-----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, UbiLis2wUIz5HAs6DPSHCZzuEkhrAQPl0hqX79AKQ+ajW6cGtMvs7xuqUMM/vID8 tpOEodhpOqvH9N+PokasSw== /in/edgar/work/0000950123-00-008897/0000950123-00-008897.txt : 20000929 0000950123-00-008897.hdr.sgml : 20000929 ACCESSION NUMBER: 0000950123-00-008897 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000727 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAPCO SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000069633 STANDARD INDUSTRIAL CLASSIFICATION: [3669 ] IRS NUMBER: 112277818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-10004 FILM NUMBER: 729569 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 8-K/A 1 y40821e8-ka.txt AMENDMENT #1 TO FORM 8-K 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.) 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 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.
*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
- ------------------ * Filed previously. (1) The schedules and exhibits have been omitted and will be furnished by the Company upon request of the Commission. 3 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 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 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 7 NAPCO SECURITY SYSTEMS, INC. PRO FORMA BALANCE SHEET AT MARCH 31, 2000
Napco Security Continental Systems, Inc. Instruments, LLC Transaction ASSETS Historical Historical Adjustments Pro Forma ------ ---------------- ------------------ ---------------- ------------------ (Unaudited) (Unaudited) 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 =============== ================== ================ ==================
F-3 8 NAPCO SECURITY SYSTEMS, INC. PRO FORMA STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 1999
Napco Security Continental Systems, Inc. Instruments, LLC Transaction Historical Historical Adjustments Pro Forma ---------------- ------------------ ---------------- ------------------ (Audited) (Unaudited) 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 ========== ==========
F-4 9 NAPCO SECURITY SYSTEMS, INC. PRO FORMA STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MARCH 31, 2000 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 =========== ===========
F-5 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 11 CONTINENTAL INSTRUMENTS LLC ============================================= FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999 AND 1998 AND APRIL 14, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997 F-7 12 CONTINENTAL INSTRUMENTS LLC CONTENTS ==============================================================================
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
F-8 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 14 CONTINENTAL INSTRUMENTS LLC BALANCE SHEETS ==============================================================================
December 31, 1999 1998 - ------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: 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 ============ ============
F-10 ============================================================================== The accompanying notes are an integral part of these statements. 2 15 CONTINENTAL INSTRUMENTS LLC
STATEMENTS OF OPERATIONS AND MEMBERS' CAPITAL ===================================================================================== April 14, 1997 YEAR ENDED Year Ended (Inception) to DECEMBER 31, December 31, December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------- 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 =========== =========== ===========
F-11 ============================================================================== The accompanying notes are an integral part of these statements. 3 16 ===============================================================================
April 14, 1997 YEAR ENDED Year Ended (Inception) to DECEMBER 31, December 31, December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------- 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) ------------ ------------ ------------ April 19, 1997 YEAR ENDED Year Ended (Inception) to DECEMBER 31, December 31, December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- 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)
============================================================================== 4 F-12 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 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:
1999 1998 --------- --------- Component parts $ 106,218 $ 113,704 Finished goods 443,628 574,086 --------- --------- $ 549,846 $ 687,790 ========= =========
F-14 19 CONTINENTAL INSTRUMENTS LLC NOTES TO FINANCIAL STATEMENTS =============================================================================== 5. PROPERTY AND Property and equipment consist of the following: EQUIPMENT
December 31, --------------------- 1999 1998 Life --------- --------- ----- 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 ========= =========
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:
2000 $ 47,116 2001 48,172 2002 20,257 --------- $ 115,545 =========
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 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:
Inventory $ 532,700 Fixed assets 116,600 Goodwill 1,312,374 ----------- Total $ 1,961,674 ===========
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 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 -----END PRIVACY-ENHANCED MESSAGE-----