1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended June 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the Transition period from _________ to ________ COMMISSION FILE NUMBER: 0-10004 NAPCO SECURITY SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Delaware 11-2277818 (State or other jurisdiction of (I.R.S. Employer I.D. Number) incorporation or organization) 333 Bayview Avenue, Amityville, New York 11701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 842-9400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 16, 1999, 3,495,351 shares of Common Stock were outstanding, and the aggregate market value of the stock (based upon the last sale price of the stock on such date) held by non-affiliates was approximately $12,233,729. Documents Incorporated by Reference: Portions of the Registrant's Proxy Statement in connection with its 1999 Annual Meeting of Stockholders are incorporated by reference in Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 2 PART I ITEM 1. BUSINESS. NAPCO Security Systems, Inc. ("NAPCO") was incorporated in December 1971 in the State of Delaware for the purpose of acquiring National Alarm Products Co., Inc., a New Jersey corporation founded in 1969 ("National"). In December 1971, NAPCO issued an aggregate of 300,000 shares of its common stock, par value $.01 per share ("Common Stock"), to the stockholders of National in exchange for all of the issued and outstanding capital stock of National, after which National was merged into NAPCO. NAPCO and its subsidiaries (collectively, the "Company") are engaged in the development, manufacture, distribution and sale of security alarm products and door security devices (the "Products") for commercial and residential installations. Products Alarm Systems. Alarm systems usually consist of various detectors, a control panel, a digital keypad and signaling equipment. When a break-in occurs, an intrusion detector senses the intrusion and activates a control panel via hard-wired or wireless transmission that sets off the signaling equipment and, in most cases, causes a bell or siren to sound. Communication equipment such as a digital communicator may be used to transmit the alarm signal to a central station or another person selected by a customer. The Company manufactures and markets the following products for alarm systems: Automatic Communicators. When a control panel is activated by a signal from an intrusion detector, it activates a communicator that can automatically dial one or more pre-designated telephone numbers. If programmed to do so, a digital communicator dials the telephone number of a central monitoring station and communicates in computer language to a digital communicator receiver, which prints out an alarm message. Control Panels. A control panel is the "brain" of an alarm system. When activated by any one of the various types of intrusion detectors, it can activate an audible alarm and/or various types of communication devices. For marketing purposes, the Company refers to its control panels by the trade name, generally "Magnum Alert(TM)" followed by a numerical designation. 1 3 Combination Control Panels/Digital Communicators and Digital Keypad Systems. A combination control panel, digital communicator and a digital keypad (a plate with push button numbers as on a telephone, which eliminates the need for mechanical keys) has continued to grow rapidly in terms of dealer and consumer preference. Benefits of the combination format include the cost efficiency resulting from a single microcomputer function, as well as the reliability and ease of installation gained from the simplicity and sophistication of micro-computer technology. Door Security Devices. The Company manufactures a variety of exit alarm locks ranging from simple dead bolt locks to door alarms. Fire Alarm Control Panel. Multi-zone fire alarm control panels, which accommodate an optional digital communicator for reporting to a central station, are also manufactured by the Company. Area Detectors. The Company's area detectors are both passive infrared heat detectors and combination microwave/passive infrared detectors that are linked to alarm control panels. Passive infrared heat detectors respond to the change in heat patterns caused by an intruder moving within a protected area. Combination units respond to both changes in heat patterns and changes in microwave patterns occurring at the same time. Peripheral Equipment The Company also markets peripheral and related equipment manufactured by other companies. Revenues from peripheral equipment have not been significant. Research and Development The Company's business involves a high technology element. A substantial amount of the Company's efforts are expended to develop and improve the Products. During the fiscal years ended June 30, 1999, 1998, and 1997, the Company expended approximately $4,008,000, $3,817,000, and $3,340,000, respectively, on Company-sponsored research and development activities conducted by its engineering department and outside consultants. Substantially all of the Company's research and development activities during fiscal 1999, 1998 and 1997 were conducted by its engineering department. The Company intends to continue to conduct a significant portion of its future research and development activities internally. Employees As of June 30, 1999, the Company had approximately 940 full-time employees. Marketing and Major Customers The Company's staff of 37 sales and marketing support employees located at the Company's headquarters sells and markets the Products directly to independent distributors and 2 4 wholesalers of security alarm and security hardware equipment. Management estimates that these channels of distribution represented approximately 80% of the Company's total sales for the fiscal year ended June 30, 1999. The Company's sales representatives periodically contact existing and potential customers to introduce new products and create demand for those as well as other Company Products. These sales representatives, together with the Company's technical personnel, provide training and other services to wholesalers and distributors so that they can better service the needs of their customers. In addition to direct sales efforts, the Company advertises in technical trade publications and participates in trade shows in major United States cities. Some of the Company's products are marketed under the "private label" of certain customers. Sales to one customer unaffiliated with the Company accounted for approximately 27%, 23% and 21% of the Company's total sales for the fiscal years ended June 30, 1999, 1998 and 1997, respectively (see Note 9 to Consolidated Financial Statements). The loss of this customer could have a material adverse effect on the Company's business. Competition The security alarm products industry is highly competitive. The Company's primary competitors are comprised of approximately 30 other companies that manufacture and market security equipment to distributors, dealers, central stations and original equipment manufacturers. The Company believes that no one of these competitors is dominant in the industry. Certain of these companies may have substantially greater financial and other resources than the Company. The Company competes primarily on the basis of the features, quality, reliability and price of, and the incorporation of the latest innovative and technological advances into, its Products. The Company also competes by offering technical support services to its customers. In addition, the Company competes on the basis of its expertise, its proven products, reputation and its ability to provide Products to customers without delay. The inability of the Company to compete with respect to any one or more of the aforementioned factors could have an adverse impact on the Company's business. Relatively low-priced "do-it-yourself" alarm system products have become available in recent years and are available to the public at retail stores. The Company believes that these products compete with the Company only to a limited extent because they appeal primarily to the "do-it-yourself" segment of the market. Purchasers of such systems do not receive professional consultation, installation, service or the sophistication that the Company's Products provide. Raw Materials and Sales Backlog The Company prepares specifications for component parts used in the Products and purchases the components from outside sources or fabricates the components itself. These components, if standard, are generally readily available; if specially designed for the Company, there is usually more than one alternative source of supply available to the Company on a competitive basis. The Company generally maintains inventories of all critical 3 5 components. The Company for the most part is not dependent on any one source for its raw materials. In general, orders for the Products are processed by the Company from inventory. A sales backlog of approximately $918,500 existed as of June 30, 1999. This compared to a sales backlog of approximately $1,240,000 a year ago. Government Regulation The Company's telephone dialers, microwave transmitting devices utilized in its motion detectors and any new communication equipment that may be introduced from time to time by the Company must comply with standards promulgated by the Federal Communications Commission ("FCC") in the United States and similar agencies in other countries where the Company offers such products, specifying permitted frequency bands of operation, permitted power output and periods of operation, as well as compatibility with telephone lines. Each new Product of the Company that is subject to such regulation must be tested for compliance with FCC standards or the standards of such similar governmental agencies. Test reports are submitted to the FCC or such similar agencies for approval. Patents and Trademarks The Company has been granted several patents and trademarks relating to the Products. While the Company obtains patents and trademarks as it deems appropriate, the Company does not believe that its current or future success is dependent on its patents or trademarks. Foreign Sales The revenues, operating income and identifiable assets attributable to the foreign and domestic operations of the Company for its last three fiscal years, and the amount of export sales in the aggregate, are summarized in the following tabulation. 4 6 Financial Information Relating to Foreign and Domestic Operations and Export Sales(1) 1999 1998 1997 ---- ---- ---- (in thousands) Sales to unaffiliated customers: United States $50,573 $50,269 $53,302 Foreign 0 0 0 Identifiable assets: United States $33,067 $39,783 $41,242 Foreign 22,720 18,780 16,002 Export sales: United States(2) $10,713 $12,101 $10,355 ITEM 2. PROPERTIES. The Company has executive offices and production and warehousing facilities at 333 Bayview Avenue, Amityville, New York. This facility consists of a fully-utilized 90,000 square foot building on a six acre plot. This six-acre plot provides the Company with space for expansion of office, manufacturing and storage capacities. The Company completed construction on this facility in 1988 with the proceeds from industrial revenue bonds that have since been retired. The Company's foreign subsidiary, NAPCO/Alarm Lock Grupo International, S.A. (formerly known as NSS Caribe, S.A.), is located in the Dominican Republic, where it owns a building of approximately 167,000 square feet of production and warehousing space. That subsidiary also leases the land associated with this building under a 99-year lease expiring in the year 2092. As of June 30, 1999, most of the Company's sales related to labor on assemblies, goods and subassemblies produced at these sites, utilizing U.S. quality control standards. Management believes that these facilities are more than adequate to meet the needs of the Company in the foreseeable future. - ---------------- (1) Certain prior year amounts have been reclassified to conform to current year presentation. (2) Export sales from the United States in fiscal year 1999 included sales of approximately $6,730,000, $869,000, $1,653,000 and $1,461,000 to Europe, North America, South America and other areas, respectively. Export sales from the United States in fiscal year 1998 included sales of approximately $6,966,000, $1,070,000, $2,094,000, and $1,971,000 to Europe, North America, South America and other areas, respectively. Export sales from the United States in fiscal year 1997 included sales of approximately $6,046,000, $1,608,000, $1,127,000, and $1,574,000 to Europe, North America, South America and other areas, respectively. 5 7 ITEM 3. LEGAL PROCEEDINGS. There are no pending or threatened material legal proceedings to which NAPCO or its subsidiaries or any of their property is subject, other than as follows: In August 1995, the Internal Revenue Service (the "IRS") informed the Company that it had completed the audit of the Company's Federal tax returns for fiscal years 1986 through 1993. The IRS had issued a report to the Company proposing adjustments that would result in taxes due of approximately $4.3 million, excluding interest charges. The primary adjustments presented by the IRS related to intercompany pricing and royalty charges, DISC earnings and charitable contributions. The Company disagreed with the IRS and began the process of vigorously appealing this assessment using all remedies and procedural actions available under the law. The Company had provided a reserve to reflect its estimate of the ultimate resolution of this matter, so that the outcome of this matter would not have a material adverse effect on the Company's consolidated financial statements. During fiscal 1998, the Company continued to discuss the assessment with the IRS Appeals Office and in July 1998 received a revised audit report, which was subject to final government administrative approval, and which reduced the original assessment for the years covered by the IRS audit. The Company accepted the revised audit report and the final government approval was pending as of June 30, 1998. Accordingly, the Company determined that $900,000 of previously recorded reserves should be reversed through the 1998 income tax provision to reflect the expected final settlement with respect to this IRS audit. In fiscal 1999, the Company received the final government approval on the IRS audit related to fiscal years 1986 through 1993. In addition, the IRS completed its audits of fiscal years 1994 through 1997. As a result of the favorable outcome from the audits, the Company reversed an additional $1,896,000 of previously recorded reserves through the income tax provision in fiscal 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Principal Market NAPCO's Common Stock became publicly traded in the over-the-counter ("OTC") market in 1972. In December 1981, the Common Stock was approved for reporting by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under 6 8 the symbol "NSSC", and in November 1984 the Common Stock was designated by NASDAQ as a National Market System Security, which has facilitated the development of an established public trading market for the Common Stock. The tables set forth below reflect the range of high and low sales of the Common Stock in each quarter of the past two fiscal years as reported by the NASDAQ National Market System. Quarter Ended ------------------------------------------ Fiscal 1999 ------------------------------------------ Sept. 30 Dec. 31 March 31 June 30 -------- ------- -------- ------- Common Stock High $5.88 $4.63 $4.38 $4.13 Low $4.00 $4.00 $2.56 $2.50 Quarter Ended ------------------------------------------ Fiscal 1998 ------------------------------------------ Sept. 30 Dec. 31 March 31 June 30 -------- ------- -------- ------- Common Stock High $6.88 $6.75 $6.25 $8.25 Low $3.75 $5.50 $5.25 $4.75 Approximate Number of Security Holders The number of holders of record of NAPCO's Common Stock as of September 16, 1999 was 196 (such number does not include beneficial owners of stock held in nominee name). Dividend Information NAPCO has declared no cash dividends during the past three years with respect to its Common Stock, and the Company does not anticipate paying any cash dividends in the foreseeable future. 7 9 ITEM 6. SELECTED FINANCIAL DATA. NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES Years Ended June 30 ------------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands, except for per share data) Operations Net Sales $ 50,573 $ 50,269 $ 53,302 $ 49,088 $ 48,078 Gross Profit 12,059 11,785 12,778 11,302 11,325 (Benefit) Provision for Income Taxes (1,925) (525) 605 515 532 Net Income 2,493 2,038 1,639 1,014 512 Earnings per Share: Basic .71 .48 .38 .23 .12 Diluted .71 .48 .37 .23 .12 Cash Dividends per Share(3) 0 0 0 0 0 As of June 30 ----------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (in thousands, except for per share data) Financial Condition Total Assets $55,787 $58,563 $57,244 $57,319 $55,739 Long-term Debt 17,241 18,644 13,313 14,150 15,275 Working Capital 34,920 33,942 30,136 28,676 28,660 Stockholders' Equity 31,328 28,833 31,218 29,574 28,560 Stockholders' Equity Per Outstanding Share 8.98 8.26 7.14 6.77 6.54 - --------------- (3) The Company has never declared or paid a cash dividend on its common stock. It is the policy of the Board of Directors to retain earnings for use in the Company's business. 8 10 Quarterly Results and Seasonality The following table sets forth unaudited financial data for each of the Company's last eight fiscal quarters (in thousands except for per share data): Year Ended June 30, 1999 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net Sales $11,090 $10,860 $11,672 $16,951 Gross Profit 2,708 2,601 2,722 4,028 Income from Operations 480 106 (525) 1,850 Net Income 272 132 343 1,746 Net Income Per Share Basic .08 .04 .10 .49 Diluted .08 .04 .10 .49 Year Ended June 30, 1998 ---------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Net Sales $12,253 $11,411 $12,023 $14,582 Gross Profit 3,172 2,798 2,822 2,993 Income from Operations 809 552 545 590 Net Income 382 206 121 1,329 Net Income Per Share Basic .09 .05 .03 .31 Diluted .09 .05 .03 .31 9 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity and Capital Resources The Company's cash on hand combined with proceeds from operating activities during fiscal 1999 were adequate to meet the Company's capital expenditure needs and short and long-term debt obligations. The primary source of financing related to borrowings under a $16,000,000 secured revolving credit facility. The Company expects that cash generated from operations and cash available under the Company's bank line of credit will be adequate to meet its short-term liquidity requirements. The Company's primary internal source of liquidity is the cash flow generated from operations. As of June 30, 1999, the Company's unused sources of funds consisted principally of $2,230,000 in cash and approximately $1,487,000, which represents the unused portion of its secured revolving credit facility. In fiscal 1988, the Company completed construction of a new manufacturing and administrative facility in Amityville, New York financed by a $3.9 million industrial revenue bond issue bearing interest at a variable rate determined weekly by the underwriting bank based upon market conditions. The bonds had a maturity date of April 1, 2000, subject to quarterly sinking fund payments. Such bonds were retired in May 1997 as part of the Company's debt refinancing with its new primary bank as discussed below. On April 26, 1993, the Company's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the Dominican Republic, at an annual cost of approximately $272,000. On May 13, 1997, the Company refinanced the majority of its bank debt with a new primary bank and entered into a $16,000,000 secured revolving credit agreement and a $3,000,000 line of credit to be used in connection with commercial and standby letters of credit, and replaced the $2,500,000 standby letter of credit securing an earlier loan from another bank in connection with the Company's international operations. The Company restructured its debt to allow for future growth and expansion as well as to obtain terms more favorable to the Company. As part of the debt restructuring, the Company retired the outstanding industrial revenue bonds relating to the financing of the construction of the Company's Amityville, New York facility. The revolving credit agreement will expire in November 2000 and any outstanding borrowings are to be repaid on or before that time. In addition, a subsidiary of the Company maintains a $4,500,000 line of credit with another bank, $450,000 of which was outstanding as of June 30, 1999 (see Note 5 to Consolidated Financial Statements). 10 12 In May of 1998 the Company repurchased 889,576 shares of Napco common stock for $5.00 per share from one of its co-founders, Kenneth Rosenberg. $2.5 million was paid at closing with the balance of the purchase price to be paid over a four (4) year period pursuant to an interest-bearing note. The portion of the purchase price paid at closing was financed by the Company's primary bank and is to be repaid over a five (5) year period. At the closing, Mr. Rosenberg retired as President and Director of the Company but will be available to the Company pursuant to a consulting agreement. The repurchase agreement also provides that Mr. Rosenberg will not compete with the Company for a ten (10) year period. The Company takes into consideration a number of factors in measuring its liquidity, including the ratios set forth below: 1999 1998 1997 ---- ---- ---- Current Ratio 6.2 to 1 4.3 to 1 3.5 to 1 Sales to Receivables 3.1 to 1 3.4 to 1 3.8 to 1 Total Debt to Equity .8 to 1 1.0 to 1 .8 to 1 As of June 30, 1999, the Company had no material commitments for purchases or capital expenditures. Working Capital. Working capital increased by $978,000 to $34,920,000 at June 30, 1999 from $33,942,000 at June 30, 1998. The additional working capital was generated primarily from the increase in accounts receivable and the decrease in Income Taxes Payable resulting from the benefit from income taxes, which was partially offset by the Company's reduction in its inventory, all as discussed below. Accounts Receivable. Accounts receivable increased by $1,686,000 to $16,446,000 at June 30, 1999 from $14,760,000 at June 30, 1998. This increase resulted primarily from the 16% increase in sales during the fourth quarter as compared to the fourth quarter in fiscal 1998. Inventory. Inventory was reduced by $3,943,000 to $21,495,000 at June 30, 1999 as compared to $25,438,000 at June 30, 1998. The Company generated a significant reduction in its inventory during the year ended June 30, 1999 due in part to its efforts at improving various planning and forecasting techniques as well as the high sales levels achieved in the fourth quarter of fiscal 1999. Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses decreased by $408,000 to $4,479,000 at June 30, 1999 from $4,887,000 at June 30, 1998. This decrease was due primarily to the decrease in component part purchases, which was a direct result of the improved planning and forecasting as discussed above. Results of Operations Fiscal 1999 Compared to Fiscal 1998 11 13 Net Sales. Net sales in fiscal 1999 increased by 1% to $50,573,000 from $50,269,000 in fiscal 1998. The Company achieved this sales level in fiscal 1999 mainly through the increased sales in the fourth quarter as compared to the same quarter of fiscal 1998. Sales in the fourth quarter of fiscal 1999 were $16,951,000 as compared to $14,582,000 in 1998. This increase was due primarily to a significant increase in the demand of the Company's door locking products as well as increased orders from a major customer who returned to a more normal inventory position of the Company's products after tightening these levels during their acquisition of another company. These increases more than offset the decrease in sales during the first three quarters of fiscal 1999 which were affected, in part, by the major customer as discussed above. Gross Profit. The Company's gross profit increased $274,000 to $12,059,000 or 23.8% of net sales in fiscal 1999 as compared to $11,785,000 or 23.4% of net sales in fiscal 1998. The increase in gross profit margin was primarily due to the company's improvement in its component costs. Expenses. Selling, general and administrative expenses in fiscal 1999 increased 9% to $10,148,000 or 20% of net sales from $9,289,000 or 19% of net sales in fiscal 1998. This increase is primarily due to the increased selling and marketing expenses relating to the increased sales of the Company's door security products as well as the introduction of the Company's new fire and access control products. Other Expenses. Other Expenses in fiscal 1999 increased by $360,000 to $1,343,000 as compared to $983,000 in fiscal 1998. This increase was primarily due to increased interest expense resulting from increased borrowings related to the repurchase of common shares at the end of fiscal 1998. Income Taxes. The benefit for income taxes increased $1,400,000 to a benefit of $1,925,000 during fiscal 1999. This compared to a benefit of $525,000 during fiscal 1998. The increase in the benefit for fiscal 1999 is primarily attributable to the favorable outcome of the IRS audits of fiscal years 1986 through 1997 and the resulting impact on related reserve requirements. Effects of Inflation. During the three-year period ended June 30, 1999, inflation and changing prices did not have a significant impact on the Company's operations. Fiscal 1998 Compared to Fiscal 1997 Net Sales. Net sales in fiscal 1998 decreased approximately $3,033,000 or 5.7% to $50,269,000 from $53,302,000 in fiscal 1997. This decrease was primarily the result of pricing pressures and the decreased sales to one major customer, as previously disclosed. These decreases were offset, in part, by increased export sales as well as the markets continued favorable reception of the Company's hybrid hard-wired/wireless products and digital locks. 12 14 Gross Profit. The Company's gross profit decreased $993,000 to $11,785,000 or 23.4% of net sales in fiscal 1998 as compared to $12,778,000 or 24.0% of net sales in fiscal 1997. The decrease in gross profit was primarily due to the pricing pressures and reduction in net sales as discussed above as partially offset by reduced material and freight costs. Expenses. Selling, general and administrative expenses in fiscal 1998 increased slightly to $9,289,000 or 18.5% of net sales from $9,133,000 or 17.1% of net sales in fiscal 1997. This increase was primarily due to the Company's expansion of its international sales operations and related informational systems as partially offset by continuing cost saving efforts. Other Expenses. Other Expenses in fiscal 1998 decreased by $418,000 to $983,000 as compared to $1,401,000 in fiscal 1997. This decrease was primarily due to decreased interest expense resulting from more favorable interest rates available to the Company as well as more favorable foreign currency transaction rates realized by the Company during the year as partially offset by increased borrowings. Income Taxes. Provision for income taxes decreased $1,130,000 to a benefit of $525,000 during fiscal 1998. This compared to a provision of $605,000 or approximately 27% of income before provision for income taxes during fiscal 1997. The decrease in the provision for fiscal 1998 was primarily attributable to the reversal of $900,000 of reserves no longer required with respect to an IRS audit of fiscal years 1986 through 1993. Effects of Inflation. During the three-year period ended June 30, 1998, inflation and changing prices did not have a significant impact on the Company's operations. By-Laws The Board of Directors amended the Company's By-Law provision on indemnification of officers and directors to make it more detailed as to the circumstances for such indemnification and the Company entered into an Indemnification Agreement with the directors. Year 2000 Date Conversion As the century turns from 1900 to 2000, date-sensitive systems may recognize the year 2000 as 1900 or not at all. This results primarily because of the conventional use of a two- digit date field in most software applications. The inability to properly recognize the year 2000 may cause systems to process financial and operational information incorrectly. The Company believes that virtually all of the Company's systems are now fully compliant. Due to the fact that the Company's primary software supplier includes the year 2000 upgrade as part of its ongoing maintenance, the Company expects to expend a minimal amount of its resources in this area. Although the Company expects its critical systems to be compliant, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible failure to identify all susceptible systems, noncompliance by third parties whose systems and operations impact the Company, and other similar uncertainties. In addition to internal Year 2000 remediation activities, the Company is in contact with key suppliers and customers to reduce the likelihood of any significant interruption in the business between the Company and these important third parties relating to the Year 2000 13 15 issue. A comprehensive survey of all vendors and customers has not been made and is not presently planned. The Company's efforts thus far have been focused on key vendors and customers. If these third parties do not convert their systems in a timely manner and in a way that is compatible with the Company's systems, the year 2000 issue could have a material adverse effect on the Company's operations. The Company believes that its actions with key suppliers and customers will minimize these risks. The vast majority of the Company's products are not date-sensitive. The Company has collected information on current and discontinued date-sensitive products. At this time, the Company does not have in place a comprehensive, global contingency plan relative to potential Year 2000 disruptions. Rather, each significant system with a potential problem either has been repaired and tested or is being updated. Contingency plans for certain types of unforeseen problems are being developed. Item 7A: 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 facility) 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 June 30, 1999, an aggregate principal amount of approximately $15,000,000 was outstanding under the Company's credit facility and term loan with a weighted average interest rate of 6.5%. If principal amounts outstanding under the Company's credit facility remained at this year-end level for an entire year and the prime rate increased or decreased, respectively, by 1.25% the Company would pay or save, respectively, an additional $187,500 in interest that year. The Company does not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. 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 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. 14 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES TABLE OF CONTENTS OF CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 Page ---- Report of Independent Public Accountants as of June 30, 1999 and 1998 and for each of the 3 Years in the Period Ended June 30, 1999.................................................. 16 Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 1999 and 1998.............................................. 17 Consolidated Statements of Income for the Years Ended June 30, 1999, 1998 and 1997................................................. 18 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997............................................................ 19 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997........................................ 20 Notes to Consolidated Financial Statements, June 30, 1999, 1998 and 1997............................ 21 Schedules: I. Condensed Financial Information on Parent Company............................................... 32 II. Valuation and Qualifying Accounts........................... 34 15 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Napco Security Systems, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Napco Security Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 Napco Security Systems, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index to consolidated financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Melville, New York September 22, 1999 16 18 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998 ASSETS 1999 1998 -------- -------- (in thousands, except share data) CURRENT ASSETS: Cash $ 2,230 $ 1,989 Accounts receivable, less reserve for doubtful accounts of $887 and $755, respectively 16,446 14,760 Inventories 21,495 25,438 Prepaid expenses and other current assets 809 674 Deferred income taxes 716 1,292 -------- -------- Total current assets 41,696 44,153 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of approximately $12,316 and $11,055, respectively 11,280 11,491 GOODWILL, net of accumulated amortization of approximately $1,256 and $1,149, respectively 2,485 2,592 OTHER ASSETS 326 327 -------- -------- $ 55,787 $ 58,563 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,433 $ 1,667 Accounts payable 3,651 3,862 Accrued expenses 828 1,025 Accrued salaries and wages 754 653 Accrued income taxes 110 3,004 -------- -------- Total current liabilities 6,776 10,211 LONG-TERM DEBT 17,241 18,644 DEFERRED INCOME TAXES 442 875 -------- -------- Total liabilities 24,459 29,730 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share; 21,000,000 shares authorized; 5,908,602 and 5,908,102 shares issued, respectively; 3,490,151 and 3,489,651 shares outstanding, respectively 59 59 Additional paid-in capital 751 749 Retained earnings 34,967 32,474 Less: Treasury stock, at cost (2,418,451 shares) (4,449) (4,449) -------- -------- Total stockholders' equity 31,328 28,833 -------- -------- $ 55,787 $ 58,563 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. 17 19 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 1999 1998 1997 ----------- ----------- ----------- (in thousands, except share and per share data) NET SALES $ 50,573 $ 50,269 $ 53,302 COST OF SALES 38,514 38,484 40,524 ----------- ----------- ----------- Gross profit 12,059 11,785 12,778 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,148 9,289 9,133 ----------- ----------- ----------- Operating income 1,911 2,496 3,645 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense, net (1,359) (1,130) (1,081) Other, net 16 147 (320) ----------- ----------- ----------- (1,343) (983) (1,401) ----------- ----------- ----------- Income before (benefit) provision for income taxes 568 1,513 2,244 (BENEFIT) PROVISION FOR INCOME TAXES (1,925) (525) 605 ----------- ----------- ----------- Net income $ 2,493 $ 2,038 $ 1,639 =========== =========== =========== EARNINGS PER SHARE (Note 1): Basic $ .71 $ .48 $ .38 =========== =========== =========== Diluted $ .71 $ .48 $ .37 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 1): Basic 3,493,000 4,263,000 4,369,000 =========== =========== =========== Diluted 3,512,000 4,285,000 4,383,000 =========== =========== =========== The accompanying notes are an integral part of these consolidated statements. 18 20 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (in thousands except share data) Common Stock ------------------------ Additional Number of Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 1996 5,896,602 $ 59 $ 719 $ 28,797 $ (1) $ 29,574 Exercise of employee stock options 2,000 - 5 - - 5 Net income - - - 1,639 - 1,639 --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 1997 5,898,602 59 724 30,436 (1) 31,218 Purchase of treasury stock - - - - (4,448) (4,448) Exercise of employee stock options 9,500 - 25 - - 25 Net income - - - 2,038 - 2,038 --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 1998 5,908,102 59 749 32,474 (4,449) 28,833 Purchase of treasury stock - - - - - - Exercise of employee stock options 500 - 2 - - 2 Net income - - - 2,493 - 2,493 --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 1999 5,908,602 $ 59 $ 751 $ 34,967 $ (4,449) $ 31,328 ========= ========= ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated statements. 19 21 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 1999 1998 1997 ------- ------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,493 $ 2,038 $ 1,639 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation and amortization 1,368 1,289 1,440 Provision for doubtful accounts 230 50 55 Deferred income taxes 143 (259) (11) Changes in operating assets and liabilities resulting from increases and decreases in: Accounts receivable (1,916) (873) (233) Inventories 3,943 264 242 Prepaid expenses and other current assets (135) (284) 99 Other assets 1 109 (105) Accounts payable, accrued expenses, accrued salaries and wages and accrued income taxes (3,201) (2,441) (368) ------- ------- -------- Net cash provided by (used in) operating activities 2,926 (107) 2,758 ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (1,050) (585) (746) ------- ------- -------- Net cash used in investing activities (1,050) (585) (746) ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable to bank - 2,500 - Principal payments on long-term debt (1,637) (900) (13,400) Proceeds from long-term debt - 2,550 11,963 Purchase of treasury stock - (2,500) - Proceeds from exercise of employee stock options 2 25 5 ------- ------- -------- Net cash (used in) provided by financing activities (1,635) 1,675 (1,432) ------- ------- -------- NET INCREASE IN CASH 241 983 580 CASH, beginning of year 1,989 1,006 426 ------- ------- -------- CASH, end of year $ 2,230 $ 1,989 $ 1,006 ======= ======= ======== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 1,301 $ 1,289 $ 1,076 ======= ======= ======== Income taxes paid $ 259 $ 108 $ 35 ======= ======= ======== NON-CASH FINANCING ACTIVITIES: Issuance of note payable for purchase of treasury stock $ - $ 1,948 $ - ======= ======= ======== The accompanying notes are an integral part of these consolidated statements. 20 22 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Napco Security Systems, Inc. and subsidiaries (the "Company") is engaged principally in the development, manufacture and distribution of security alarm products and door security devices for commercial and residential use. Principles of Consolidation The consolidated financial statements include the accounts of Napco Security Systems, Inc. and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are valued at the lower of cost (using the first-in, first-out method) or market. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is recorded over the estimated service lives of the related assets using primarily the straight-line method. Amortization of leasehold improvements is calculated by using the straight-line method over the estimated useful life of the asset or lease term, whichever is shorter. Goodwill Goodwill is being amortized on a straight-line basis over 35 years. Subsequent to an acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of the goodwill may warrant revision or that the remaining balance may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the undiscounted cash flows over the remaining life of the goodwill in measuring whether it is recoverable. In the years ended June 30, 1999, 1998 and 1997, there were no adjustments to the carrying value of goodwill, other than the straight-line amortization. 21 23 Revenue Recognition Revenue is recognized upon shipment of the Company's products to its customers. The Company reports its sales levels on a net sales basis, with net sales being computed by deducting from gross sales the amount of actual sales returns and the amount of reserves established for anticipated sales returns. Income Taxes Deferred income taxes are recognized for the expected future tax consequences of temporary differences between the amounts reflected for financial reporting and tax purposes. The provision for income taxes represents U.S. Federal and state taxes on income generated from U.S. operations. Income generated by the Company's foreign subsidiary in the Dominican Republic is non-taxable. The Company accounts for the research and development credit as a reduction of income tax expense in the year in which such credits are allowable for tax purposes. In prior years, the Company did not provide for income taxes on the undistributed earnings of its Domestic International Sales Corporation ("DISC") subsidiary because it was the Company's intent to continue the subsidiary's qualification for tax deferral. Due to the shifting of manufacturing outside the U.S., management determined in fiscal 1995 that the DISC no longer qualified for continued tax deferral. As a result, previously deferred earnings of the DISC totaling $2,031,000 must be reported as taxable income over a ten-year period in the Company's tax returns, starting with the June 30, 1992 tax year. The Company does not provide for income taxes on the undistributed earnings of its foreign subsidiary in the Dominican Republic because such earnings are reinvested abroad and it is the intention of management that such earnings will continue to be reinvested abroad. As of June 30, 1999 and 1998, approximately $19,369,000 and $19,085,000 in cumulative earnings of this foreign subsidiary are included in consolidated retained earnings. Earnings Per Share The Company accounts for Earnings Per Share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of income. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution; Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the currently-required fully diluted EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. 22 24 A reconciliation between the numerators and denominators of the Basic and Diluted EPS computations for net income is as follows: Net Income - Numerator Shares - Denominator Per Share Amounts ---------------------- -------------------- ----------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- ---- ---- ---- Net income .................. $2,493 $2,038 $1,639 -- -- -- $ -- $ -- $ -- Basic EPS Net income attributable to common stock ........... 2,493 2,038 1,639 3,493 4,263 4,369 0.71 0.48 0.38 ------ ------ ------ ------ ------ ------ ----- ----- ----- Effect of Dilutive Securities Options .................. -- -- -- 19 22 14 -- -- (0.01) ------ ------ ------ ------ ------ ------ ----- ----- ----- Diluted EPS Net income attributable to common stock and assumed option exercises ........ $2,493 $2,038 $1,639 3,512 4,285 4,383 $ 0.71 $ 0.48 $ 0.37 ====== ====== ====== ====== ====== ====== ======= ======== ======= Options to purchase 10,620, 4,400 and 4,200 shares of common stock for the three years ended June 30, 1999, respectively, were not included in the computation of diluted EPS because the exercise prices exceeded the average market price of the common shares for the respective periods because their inclusion would be antidilutive. These options were still outstanding at the end of the respective periods. Stock-Based Compensation The Company accounts for stock-based compensation under the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation". The Company adopted this standard in fiscal 1997, and has elected to continue the accounting set forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and to provide the necessary pro-forma disclosures (Note 6). Comprehensive Income In the first quarter of 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive Income," which establishes new rules for the reporting of comprehensive income and its components. The adoption of this statement had no impact on the Company's net income or stockholders' equity. For the fiscal years ended 1999, 1998 and 1997, the Company's operations did not give rise to items includable in comprehensive income which were not already included in net income. Therefore, the Company's comprehensive income is the same as its net income for all periods presented. Segment Reporting Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Pursuant to this pronouncement, the reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company's results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. The company has presented required geographical segment data in Note 11, and no additional segment data has been presented. 23 25 Fair Value of Financial Instruments The Company calculates the fair value of financial instruments and includes this additional information in the notes to financial statements where the fair value is different than the book value of those financial instruments. When the fair value approximates book value, no additional disclosure is made. The Company uses quoted market prices whenever available to calculate these fair values. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments which take into account the present value of estimated future cash flows. At June 30, 1999, management of the Company believes the carrying value of all financial instruments approximated fair value. 2. INVENTORIES: Inventories consist of the following: June 30, -------- 1999 1998 (in thousands) Component parts .................. $10,093 $10,200 Work-in-process .................. 4,954 4,056 Finished products ................ 6,448 11,182 ------- ------- $21,495 $25,438 ======= ======= 3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following: Depreciation/ June 30, amortization- 1999 1998 annual rates (in thousands) Land ............................. $ 904 $ 904 -- Building ......................... 8,911 8,911 3% Molds and dies ................... 3,180 2,819 20% to 33% Furniture and fixtures ........... 964 912 10% to 20% Machinery and equipment .......... 9,581 8,944 10% to 15% Leasehold improvements ........... 56 56 Shorter of the lease ------- ------- term or life of asset 23,596 22,546 Less: Accumulated depreciation and amortization ................... 12,316 11,055 ------- ------- $11,280 $11,491 ======= ======= Depreciation and amortization expense on property, plant and equipment was approximately $1,261,000, $1,182,000 and $1,332,000 for the three years ended June 30, 1999, respectively. 24 26 4. INCOME TAXES: In August 1995, the Internal Revenue Service (the "IRS") informed the Company that it had completed the audit of the Company's Federal tax returns for fiscal years 1986 through 1993. The IRS had issued a report to the Company proposing adjustments that would result in taxes due of approximately $4.3 million, excluding interest charges. The primary adjustments presented by the IRS related to intercompany pricing and royalty charges, DISC earnings and charitable contributions. The Company disagreed with the IRS and began the process of vigorously appealing this assessment using all remedies and procedural actions available under the law. The Company had provided a reserve to reflect its estimate of the ultimate resolution of this matter, so that the outcome of this matter would not have a material adverse effect on the Company's consolidated financial statements. During fiscal 1998, the Company continued to discuss the assessment with the IRS Appeals Office and in July 1998 received a revised audit report, that was subject to final government administrative approval, and which reduced the original assessment for the years covered by the IRS audit. The Company accepted the revised audit report and the final government approval was pending as of June 30, 1998. Accordingly, the Company determined that $900,000 of previously recorded reserves should be reversed through the 1998 income tax provision to reflect the expected final settlement with respect to this IRS audit. In fiscal 1999, the Company received the final government approval on the IRS audit related to fiscal years 1986 through 1993. In addition, the IRS completed its audits of fiscal years 1994 through 1997. As a result of the favorable outcome from the audits, the Company reversed an additional $1,896,000 of previously recorded reserves through the income tax provision in fiscal 1999. (Benefit) provision for income taxes consists of the following: For the Years Ended June 30, ------------------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Taxes currently payable: Federal .................................. $(2,271) $ (210) $ 340 State .................................... (4) (56) 120 ------- ------- ------- (2,275) (266) 460 Taxes on DISC earnings and other ............ -- -- 156 Deferred income tax (benefit) provision ..... 350 (259) (11) ------- ------- ------- (Benefit) provision for income taxes $(1,925) $ (525) $ 605 ======= ======= ======= 25 27 The difference between the statutory U.S. Federal income tax rate and the Company's effective tax rate as reflected in the consolidated statements of income is as follows: 1999 1998 1997 -------------------- --------------------- ------------------- % of % of % of Pre-tax pre-tax pre-tax Amount Income Amount Income Amount Income (in thousands, except percentages) Tax at Federal statutory rate .................. $ 193 34% $ 514 34.0% $ 763 34.0% Increases (decreases) in taxes resulting from: State income taxes, net of Federal income tax benefit ................................... (2) (0.4) 38 2.5 96 4.3 Amortization of non-deductible goodwill ..... 36 6.3 36 2.4 36 1.6 Non-taxable foreign source income ........... (362) (63.7) (257) (17.0) (382) (17.0) Adjustment to reflect IRS settlement ........ (1,896) (333.8) (900) (59.5) -- -- Other, net .................................. 106 18.7 44 2.9 92 4.1 ------- ------- ------- ------- ------- ------- (Benefit) provision for income taxes ........... $(1,925) (338.9)% $ (525) (34.7)% $ 605 27.0% ======= ======= ======= ======= ======= ======= Foreign income taxes are not provided on income generated by the Company's subsidiary in the Dominican Republic, as such income is presently exempt from domestic income tax. Deferred tax assets and deferred tax liabilities at June 30, 1999 and 1998 are as follows (in thousands): Deferred Net Deferred Deferred Tax Assets Tax Liabilities Tax Assets (Liabilities) ------------------- --------------- ------------------------ 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Current: Accounts receivable $ 255 $ 314 $ - $ - $ 255 $ 314 Inventories 392 902 - - 392 902 Accrued liabilities 93 194 - - 93 194 Other 15 29 39 147 (24) (118) -------- -------- -------- -------- -------- --------- 755 1,439 39 147 716 1,292 Noncurrent: Fixed assets - - 442 875 (442) (875) -------- -------- -------- -------- -------- -------- Total deferred taxes $ 755 $ 1,439 $ 481 $ 1,022 $ 274 $ 417 ======== ======== ======== ======== ======== ======== As a result of the Company's U.S. operations generating income in each of the three years in the period ended June 30, 1999, management believes it is more likely than not that the Company will realize the benefit of the net deferred tax assets existing at June 30, 1999 and 1998. Accordingly, the Company has not reflected any valuation allowance against the deferred tax assets at June 30, 1999 and 1998. Furthermore, management believes that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate taxable earnings or any specific level of continuing earnings in the future. 26 28 5. LONG-TERM DEBT: Long-term debt consists of the following: June 30, ---------------------------- 1999 1998 (in thousands) Revolving credit and term loan facility (a) $ 14,513 $ 14,513 Notes payable (b) 4,161 5,798 ---------- ---------- 18,674 20,311 Less: Current portion 1,433 1,667 ---------- ---------- $ 17,241 $ 18,644 ========== ========== (a) On May 13, 1997, the Company refinanced the majority of its bank debt with a new primary bank and entered into a $16,000,000 secured revolving credit agreement and a $3,000,000 line of credit to be used in connection with commercial and standby letters of credit, and replaced the $2,500,000 standby letter of credit securing an earlier loan from another bank in connection with the Company's international operations. The revolving credit agreement and the letters of credit are secured by all the accounts receivable, inventory and certain other assets of Napco Security Systems, Inc., a first and second mortgage on the Company's headquarters in Amityville, New York and common stock of two of the Company's subsidiaries. The revolving credit agreement bears interest at either the bank's prime rate (7.75% at June 30, 1999) or an alternate rate based on LIBOR as described in the agreement. As part of the debt restructuring, the Company retired the outstanding Industrial Revenue Bonds relating to the financing of the construction of the Company's Amityville, New York facility. The revolving credit agreement will expire in November 2000 and any outstanding borrowings are to be repaid on or before that time. The agreement contains various restrictions and covenants including, among others, restrictions on payment of dividends, restrictions on borrowings, restrictions on capital expenditures, the maintenance of minimum amounts of tangible net worth, and compliance with other certain financial ratios, as defined in the agreement. As of June 30, 1999, the Company was in compliance with all of these financial covenants. (b) In November 1991, a subsidiary of the Company entered into a $4,500,000 line of credit agreement with a bank in connection with the Company's international operations. The line is secured by a letter of credit from the Company's primary bank. Interest on amounts outstanding under this line is payable quarterly at a rate determined periodically based on a number of options available to the Company. The balance outstanding under the line as of December 31, 1994 automatically converted to a term loan payable in 20 equal quarterly installments commencing on that date. At June 30, 1999 and 1998, the amounts outstanding ($450,000 and $1,350,000, respectively) bore interest at rates of 5.57% and 6.19%, respectively. Under the terms of the agreement, all advances under the line must be used to pay for certain specified costs incurred by this subsidiary. In addition, the terms of the agreement limit, among other things, the amount of additional debt or liens that may be incurred and prohibit the payment of dividends by this subsidiary. In May 1997, the Company entered into an agreement with its primary bank to replace a previous $2,500,000 standby letter of credit agreement which expired in February 1997 with a new $2,500,000 standby letter of credit, as described above, for the purpose of providing additional collateral for the line of credit agreement. In connection with the stock purchase agreement described in Note 7, the Company entered into a term-loan facility in May 1998 with its primary bank for a $2,500,000 term loan. Under the terms of the note, the loan is to be repaid in 60 equal monthly installments of $41,667, plus interest at 7.94%, beginning on July 1, 1998. 27 29 In addition, the Company issued a four-year term loan in the amount of $1,947,880 to its former president in connection with the stock purchase agreement. This note bears interest at 8% and calls for payments to begin in April 1999, with a final maturity June 2003. Maturities of long-term debt are as follows (in thousands): Year Ending June 30, 2000 $ 1,433 2001 15,571 2002 1,116 2003 554 ------------ $ 18,674 ============ 6. STOCK OPTIONS: In November 1992, the stockholders approved a 10-year extension of the already existing 1982 Incentive Stock Option Plan (the "1992 Plan"). The 1992 Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of approximately 815,000 shares of the Company's common stock to be acquired by the holders of such awards. Under the 1992 Plan, the Company may grant stock options, which are intended to qualify as incentive stock options ("ISOs"), to key employees, officers, and employee directors. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company's outstanding common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant and the option must be exercised within five years from the date of grant. Under the 1992 Plan, stock options have been granted to employees and directors for terms of up to 5 years at an exercise price equal to the fair market on the date of grant and are exercisable in whole or in part at 20% per year from the date of grant. At June 30, 1999, 138,750 stock options granted to employees and directors were exercisable. The Company accounts for awards granted to employees, directors and key employees under APB Opinion No. 25, under which compensation cost is recognized for stock options granted at an exercise price less than the market value of the options on the grant date. Had compensation cost for all stock option grants in fiscal years 1999, 1998 and 1997 been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been: 1999 1998 1997 ---- ---- ---- (in thousands, except for per share data) NET INCOME: As reported $ 2,493 $ 2,038 $ 1,639 Pro forma 2,279 1,901 1,629 BASIC EPS: As reported $ 0.71 $ 0.48 $ 0.38 Pro forma 0.65 0.45 0.37 DILUTED EPS: As reported $ 0.71 $ 0.48 $ 0.37 Pro forma 0.65 0.44 0.37 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to option awards granted prior to fiscal year 1996. 28 30 The following table reflects activity under the plan for the years ended: June 30, ----------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 236,250 $3.91 75,750 $3.08 76,000 $3.02 Granted 251,600 3.12 209,000 4.11 3,250 3.59 Exercised (500) 3.88 (9,500) 2.61 (2,000) 2.25 Forfeited (35,500) 4.66 (34,500) 3.76 - - Canceled/Lapsed (13,750) 4.28 (4,500) 2.97 (1,500) 2.25 -------- ---- ------ ------ ---- Outstanding at end of year 438,100 3.39 236,250 3.91 75,750 3.08 ======= ======= ====== Exercisable at end of year 138,570 3.40 72,800 3.71 46,750 3.21 ======= ====== ====== Weighted average fair value of options granted $4.25 $3.04 $1.76 The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1999 1998 1997 ---- ---- ---- Risk-Free Interest Rates 5.22% 6.10% 5.99% Expected Lives 5 years 5 years 5 years Expected Volatility 45% 46% 47% Expected Dividend Yields 0% 0% 0% The following table summarizes information about stock options outstanding at June 30, 1999: Options Outstanding Options Exercisable ------------------------------------------------------ ------------------------------ Number Weighted Weighted Number Weighted Outstanding Average Average Exercisable Average at Remaining Exercise at Exercise Range of Exercise Prices 6/30/99 Contractual Life Price 6/30/99 Price ------------------------ ------- ---------------- ----- ------- ----- $ 2.50 - $ 3.75 261,000 4.23 $2.97 72,350 $2.85 3.76 - 5.63 177,100 3.23 4.00 66,220 4.00 ------- ---- ---- ------ ---- 2.50 - 5.63 438,100 3.82 3.39 138,570 3.40 ======= ==== ==== ======= ==== Effective October 1990, the Company established a non-employee stock option plan (the "1990 Plan") to encourage non-employee directors and consultants of the Company to invest in the Company's stock. The 1990 Plan provides for the granting of non-qualified stock options, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of the stock options. The 1990 Plan provides that the option price shall not be less than 100% of the fair market value of the stock at the date of grant. Options are exercisable at 20% per year and expire five years after the date of grant. The Company has adopted SFAS No. 123 to account for stock-based compensation awards granted to non-employee consultants, under which a compensation cost is recognized for the fair value of the options granted as of the date of grant. As of June 30, 1999, no shares have been granted under this plan. 29 31 7. STOCK PURCHASE: On May 28, 1998, the Company entered into a stock purchase agreement with its former president, which called for the purchase by the Company of all the shares of the Company's common stock held by the former president (889,576 shares) at a price of $5 per share, in connection with the former president's retirement . The agreement also contained a consulting and non-compete agreement for a period of ten years each. Upon closing, $2,500,000 of the purchase price was paid to the former president with the proceeds of the term loan discussed in Note 5 (b). The remaining purchase price is to be paid over a 4 year period according to the terms of a note issue to the former president. The common stock purchased is included in treasury stock as of June 30, 1999. 8. 401(k) PLAN: The Company maintains a 401(k) plan covering all employees with one or more years of service. The plan is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. The Company provides for matching contributions of 50% of the first 2% of employee contributions. Company contributions to the plan totaled approximately $54,000, $53,000 and $47,000 for the three years ended June 30, 1999, respectively. 9. BUSINESS AND CREDIT CONCENTRATIONS: The Company is engaged in one major line of business - the development, manufacture and distribution of security alarm products and door security devices for commercial and residential use. Sales to unaffiliated customers are primarily shipped from the United States. The Company has customers worldwide with major concentrations in North America, Europe and South America. Identifiable assets (net of intercompany receivables and payables) relating to the Company's foreign subsidiaries were approximately $22,720,000 and $18,780,000 at June 30, 1999 and 1998, respectively. Export sales amounted to $10,713,000, $12,101,000 and $10,355,000 for the three years ended June 30, 1999, respectively. At June 30, 1999, the Company had two customers (Customer A and B) with accounts receivable balances that aggregated 49% of the Company's accounts receivable. At June 30, 1998, the Company had two customers (Customer A and C) with accounts receivable balances that aggregated 36% of the Company's accounts receivable. The Company had one customer that accounted for 27%, 23% and 21% of the Company's net sales in fiscal 1999, 1998 and 1997, respectively. During the past three fiscal years no other customer represented more than 10% of the Company's net sales. 30 32 10. COMMITMENTS AND CONTINGENCIES: Leases The Company is committed under various operating leases which do not extend beyond fiscal 2001. Minimum lease payments through the expiration dates of these leases, with the exception of the land lease referred to below, are as follows (in thousands): Year ending June 30, -------------------- 2000 $ 371 2001 165 2002 70 2003 45 Thereafter 15 Rent expense totaled approximately $805,000, $866,000 and $736,000 for the three years ended June 30, 1999, respectively. Land Lease On April 26, 1993, one of the Company's foreign subsidiaries entered into a 99 year lease for approximately four acres of land in the Dominican Republic, at an annual cost of approximately $272,000, on which the Company's main production facility is located. Letters of Credit At June 30, 1999, the Company was committed for approximately $576,000 under open commercial letters of credit and steamship guarantees. Litigation In the normal course of business, the Company is a party to claims and/or litigation. Management believes that the settlement of such claims and/or litigation, considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations. 11. SEGMENT DATA: As described in Note 1, effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." While the company's results of operations are primarily reviewed on a consolidated basis, the chief operating decision maker also manages the enterprise in two geographic segments: (i) United States (ii) Foreign. The following represents selected consolidated financial information for the Company's segments for the fiscal years ended June 30, 1999, 1998 and 1997: 1999 1998 1997 ---- ---- ---- (in thousands) Sales to unaffiliated customers: United States $50,573 50,269 53,302 Foreign (see Note 9) 0 0 0 Identifiable assets: United States 33,067 39,783 41,242 Foreign 22,720 18,780 16,002 31 33 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY CONDENSED BALANCE SHEETS As of June 30 ------------- ASSETS 1999 1998 - ------ ---- ---- (in thousands) CASH ...................................... $ 1,452 $ 1,825 ACCOUNTS RECEIVABLE, net .................. 13,311 12,905 INVENTORIES ............................... 6,583 12,656 PREPAID EXPENSES AND OTHER CURRENT ASSETS . 489 533 DEFERRED INCOME TAXES ..................... 716 1,292 ------- ------- Total current assets .... 22,551 29,211 INVESTMENT IN SUBSIDIARIES, on equity basis 29,495 25,102 PROPERTY, PLANT AND EQUIPMENT, net ........ 5,777 5,744 OTHER ASSETS .............................. 214 146 ------- ------- $58,037 $60,203 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES ....................... $ 5,665 $ 8,917 DUE TO SUBSIDIARIES ....................... 3,361 3,384 LONG-TERM DEBT ............................ 17,241 18,194 DEFERRED INCOME TAXES ..................... 442 875 ------- ------- Total liabilities ....... 26,709 31,370 STOCKHOLDERS' EQUITY ...................... 31,328 28,833 ------- ------- $58,037 $60,203 ======= ======= This schedule should be read in conjunction with the accompanying consolidated financial statements and notes thereto. 32 34 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY CONDENSED STATEMENTS OF INCOME For the Years Ended June 30, --------------------------------- 1999 1998 1997 ---- ---- ---- (in thousands) NET SALES ................................................... $ 35,733 $ 41,610 $ 43,921 COST OF SALES ............................................... 26,325 32,022 33,733 -------- -------- -------- Gross profit ..................................... 9,408 9,588 10,188 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................................................. 7,741 7,934 7,826 -------- -------- -------- Operating income ................................. 1,667 1,654 2,362 EQUITY IN EARNINGS OF SUBSIDIARIES .......................... 284 757 1,122 OTHER EXPENSE, net .......................................... (1,383) (898) (1,240) -------- -------- -------- Income before (benefit) provision for income taxes 568 1,513 2,244 (BENEFIT) PROVISION FOR INCOME TAXES ........................ (1,925) (525) 605 -------- -------- -------- Net income ....................................... $ 2,493 $ 2,038 $ 1,639 ======== ======== ======== This schedule should be read in conjunction with the accompanying consolidated financial statements and notes thereto. 33 35 NAPCO SECURITY SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands) Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Charged to Balance Beginning Costs and at End of Description of Period Expenses Deductions (1) Period ----------- --------- -------- -------------- ------ For the year ended June 30, 1997: Allowance for doubtful accounts (deducted from accounts receivable) $ 864 $ 55 $ 114 $ 805 ======= ======= ======= ======= For the year ended June 30, 1998: Allowance for doubtful accounts (deducted from accounts receivable) $ 805 $ 50 $ 100 $ 755 ======= ======= ======= ======= For the year ended June 30, 1999: Allowance for doubtful accounts (deducted from accounts receivable) $ 755 $ 230 $ 98 $ 887 ======= ======= ======= ======= (1) Deductions relate to uncollectible accounts charged off to valuation accounts, net of recoveries. This schedule should be read in conjunction with the accompanying consolidated financial statements and notes thereto. 34 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 35 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Part III (Items 10, 11, 12 and 13) is incorporated herein by reference from the Company's definitive proxy statement for the 1999 annual meeting of stockholders which the Company intends to file with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's 1999 fiscal year, and, accordingly, items 10, 11, 12 and 13 are omitted pursuant to General Instruction G(3). 36 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)1. Financial Statements The following consolidated financial statements of NAPCO Security Systems, Inc. and its subsidiaries are included in Part II, Item 8: Page ---- Report of Independent Public Accountants as of June 30, 1999 and 1998 and for each of the 3 Years in the Period Ended June 30, 1999............................................................... 16 Consolidated Balance Sheets as of June 30, 1999 and 1998.................................................................................. 17 Consolidated Statements of Income for the Years Ended June 30, 1999, 1998 and 1997...................................................................... 18 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997................................................................................................ 19 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997................................................................ 20 Notes to Consolidated Financial Statements, June 30, 1999, 1998 and 1997............................................................................ 21 (a)2. Financial Statement Schedules The following consolidated financial statement schedules of NAPCO Security Systems, Inc. and its subsidiaries are included in Part II, Item 8: I: Condensed Financial Information on Parent Company.................................................................................. 32 II: Valuation and Qualifying Accounts.................................................................. 34 Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the required information is shown in the consolidated financial statements and/or notes thereto. 37 39 (a)3 and (c). Exhibits Exhibit No. Title --- ----- Ex-3.(i) Articles of Incorporation, as amended................................. Exhibit 3a to Report on Form 10-K for fiscal year ended June 30, 1988 Ex-3.(ii) Amended and Restated By-Laws - August 9, 1999......................... E-1 Ex-10.A Amended and Restated 1992 Incentive Stock Option Plan ................................................... E-17 Ex-10.B 1990 Non-Employee Stock Option Plan................................... Exhibit 10c to Report on Form 10-K for fiscal year ended June 30, 1991 Ex-10.C Defined Contribution Pension Plan Basic Plan Document................................................... Exhibit 10d to Report on Form 10-K for fiscal year ended June 30, 1989 Ex-10.D Defined Contribution Pension Plan 401(k) Profit Sharing Plan Adoption Agreement.................................................... Exhibit 10e to Report on Form 10-K for fiscal year ended June 30, 1989 Ex-10.E Promissory Note dated as of November 8, 1991 between Citibank, N.A. and the Company........................................................... Exhibit 10-i to Report on Form 10-K for fiscal year ended June 30, 1992 Ex-10.F Credit Agreement dated November 8, 1991 between N.S.S. Caribe S.A. and Citibank, N.A......................................................... Exhibit 10-j 38 40 Exhibit No. Title --- ----- to Report on Form 10-K for fiscal year ended June 30, 1992 Ex-10.G Construction Contract dated June 5, 1993.................................................................. Exhibit 10-l to Report on Form 10-K for fiscal year ended June 30, 1993 Ex-10.H First Amendment dated as of November 5, 1993 to Credit Agreement dated as of November 8, 1991 with Citibank, N.A................................... Exhibit 10-0 to Report on Form 10-K for fiscal year ended June 30, 1993 Ex-10.I Loan and Security Agreement with Marine Midland Bank dated as of May 12, 1997.......................................................... Exhibit 10.I to Rpt. On Form 10K for fiscal year ended June 30, 1997 Ex-10.J Revolving Credit Note #1 to Marine Midland Bank dated as of May 12, 1997................................. Exhibit 10.J to Report on Form 10-K for Fiscal year ended June 30, 1997 Ex-10.K Revolving Credit Note #2 to Marine Midland Bank dated as of May 12, 1997................................. Exhibit 10.K to Report on Form 10-K for fiscal year ended June 30, 1997 Ex-10.L Promissory Note to Marine Midland Bank dated as of May 12, 1997.............................................. Exhibit 10-L to Report on Form 10-K for fiscal year ended June 30, 1997 Ex-10.G Construction Contract dated June 5, 1993.................................................................. Exhibit 10-l to Report on Form 10-K for fiscal year ended June 30, 1993 Ex-10.H First Amendment dated as of November 5, 1993 to Credit Agreement dated as of November 8, 1991 with Citibank, N.A................................... Exhibit 10-0 to Report on Form 10-K for fiscal year ended June 30, 1993 Ex-10.I Loan and Security Agreement with Marine Midland Bank dated as of May 12, 1997.......................................................... Exhibit 10.I to Rpt. On Form 10K for fiscal year ended June 30, 1997 Ex-10.J Revolving Credit Note #1 to Marine Midland Bank dated as of May 12, 1997................................. Exhibit 10.J to Report on Form 10-K for Fiscal year ended June 30, 1997 Ex-10.K Revolving Credit Note #2 to Marine Midland Bank dated as of May 12, 1997................................. Exhibit 10.K to Report on Form 10-K for fiscal year ended June 30, 1997 Ex-10.L Promissory Note to Marine Midland Bank dated as of May 12, 1997.............................................. Exhibit 10-L to Report on Form 10-K for fiscal year ended June 30, 1997 39 41 Ex-10.M Amendment No. 1 to the Loan and Security Agreement with Marine Midland Bank dated as of May 28, 1998.................................... Exhibit 10-M to Report in Form 10-K for fiscal year ended June 30, 1998. Ex.-10.N Term Loan Note to Marine Midland Bank dated as of May 28, 1998................................................ Exhibit 10-N to Report in Form 10-K for fiscal year ended June 30, 1998. Ex-10.0 Promissory Note to Kenneth Rosenberg dated as of May 28, 1998................................................ Exhibit 10-O to Report in Form 10-K for fiscal year ended June 30, 1998. Ex-10.P Consulting Agreement with Kenneth Rosenberg dated as of May 28, 1998....................................... Exhibit 10-P to Report in Form 10-K for fiscal year ended June 30, 1998. Ex-10.Q Employment Agreement with Richard Soloway .......... Exhibit 10.Q to Report in Form 10-Q for period ended March 31, 1999. Ex-10.R Employment Agreement with Jorge Hevia ............... Exhibit 10-R to Report in Form 10-Q for period ended March 31, 1999. Ex-10.S Amendment No. 2 to the Loan and Security Agreement with HSBC Bank dated as of June 30, 1999............................................ E-26 Ex-10.T Indemnification Agreement dated August 9, 1999 ...................... E-29 Ex-11 Computation of earnings per share ................................... E-33 Ex-12 Computation of ratios ............................................... E-34 Ex-21 Subsidiaries of the Registrant ...................................... E-35 40 42 Ex-23 Consent of Independent Public Accountants............................ E-36 Ex-27 Financial Data Schedule.............................................. E-37 Exhibits have been included in copies of this Report filed with the Securities and Exchange Commission. Stockholders of the registrant will be provided with copies of these exhibits upon written request to the Company. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended June 30, 1999. 41 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. September 28, 1999 NAPCO SECURITY SYSTEMS, INC. (Registrant) By: /s/ RICHARD SOLOWAY By: /s/ KEVIN S. BUCHEL Richard Soloway Kevin S. Buchel Chairman of the Board of Senior Vice President of Directors, President and Secretary Operations and Finance and Treasurer (Principal Executive Officer) (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and the dates indicated. Signature Title Date --------- ----- ---- /s/ RICHARD SOLOWAY Chairman of the - ----------------------------- Board of Directors September 28, 1999 Richard Soloway /s/ KEVIN S. BUCHEL - ----------------------------- Kevin S. Buchel Director September 28, 1999 /s/ RANDY B. BLAUSTEIN - ----------------------------- Randy B. Blaustein Director September 28, 1999 /s/ ANDREW J. WILDER - ----------------------------- Andrew J. Wilder Director September 28, 1999 42 44 INDEX TO EXHIBITS Ex-3(ii) Amended and Restated By-Laws - August 9, 1999....................................... E-1 Ex-10.A Amended and Restated 1992 Incentive Stock Option Plan............................... E-17 Ex-10.S Amendment No. 2 to the Loan and Security Agreement with HSBC Bank dated as of June 30, 1999........................................................... E-26 Ex-10.T Indemnification Agreement dated August 9, 1999...................................... E-29 Ex-11 Computation of earnings per share................................................... E-33 Ex-12 Computation of ratios............................................................... E-34 Ex-21 Subsidiaries of the Registrant...................................................... E-35 Ex-23 Consent of Independent Public Accountants........................................... E-36 Ex-27 Financial Data Schedule............................................................. E-37