SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB-Annual or Transitional Report
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-17580
FIRETECTOR INC.
(Exact name of Small Business Issuer in its charter)
Delaware 11-2941299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
262 Duffy Avenue, Hicksville, New York 11801
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (516) 477-4300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value 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 and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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 the Registrant's knowledge, in definitive proxy or information
statements be reference in Part III of this Form 10-KSB ( )
State issuer's revenues for its most recent fiscal year: $13,527,000
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average bid and ask prices for the Registrant's
Common Stock, $.001 par value per share, as of January 8, 1996 was
$3,244,205.00.
As of January 8, 1996, the Registrant had 3,243,400 shares of Common Stock
outstanding.
Documents Incorporated by Reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Firetector Inc. ("Firetector" or the "Company") is a Delaware corporation
organized in October 1988 to acquire controlling interests in companies engaged
in the design, manufacture, sale and servicing of fire, life safety security,
energy management, intercom, audio-video communication and other systems.
Reference to Firetector or the Company include operations of each of its
subsidiaries except where the context otherwise requires. Firetector's business
is conducted through subsidiaries in New York City and Dallas Texas in three
principal market categories:
Service & Maintenance
Engineered life safety systems
Engineered sound systems
Firetector Products
Firetector designs, manufactures, markets and sells its own proprietary life
safety and communication systems and also engineers, markets and sells systems
and products manufactured by other parties. Firetector's proprietary product
line features the COMTRAK 1720 and 2000 Life Safety Systems and the TELTRAK
Communications System.
In 1973, New York City passed Local Law 5 requiring that all office
buildings of 100 feet or more be outfitted with smoke detectors, manual and
audio communicating systems for life safety and fire reporting purposes. In
anticipation of the demand that this legislation would create for equipment and
systems employing improved technology and design features, Firetector engaged in
extensive research and development which led to its proprietary COMTRAK 1720
Life Safety System which has been installed in scores of buildings since the
early 1980's.
To meet the challenges of more stringent code requirements and a sluggish
market for new construction, Firetector developed its new generation proprietary
COMTRAK 2000 Life Safety System which utilizes the latest technology to not only
meet the current code requirements, and satisfy the "wish list" of current
COMTRAK customers, but many likely future code requirements as well. One of the
improvements incorporated into the COMTRAK 2000 is a Fire Command Station which
offers a new color CRT display system along with three sectional displays. These
features provide the operator with a wide variety of pertinent information,
allowing for quicker response, which is critical in an emergency. In addition,
the expanded memory capability of the new Fire Command Station enables a single
station to control multi-building
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projects and permits simplified operation.
COMTRAK 1720 and 2000 Systems are operating in approximately 100 buildings
in New York City. Firetector has approvals from Factory Mutual and various New
York City agencies for the COMTRAK 1720 and COMTRAK 2000 System.
TELTRAK Communications Systems. In the early 1980s, Firetector began
investigating the intercom market and the possibilities of utilizing its
computerized multiplex technology for this market. Significant construction of
new high-rise housing occurred in the 1970s and 1980s and increased the
potential demand for technologically advanced intercom systems. To meet this
demand, Firetector developed a micro-processor-based combination intercom and
security system using Casey's multiplex technology. The TELTRAK I intercom and
security system is capable of a variety of accessory functions in addition to
its basic intercom and security function. Firetector added video capabilities to
its TELTRAK I technology and created the TELTRAK II, for installation in luxury
condominium, cooperative and apartment buildings. Over 16,000 TELTRAK I and II
units have been sold. In 1991, the redesigned TELTRAK III intercom/security
station was introduced, with enhanced features to expand its use and
competitiveness in the face of the reduced market for these products. New
features, such as public address, enable important messages to be given to
building occupants either locally or by groups in case of emergency.
Other Products
In the past three years Firetector has sought to diversify its product lines
to establish a greater base to absorb product support, R & D and other overhead
and to provide product and customer diversification. To that end, Firetector has
augmented its established position in marketing engineered life safety systems
(proprietary and third party) by developing a significant business in engineered
sound systems for application to a variety of users including hospitals,
educational facilities and transit facilities (e.g. subway stations). Firetector
has developed a focused unit with a high level of experience to penetrate this
niche market with significant success as a substantial portion of Firetector's
order position derives from this effect. In addition, Firetector organized new
marketing units to focus on marketing, engineering and servicing systems and
products manufactured by third parties, particularly national manufacturers.
These units are service oriented organizations which focus on close
relationships with customers and key suppliers.
In addition, in 1993, Firetector acquired assets of a company which
manufactured and marketed sophisticated products and on-board information and
communication systems with applications for municipal transit carriers,
long-distance passenger carriers and bus and train builders. Firetector has
integrated this
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operation into its New York division and has to date supplied products to
customers such as ABB Traction, Sumitomo, Kawasaki, Morrison-Knudsen, the New
York City Transit Authority and AMTRAK.
Service
Firetector continues to put an increasing priority on the development of an
integrated and efficient service organization. Sales personnel have been
dedicated to securing service contracts and are intensifying efforts to market
service to COMTRAK and other Firetector projects coming out of warranty and the
renewal of such contracts. Recent changes to the New York City Administrative
Code, requiring more stringent maintenance/cleaning are augmenting Firetector's
sales efforts. To improve efficiencies and productivity, Firetector organized a
division to perform cleaning on life safety systems, which was previously
subcontracted to an external entity. To improve customer service, Firetector
maintains an office in New York City which houses its New York service
management.
General Sound (Texas) Company
Firetector conducts business in Texas through its subsidiary, General Sound
(Texas) Company, which distributes, services, installs and designs a variety of
sound, fire alarm, intercom and security systems in the Dallas/Ft. Worth, Texas
area. General Sound concentrates its sales effort on the commercial market and
schools. General Sound provides its customers, primarily electrical contractors,
with engineered systems, assistance in design, installation support and
post-installation service.
General Sound has non-exclusive distribution agreements for the Dallas/Ft.
Worth area with Notifier, Dukane, and other manufacturers. The product mix and
dependence on individual suppliers varies from year to year depending on
customer requirements and market trends.
Research and Development
During the fiscal years ended September 30, 1995 and 1994, Firetector spent
approximately $160,000 and $143,000, respectively, for research and development
(including capitalized software development costs in fiscal 1995 of $14,000) of
Firetector's life safety and communication systems.
Customers and Suppliers
For the fiscal years ended September 30, 1995 and 1994, no customers or
suppliers accounted for more than 10% of Firetector's revenues.
Regulations
Firetector believes that it is in compliance with applicable
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building codes, zoning ordinances, occupational, safety and hazard standards and
other Federal, state and local ordinances and regulations governing its business
activities.
Competition
Firetector's business is competitive; some of Firetector's competitors may
have greater financial resources and may offer a broader line of fire and life
safety products. Firetector also faces competition in the servicing of systems
which it sells. Accordingly, even though Firetector may sell and install a fire
and life safety control and communications system, it may not receive the
contract to service that system. Firetector, however, believes that it can
effectively compete with any entity which conforms with applicable rules and
regulations. See ITEM 3. LEGAL PROCEEDINGS.
Employees
Firetector and its subsidiaries have 117 full time employees, including 39
that are covered by union contracts in New York and 9 that were covered by a
union contract in Texas. On June 30, 1995, at the expiration of the Texas union
contract, the employees agreed to terminate the union. All employees remained
with the Company.
Business Conditions
Firetector believes that its labor and material sources are sufficient and
that other than normal competitive factors, and what is discussed above or under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," or in ITEM 3. LEGAL
PROCEEDINGS, Firetector's operations and industry do not have any special
characteristics which may have a material impact upon its future financial
performance.
Patents and Trademarks
The Company does not have any patents on its systems, but, it uses
proprietary technology which it seeks to protect as trade secrets. The
"Firetector" and "COMTRAK" trademarks are registered with the United States
Patent and Trademark Office.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 14,800 square feet of office, manufacturing
and warehouse space in Hicksville, New York. The lease runs for an initial term
from March 1, 1995 through February 29, 2000, with a five year renewal option.
The rental schedule provides for monthly rent of $10,175 in the first year
increasing to $11,950 during the final year of the initial term and $15,785
during the final year of the renewal term.
The Company leases approximately 2,333 square feet of office
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and warehouse space in New York City. The lease term runs from May 13, 1994
through May 12, 2004. The lease agreement provides for annual rental fees of
$51,941.
The Company leases a 7,700 square foot office and warehouse facility in
Richardson, Texas, a suburb of Dallas, pursuant to a lease expiring on April 30,
1998 providing for annual rent on a net basis of $40,200 escalating annually to
$47,880 in the final year of the lease. The Company has a 24 month renewal
option on the lease which would allow for maximum rent of $51,975 and tenant
responsibility for any increase in common area expenses over the 1988 base year.
Management believes there is sufficient space at this facility for its current
and intended business.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its operations, the Company has been or, from time
to time, may be named in legal actions seeking monetary damages. While the
outcome of these matters cannot be estimated with certainty, Management does not
expect, based upon consultation with legal counsel, that they will have a
material effect on the Company's business or financial condition.
The Company has filed suit in the United States District Court for the
Southern District of New York against a competitor in the New York City life
safety market, Firecom, Inc. and a number of its affiliates. The suit, which
seeks legal damages in excess of $10,000,000 and certain equitable remedies, is
based on numerous Federal and State claims including, without limitation,
alleged violation of Federal and New York State anti-trust statutes, unfair
competition, unlawful theft of proprietary information, deceptive trade
practices, tortious interference with contract and other claims. The suit also
sets forth a breach of contract claim against a customer who, Management
alleges, improperly breached a binding contract. The Company's counsel believes
that the suit will be contested but that The Company will, in the ultimate, be
successful in an amount yet to be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Firetector's Common Stock has been traded on the National Association of
Securities Dealer's Inc. Automated Quotation System ("NASDAQ") since April 11,
1989 under the "FTEC" symbol. The following table shows the high and low bid and
ask quotations
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for each fiscal quarter from December 31, 1993 through September 30, 1995, which
quotations were obtained from the National Association of Securities Dealers
Inc.
Common Stock
Quarter Ended BID ASK
High Low High Low
---------------------------------------------
December 31, 1993 3 1 1/2 3 1/8 1 5/8
March 31, 1994 1 5/8 7/8 1 11/16 1
June 30, 1994 1 1/4 5/8 1 3/8 13/16
September 30, 1994 25/32 7/16 7/8 17/32
December 31, 1994 9/16 1/4 21/32 7/16
March 31, 1995 1/2 3/16 9/16 1/4
June 30, 1995 1 7/32 15/32 1 5/16 9/16
September 30, 1995 1 13/16 1 1/32 2 1 5/32
The above quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions. As of January 8, 1996, there were 507 record holders of
Firetector's Common Stock.
On January 8, 1996 the bid and ask prices for the Common Stock were 1-26/64
and 1-30/64 respectively.
The Company has not paid any cash dividends on its Common Stock. Payment of
cash dividends in the foreseeable future is not contemplated by the Company.
Whether dividends are paid in the future will depend on the Company's earnings,
capital requirements, financial condition along with economic and market
conditions, industry standard and other factors considered relevant to the
Company's Board of Directors. Payment of dividends is restricted in certain
cases by the Company's credit facilities. The Company's Preferred Stock would be
entitled to a dividend preference over the Common Stock. Accordingly, no
assurance can be given as to the amount or timing of future dividend payments,
if any.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Liquidity and Capital Resources
In August 1994, Firetector completed a refinancing with a New York City
bank providing for a $500,000 three year term loan with a seven year
amortization period and a $2,250,000 revolving credit facility (the "Credit
Facility"). The Credit Facility provides for interest at prime plus 2% (10.75%
at September 30, 1995) on outstanding balances, and an annual facility fee of
1%. Advances under the revolver are measured against a borrowing base calculated
on eligible accounts receivable and inventory as defined. The Credit Facility is
secured by all of the assets of
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Firetector and all of its operating subsidiaries as well as a $500,000 letter of
credit provided by Firetector's largest stockholder, Mirtronics Inc., an Ontario
corporation ("Mirtronics").
First Corporate Capital Inc. an Ontario Corporation ("FCC") provided a
guaranty of minimum levels of net income in fiscal 1994 and 1995. FCC provided a
$100,000 subordinated loan to Firetector required by the 1994 guaranty.
The Credit Facility includes various covenants, including maintenance of
sufficient qualifying accounts receivable and inventory to support the
outstanding loan balance. The Credit Facility expires on March 31, 1996 but the
Company expects to negotiate a renewal and/or extension of the Credit Facility.
If the lender demands repayment of all indebtedness at expiration, Firetector
would not be in a position to repay all of this indebtedness without assistance
from affiliates. There can be no assurance that affiliates would or could
provide such assistance.
The Company had $13,000 of net cash provided from operating activities
during its fiscal 1995, primarily the result of an operating profit of $105,000,
and a decrease in trade accounts receivable. The decrease in trade accounts
receivable was primarily due to a program of negotiation of terms prior to the
beginning of a project, the monitoring of its terms during a project and
completing projects in a more timely fashion resulting in faster final payments.
It is the intention of the Company to continue this program in fiscal 1996.
The ratio of Firetector's current assets to current liabilities increased
to approximately 1.38 to 1 at September 30, 1995 from 1.17 to 1 at September 30,
1994.
The Company further anticipates meeting its future cash requirements
through a cost reduction program, acceleration of the collection of receivables,
reduction of inventory levels and generating of profits by operating without
unfair interference as described in ITEM 3. LEGAL PROCEEDINGS.
As of September 30, 1995 and September 30, 1994, Firetector and its
affiliates were indebted to Mirtronics and its subsidiaries and affiliates for
materials, loans and miscellaneous advances in the amount of $139,000 and
$703,000, respectively. The Company is also indebted to First Corporate Equity
Ltd., an affiliate of a director of Mirtronics, in the aggregate amount of
$190,000 at September 30, 1995. The Company had a receivable from Mirtronics and
its subsidiaries in the amount of $297,000 and $197,000 at September 30, 1995
and 1994, respectively.
Firetector's terms of sale are net 30 days. However, the normal receivable
collection period is 60-120 days, exclusive of retainage, because certain
governmental regulations and the
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Company's frequent status as a subcontractor (entitled to pro rata payments as
the general project is completed) extend the normal collection period.
Firetector believes this is a standard industry practice. Firetector's
receivable experience is consistent with the industry as a whole and will likely
continue until the economic environment improves. While this is an area of risk
and concern, due to the proprietary nature of Firetector's systems, many
projects require Firetector's cooperation to secure a certificate of occupancy
and/or to activate/operate a life safety system, thus assisting Firetector's
collection of a significant portion or even total payment, even when
Firetector's immediate account debtor (contractor) has liquidated and/or
creditors have seized a project.
RESULTS OF OPERATIONS
Revenues and Net (Loss) Income
Revenues increased 11.5% in fiscal 1995 over fiscal 1994 as a result of an
18% increase in service revenues and a 9% increase in product revenues. The
increase in service revenues resulted from a continuing intense effort to secure
service contracts and call-in maintenance revenue on Firetector systems and
other systems.
Gross Profit
During fiscal 1995 gross profit on product sales increased slightly to 36%
from 34% in fiscal 1994 as Management focused on controlling material cost,
reduced fixed overhead and improved the project status and costing system. Gross
profit and therefore profitability were adversely impacted by significant cost
overruns on several installations by one of Firetector's new subsidiaries.
Management has instituted numerous changes in this operation and is confident
that the problem has been rectified. Gross profit was impacted by severe
competition and relating price pressure on life safety installations in the New
York area.
During fiscal 1995 gross profit on service increased to 41% from 29% in
fiscal 1994 primarily due to over-absorption of fixed costs through higher
volumes, more efficient use of labor and the elimination of outside
subcontracted labor. The analysis of gross profit in both product and service is
skewed due to the fact that certain costs have been reallocated between product
sales and service sales.
Net Income
Net income increased to $265,000 or $.06 per share in fiscal 1995 from a
loss of $(668,000) or $(.22) per share in fiscal 1994. Net income before
provision (credit) for income taxes was $105,000 in fiscal 1995 which was an
increase in operating income
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of approximately $773,000 from fiscal 1994. Results in fiscal 1995 included the
impact of utilizing the tax benefit of net operating loss carryforwards of
$160,000 as Firetector returned to profitability. Firetector retains over
$3,000,000 of additional net operating loss carryforwards. The increase in
profitability derived from higher volumes and higher gross profit resulting from
the Company's cost reduction program. Results during 1995 as compared to 1994
were impacted by a $56,000 increase in depreciation and amortization
(acquisitions, computer and equipment additions), a $122,000 increase in
interest expense (higher borrowings and prime rate) and approximately $100,000
of non-operating costs such as litigation expense, costs relating to relocation
of the Company's Long Island facility and employee termination costs. The
Company expects to realize $160,000 from the utilization of its tax loss
carryforwards. This amount will be utilized against future earnings based on
management projections. The Company has experienced an increase in backlog to
$7,000,000. Although Management is confident that this utilization will be
realized, there does remain some uncertainty due to unforeseen events.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased by 3.5% in fiscal
1995 over 1994. The rate of increase was much lower than the rate of revenue
increase due to the impact of Management's cost cutting program. The impact of
this program was not felt to its full effect in fiscal 1995 due to (i) the
timing of such costs; (ii) litigation costs; and (iii) non-recurring costs
relating to facility relocation and employee termination.
Backlog
Firetector's backlog, excluding service, increased to $6,200,000 at
September 30, 1995 from $4,800,000 at September 30, 1994 and had further
increased to approximately $7,000,000 at December 31, 1995.
Plan of Operations
During fiscal 1996 Management intends to continue to focus on the reduction
of fixed overhead as well as to reduce variable costs through improved
efficiency and productivity. Enhancements to Firetector's management information
systems and methods of approving and monitoring project costs have been
improving Management's ability to pinpoint waste and/or third party (supplier or
customer) cost responsibility. Assuming the continuation of the Credit Facility,
Management believes that Firetector will generate sufficient cash flow from
operations.
Seasonality and Industry Trends
The Company's sales are slightly affected by seasonal changes.
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INFLATION
The impact of inflation on the Company's business operations is not
material. Casey's labor costs are normally controlled by union contracts
covering a period of two years and its material costs have remained relatively
stable.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements required to be filed hereunder are
indexed at Page 21 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Subsequent to the fiscal year ended September 30, 1995, the accounting firm
of Moore Stephens L.L.P. was engaged as the principal accountant to audit the
Company's financial statements, replacing the firm of Ernst & Young LLP.
In connection with the audit of the two most recent fiscal years and any
subsequent interim period, there were no disagreements with Ernst & Young LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make
reference to the matter in their report.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Directors and Executive Officers of the Company are as follows:
DATE SERVICE
NAME AGE OFFICE COMMENCED
Richard Axelsen 62 President, Chief October 1988
Executive Officer
and Director
Marc Palker 43 Treasurer, Chief October 1988
Financial Officer,
Secretary and
Director
Daniel S. Tamkin 36 Vice President and October 1990
General Counsel
Joseph Vitale 48 President of Casey May 1994
and Director
Henry Schnurbach 44 Director October 1988
Mr. Axelsen has a Bachelor of Science degree from Hofstra University. Mr.
Axelsen was President of Casey for the past ten years and was Vice President of
Systems Equipment Corp. ("Systems"), at the time the Company's principal
stockholder, from September 1986 until August 23, 1991 when it was merged into
the Company. Mr. Axelsen was President and Director of Systems from 1981 to
1986, and was reappointed as a Director of Systems in April 1989. Systems was
registered under the Securities Exchange Act of 1934 (the "Exchange Act"). Mr.
Axelsen previously served as a Director of the Automatic Fire Alarm Association
of New York and as Co-Chairman of the Association's advisory committee for new
codes and existing codes.
Mr. Palker has been employed by Casey, as Vice President Finance and
Administration since September 1988 and was employed by Systems as a Director,
President and Chief Executive Officer from November 1988 until August 23, 1991
when it was merged into the Company. From 1988 through 1992, Mr. Palker served
as a National Vice President of the Institute of Management Accountants and
currently serves as a National Director of this organization. Mr. Palker holds a
Bachelor of Science degree from Rider College and a Master of Business
Administration degree from St. John's University. Mr. Palker is a Certified
Management Accountant.
Mr. Tamkin has a J.D. degree from New York University School of Law and an
A.B. degree from Columbia University. Mr. Tamkin
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has been Vice President and General Counsel of the Company since October 1990.
Also since October 1990, Mr. Tamkin has been a Vice President of Mirtronics and
Executive Vice President of Forum Financial Corporation, a Toronto based
merchant banking organization controlled by a Director of Mirtronics. Since
November 1992, Mr. Tamkin has been a director of Unicap Commercial Corporation,
an Ontario corporation which is registered under the Exchange Act. Mr. Tamkin
was associated with Varet & Fink P.C. from 1986 to October 1990 and from October
1990 to January, 1993 was Counsel to that firm. Mr. Tamkin is presently counsel
to Dolgenos Newman & Cronin, Counsel to the Company.
Mr. Vitale has been active in the fire/communications industry with Casey
since 1982. Mr. Vitale has been President of Casey since 1993 and has held the
positions of Director of Engineering, Vice President - Engineering and Executive
Vice President. Mr. Vitale became President of Casey in 1993. Mr. Vitale holds a
Bachelor of Science degree in Engineering from C.W. Post College and a Master of
Science degree in Electrical Engineering from New York University.
Mr. Schnurbach has a Bachelor of Commerce degree from Sir George Williams
University and is a Certified Management Accountant in Ontario. Since October
1991, Mr. Schnurbach has been Chief Executive Officer of Cantar/Polyair
Incorporated, a manufacturer of specialty covers and packaging materials. Since
November 1988, Mr. Schnurbach has been a Director, and from March 1989 to March
1990, President of Mirtronics, which is registered under the Exchange Act. From
January 1990 to July 1990 Mr. Schnurbach was Senior Vice President of Atlantique
Video & Sound Inc., a Quebec corporation which prior to liquidation, operated a
chain of full service electronics stores.
There are no family relationships between any Director or Executive Officer
of Firetector and any other Director or Executive Officer of Firetector.
Directors hold office for a period of one year from the Annual Meeting of
Stockholders at which they are elected or until their successors are duly
elected and qualified. Officers are appointed by the Board of Directors and hold
office at the will of the Board. There is no nominating, auditing or
compensation committee of the Board of Directors nor is there any committee
performing similar functions.
During the fiscal year ended September 30, 1995, Mirtronics Inc. a 10%
holder of the Common Stock of the Company during the fiscal year ended September
30, 1995, failed to file with the Securities and Exchange Commission on a timely
basis two required reports relating to transactions involving options to
purchase Common Stock owned by it. During the fiscal year ended September 30,
1995, Daniel S. Tamkin a Director of the Company during the fiscal year ended
September 30, 1995, failed to file with the
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Securities and Exchange Commission on a timely basis one required report
relating to transactions involving Common Stock owned by him. In making these
statements, the Company has relied on the written representations of its
directors, officers and 10% holders and copies of the reports that they have
filed with the Commission.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid or accrued by the Company for services rendered to it for each
of the three fiscal years ended September 30, 1995, as to Richard Axelsen, the
Company's Chief Executive Officer; none of the Company's other Executive
Officers had aggregate remuneration in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG
ANNUAL COMPENSATION TERM COMPENSATION
All Other
Year Salary ($) Bonus($)(1) Other($) Option/SAR Compensation
- -----------------------------------------------------------------------------
- -
1995 $110,000 -- -- -- --
1994 $137,000 -- -- 3,750(2) --
1993 $126,000 -- -- 8,750(3) --
In December 1995, the Board of Directors voted to institute a 401K plan for
nonunion employees to be effective January 1, 1996. The plan includes a profit
sharing provision at a formula yet to be determined.
Directors do not receive any compensation for their service. Out-of-pocket
expenses for travel, meals and miscellaneous expenses incurred in the course of
the Director's activities on behalf of the Company are reimbursed at cost.
- --------
(1) Mr. Axelsen had an employment agreement through December 31, 1995 that
provided, in addition to salary, a bonus equal to 8% of the Company's
consolidated net income in excess of certain performance thresholds.
(2) Options to purchase 3,750 shares of Common Stock, at a price of $1.00
per share, were issued to Mr. Axelsen on May 24, 1994.
(3) Options to purchase 8,750 shares of Common Stock at a price of $1.00
per share were issued to Mr. Axelsen on October 15, 1991. These options vest 20%
annually. The price of a share of Common Stock on said date was $.50.
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The Company adopted its 1990 Non-Qualified Stock Option Plan (the "Plan")
and has reserved 175,000 Common Shares for issuance under the Plan to employees
and officers of the Company and its subsidiaries. The Plan is administered by
the Company's Board of Directors, which determines the officers and employees to
whom options ("Options") are to be granted, the number of shares that may be
purchased at the Option price, which may not be less than 100% of the fair
market value of a Common Share at the time the Option is granted. Each Option
granted under the Plan is evidenced by a written Option Agreement. All Options
granted under the Plan expire on May 24, 1999, or with respect to any optionee,
90 days after termination of employment (with certain exceptions in the case of
death or permanent disability of the optionee) or if an optionee is terminated
for cause, upon termination. Directors may grant options to eligible employees
at exercise prices not less than 100% of the fair market value of the common
shares at the time the option is granted. The Plan provides for anti-dilution
protection for optionees in the case of recapitalizations, stock splits or
combinations, and stock distributions. The standard form of Option Agreement
(which may be altered) provides for piggy-back registration of Common Shares
issued upon exercise of Options issued under the Plan. All Options issued under
the Plan are non-transferable (except to an executor or administrator of an
optionee's estate for a limited period) and all Common Shares issuable upon
exercise of Options are restricted securities and may only be sold pursuant to a
registration statement under the Act, or an available exemption from the
registration requirements of the Act.
The Company currently has issued and outstanding options to purchase
103,750 shares of its Common Stock, at an exercise price of $1.00, to certain of
its officers, Directors and employees. See Item 12, "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
At the termination of Mr. Axelsen's employment with Firetector (other than
for cause or voluntary by Mr. Axelsen for reasons other than health or
disability), Mr. Axelsen has the right to cause Firetector to repurchase up to
12,656 shares of Common Stock at $12.96 per share, owned by Mr. Axelsen (which
derived from Mr. Axelsen's ownership of Systems' Common Shares) in certain
circumstances. A portion of the proceeds from the Company's key man life
insurance policy on Mr. Axelsen is committed to fund the repurchase of such
shares. In connection with Firetector's employment agreement with Mr. Axelsen,
Mr. Axelsen was granted options to purchase 8,750 shares of Common Stock at
$1.00 per share.
Daniel S. Tamkin, Vice President and General Counsel of Firetector, is also
an officer of a company controlled by a Director of Mirtronics, Firetector's
largest stockholder. Mr. Schnurbach, a Director of the Company, is a Director of
Mirtronics.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's outstanding Common Stock at
January 8, 1996 of (i) each beneficial owner of more than five percent of the
Common Stock, (ii) each of the Company's Directors, and (iii) all Officers and
Directors of the Company as a group.
Common Stock Beneficially Owned At January 6, 1995
Number of Shares Percent of Shares
--------------------------------------
Mirtronics Inc.(1) 4,369,250 65.1%
First Corporate Capital Inc.(2) 500,000 13.4%
Marc Palker (3, 4) 12,500 nil
Richard H. Axelsen 3, 5) 37,813 1.1%
Henry Schnurbach (2) 6,250 nil
Daniel S. Tamkin (6) 172,500 5.1%
Joseph Vitale (3, 4) 12,500 nil
All Executive Officers and
Directors as a Group (5 Persons) 241,563 7.1%
- --------
(1) Includes 3,528,000 shares of Common Stock issuable upon conversion of
preferred stock, exercise of presently exercisable options held by Mirtronics
and conversion of debt owed to Mirtronics and convertible into shares of Common
Stock. See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". Address is
106 Avenue Road, Toronto, Ontario.
(2) All issuable upon exercise of presently exercisable options. Address is
106 Avenue Road, Toronto, Ontario.
(3) Address is 262 Duffy Avenue, Hicksville, NY.
(4) Issuable upon exercise of presently exercisable options.
(5) Includes 12,500 shares of Common Stock issuable upon exercise of
presently exercisable options.
(6) Includes 112,500 shares of Common Stock issuable upon exercise of
presently exercisable options. Address is 106 Avenue Road, Toronto, Ontario.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As at September 30, 1995 Firetector and its affiliates were indebted to
Mirtronics and its subsidiaries for materials, loans and miscellaneous advances
in the amount of $139,000. In addition , the Company is indebted to First
Corporate Equity Ltd., an affiliate of a director of Mirtronics, in the
aggregate amount of $190,000. Firetector and Casey also have granted Mirtronics
16
<PAGE>
a pledge of all assets to secure any indebtedness which may, from time to time,
be owing by Firetector or Casey or any subsidiaries to Mirtronics or its
subsidiaries. The Company had a receivable from Mirtronics and its subsidiaries
in the amount of $297,000 and $197,000 at September 30, 1995 and 1994,
respectively.
On April 29, 1993, in consideration of Mirtronics extending the term of a
letter of credit that supported a prior credit facility and making further
advances, Firetector restated the price, terms and conditions of the conversion
rights and options previously granted to Mirtronics and granted Mirtronics
additional options giving Mirtronics, as at September 30, 1993, the right to
acquire up to an aggregate of 1,400,000 shares of Common Stock at a price of
$.40 per share (modified from 1,075,000 shares at an average price of $.93 per
share). The previous pricing was based on the then current market price of the
Common Stock and the unrealized expectation that the proceeds from the public
offering would be sufficient to repay Mirtronics in full and release the letter
of credit. Mirtronics has the right to designate a member of Firetector's Board
of Directors and has certain standard lender covenant protections against
material changes and transactions as long as the foregoing debt and options
remain outstanding.
Mirtronics has subordinated and postponed (up to $400,000) of its loan
receivables from Firetector and its subsidiaries to the Credit Facility. In
addition, Mirtronics has arranged for a $500,000 letter of credit as further
support for the Credit Facility. In consideration for the foregoing, Firetector
reduced the exercise price and extended the expiration date on the 1,400,000
options to purchase Firetector Common Stock held by Mirtronics to $.30 and
December 31, 1999 respectively, and granted Mirtronics options to purchase an
additional 500,000 shares of Firetector Common Stock for $.30 per share through
December 31, 1999.
First Corporate Capital Inc., an Ontario corporation ("FCC") has provided
the bank under the Credit Facility with an income guaranty (see Item 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION") in consideration of
which Firetector has granted to FCC options to purchase 500,000 shares of
Firetector Common Stock at $.30 per share through December 31, 1999. Mark
Litwin, the President and a Director of Mirtronics is also President and a
Director of FCC.
Management believes each of the foregoing transactions was entered into on
terms at least as favorable as could be obtained from unrelated parties
negotiating at arms-length.
17
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit Page No.
3.1 Certificate of Incorporation of the Company, as
amended (Exhibit 3.1)(1)
3.2 By-Laws of the Company (2)
4.1 Specimen Common Stock Certificate (2)
10.1 Employment Agreement, dated as of October 15, 1991,
between the Company and Richard H. Axelsen (Exhibit 10.1)(3)
10.2 Master Grid Note (Secured Revolving Line of Credit), dated
August 25, 1994 between Firetector Inc. as Borrower and
The First Bank of The Americas as Lender (4)
10.3 Term Loan Agreement, dated August 25, 1994 between
Firetector Inc. as Borrower and The First Bank of The Americas
as Lender (4)
10.4 Subordination Agreement dated as of August 25, 1994
between Mirtronics Inc. and Firetector Inc. (4)
10.5 Employment Agreement, dated as of December 1, 1990 between
Casey Sound Systems, Inc. and Marc Palker (Exhibit 10.5)(3)
10.6 1990 Non-Qualified Stock Option Plan (Exhibit 10.18)(5)
10.7 Form of Option Agreement between Firetector Inc.
and Mirtronics Inc. (Exhibit 10.17)(3)
10.8 Form of Debt/Equity Conversion Agreement between
Firetector Inc. and Mirtronics Inc., as amended (Exhibit 10.21)(3)
10.9 Letter Agreement dated as of November 5, 1992, between
Firetector and Mirtronics (Exhibit 10.22)(1)
22.1 Subsidiaries of the Registrant (Exhibit 22.1)(1)
27 Financial Data Schedule 41
- --------
(1) Reference is made to the correspondingly numbered Exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-2, Registration No.
33-51472, filed with the Commission on December 23, 1992, which is incorporated
herein by reference.
(2) Reference is made to the correspondingly numbered Exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-1, Registration No.
22-26050, filed with the Commission on January 23, 1989, which is incorporated
herein by reference.
(3) Reference is made to the identified Exhibit to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended September 30, 1991, which Exhibit
is incorporated herein by reference.
(4) Reference is made to the correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended September 30,
1994, which Exhibit is incorporated herein by reference.
(5) Reference is made to the identified Exhibit to the Company's Annual
Report on Form 10-K for the Fiscal Year Ended September 30, 1990, which Exhibit
is incorporated herein by reference.
18
<PAGE>
(b) Reports on Form 8-K
On October 3, 1995, the Company filed a Report on Form 8-K, reporting,
pursuant to Item 4 thereof, a change in the Company's certifying accountant.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRETECTOR INC.
(Registrant)
By: /s/ Richard H. Axelsen
Richard H. Axelsen, President,
Chief Executive Officer and
Director
Dated: January 12, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/Richard H. Axelsen President, Chief January 12, 1996
- ---------------------- Executive Officer
Richard H. Axelsen and Director
/s/Henry Schnurbach Vice President January 12, 1996
- ---------------------- and Director
Henry Schnurbach
/s/ Marc Palker Secretary, January 12, 1996
- ---------------------- Treasurer,
Marc Palker Chief Financial Officer
and Director
/s/Daniel S. Tamkin Vice President January 12,1996
- ---------------------- and Director
Daniel S. Tamkin
/s/Joseph Vitale Director January 12, 1996
- ----------------------
Joseph Vitale
20
<PAGE>
Index to Consolidated Financial Statements
Firetector Inc. and Subsidiaries
Item 7
Report of Independent Auditors .......................................... 22
Audited Consolidated Financial Statements
Consolidated Balance Sheet-September 30, 1995 ........................... 24
Consolidated Statements of Operations
Years Ended September 30, 1995 and 1994 ................................ 26
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1995 and 1994 ................................ 27
Consolidated Statements of Cash Flows
Years Ended September 30, 1995 and 1994 ................................ 28
Notes to Consolidated Financial Statements .............................. 29
21
<PAGE>
MOORE STEPHENS L.L.P.
Report of Independent Auditors
The Board of Directors and Stockholders
Firetector Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Firetector Inc.
and Subsidiaries (the "Company") as of September 30, 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated results of operations and cash
flows of Firetector Inc. and Subsidiaries at September 30, 1995 and the
consolidated results of their operations and their cash flows for the year then
ended.
The accompanying 1994 consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As more fully described
in Note 1, prior to the current year the Company incurred recurring operating
losses. In addition, the Company's revolving bank credit line is due to expire
on March 31, 1996, and there is no assurance that the bank will renew the line.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
MOORE STEPHENS L.L.P.
December 27, 1995
New York, New York
22
<PAGE>
ERNST & YOUNG LLP
Report of Independent Auditors
The Board of Directors and Stockholders
Firetector Inc. and Subsidiaries
We have audited the accompanying consolidated financial statements of
operations, stockholders' equity, and cash flows of Firetector Inc. and
subsidiaries for the year ended September 30,1994. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated results of operations and cash
flows of Firetector Inc. and subsidiaries for the year ended September 30, 1994,
in conformity with generally accepted accounting principles.
The accompanying 1994 consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Management's plans in
regard to this matter are described in Note 1. The Company has incurred
recurring operating losses and is not in compliance with certain financial
covenants of its bank credit facility. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The 1994 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ERNST & YOUNG
December 29, 1994
23
<PAGE>
Firetector Inc. and Subsidiaries
Consolidated Balance Sheet
September 30,
1995
-------------
Assets
Current assets:
Accounts receivable, principally trade, less
allowance for doubtful accounts of $ 147,000 $3,795,000
Accounts receivable from affiliated companies 297,000
Inventories 1,945,000
Prepaid expenses and other current assets 108,000
Deferred taxes 40,000
----------
Total current assets 6,185,000
Property and equipment at cost, less accumulated
depreciation and amortization of $ 531,000 474,000
Software development costs, net 95,000
Other assets 607,000
Deferred taxes 120,000
----------
Total assets $7,481,000
==========
See accompanying notes.
24
<PAGE>
Firetector Inc. and Subsidiaries
Consolidated Balance Sheet (continued)
September 30,
1995
------------
Liabilities and stockholders' equity
Current liabilities:
Note payable bank $ 1,963,000
Other notes payable 189,000
Accounts payable and accrued expenses 1,980,000
Unearned service revenue 324,000
Current portion of capital lease obligations 5,000
-----------
Total current liabilities 4,461,000
Note payable to bank, less current portion 351,000
Other notes payable, less current portion 310,000
Capital lease obligations, less current portion 1,000
Due to affiliated companies 139,000
-----------
Total liabilities 5,262,000
Commitments and Contingencies
Stockholders' equity:
Convertible preferred stock, 2,000,000 shares
authorized, $1.00 par value; issued and
outstanding 675,000 shares 675,000
Common stock, 25,000,000 shares authorized,
$.001 par value; issued and outstanding
3,243,400 shares 3,000
Capital in excess of par 5,311,000
Retained Earnings (Deficit) (3,770,000)
-----------
Total stockholders' equity 2,219,000
-----------
Total liabilities and stockholders' equity $ 7,481,000
===========
See accompanying notes.
25
<PAGE>
Firetector Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended September 30,
1995 1994
----------------------------
Net sales $9,408,000 $8,633,000
Service revenues 4,119,000 3,496,000
----------------------------
Total revenues 13,527,000 12,129,000
Cost of sales 6,061,000 5,694,000
Cost of service 2,434,000 2,484,000
Selling, general and administrative 4,403,000 4,254,000
Interest expense 328,000 206,000
Depreciation and amortization expense 216,000 160,000
Other (income)- net (20,000) (1,000)
----------------------------
13,422,000 12,797,000
============================
Income (loss) before provision
(credit) for income taxes 105,000 (668,000)
Provision (credit) for taxes:
Current 0
Deferred (160,000)
----------------------------
Net income (loss) $265,000 $(668,000)
============================
Per share data:
Net income (loss) $.06 $(.22)
============================
See accompanying notes.
26
<PAGE>
Firetector Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
Total Capital Retained
Stockholders' Preferred Stock Common Stock in Excess Earnings
Equity Shares Amount Shares Amount of Par (Deficit)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1993 $1,718,000 2,933,400 $3,000 $5,082,000 $(3,367,000)
-----------------------------------------------------------------------------------------------
Issuance of shares
from exercise of
options 105,000 150,000 105,000
Issuance of shares
related to payment
of debt 121,000 100,000 121,000
Expenses associated
with outstanding
warrants (15,000) (15,000)
Net loss (668,000) (668,000)
-----------------------------------------------------------------------------------------------
Balance at
September 30, 1994 $1,261,000 3,183,400 $3,000 $5,293,000 $(4,035,000)
-----------------------------------------------------------------------------------------------
Issuance of
Preferred Stock 675,000 675,000 $675,000
Issuance of shares
from exercise of
options 18,000 60,000 18,000
Net income 265,000 265,000
-----------------------------------------------------------------------------------------------
Balance at
September 30, 1995 $2,219,000 675,000 $675,000 3,243,400 $3,000 $5,311,000 $(3,770,000)
===============================================================================================
</TABLE>
See accompanying notes.
27
<PAGE>
Firetector Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended September 30,
1995 1994
-----------------------
Operating activities
Net income (loss) $265,000 $(668,000)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 252,000 160,000
Provision for doubtful accounts 60,000 46,000
Changes in operating assets and liabilities:
Accounts receivable (47,000) (931,000)
Inventories, prepaid expenses and other
current assets (315,000) (231,000)
Accounts receivable from affiliated company (80,000) 216,000
Other assets (415,000) (119,000)
Accounts payable and accrued expenses 216,000 645,000
Unearned service revenue (50,000) 99,000
Due to affiliated companies 127,000 149,000
-----------------------
Net cash provided by (used in)
operating activities 13,000 (634,000)
Investing activities
Purchases of property and equipment (132,000) (222,000)
Software development costs (7,000)
Acquisition of Systems Service Technology Corp. (50,000)
-----------------------
Net cash used in investing activities (139,000) (272,000)
Financing activities
Principal payments on revolving line of
credit, long-term debt, notes payable
and capital lease obligations (452,000) (1,559,000)
Proceeds from revolving line of
credit and notes payable 466,000 2,388,000
Proceeds from exercise of common
stock options, net of expenses 18,000 105,000
Expenses associated with outstanding Warrants (15,000)
-----------------------
Net cash provided by financing activities 32,000 919,000
Net (decrease) increase in cash
and cash equivalents (94,000) 13,000
Cash and cash equivalents at beginning
of year 94,000 81,000
-----------------------
Cash and cash equivalents at end of year $0 $94,000
=======================
See accompanying notes
28
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. For the year ended September 30,
1995, the Company had income from operations, before the benefit of net
operating loss carryforwards, of $105,000 as compared to operating losses
amounting to $668,000 for the year ended September 30, 1994. The operating
losses in prior years raise substantial doubt about the Company's ability to
continue as a going concern. Management plans to continue its program,
implemented this year, of cost reduction, tighter controls of its operations and
realizing benefits from its acquisitions. The Company's revolving line of credit
expires March 31, 1996, and although the Company expects the line to be renewed,
it cannot be assumed it will. If the Company is unable to accomplish these
objectives or successfully generate sufficient levels of cash flows from
operations and/or additional levels of financing, as necessary, the Company may
not be able to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the Company to
continue as a going concern.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. The principal operating
subsidiaries are: Casey Systems Inc. ("Casey"), General Sound (Texas) Company
("GenSound"), Pyrotech Service Inc. ("Pyrotech"), Comco Technologies Inc.
("COMCO"), Systems Service Technology Corp. ("SST") and Amco Maintenance
Corporation ("AMCO"). Significant intercompany items and transactions have been
eliminated in consolidation. The Company is a subsidiary of Mirtronics, Inc.
("Mirtronics"). Business
The Company operates in one industry segment: the design, manufacture, sale and
service of life safety, fire, security, energy management and audiovideo
communications systems for the construction industry.
29
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Sales are recognized when product is shipped to customers. Service revenue from
maintenance contracts is recognized on a straightline basis over the terms of
the respective contract, which is generally one year. Non-contract service
revenue is recognized when services are performed.
Inventories
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials.
Property and Equipment
Property and equipment are stated at historical cost. Leases meeting the
criteria for capitalization are recorded at the present value of future lease
payments.
Depreciation and amortization of machinery and equipment and furniture and
fixtures are provided primarily by the straight-line method over their estimated
useful lives. The Company depreciates machinery and equipment over periods of 3
to 10 years and amortizes leasehold improvements and assets acquired under
capitalized leases over the life of the lease or their economic useful life,
whichever is shorter.
Other Assets
Other assets are comprised principally of the excess of cost over the fair value
of the assets acquired and the costs associated with the acquisition of certain
service contracts in the formation of Pyrotech, and selected assets and service
contracts in the formation of SST. The excess of cost over the fair value of the
assets acquired approximates $168,000 (net of accumulated amortization of
$28,000) and relates principally to the fiscal 1990 acquisition of GenSound (see
Note 12). This amount is being amortized over forty years under the straight
line method. The acquisition cost of the service contracts ($191,000) is being
amortized over five years which commenced October 1, 1992, under the straight
line method. The acquisition costs of selected assets and service contracts
($201,000) is being amortized over periods of three to fifteen years which
commenced April 1, 1994 (See Note 12), under the straight line method.
30
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Other Assets (continued)
The Company evaluates the periods of goodwill amortization to determine whether
later events and circumstances warrant revised estimates of useful lives. The
Company also evaluates whether the carrying value of goodwill has become
impaired.
Income Taxes
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" effective October 1, 1992. The adoption of this
statement had no material effect on the Company's accounting for income taxes.
Under SFAS No. 109, the liability method is used to determine deferred tax
assets and liabilities based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Earnings Per Share
For the year ended September 30, 1995, income per common and common equivalent
share was computed on the basis of the weighted average shares of common stock
outstanding plus common equivalent shares arising from the effect of dilutive
stock options and warrants using the treasury stock method which requires that
excess proceeds not available to repurchase shares of common stock are assumed
to retire outstanding indebtedness which resulted in an assumed interest savings
of $95,000. For the year ended September 30, 1994, loss per common share was
computed on the basis of the weighted average shares of common stock
outstanding. Outstanding common stock options and warrants were not included in
fiscal 1994 computations as the effect of such would be antidilutive. Shares
used in the computation amounted to 6,763,654 and 3,074,400 for the years ended
September 30, 1995 and 1994, respectively.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
31
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Other Assets (continued)
Concentration of Credit Risk
The Company's operations are located in two large U.S. cities (New York City,
New York and Dallas, Texas), each of which is an independent market. The Company
grants credit to its customers, principally all of which are general or
specialized construction contractors, none of which individually constitutes a
significant portion of outstanding receivables. Approximately 78% of such
outstanding receivables at September 30, 1995 are due from customers in New
York.
3. Transactions with Related Parties
At September 30, 1995, the Company was indebted to Mirtronics (see Note 2) and
its subsidiaries for materials, loans and miscellaneous advances in the
aggregate amount of $139,000. Of this indebtedness, $91,000 is secured by a
pledge of all of the Company's assets and is subordinate to debt payable to the
Company's bank. The Company is also indebted, on a demand basis, to First
Corporate Equity Ltd., an affiliate of a director of Mirtronics, for notes
payable in the aggregate amount of $190,000 at September 30, 1995. This
indebtedness is secured by the assets of Casey and GenSound. These loans bear
interest at the Royal Bank's prime lending rate plus 4% (12.00% at September 30,
1995). The Company has a receivable from Mirtronics and its subsidiaries in the
amount of $297,000 at September 30, 1995.
First Corporate Capital Inc., an Ontario corporation ("FCC"), has provided the
Company's bank (under the credit facility - See Note 6) with an income guaranty
in consideration of which the Company has granted to FCC options to purchase
500,000 unregistered shares of the Company's common stock at $.30 per share
through December 31, 1999. An officer of FCC is also a director of Mirtronics.
In July 1994, in consideration of Mirtronics extending the term of its letter of
credit in connection with the Company's credit facility (see Note 6) and making
further advances to the Company, the Company's Board of Directors restated the
price, terms and conditions of previously granted conversion rights and options
to Mirtronics. In addition, the Board also granted Mirtronics 500,000 additional
options. Presently, Mirtronics has the right to acquire up to an aggregate of
1,840,000 shares of common stock at an exercise price of $.30 per share. The
options expire on December 31, 1998.
32
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Transactions with Related Parties (continued)
In March 1995 the Company entered into a Debt/Equity Agreement with Mirtronics,
whereby Mirtronics will have the right until September 30, 1996, to convert all
or part of the Company's debt to Mirtronics into shares of Class A, Series 1
Preferred Stock, at the conversion price of $1.00 per share, or one share of
Preferred Stock for each dollar of debt converted. The Preferred Stock may be
converted into Common Stock at the rate of two Common shares for one share of
Preferred.
In March 1995, Mirtronics converted $425,000 of debt into 425,000 shares of
Class A, Series 1 Preferred Stock and in May 1995, Mirtronics converted an
additional $250,000 of debt into 250,000 shares of Class A, Series 1 Preferred
Stock.
At the termination of employment of an officer/director of the Company (other
than for cause), the officer has the right to cause the Company to repurchase up
to 12,656 shares of common stock from the officer/director at a price of $12.96
per share by means of a seven year installment promissory note bearing interest
of 6% per annum. The number of shares subject to this repurchasing agreement
will be reduced to the extent the officer/director is able to sell such shares
at specified prices to third parties prior to termination. In October 1991, the
Company, as a provision of a new four year employment agreement with the
officer/director, granted options to purchase 8,750 shares of common stock at
$1.00 per share exercisable through December 31, 1999. This agreement also
includes a clause not to compete for eighteen months after termination.
Through September 30, 1994, the Company maintained an agreement with an outside
maintenance contractor to provide ongoing cleaning services of the Company's
products installed in buildings covered by service contracts with customers. A
son of an officer/director of the Company is a shareholder (less than 10%) of
the maintenance contractor. Cost of service for the year ended September 30,
1994 amounted to $449,000 for services provided. At September 30, 1994 $320,000
was outstanding.
In an agreement dated October 1, 1994, the Company granted the owners of the
maintenance contractor options to acquire 40,000 unregistered shares of the
Company's common stock. The exercise price of the options is $.50 per share and
they expire on September 30, 1999. The options were granted in exchange for
restructuring the payment terms of the then outstanding balance. The new terms
include the immediate payment of $120,000 plus twenty-four equal payments of
$9,230 including interest at 10%. At September 30, 1995 $113,000 was
outstanding.
33
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Property, Plant and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
September 30
1995
-----------
Machinery and equipment $656,000
Furniture and fixtures 202,000
Equipment under capitalized leases 39,000
Leasehold improvements 108,000
----------
1,005,000
Less accumulated depreciation and
amortization 531,000
----------
$474,000
==========
Annual amortization of equipment under capital leases is included with
depreciation and amortization expense.
5. Software Development Costs
Certain software development costs amounting to $183,000 principally incurred in
connection with the development of certain of the Company's products, have been
capitalized in the current and prior years. These costs are being amortized,
under the straight line method, over a five year period which commenced on April
1, 1993 when the related products were ready for general release. Amortization
expense of approximately $35,000, of the $51,00 expensed in 1995, has been
included in cost of sales in fiscal 1995 and 1994. Accumulated amortization was
$104,000 and $53,000 at September 30, 1995 and 1994, respectively.
34
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Long Term Debt
In August, 1994 the Company paid its then outstanding debt to Panavest
Mercantile Corporation and completed a new credit facility with a New York City
bank for $2,750,000. The credit facility provided for a $500,000 three year term
loan (with a seven year amortization) and a $2,250,000 revolving line of credit
through March 31, 1995. The credit facility provides for interest at prime plus
2% on outstanding balances. Advances under the credit facility are measured
against a borrowing base calculated on eligible receivables and inventory. The
credit facility is secured by all of the assets of the Company and all of its
operating subsidiaries, as well as a $500,000 letter of credit provided by the
Company's majority shareholder.
Further, in exchange for options to acquire 500,000 unregistered shares of the
Company's common stock at an exercise price of $.30 per share, an affiliate of
Mirtronics has guaranteed minimum increases in retained earnings of $100,000 for
fiscal 1994 (with a maximum guarantee of $100,000) and, if the credit facility
is renewed, $250,000 for fiscal 1995 (with a maximum guarantee of $250,000). Due
to the loss in fiscal 1994, the guarantor loaned the Company the required
$100,000 which is subordinated to the bank. This loan bears interest at a rate
of 5% above the prime rate of The Royal Bank of Canada and is payable subject to
its subordination.
The Company and its bank have agreed upon extending the expiration date of the
revolving line of credit to March 31, 1996, and a reduction of the maximum
amount available to borrow to $2,000,000. All other aspects of the credit
facility remain unchanged.
The credit facility includes certain restrictive covenants, which among other
things, impose limitations on declaring or paying dividends, acquisitions and
capital expenditures. The Company is also required to maintain various financial
ratios. At September 30, 1995 the Company was not in default of any of its
financial covenants.
The Company made interest payments of $249,000 and $109,000 for the years ended
September 30, 1995 and 1994.
35
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Long Term Debt (continued)
Annual maturities of Notes Payable are as follows:
Note Other Notes
Payable Payable
Bank
---------------------------
1996 $1,963,000 $189,000
1997 351,000 310,000
---------------------------
Total $2,314,000 $499,000
===========================
7. Leases
The Company leases certain office and warehouse space under noncancellable
operating leases expiring at various times through 2004. The Company also leases
certain office equipment and vehicles under noncancellable capital and operating
leases expiring in various years through fiscal 2000.
The following is a schedule of future minimum payments, by year and in the
aggregate, under noncancellable capital and operating leases with initial or
remaining terms of one year or more at September 30, 1995:
Capital Operating
Leases Leases
------------------------
1996 $6,000 $260,000
1997 1,000 259,000
1998 - 239,000
1999 - 211,000
2000 - 122,000
2001 and thereafter - 182,000
------------------------
Total minimum lease payments $7,000 $1,273,000
==========
Less amount representing interest 1,000
--------
Present value of net minimum
lease payments (including
current portion of $5,000) $6,000
========
Rental expense amounted to $205,000 and $319,000 for the years ended September
30, 1995 and 1994.
36
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity
In June 1993, the Company sold 375,000 units at a price of $3.50 per unit. The
net proceeds, after accounting for direct expenses of the offering, were
$908,000. Each unit sold consisted of three shares of Common Stock, $.001 par
value, and three common stock purchase warrants ("warrants"). Each warrant
entitled the registered holder to purchase one share of common stock at a price
of $1.63, exercisable at any time through June 1995. The exercise term was
extendible by the Company at its sole discretion. The warrants expired on June
9, 1995.
In May 1995, the Company granted Judson Enterprises, Ltd. 100,000
options to purchase common stock at a price of $1.00 per share in
exchange for investment banking services.
In September 1995, a director of the Company exercised a subscription of 60,000
shares of Common Stock at an exercise price of $0.30 per share. The options were
originally issued to Mirtronics at the exercise price of $0.30 per share. In
addition, such director has the option to acquire 100,000 shares of the
Company's common stock at an exercise price of $.30 per share.
9. Income Taxes
During the year ended September 30, 1995 the Company recorded $160,000 and for
the year ended September 30, 1994, the Company had no tax provision or tax
benefit. A reconciliation of such with the amounts computed by applying the
statutory federal income tax rate as follows:
Year ended September 30
1995 1994
-----------------------
Statutory federal income tax rate 34% 34%
Computed expected tax (benefit) from
income (loss) $36,000 $(227,000)
Increase in taxes resulting from:
Effect of operating losses not
currently realizable 0 200,000
Nondeductible expenses 10,000 27,000
----------------------
Actual tax (benefit) applicable to
income (loss) 46,000 0
Decrease in taxes resulting from:
Reduction in valuation allowance
due to effect of net operating
losses expected to be realized 206,000
-----------------------
Provision (Benefit) $(160,000) $ 0
=======================
37
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The Company made no payments of federal income taxes during the years ended
September 30, 1995 and 1994.
The Company provided $18,000 and $17,000 for state income taxes for the years
ended September 30, 1995 and 1994, respectively. These expenses have been
included in selling, general and administrative expenses for each of the years
presented.
The Company has accumulated approximately $3,265,000 of net operating losses as
at September 30, 1995 which may be used to reduce taxable income and income
taxes in future years. The utilization of these losses to reduce future income
taxes will depend on the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards through fiscal year 2009.
Additionally, based on ownership changes as a result of the offering consummated
in June 1993 (see Note 8), it is expected that the annual utilization of the
otherwise available net operating loss carryforwards will be limited by the
current provisions of Section 382 of the Internal Revenue Code, as amended, to
approximately $150,000 annually.
The Company has recorded a deferred tax asset of approximately $1,371,000 at
September 30, 1995 related principally to the aforementioned net operating loss
carryforwards. A valuation allowance of $1,211,000 has been recorded which has
the effect of reducing the carrying value of the deferred tax asset to $160,000
in the fourth quarter. This amount will be utilized against future earnings
based on management projections as the Company has experienced an increase in
backlog to $7,000,000, its highest level ever. Although management is confident
that this utilization will be realized, there does remain some uncertainty due
to unforeseen events.
The following summarizes the operating tax loss carryforwards by year of
expiration:
Expiration Date of Tax Loss
Amount Carryforward
-------------- ----------------------------
$ 555,000 September 30, 2002
323,000 September 30, 2005
1,280,000 September 30, 2006
537,000 September 30, 2007
570,000 September 30, 2009
38
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
10. Other Matters
a. Product development costs charged to income approximated $160,000 and
$143,000, for the years ended September 30, 1995 and 1994, respectively.
b. Selling, general and administrative expenses include provisions for doubtful
accounts amounting to $60,000 and $46,000 for the years ended September 30, 1995
and 1994, respectively.
c. The net loss incurred in the fourth quarter of the year ended September 30,
1994 includes an adjustment reducing inventory and charging cost of sales as a
result of utilizing an estimated gross profit margin for the first three
quarters of fiscal 1994 that was too high. Such adjustment has the effect of
reducing gross profit and increasing the net loss for the fourth quarter by
$446,000 or $.15 per share.
11. Stock Options
On February 28, 1990, the Company and its shareholders adopted a nonqualified
stock option plan for an aggregate of 175,000 shares. Under this plan, the Board
of Directors may grant options to eligible employees at exercise prices not less
than 100% of the fair market value of the common shares at the time the option
is granted. During fiscal 1994 the Company granted 71,875 options at an exercise
price of $1.00 per share through May 24, 1999 and extended the terms of all
previously outstanding options to that date. At September 30, 1995 and 1994,
there were options outstanding to purchase 103,750 and 108,125 shares of the
Company's common stock at an exercise price of $1.00 per share.
The options are fully exercisable.
12. Acquisitions
On April 1, 1994, the Company formed a new subsidiary, Systems Service
Technology Corp., which acquired selected assets and service contracts of a New
York City service organization. The acquisition, which was immaterial, was
accounted for as a purchase, and the purchase price included initial
consideration of $50,000 and additional contingent consideration measured and
payable over three to fifteen years based on a formula as defined in the
agreement. The additional consideration through September 30, 1995 is $151,000.
The seller has the option to require some payments be made in the Company's
common stock rather than cash in year three.
39
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
12. Acquisitions (continued)
In June 1993, the Company formed a new subsidiary, Comco Technologies Inc.
("COMCO"). This new entity will concentrate on transit communication systems and
began operations in July 1993 after acquiring approximately $50,000 of inventory
from a Company in Chapter 11 and hiring certain of its employees.
In October 1992, the Company acquired the service contracts of another New York
City based company. In connection therewith, certain sales and service employees
of such company became employees of the Company's new Pyrotech Service Inc.
subsidiary. The purchase price of the service contracts amounted to $191,000 and
was paid in fiscal 1994 through the issuance of 100,000 unregistered shares of
the Company's common stock, and the balance in cash.
13. Contingencies
In the normal course of its operations, the Company has been named in a legal
action seeking monetary damages. While the outcome of this matter cannot be
estimated with certainty, management does not expect, based upon consultation
with legal counsel, that it will have a material effect on the Company's
business or financial condition.
On December 29, 1994 Casey filed suit in the United States District Court for
the Southern District of New York against its largest competitor in the New York
City life safety market, Firecom, Inc. and a number of its affiliates. The suit,
which seeks legal damages in excess of $10,000,000 and certain equitable
remedies, is based on numerous Federal and State claims including, without
limitations, violation of Federal and New York State anti-trust statutes, unfair
competition, unlawful theft of proprietary information, deceptive trade
practices, tortious interference with contract and other claims. The suit also
sets forth a breach of contract claim against a customer of Casey who improperly
breached a binding contract with Casey. The Company's counsel believes that the
suit will be contested but that The Company will, in the ultimate, be successful
in an amount yet to be determined.
14. Subsequent Event
In December 1995, the Board of Directors voted to institute a 401K plan for
nonunion employees to be effective January 1, 1996. The plan includes a profit
sharing provision at a formula yet to be determined.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as at September 30, 1995 and the Consolidated
Statements of Operations at September 30, 1994 and 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
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<RECEIVABLES> 4,239
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<INVENTORY> 1,945
<CURRENT-ASSETS> 6,185
<PP&E> 1,005
<DEPRECIATION> 531
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0
675
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<SALES> 13,527
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<INCOME-PRETAX> 105
<INCOME-TAX> (160)
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