ----- ----- ----- BASIC EPS Net income attributable to common stock $ 207 3,343 $0.06 EFFECT OF DILUTIVE SECURITIES Options $-- 164 -- ----- ----- ----- DILUTED EPS Net income attributable to common stock and assumed option exercises $ 207 3,507 $0.06 ===== ===== =====
Options to purchase 3,500 shares of common stock in the three months ended March 31, 2002 were not included in the computation of Diluted EPS because the exercise prices exceeded the average market price of the common shares for this period. These options were still outstanding at the end of the period. 8 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED STATEMENTS
Nine months ended March 31, 2003 (in thousands, except per share data) ---------------------------------------- Net Income Shares Per Share (numerator) (denominator) Amounts ----------- ------------- ------- Net loss $(274) -- -- ----- ----- ----- BASIC EPS Net loss attributable to common stock $(274) 3,349 ($0.08) EFFECT OF DILUTIVE SECURITIES Options $-- -- -- ----- ----- ----- DILUTED EPS Net loss attributable to common stock and assumed option exercises $(274) 3,349 ($0.08) ===== ===== =====
Options to purchase 421,860 shares of common stock in the nine months ended March 31, 2003 were not included in the computation of Diluted EPS because the Company incurred a loss for the nine months, therefore the impact would have been anti-dilutive. These options were still outstanding at the end of the period.
Nine months ended March 31, 2002 (in thousands, except per share data) ---------------------------------------- Net Income Shares Per Share (numerator) (denominator) Amounts ----------- ------------ ------- Net loss $(265) -- -- ----- ----- ----- BASIC EPS Net loss attributable to common stock $(265) 3,376 ($0.08) EFFECT OF DILUTIVE SECURITIES Options $-- -- -- ----- ----- ----- DILUTED EPS Net loss attributable to common stock and assumed option exercises $(265) 3,376 ($0.08) ===== ===== =====
Options to purchase 418,080 shares of common stock in the nine months ended March 31, 2002 were not included in the computation of Diluted EPS because the Company incurred a loss for the nine months, therefore the impact would have been anti-dilutive. These options were still outstanding at the end of the period. 9 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED STATEMENTS 5) Long Term Debt In January 2003, the Company repurchased 250,000 shares of its common stock from two shareholders, unaffiliated with the Company, at $9.75 per share, a discount from its then current trading price of $10.01. The transaction was approved by the board of directors and the purchase price of $2,437,500 was financed through the Company's revolving line of credit and a new five (5) year term loan from its primary bank for approximately 50% of the purchase price. This term loan is for $1,250,000 and is being repaid in 60 equal monthly installments commencing on April 30, 2003. 6) Accrued Warranty Obligations In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees it has issued. the initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. The Company adopted the disclosure requirements of this interpretation in the current quarter. the adoption of this interpretation did not have a material impact on its consolidated financial position, results of operations or cash flows. The Company recognizes the estimated cost associated with its standard warranty on products at the time of sale. The estimate is based on historic as well as current return rates and experience. The changes in the Company's accrued warranty obligation for the period was immaterial. 7) Employee Stock-based Compensation As of March 31, 2003, the Company had 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, 2002. 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. Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation - Transition and Disclosure" requiring quarterly SFAS No. 123 pro forma disclosure. The following table illustrates the effect on net income 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 Nine Months Ended March 31, Ended March 31, ------------------------ ------------------------ 2003 2002 2003 2002 -------- -------- -------- -------- (Unaudited) (In thousands, except per share data) Net earnings attributable to common stock, as reported $ (206) $ 207 $ (274) $ (265) Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (74) (100) (248) (306) -------- -------- -------- -------- Pro forma net earnings, attributable to common stock $ (280) $ 107 $ (522) $ (571) ======== ======== ======== ======== EARNINGS PER COMMON SHARE: Basic - as reported $ (0.06) $ 0.06 $ (0.08) $ (0.08) ======== ======== ======== ======== Basic - pro forma $ (0.08) $ 0.03 $ (0.16) $ (0.17) ======== ======== ======== ======== Diluted - as reported $ (0.06) $ 0.06 $ (0.08) $ (0.08) ======== ======== ======== ======== Diluted - pro forma $ (0.08) $ 0.03 $ (0.16) $ (0.17) ======== ======== ======== ========
10 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Sales for the three months ended March 31, 2003 increased by 0.6% to $13,406,000 as compared to $13,321,000 for the same period a year ago. Sales for the nine months ended March 31, 2003 increased by 6.2% to $38,990,000 as compared to $36,712,000 for the same period a year ago. The increases in net sales for the three and nine months were primarily due to increases in sales volume to several of the Company's larger, domestic alarm customers as well as one of the Company's major customers that had streamlined its on-hand inventory during the first half of fiscal 2002. The Company's gross profit for the three months ended March 31, 2003 increased by $36,000 to $3,496,000 or 26.1% of sales as compared to $3,460,000 or 26.0% of sales for the same period a year ago. The Company's gross profit for the nine months ended March 31, 2003 increased by $576,000 to $10,113,000 or 25.9% of sales as compared to $9,537,000 or 26.0% of sales for the same period a year ago. These increases in dollars are due primarily to the increase in sales as discussed above. In addition, gross profit, both in dollars and as a percentage of net sales, was impacted slightly by a shift in product mix to lower margin products. Selling, general and administrative expenses for the three months ended March 31, 2003 increased by $574,000 to $3,487,000, or 26.0% of sales, as compared to $2,913,000, or 21.9% of sales a year ago. Selling, general and administrative expenses for the nine months ended March 31, 2003 increased by $1,285,000 to $9,913,000, or 25.4% of sales, as compared to $8,628,000, or 23.5% of sales, a year ago. These increases for the three and nine months are due primarily to additions to the Company's sales force and investor relations expenses, as well as increases in the Company's property and liability insurance rates. Interest and other expense for the three months ended March 31, 2003 decreased by $130,000 to $210,000 from $340,000 for the same period a year ago. Interest and other expense for the nine months ended March 31, 2003 decreased by $715,000 to $459,000 from $1,174,000 for the same period a year ago. These decreases for the three and nine months resulted from a decrease in interest expense during the nine months ended March 31, 2003 resulting from the continued reduction of the Company's outstanding debt as well as a decline in the interest rates available to the Company. In addition, during the quarter ended September 30, 2002, the Company settled litigation which it had initiated as the plaintiff and realized a gain of approximately $210,000. This gain was recorded as Other Income during the quarter ended September 30, 2002. The Company had a provision for income taxes for the three months ended March 31, 2003 of $5,000 as compared to no provision for the same period a year ago. The Company had a provision for income taxes for the nine months ended March 31, 2003 of $15,000 as compared to no provision for the same period a year ago. These provisions relate to income taxes on the Company's United Kingdom subsidiary. Net income decreased by $413,000 to a loss of ($206,000) or ($0.06) per share for the three months ended March 31, 2003 as compared to net income of $207,000 or $0.06 per share for the same period a year ago. Net income decreased by $9,000 to a net loss of $(274,000) or $(0.08) per share for the nine months ended March 31, 2003 as compared to a net loss of $(265,000) or $(0.08) per share for the same period a year ago. These changes were primarily due to the items discussed above. Liquidity and Capital Resources During the nine months ended March 31, 2003 the Company utilized a portion of its cash generated from operations to reduce certain of its outstanding borrowings, purchase property, plant and equipment and invest in additional inventory as discussed below. During the first quarter of fiscal 2001, the Company entered into an $8,250,000 term loan agreement, payable over 60 equal monthly installments, in order to purchase the assets of Continental Instruments, LLC. The Company's management believes that current working capital, cash flows from operations and its revolving credit agreement will be sufficient to fund the Company's operations through at least the first quarter of fiscal 2005. Accounts Receivable at March 31, 2003 decreased $4,905,000 to $13,408,000 as compared to $18,313,000 at June 30, 2002. This decrease is primarily the result of the higher sales volume during the quarter ended June 30, 2002 as compared to the quarter ended March 31, 2003. Inventory at March 31, 2003 increased by $1,289,000 to $19,220,000 as compared to $17,931,000 at June 30, 2002. This increase was primarily the result of the Company's level-loading its production schedule in anticipation of its historical sales cycle where a larger portion of the Company's sales occur in the latter fiscal quarters as compared to the earlier quarters. 11 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In May of 1998 the Company repurchased 889,576 shares of Napco common stock for $5.00 per share from one of its co-founders. $2.5 million was paid at closing and the balance of the purchase price was paid over a four (4) year period. The portion of the purchase price paid at closing was financed by the Company's primary bank and is being repaid over a five (5) year period. In November 2000 the Company adopted a stock repurchase program. Under this program, the Company is authorized to repurchase from time to time, 205,000 shares of its common stock. As of March 31, 2003 the Company had repurchased 202,605 shares under this program for a total cash amount of $968,000. In January 2003, the Company repurchased 250,000 shares of its common stock from two shareholders, unaffiliated with the Company, at $9.75 per share, a discount from its then current trading price of $10.01. The transaction was approved by the board of directors and the purchase price of $2,437,500 was financed through the Company's revolving line of credit and a new five (5) year term loan from its primary bank for approximately 50% of the purchase price. This term loan is for $1,250,000 and is being repaid in 60 equal monthly installments commencing on April 30, 2003. Other than the $8,250,000 loan described above, the Company's bank debt consisted of an $18,000,000 secured revolving credit agreement and a $3,000,000 line of credit to be used in connection with commercial and standby letters of credit. The revolving credit agreement has an expiration date of July 2004 and the Company expects to renew it on or before that time. As of March 31, 2003, the Company was in compliance with all covenants related to the agreements described above. As of March 31, 2003 the Company had no material commitments for capital expenditures or inventory purchases other than purchase orders used in the normal course of business. Recently Issued Accounting Standards The Financial Accounting Standards Board recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 but retains fundamental provisions of SFAS No. 121 for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supercedes the accounting/reporting provisions of Accounting Principles Board Opinion No. 30 for segments of a business to be disposed of but retains APB 30's requirement to report discontinued operations separately from continuing operations and extends that reports to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The effect of the adoption of SFAS No. 144 effective July 1, 2002 was not material. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after March 31, 2003 and thus will become effective for the Company on January 1, 2003. The Company will continue to apply the provisions of EITF Issue 94-3 to any exit activities that have been initiated under an exit plan that met the criteria of EITF Issue No. 94-3 before the adoption of SFAS No. 146. The adoption of SFAS No. 146 did not have a material effect on the financial position, results of operations or cash flows of the Company upon adoption. In December 2001, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others." The SOP applies to any entity that lends to or finances the activities of others, and specifies accounting and disclosure requirements for entities that extend trade credit to customers and also provides specific guidance for other types of transactions specific to certain financial institutions. The SOP is effective for the Company beginning July 1, 2003 and the Company does not believe the recognition and measurement provisions within this SOP will result in a change in practice for its trade receivables or any other activities of the Company. The SOP also provides certain presentation and disclosure changes for entities with trade receivables as part of the objective of requiring consistent accounting and reporting for like transactions, which the Company intends to include in its disclosures upon adoption. 12 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 "Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. We adopted the disclosure portion of this statement for the current fiscal quarter ended March 31, 2003. The application of the disclosure portion of this standard will have no impact on our consolidated financial position or results of operations. On April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an exposure draft letter this year that could become effective in 2004. We will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's consolidated financial statements. Forward-looking Statements This quarterly report, other than historical financial information, contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended June 30, 2002. These include risks and uncertainties relating to competition and technological change, intellectual property rights, capital spending international operations, and the Company's acquisition strategies. Quantitative and Qualitative Disclosures About Market Risk The Company's 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 March 31, 2003 an aggregate amount of approximately $16,600,000 was outstanding under this facility. 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 $166,000 in interest that year. In October 2000, the Company entered into an interest rate swap to maintain the value-at-risk inherent in its interest rate exposures. This instrument expired on October 30, 2002. This transaction met the requirements for cash flow hedge accounting. Accordingly, any gain or loss associated with the difference between interest rates was included as a component of interest expense. The fair value of this instrument was not material. The Company has not entered into any new interest rate swaps and does not hold or enter into derivative financial instruments for trading or speculative purposes. Where appropriate, the Company requires that letters of credit be provided on foreign sales. In addition, a significant number of transactions by the Company are denominated in U.S. dollars. As such, the Company has shifted foreign currency exposure onto many of its foreign customers. As a result, if exchange rates move against foreign customers, the Company could experience difficulty collecting unsecured accounts receivable, the cancellation of existing orders or the loss of future orders. The foregoing could materially adversely affect the Company's business, financial condition and results of operations. In addition, the Company transacts certain sales in Europe in British Pounds Sterling, therefore exposing itself to a certain amount of foreign currency risk. Management believes that the amount of this exposure is immaterial. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex and, consequently, actual results 13 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS could differ from those estimates. Our most critical accounting policies relate to revenue recognition; concentration of credit risk; inventory; goodwill and other intangible assets; and income taxes. Revenue Recognition Generally, revenues from merchandise sales are recorded at the time the product is shipped to our customer. We report our sales levels on a net sales basis, which is computed by deducting from gross sales the amount of actual returns received and an amount established for anticipated returns. Our sales return accrual is a subjective critical estimate that has a direct impact on reported net sales. This accrual is calculated based on a history of gross sales and actual returns by region and product category. In addition, as necessary, specific accruals for sales returns may be established for known or anticipated events. Concentration of Credit Risk An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had it mitigated its risk through diversification of customers. Such risks of loss are manifest differently, depending on the nature of the concentration, and vary in significance. We have two major customers that accounted for approximately $4,354,000, or 32%, of our consolidated net sales for the three months ended March 31, 2003, $10,068,000, or 26%, of our consolidated net sales for the nine months ended March 31, 2003 and $7,250,000, or 54%, of our accounts receivable as of March 31, 2003. The largest of these two customers accounted for $3,560,000, or 27%, and $7,392,000, or 19% of sales for the three and nine months ended March 31, 2003, respectively, and $3,681,000, or 27%, of accounts receivable. These customers sell primarily within North America. Although management believes that these customers are sound and creditworthy, a severe adverse impact on their business operations could have a corresponding material adverse effect on our net sales, cash flows, and/or financial condition. In the ordinary course of business, we have established an allowance for doubtful accounts and customer deductions in the amount of $435,000 and $393,000 as of March 31, 2003 and June 30, 2002, respectively. Our allowance for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable aging, specific exposures and historical trends. Inventory We state our inventory at the lower of cost or fair market value, with cost being determined on the first-in, first-out (FIFO) method. We believe FIFO most closely matches the flow of our products from manufacture through sale. The reported net value of our inventory includes finished saleable products, work-in-process and raw materials that will be sold or used in future periods. Inventory cost includes raw materials, direct labor and overhead. We also record an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated fair market value, based on various product sales projections. This reserve is calculated using an estimated obsolescence percentage based on age, historical trends and requirements to support forecasted sales. In addition, and as necessary, we may establish specific inventory obsolescence reserves for known or anticipated events. Goodwill and Other Intangible Assets Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets. Goodwill is not amortized. Other intangible assets are not material. On an annual basis, we test goodwill and other intangible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates we choose. To mitigate undue influence, we use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management. Additionally, we evaluated our recorded goodwill with the assistance of a third-party valuation firm. Income taxes We have accounted for, and currently account for, income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This statement establishes financial accounting and reporting standards for the 14 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS effects of income taxes that result from an enterprise's activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. As of March 31, 2003, we have net long-term deferred tax assets of $493,000. These net deferred tax assets assume sufficient future taxable earnings for their realization, as well as the continued application of current tax rates in the respective jurisdictions. Included in net deferred tax assets is a valuation allowance of $3,748,000 for deferred tax assets, which relates to tax loss carry-forwards not utilized to date, where management believes it is more likely than not that the deferred tax assets will not be realized in the relevant jurisdiction. Based on our assessments, no additional valuation is required. If we determine that a deferred tax asset will not be realizable or that a previously reserved deferred tax asset will become realizable, an adjustment to the deferred tax asset will result in a reduction of, or an increase to, earnings at that time. Controls and Procedures Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Chief Executive Officer and the Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures within the last ninety days and have concluded that the disclosure controls and procedures (as defined in Rules 13(a)-14(c) and 15(d)-14(e) promulgated under the Securities Exchange Act of 1934) are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated by our Chief Executive Officer and Chief Financial Officer nor were any corrective actions required with regard to significant accounting deficiencies or material weaknesses. Forward-looking Information We and our representatives from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders. The words and phrases, "will likely result", expect", "believe", "planned", "will", "will continue", "is anticipated", "estimates", "projects" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, our expectations regarding sales, earnings or other future financial performance and liquidity, product introductions, entry into new geographic regions, information systems initiatives, new methods of sale and future operations or operating results. Although we believe that our expectations are based on reasonable assumption within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation: i increased competitive activity from companies in the industry, some of which have greater resources than we do; ii our ability to develop, produce and market new products on which future operating results may depend; iii consolidations, restructurings, bankruptcies and reorganizations in the industry causing a decrease in the number of customers that sell our products, an increase in the ownership concentration within the industry, ownership of customers by our competitors and ownership of competitors by our customers; iv shifts in the preferences of installers as to where and how they order the types of products we sell; v social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; vi changes in the laws, regulations and policies, including changes in accounting standards, tax and trade rules, and legal or regulatory proceedings, that affect, or will affect, our business; vii foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the assets, the operating and manufacturing costs outside of the United States; 15 NAPCO SECURITY SYSTEMS, INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS viii changes in global or economic conditions that could affect consumer purchasing, the financial strength of our customers, the cost and availability of capital, which we may need for new equipment, facilities or acquisitions, and the assumptions underlying our critical accounting estimates; ix shipment delays, depletion of inventory and increased production costs resulting from disruptions of our operations at our Amityville or Dominican Republic facilities; x changes in product mix to products, which are less profitable; xi our ability to capitalize on opportunities for improved efficiency, such as globalization, and to integrate acquired businesses and realize value therefrom; and xii consequences attributable to the events that took place in New York City and Washington, D.C. on September 11, 2001, including further attacks, retaliation and the threat of further attacks or retaliation. We assume no responsibility to update forward-looking statements made herein or otherwise. 16 PART II: OTHER INFORMATION Item 1. Legal Proceedings In August 2001, the Company became a defendant in a product-related lawsuit, in which the plaintiff seeks damages of approximately seventeen million dollars ($17,000,000). This action is being defended by the Company's insurance company on behalf of the Company. Management believes that the action is without merit and plans to have this action vigorously defended. During the quarter ended September 30, 2002, the Company settled litigation which it had initiated as the plaintiff and realized a gain of approximately $210,000. This gain was recorded as Other Income during the quarter ended September 30, 2002 Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 14, 2003 NAPCO SECURITY SYSTEMS, INC (Registrant) By: /s/ Richard Soloway ------------------------------------------------- Richard Soloway Chairman of the Board of Directors, President and Secretary (Chief Executive Officer) By: /s/ Kevin S. Buchel ------------------------------------------------- Kevin S. Buchel Senior Vice President of Operations and Finance and Treasurer (Principal Financial and Accounting Officer) 18 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, RICHARD SOLOWAY, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Napco Security Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows for the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ("Evaluation date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 5/14/03 /s/ RICHARD SOLOWAY ---------------------------------------------- Chairman of the Board, President and Secretary 19 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, KEVIN S. BUCHEL, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Napco Security Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows for the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ("Evaluation date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 5/14/03 /s/ KEVIN S. BUCHEL ----------------------------------------------- Senior Vice President of Operations and Finance 20 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Report of Napco Security Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 filed herewith (the "Report"), I, RICHARD SOLOWAY, Chief Executive Officer of the Company, certify, that to the best of my knowledge: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of the Company. This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Dated: as of May 14, 2003 /s/ RICHARD SOLOWAY - -------------------------------------------- Richard Soloway, Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Report of Napco Security Systems, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 filed herewith (the "Report"), I, KEVIN S. BUCHEL, Chief Financial Officer of the Company, certify, that to the best of my knowledge: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of the Company. This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Dated: as of May 14, 2003 /s/ KEVIN S. BUCHEL - -------------------------------------------- Kevin S. Buchel, Chief Financial Officer 21 NAPCO SECURITY SYSTEMS, INC INDEX TO EXHIBITS Exhibits None 22 -----END PRIVACY-ENHANCED MESSAGE-----