<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 27, 2000
NAPCO SECURITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-10004 11-2277818
(State of other jurisdiction (Commission (I.R.S.
of incorporation File Number) Employer
Identification No.)
333 BAYVIEW AVE.
AMITYVILLE, NY 11701
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (631) 842-9400
NOT APPLICABLE
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Acquisition
On July 27, 2000, Napco Security Systems, Inc. (the "Company") through
a subsidiary, pursuant to an Asset Purchase Agreement dated July 2000 with
Continental Instruments LLC ("CIL") of Edgewood, New York, acquired
substantially all of the assets of CIL for consideration consisting of cash and
deferred payments as described in the Asset Purchase Agreement. A copy of the
Asset Purchase Agreement is filed as an exhibit hereto. This summary description
of the terms and conditions of such agreement does not purport to be complete
and is qualified in its entirety by reference to the Asset Purchase Agreement,
which is incorporated herein by reference.
The CIL business involves the manufacturing and distribution of access
control and security management systems. The Company plans to continue to use
the equipment and other physical property acquired in the Company's access
control business.
The acquisition was financed by a loan from the Company's primary
lender. The loan is secured by a mortgage, guaranties and other collateral. The
amendment to the loan and security agreement is filed as an exhibit hereto.
* * *
This current report on Form 8-K contains forward-looking statements
that involve risks and uncertainties. Actual results may differ from the results
discussed in the forward-looking statements due to many factors including,
without limitation, the unanticipated loss of business from major customers
and/or additional business from existing or new customers.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Filed as pages F-7 through F-17.
(b) PRO FORMA FINANCIAL INFORMATION.
Filed as pages F-2 through F-6 hereto.
(c) EXHIBITS.
<TABLE>
<CAPTION>
<S> <C>
*Exhibit 2.1 Asset Purchase Agreement (1)
*Exhibit 10.U Amendment No. 4 to Loan and Security Agreement
*Exhibit 99.1 Press Release dated July 27, 2000
</TABLE>
------------------
* Filed previously.
(1) The schedules and exhibits have been omitted and will be furnished by the
Company upon request of the Commission.
3
<PAGE> 4
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 hereunto duly authorized.
NAPCO SECURITY SYSTEMS, INC.
Date: September 26, 2000 By: /s/ Richard Soloway
Richard Soloway
Chairman, President and
Chief Executive Officer
4
<PAGE> 5
NAPCO SECURITY SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL INFORMATION
1. Unaudited Consolidated Pro Forma Financial Data F-2
2. Financial Statements of Business Acquired F-7
<PAGE> 6
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
On July 27, 2000, the Company signed an Asset Purchase Agreement to acquire the
net assets of Continental Instruments, LLC. ("Continental") for an initial
purchase price of $7,500,000, with additional payments, subject to adjustment
based on a closing balance sheet audit and certain other contingent events, of
up to $1,700,000 (the "Deferred Payments"). The Company financed the transaction
with borrowings under a term loan of $8,250,000. Continental designs and sells
access control and other security control systems to dealers and distributors
worldwide.
The acquisition described above will be accounted for as a purchase and was
valued based on management's estimate of the fair value of the assets acquired
and liabilities assumed. The estimates of fair value are preliminary and subject
to adjustment for a period of up to one year from the date of acquisition, and
any such adjustments are not expected to be material. Any increases or decreases
in the Deferred Payments will be recorded as adjustments to the purchase price
and related goodwill prospectively from the date of the change in payment. Costs
in excess of net assets acquired of approximately $6,700,000 will be allocated
to goodwill in the first quarter of fiscal 2001.
The following unaudited consolidated pro forma financial data have been derived
from the historical financial statements of Napco Security Systems, Inc. and
Continental. The unaudited consolidated pro forma balance sheet gives effect to
the Purchase Transaction as if it had occurred on March 31, 2000. The unaudited
consolidated pro forma statements of income for the fiscal year ended June 30,
1999 and the nine month period ended March 31, 2000 give effect to the Purchase
Transaction as if it had occurred at the beginning of each period presented.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable and are described in the
notes accompanying the unaudited consolidated pro forma financial statements.
The unaudited consolidated pro forma financial data do not purport to represent
what our results of operations or financial position would have been had the
Purchase Transaction occurred on the dates indicated, or to project our results
of operations or financial position for any future period or date, nor does it
give effect to any matters other than those describe in the notes thereto. The
Purchase Transaction will be accounted for as a purchase for financial
accounting purposes.
F-2
<PAGE> 7
NAPCO SECURITY SYSTEMS, INC.
PRO FORMA BALANCE SHEET
AT MARCH 31, 2000
<TABLE>
<CAPTION>
Napco Security Continental
Systems, Inc. Instruments, LLC Transaction
ASSETS Historical Historical Adjustments Pro Forma
------ ---------------- ------------------ ---------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,488,000 $ 138,980 $1,049,422 (a, b) $2,676,402
Accounts receivable, net 14,589,000 856,363 - 15,445,363
Inventories, net 23,020,000 548,586 - 23,568,586
Prepaid expenses and other current 761,000 7,062 - 768,062
assets
Deferred income taxes, net 716,000 - - 716,000
------------- ------------- ------------ ------------
Total current assets 40,574,000 1,550,991 1,049,422 43,174,413
PROPERTY, PLANT AND EQUIPMENT, net 11,169,000 29,701 - 11,198,701
GOODWILL, net 2,405,000 1,049,899 6,544,651 (c) 9,999,550
OTHER ASSETS 297,000 5,831 64,000 (d) 366,831
------------- ------------- ------------ ------------
Total assets $54,445,000 $2,636,422 $7,658,073 $64,739,495
============= ============= ============ ============
LIABILITIES, STOCKHOLDERS' EQUITY
----------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $1,058,000 $ - $1,878,401 (e) $2,936,401
Accounts payable 3,527,000 227,951 - 3,754,951
Accrued and other current liabilities 1,335,000 135,912 - 1,470,912
Accrued taxes 20,000 - - 20,000
---------------- ------------------ ---------------- ------------------
Total current liabilities 5,940,000 363,863 1,878,401 8,182,264
LONG-TERM DEBT 16,454,000 - 8,052,231 (a, e) 24,506,231
DEFERRED INCOME TAXES 442,000 - - 442,000
---------------- ------------------ ---------------- ------------------
Total liabilities 22,836,000 363,863 9,930,632 33,130,495
STOCKHOLDERS' EQUITY:
Common stock 59,000 - - 59,000
Additional paid-in-capital 766,000 - - 766,000
Retained earnings 35,233,000 - - 35,233,000
Member's equity - 2,272,559 (2,272,559) (f) -
Less: Treasury stock, at cost (4,449,000) - - (4,449,000)
---------------- ------------------ ---------------- ------------------
Total stockholders' equity 31,609,000 2,272,559 (2,272,559) 31,609,000
---------------- ------------------ ---------------- ------------------
Total liabilities and
stockholders' equity $54,445,000 $2,636,422 $7,658,073 $64,739,495
=============== ================== ================ ==================
</TABLE>
F-3
<PAGE> 8
NAPCO SECURITY SYSTEMS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Napco Security Continental
Systems, Inc. Instruments, LLC Transaction
Historical Historical Adjustments Pro Forma
---------------- ------------------ ---------------- ------------------
(Audited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $50,573,000 $4,529,871 $ - $ 55,102,871
Cost of sales 38,514,000 1,659,656 - 40,173,656
---------------- ------------------ ---------------- ------------------
Gross profit 12,059,000 2,870,215 - 14,929,215
Selling, general and administrative
expenses 10,148,000 1,746,446 485,745 (g, h) 12,380,191
---------------- ------------------ ---------------- ------------------
Operating income 1,911,000 1,123,769 (485,745) 2,549,024
OTHER INCOME (EXPENSE):
Interest expense, net (1,359,000) (193,658) (659,600) (i, j) (2,212,258)
Life insurance proceeds - 2,900,000 - 2,900,000
Other, net 16,000 - - 16,000
---------------- ------------------ ---------------- ------------------
Income before (benefit) for
income taxes 568,000 3,830,111 (1,145,345) 3,252,766
(Benefit) for income taxes (1,925,000) - - (1,925,000)
---------------- ------------------ ---------------- ------------------
Net income $2,493,000 $3,830,111 $(1,145,345) $5,177,766
================= ================== ================ ==================
EARNINGS PER SHARE:
Basic $ .71 $ 1.48
========== ===========
Diluted $ .71 $ 1.47
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 3,493,000 3,493,000
========== ==========
Diluted 3,512,000 3,512,000
========== ==========
</TABLE>
F-4
<PAGE> 9
NAPCO SECURITY SYSTEMS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED MARCH 31, 2000
<TABLE>
<S> <C> <C> <C> <C>
Napco Security Continental
Systems, Inc. Instruments, LLC Transaction
Historical Historical Adjustments Pro Forma
---------------- ------------------ ---------------- ------------------
(Unaudited) (Unaudited)
Net sales $36,748,000 $4,078,434 $ - $40,826,434
Cost of sales 27,508,000 1,460,192 - 28,968,192
------------- ----------- ----------- -----------
Gross profit 9,240,000 2,618,242 - 11,858,242
Selling, general and administrative
expenses 7,870,000 1,423,046 364,309 (g, h) 9,657,355
------------- ----------- ----------- -----------
Operating income 1,370,000 1,195,196 (364,309) 2,200,887
OTHER INCOME (EXPENSE):
Interest expense, net (991,000) (34,548) (494,700) (i, j) (1,520,248)
Other, net (45,000) - - (45,000)
------------- ----------- ----------- -----------
Income before provision for
income taxes 334,000 1,160,648 (859,009) 635,639
Provision for income taxes 68,000 - - 68,000
------------- ----------- ----------- -----------
Net income $ 266,000 $1,160,648 $(859,009) $ 567,639
============= =========== =========== ===========
EARNINGS PER SHARE:
Basic $ .08 $ .16
========== ===========
Diluted $ .08 $ .16
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 3,494,000 3,494,000
=========== ===========
Diluted 3,510,000 3,510,189
=========== ===========
</TABLE>
F-5
<PAGE> 10
NAPCO SECURITY SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS
We have made the following pro forma adjustments to arrive at our pro forma
consolidated balance sheet as of March 31, 2000:
(a) Represents initial $8,250,000 cash borrowings under a term loan.
(b) Represents cash used as initial consideration in the Purchase
Transaction.
(c) Represents the excess of the purchase price over the fair value of the net
assets acquired arising as a result of the Purchase Transaction.
(d) Represents deferred financing costs associated with the Term Loan and
Purchase.
(e) Represents the present value of future additional payments - current
and long-term.
(f) Represents the elimination of Continental's Member's equity.
2. UNAUDITED PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
We have made the following pro forma adjustments to arrive at our pro forma
consolidated statements of income:
(g) Represents the amortization of the excess of the purchase price over the
fair value of net assets acquired arising as a result of the Purchase
Transaction based on a useful life of 20 years.
(h) Represents additional salary expense for Continental executives who will
be Napco employees, not previously included in salary expense in
Continental's historical financial statements.
(i) Represents interest expense as a result of the issuance of the Term Loan,
which was used to finance the Purchase Transaction at a rate of 7.87% per
annum.
(j) Represents amortization of deferred financing costs over the 5 year life
of the Term Loan.
F-6
<PAGE> 11
CONTINENTAL INSTRUMENTS LLC
=============================================
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
APRIL 14, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
F-7
<PAGE> 12
CONTINENTAL INSTRUMENTS LLC
CONTENTS
==============================================================================
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations and Members' Capital 3
Statements of Cash Flows 4
Notes to Financial Statements 5 - 9
</TABLE>
F-8
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
Members
Continental Instruments LLC
Edgewood, New York
We have audited the accompanying balance sheets of Continental Instruments LLC
as of December 31, 1999 and 1998, and the related statements of operations and
members' capital, and cash flows for the years then ended, and for the period
from April 14, 1997 (inception) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Continental Instruments LLC as
of December 31, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended and for the period from April 14, 1997
(inception) through December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ MARGOLIN, WINER & EVENS LLP
March 24, 2000
Garden City, New York
1
F-9
<PAGE> 14
CONTINENTAL INSTRUMENTS LLC
BALANCE SHEETS
==============================================================================
<TABLE>
<CAPTION>
December 31, 1999 1998
-------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 276,756 $ 486,477
Accounts receivable, net of allowance for doubtful
accounts of $25,000 and $2,000, respectively 953,111 448,285
Life insurance proceeds receivable (Note 3) - 2,900,000
Inventory (Note 4) 549,846 687,790
Prepaid expenses 15,667 18,192
------------ ------------
TOTAL CURRENT ASSETS 1,795,380 4,540,744
------------ ------------
PROPERTY AND EQUIPMENT - NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION (NOTES 2 AND 5) 33,957 30,926
------------ ------------
OTHER ASSETS:
Goodwill - net of accumulated amortization of $240,602
and $153,111, respectively (Notes 2 and 8) 1,071,772 1,159,263
Security deposits 5,831 5,831
------------ ------------
TOTAL OTHER ASSETS 1,077,603 1,165,094
------------ ------------
TOTAL ASSETS $ 2,906,940 $ 5,736,764
============ ============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Loans payable - Members (Note 6) $ - $ 1,107,644
Accounts payable and accrued expenses 387,327 341,378
------------ ------------
TOTAL CURRENT LIABILITIES 387,327 1,449,022
COMMITMENTS (NOTE 7) - -
MEMBERS' CAPITAL 2,519,613 4,287,742
------------ ------------
TOTAL LIABILITIES AND MEMBERS' CAPITAL $ 2,906,940 $ 5,736,764
============ ============
</TABLE>
F-10
==============================================================================
The accompanying notes are an integral part of these statements.
2
<PAGE> 15
CONTINENTAL INSTRUMENTS LLC
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS AND MEMBERS' CAPITAL
=====================================================================================
April 14, 1997
YEAR ENDED Year Ended (Inception) to
DECEMBER 31, December 31, December 31,
1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 5,225,126 $ 4,248,181 $ 2,866,571
COST OF GOODS SOLD 1,806,111 1,616,986 1,207,185
----------- ----------- -----------
GROSS PROFIT 3,419,015 2,631,195 1,659,386
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,797,829 1,826,514 1,162,939
----------- ----------- -----------
INCOME FROM OPERATIONS 1,621,186 804,681 496,447
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Life insurance proceeds - 2,900,000 -
Interest income 119,212 7,958 6,669
Interest expense (Note 6) (309,261) (105,518) (133,443)
----------- ----------- -----------
(190,049) 2,802,440 (126,774)
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 1,431,137 3,607,121 369,673
EXTRAORDINARY ITEM - EXTINGUISHMENT OF
LIABILITIES (NOTE 8) - 608,640 -
----------- ----------- -----------
NET INCOME 1,431,137 4,215,761 369,673
----------- ----------- -----------
MEMBERS' CAPITAL - BEGINNING OF PERIOD 4,287,742 379,673 -
----------- ----------- -----------
INITIAL CONTRIBUTIONS - - 10,000
----------- ----------- -----------
REDEMPTION OF MEMBER'S INTEREST (1,956,116) - -
----------- ----------- -----------
DISTRIBUTIONS (1,243,150) (307,692) -
----------- ----------- -----------
MEMBERS' CAPITAL - END OF PERIOD $ 2,519,613 $ 4,287,742 $ 379,673
=========== =========== ===========
</TABLE>
F-11
==============================================================================
The accompanying notes are an integral part of these statements. 3
<PAGE> 16
===============================================================================
<TABLE>
<CAPTION>
April 14, 1997
YEAR ENDED Year Ended (Inception) to
DECEMBER 31, December 31, December 31,
1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,431,137 $ 4,215,761 $ 369,673
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 105,517 113,598 81,173
Accrued interest (74,644) 67,192 122,048
Gain on sale of equipment - (1,436) -
Extinguishment of accounts payable - (494,044) -
Extinguishment of accrued interest - (114,596) -
Loss on disposal of equipment - - 92,098
Provision for bad debts 32,792 100 2,000
(Increase) in accounts receivable (537,618) (24,171) (1,330,933)
(Increase) decrease in prepaid
expenses 2,525 (11,748) (6,444)
(Increase) decrese in inventory 137,944 (171,357) 16,267
Increase(decrease) in accounts
payable and accrued expenses 45,949 (122,939) 958,361
Increase in other assets - security
deposits - - (5,831)
(Increase) decrease in life insurance
proceeds receivable 2,900,000 (2,900,000) -
------------ ------------ ------------
Total adjustments 2,612,465 (3,659,401) (71,261)
------------ ------------ ------------
Net Cash Provided by Operating
Activities 4,043,602 556,360 298,412
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (21,057) (13,795) (35,973)
Proceeds from sale of equipment - 3,120 -
Payments for assets acquired from
Sensormatic (Note 8) - - (100,000)
------------ ------------ ------------
Net Cash Used in Investing Activities (21,057) (10,675) (135,973)
------------ ------------ ------------
<CAPTION>
April 19, 1997
YEAR ENDED Year Ended (Inception) to
DECEMBER 31, December 31, December 31,
1999 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan for asset acquisition $ - $ (956,955) $ -
Repayment of loans payable - members (1,033,000) - -
Increase in loans payable - members - 838,000 195,000
Distributions (1,243,150) (307,692) -
Redemption of member's interest (1,956,116) - -
Initial capital contributions - - 10,000
------------ ------------ ------------
Net Cash Provided by (Used in)
Financing Activities (4,232,266) (426,647) 205,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (209,721) 119,038 367,439
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 486,477 367,439 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 276,756 $ 486,477 $ 367,439
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid during the period for
interest $ 383,905 $ 38,326 $ 11,395
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
On April 14, 1997, the Company acquired
certain assets from Sensormatic
Electronics Corporation. (See Note 8.)
Fixed assets $ 116,600
Inventory 532,700
Goodwill 1,312,374
Loan payable (1,861,674)
------------
Cash paid in 1997 $ 100,000
============
In connection with the settlement with
Sensormatic (Note 8), accounts receivable
due from Sensormatic were applied against
the loan payable to Sensormatic. $ (904,719)
</TABLE>
==============================================================================
4
F-12
<PAGE> 17
CONTINENTAL INSTRUMENTS LLC
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. ORGANIZATION Continental Instruments LLC ("the Company") was organized
AND NATURE OF on April 14, 1997 as a limited liability company under the
BUSINESS laws of the State of New York. Although limited liability
companies are unincorporated associations, its members
have limited personal liability for the obligations and
debts of the entity similar to stockholders of a
corporation; however, the entity is classified as a
partnership for Federal income tax purposes. The latest
date the Company is set to dissolve is April 15, 2037.
The Company designs and sells access control and other
security control systems to dealers and distributors
worldwide. The Company's sales for the years ended
December 31, 1999 and 1998 and the period from April 14,
1997 (inception) through December 31, 1997 were
approximately 85%, 81% and 88%, respectively, to customers
in the United States. The Company's products are
manufactured by several contract manufacturers.
2. SUMMARY OF CASH AND CASH EQUIVALENTS - The Company considers cash and
SIGNIFICANT cash equivalents to include cash on hand, amounts due from
ACCOUNTING banks, and any other highly liquid instruments purchased
POLICIES with an original maturity of three months or less. As of
December 31, 1999 and 1998, cash and cash equivalents
includes money market mutual funds of $351,669 and
$406,437, respectively.
INVENTORY - Inventory is stated at the lower of cost,
determined on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT - Property and equipment are
recorded at cost. Assets retired or otherwise disposed of
and the related amounts of accumulated depreciation or
amortization are eliminated from the accounts. Gains and
losses from disposals are included in income. Depreciation
and amortization are computed by straight-line and
accelerated methods based on the estimated useful lives of
the related assets or the lease term for the leasehold
improvements. Maintenance and repairs which do not improve
or extend the life of the assets are expensed in the year
incurred. Betterments and major renewals or replacements
are capitalized.
GOODWILL - Cost in excess of the fair value of net assets
acquired in connection with the April 1997 acquisition of
the business is being amortized using the straight-line
method over a fifteen year period. Amortization expense
for the years ended December 31, 1999 and 1998 and the
period from April 14, 1997 (inception) through December
31, 1997 was $87,491, $87,492 and $65,619, respectively.
MEMBERS' COMPENSATION - The Company does not recognize
compensation expense for services provided by the members
of the
5
F-13
<PAGE> 18
CONTINENTAL INSTRUMENTS LLC
NOTES TO FINANCIAL STATEMENTS
===============================================================================
Company.
INCOME TAXES - No provision has been made for Federal or
state income taxes. The Company, as a limited liability
company, is not subject to income taxes as an entity. The
members have consented to include the income or loss of
the Company in their income tax returns.
ADVERTISING - All costs associated with advertising are
expensed in the year incurred. Advertising expense for the
years ended December 31, 1999 and 1998 and the period from
April 14, 1997 (inception) through December 31, 1997
totaled $115,049, $129,960 and $73,165, respectively.
USE OF ESTIMATES - The preparation of financial statements
in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
3. LIFE INSURANCE Life insurance proceeds receivable represents the amount
PROCEEDS received pursuant to a term life insurance policy owned by
RECEIVABLE the Company on the life of a member who died on December
23, 1998.
On September 23, 1999, these proceeds were disbursed as
part of the total cash consideration of $3,355,000 paid to
the estate of the deceased member of the Company. The
amount paid was for the conveyance of all right of title
to the former member's ownership of the Company and the
payment of all obligations (including interest) due the
former member.
4. INVENTORY Inventory consists of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Component parts $ 106,218 $ 113,704
Finished goods 443,628 574,086
--------- ---------
$ 549,846 $ 687,790
========= =========
</TABLE>
F-14
<PAGE> 19
CONTINENTAL INSTRUMENTS LLC
NOTES TO FINANCIAL STATEMENTS
===============================================================================
5. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998 Life
--------- --------- -----
<S> <C> <C> <C>
Furniture and fixtures $ 28,530 $ 28,530 5 years
Office equipment and computers 46,609 25,552 3-5 years
Show booth 12,399 12,399 3 years
Leasehold improvements 4,000 4,000 5 years
--------- ---------
91,538 70,481
Accumulated depreciation
and amortization 57,581 39,555
--------- ---------
$ 33,957 $ 30,926
========= =========
</TABLE>
6. LOANS Loans payable to members represent obligations for working
PAYABLE - capital. The notes are payable on demand and bear
MEMBERS interest at 8.50% per annum. Interest expense on loans
payable to members for the years ended December 31, 1999
and 1998 and the period from April 14, 1997 (inception)
through December 31, 1997 totaled $309,261, $74,644 and
$11,395, respectively.
7. COMMITMENTS The Company is obligated pursuant to the terms of a lease
for its operating facility. Minimum future rental
payments for years ending December 31, are:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 47,116
2001 48,172
2002 20,257
---------
$ 115,545
=========
</TABLE>
Rent expense charged to operations for the years ended
December 31, 1999 and 1998 and the period from April 14,
1997 (inception) through December 31, 1997 totaled
$52,698, $50,541, $24,711, respectively.
F-15
<PAGE> 20
CONTINENTAL INSTRUMENTS LLC
NOTES TO FINANCIAL STATEMENTS
===============================================================================
8. ACQUISITION On April 14, 1997 the Company acquired the
business and certain assets of the Continental Instruments
division of Sensormatic Electronics Corporation
(Sensormatic) for the aggregate purchase price of
$1,961,674. The acquisition was accounted for by the
purchase method. The allocation of the purchase price is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Inventory $ 532,700
Fixed assets 116,600
Goodwill 1,312,374
-----------
Total $ 1,961,674
===========
</TABLE>
The asset purchase agreement provided that certain
additional payments due the seller (based on a percentage
of the Company's gross revenues for a sixty month period)
would not be less than $1,400,000 (the Minimum Additional
Consideration, as defined), payable through December 31,
2003. The purchase price of $1,961,674 includes the
present value of the "Minimum Additional Consideration"
discounted at 9%.
The Company entered into a service agreement as of April
14, 1997 to provide transitional services for Sensormatic
for a period of approximately six months. During the
transitional period the Company filled Sensormatic's
customer orders, including assembly, packing and shipping.
Approximately $850,000 of revenue was recorded under the
service agreement in 1997. During 1997 and 1998, the
Company also purchased inventory pursuant to a supply
agreement with Sensormatic.
On March 2, 1998, the Company and Sensormatic executed a
settlement agreement. Among other items, the Company paid
Sensormatic in full for all amounts due under the asset
purchase agreement, including $1,000,000 in full
settlement of all additional payments (as discussed above)
due Sensormatic. The settlement agreement also relieved
the Company and Sensormatic of all obligations owed to
each other under the service agreement and the supply
agreement. The Company recognized a gain on the
extinguishment of approximately $494,000 due Sensormatic
pursuant to the supply agreement and approximately
$114,000 of accrued interest due Sensormatic attributable
to the acquisition indebtedness under the asset purchase
agreement.
9. EMPLOYEE The Company has an employee savings plan under Section
BENEFIT PLANS 401(k) of the Internal Revenue Code which covers all
eligible employees. Under the provisions of the plan,
eligible employees may defer up to ten percent of their
annual compensation subject to the Internal Revenue
Service limits.
F-16
<PAGE> 21
CONTINENTAL INSTRUMENTS LLC
NOTES TO FINANCIAL STATEMENTS
===============================================================================
The Company does not contribute to this plan.
In addition, the Company has a profit sharing plan
covering all eligible employees. Annual contributions to
the plan which are made solely at the discretion of the
Company are based on a percentage of the eligible
employees' compensation. Eligible employees vest 0% in the
first year and then 20% per year for the next five years.
Pension expense for the years ended December 31, 1999 and
1998 and the period from April 14, 1997 (inception)
through December 31, 1997 totaled $56,544, $65,697 and
$55,012, respectively.
10. BUSINESS AND The Company maintains its cash in bank deposit accounts
CREDIT which, at times, may exceed the federally insured limits
CONCENTRATIONS of $100,000 per financial institution. The Company has
not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk
on cash accounts. The Company had cash balances exceeding
the FDIC insured limit as of December 31, 1999 and 1998
(based upon bank balances) by approximately $92,000 and
$19,000, respectively.
During 1999 no one customer accounted for a concentration
of 10% or greater of sales or accounts receivable. During
1998, one customer accounted for approximately 14% of
total sales. As of December 31, 1998, such customer
accounted for approximately 18% of total accounts
receivable. During 1997, one customer accounted for
approximately 33% of total sales.
F-17
