SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 by reference in Part III of this Form 10-KSB ( )
State issuer's revenues for its most recent fiscal year: $14,299,000
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 December 18, 1998 was
$712,383.
As of December 17, 1998, the Registrant had 1,571,000 shares of Common
Stock outstanding.
Documents Incorporated by Reference: Definitive Proxy Statement to be filed.
<PAGE>
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:
Engineered life safety systems
Engineered sound systems
Service & Maintenance
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 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 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
<PAGE>
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 four 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 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
operation into its New York division and has to date supplied products to
customers such as ABB Traction, Sumitomo, Kawasaki, Morrison-Knudsen, Siemens,
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. 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, 1998 and 1997, Firetector spent
approximately $128,000 and $113,000, respectively, for research and development
of Firetector's life safety and communication systems.
<PAGE>
Customers and Suppliers
For the fiscal year ended September 30, 1998 no customers or suppliers
accounted for more than 10% of Firetector's revenues. For the fiscal year ended
September 30, 1997, one customer, Unity Electric Inc., accounted for 12% of the
Company's revenues.
Regulations
Firetector believes that it is in compliance with applicable 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.
Employees
Firetector and its subsidiaries have 114 full time employees, including 44
that are covered by union contracts in New York.
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", 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", "Casey Systems" 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 four years of the initial term and
$15,785 during the final year of the renewal term.
The Company leases approximately 3,000 square feet of office 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 that was extended in
October, 1997 to expire on April 30, 2003 providing for annual rent on a net
basis of $51,700 escalating annually to $61,200 in the final year of the lease.
The Company has a 24 month renewal option on the lease which would allow for
rent at the prevailing market rate and tenant responsibility for any increase in
<PAGE>
common area expenses over the 1997 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On July 31, 1998, Firetector's Board of Directors approved a resolution to
recommend to the Company's stockholders that they approve a one for three (1:3)
reverse recapitalization of the Company's common stock (the "Reverse Split"). On
September 23, 1998, at a Special Meeting of Stockholders, votes representing
4,316,456 shares of the Company's common stock (91.6%) were voted in favor of
the Reverse Split and votes representing shares of the Company's common stock
(3.5%) were withheld or abstained from voting on the resolution. The Reverse
Split took effect on September 24, 1998.
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 for each fiscal quarter from December 31, 1996 through September
30, 1998 which quotations were obtained from the National Association of
Securities Dealers Inc. The prices have not been adjusted to reflect the effect
of a one for three (1:3) reverse split which became effective on September 24,
1998.
Common Stock
Quarter Ended BID ASK
High Low High Low
---------------------------------------------
December 31, 1996 1 3/4 7/8 1 13/16 1 1/16
March 31, 1997 1 15/16 1 2 1/32 1 1/32
June 30, 1997 1 5/8 1 1/8 1 23/32 1 3/8
September 30, 1997 1 9/32 15/16 1 1/2 1
December 31, 1997 1 1/8 5/8 1 3/16 23/32
March 31, 1998 1 1/4 3/4 1 5/16 7/8
June 30, 1998 1 1/4 25/32 1 5/16 13/16
September 30, 1998 1 1/4 1/4 1 1/2 7/16
The above quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions. As of December 18, 1998, there were 617 record holders of
Firetector's Common Stock.
On December 17, 1998 the bid and ask prices for the Common Stock were 15/16
and 1 1/8, 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. Accordingly, no
<PAGE>
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 June 1998, the Company entered into a new three-year credit facility
with Citizens Business Credit Company of Boston, Mass. (the "Credit Facility").
The new Credit Facility provides for an increased revolving line of credit of
$3,000,000 through June 2001. The Credit Facility has an interest rate of prime
plus 3/4% 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 assets of the Company and all
of its operating subsidiaries, as well as a $300,000 letter of credit provided
by Mirtronics, Inc., an Ontario corporation which is the Company's largest
stockholder ("Mirtronics").
The Credit Facility includes various covenants, which among other things,
impose limitations on declaring or paying dividends, acquisitions and capital
expenditures. The company is also required to maintain certain financial ratios.
At September 30, 1998, the Company was not in default with any of its financial
covenants.
Initial proceeds from the Credit Facility amounting to $1,716,415 were used
to pay off principal and interest due on the Company's previous loan agreement
with another bank. The Company owed $1,748,106 under the credit facility at
September 30, 1998.
Net cash used by operations for the twelve months ended September 30, 1998
amounted to $267,000 as compared to cash being provided by operations of
$607,000 for the comparable prior period. The primary reason for the use of cash
in operations was the decrease in income from operations of approximately
$640,000 and from an increase in trade receivables of approximately $1.1 million
due to delayed collections in major New York City projects (subsequent to
September 30, 1998, collections from these receivables have improved). However,
the Company further anticipates meeting its future cash requirements through
continuation of the negotiation of certain terms with its customers prior to the
beginning of a project, the monitoring of its terms during a project and
completing projects in timely fashion, resulting in faster final payments. It is
the intention of the Company to closely monitor this program throughout fiscal
1999.
The ratio of the Company's current assets to current liabilities increased
to approximately 2.8 to 1 at September 30, 1998 from 2.04 to 1 at September 30,
1997 due to the non-current classification of the new three year Credit Facility
with Citizens Business Credit Company.
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 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. This
could be considered an area of risk and concern. However, 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's (contractor)
creditors have seized a project.
RESULTS OF OPERATIONS
Revenues
During fiscal 1996 and 1997 management focused on reorganizing, retraining
and replacing personnel and cost control after several years of financial
difficulty. These efforts resulted in record profitability in those years but
did serve to restrain sales and marketing efforts, and ultimately lowered
revenues in 1998. With its reorganized cost and personnel program essentially
complete, during 1998, at the expense of short-term profitability, management
intensified sales and marketing with the hiring of several sales, marketing,
customer service, engineering and field support personnel. In addition, the
Company commenced work on numerous projects involving limited initial gross
profit in anticipation of additional revenue with higher gross margin or
supplemental service and tenant revenues. The Company also became a distributor
of several new products and commenced marketing in new regions such as Long
Island, Pennsylvania, St Louis and California. Management believes this strategy
is directly responsible for the Company's near record order position. Also see
section entitled Order Position.
Total revenues in 1998 amounted to $14.3 million, a decrease of 11%
compared to revenues of $16.0 million in 1997. This decrease was primarily due
to a 13% decline in product revenues in 1988 to $10.0 million as compared to
$11.5 million in 1997. This decrease was attributed to fewer significant
construction projects in both the New York and Dallas market areas. In addition,
product revenues during 1997 included approximately $1,865,000 of billing in
relation to one transit project, which involved the sale of approximately
$1,365,000 of lower margin products purchased from a third party for resale.
Service revenues decreased 5% in 1998 to $4,274,000. The decrease in
service revenues reflects lower than normal call-in maintenance service on
Firetector systems and other systems.
Gross Profit
Gross profit from product revenues decreased 16% in 1998 to $3,280,000
while gross profit margin on product revenues decreased from 33.8% to 32.7%
primarily due to lower product revenues and reduced overhead absorption.
Gross profit on service revenues decreased slightly in 1998 from 37.8% to
37.2% in 1997. This decrease reflects the effect of lower call-in maintenance
service revenue in 1998 on essentially fixed overhead.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses decreased by 2% or $66,000 in
1998 over 1997 as a result of the Company's previous cost containment program.
As discussed above, during 1998 the Company intensified its marketing efforts
and expanded its product line and territory. While this effort has offset
savings in selling, general and administrative costs, the Company has achieved
an improvement in new order bookings and near record backlog of orders, as noted
below.
Income Before Tax
Operating income declined in 1998 to $261,000 compared to $902,000 in
fiscal 1997. The decline in operating income was primarily the result of lower
product revenues as 1997 included product sales from a major sports facility in
Texas and shipments on several major projects in New York. While the decline in
operating income during 1998 was related to lower product shipments and reduced
call-in service revenues, the decline was minimized by lower selling, general
and administrative expenses, and lower depreciation and amortization. In
addition, there was an increase in interest expenses in 1998 due to the
conversion of $675,000 of preferred stock into notes payable with interest of
10% (see Note 2 to Financial Statements).
Tax Provisions
The Company's current income tax provision represent state and local income
taxes and the alternative minimum tax for Federal income purposes. Firetector
retains approximately $908,000 of additional net operating loss carry forwards.
Order Position
Firetector's order position, excluding service, increased to $9.6 million
at September 30, 1998 from $5.7 million at September 30, 1997 reflecting in part
management's recent intensified marketing efforts. The higher order position
reflects the receipt in 1998 of significant new orders from several major subway
complexes, a major media company, an auction house, and a museum. Due to the
fact that the Company's products are sold and installed as part of larger
construction or mass transit projects, there is typically a delay between the
booking of the contract and its revenue realization. The order position includes
and the Company continues to bid on projects that might include significant
subcontractor labor, and expects to be active in seeking orders where the
Company would act as a prime contractor.
Plan of Operations
During fiscal 1999, Management intends to focus on it's intensified
marketing programs that were begun in 1998 and to continue to contain fixed
overhead as well as to reduce variable costs through improved efficiency and
productivity. Enhancements in recent years to Firetector's management
information systems and methods of approving and monitoring project costs have
improved Management's ability to pinpoint waste and/or third party (supplier or
customer) cost responsibility. Management will also focus its efforts in 1999 to
improve accounts receivable collections in order to reduce the number of days
sales outstanding. Management believes that Firetector will generate sufficient
cash flow from operations to meet its obligations. Management believes that the
Company's balance sheet is in a good condition after the changes made in the
past few years.
YEAR 2000.
The Company has conducted an evaluation of the actions necessary in order
to ensure that its computer systems will be able to function without disruption
with respect to the application of dating systems in the Year 2000. As a result
of these evaluations the Company is in the process of upgrading and replacing
certain of its computer information and other computer systems so as to be able
to operate without disruption due to Year 2000 issues. The Company does not
anticipate that the costs of its remedial actions will be material to the
results of operations or financial condition. However, there can be no assurance
that the remedial actions being implemented by the Company will be completed by
the time necessary to avoid dating systems problems or that the cost of doing so
will not be material. Performance of the Company's proprietary products is not
date sensitive. However, date information is displayed on certain console
equipment. The Company has completed software changes so that its proprietary
equipment is also compliant with respect to display information and the Company
is installing these software upgrades to customer equipment in buildings as part
of normal maintenance service. In addition, disruptions with respect to the
computer systems of vendors or customers, which systems are outside the control
of the Company, could impair the ability of the Company to obtain necessary
materials or products or to sell to or service their customers. However, there
can be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems would
not have a material adverse effect on the Company.
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 11 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
Incorporated by reference to the Registrant's Definitive Proxy.
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 Credit Agreement dated June 23, 1998 between
Firetector Inc. as Borrower and Citizens Business Credit Company
as Lender
10.2 Debt Matching Agreement dated as of September 30, 1998 between
Firetector Inc. and Mirtronics Inc.
10.3 Amended Debt/Equity Agreement dated February 19, 1998 between
Firetector Inc. and Mirtronics Inc.
10.4 1997 Non-Qualified Stock Option Plan (Exhibit 10.6)(3)
<PAGE>
10.4 Employment Agreement, dated as of January 1, 1997 between
Firetector Inc. and John A. Poserina (Exhibit 10.10)(3)
22.1 Subsidiaries of the Registrant (Exhibit 22.1)(1)
27 Financial Data Schedule
- - --------
(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 correspondingly numbered Exhibit to the
Company's Annual Report on Form 10-KSB for the Fiscal Year Ended September 30,
1997, which Exhibit is incorporated herein by reference.
(b) Reports on Form 8-K
None
<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, hereunto duly authorized.
FIRETECTOR INC.
(Registrant)
By: /s/ Daniel S. Tamkin
Daniel S. Tamkin,
Chief Executive Officer and
Director
Dated: December 29, 1998
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/Daniel S. Tamkin Chairman, December 29,1998
- - ---------------------- Chief Executive Officer
Daniel S. Tamkin and Director
/s/Joseph Vitale President, Chief Operating
Officer and Director December 29, 1998
- - ----------------------
Joseph Vitale
/s/John A. Poserina Vice President, Chief December 29, 1998
Financial Officer
- - ---------------------- Treasurer and Director
John A. Poserina
/s/Henry Schnurbach Director December 29, 1998
- - ----------------------
Henry Schnurbach
/s/Dennis P. McConnell Secretary December 29, 1998
- - ---------------------- and Director
Dennis P. McConnell
<PAGE>
Index to Consolidated Financial Statements
Firetector Inc. and Subsidiaries
Item 7
Report of Independent Auditors ..........................................
Audited Consolidated Financial Statements
Consolidated Balance Sheet-September 30, 1998 ...........................
Consolidated Statements of Income
Years Ended September 30, 1998 and 1997 ................................
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1998 and 1997 ................................
Consolidated Statements of Cash Flows
Years Ended September 30, 1998 and 1997 ................................
Notes to Consolidated Financial Statements ..............................
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Firetector Inc.
We have audited the accompanying consolidated balance sheet of Firetector Inc.
and its subsidiaries as of September 30, 1998 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
fiscal years in the period ended September 30, 1998. These 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present fairly, in
all material respects, the consolidated financial position of Firetector Inc.
and its subsidiaries as of September 30, 1998 and the consolidated results of
their operations and their cash flows for each of the two fiscal years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
New York, NY
November 25, 1998 MOORE STEPHENS, P.C.
<PAGE>
Part I - FINANCIAL INFORMATION
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
1998
--------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $105,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $190,000 4,868,000
Inventories 1,902,000
Deferred taxes 168,000
Prepaid expenses and other current assets 125,000
-------------
TOTAL CURRENT ASSETS 7,168,000
-------------
PROPERTY, PLANT AND EQUIPMENT -at cost, less
accumulated depreciation and amortization of $812,000 346,000
SOFTWARE DEVELOPMENT COSTS, net 3,000
OTHER ASSETS 279,000
DEFERRED TAXES 206,000
------------
TOTAL ASSETS $8,002,000
============
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Continued)
September 30,
1998
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to Mirtronics $393,000
Notes payable - principally to related party 70,000
Accounts payable and accrued expenses 1,738,000
Unearned service revenue 343,000
Current portion of capital lease obligations 24,000
------------
TOTAL CURRENT LIABILITIES 2,568,000
------------
Note payable to bank 1,748,000
Notes payable- principally to related party, less
current portion 222,000
Capital lease obligations, less current portion 18,000
------------
TOTAL LIABILITIES 4,556,000
------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 13)
STOCKHOLDERS' EQUITY
Convertible preferred stock, 2,000,000 shares authorized-
$1.00 par value; none issued and outstanding
Common stock, 25,000,000 shares authorized, $.001
par value; issued and outstanding 1,571,097 shares 2,000
Capital in excess of par 5,159,000
Deficit (1,715,000)
------------
TOTAL STOCKHOLDERS' EQUITY 3,446,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,002,000
============
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $10,025,000 $11,545,000
Service revenue 4,274,000 4,484,000
----------- ------------
Total revenues 14,299,000 16,029,000
----------- ------------
Cost of sales 6,745,000 7,637,000
Cost of service 2,682,000 2,788,000
Selling, general and administrative 4,198,000 4,264,000
Interest expense 260,000 242,000
Depreciation and amortization expense 206,000 246,000
Other (income) - net (53,000) (50,000)
------------ ------------
14,038,000 15,127,000
------------ ------------
Income from operations before provision
for income taxes 261,000 902,000
Provision for income taxes:
Current 50,000 110,000
Deferred (10,000)
------------ ------------
50,000 100,000
------------ ------------
Net Income $211,000 $ 802,000
============ ============
Earnings Per Common Share
Basic Earnings Per Share $0.15 $0.68
Diluted Earnings Per Share $0.11 $0.34
=========== ============
Weighted Average Number of Common Shares Outstanding 1,420,045 1,176,522
Weighted Average Number of Common and Potential Dilutive
Common Shares Outstanding 2,145,202 2,372,654
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. and
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
TOTAL
STOCKHOLDERS' PREFERRED STOCK COMMON STOCK
EQUITY SHARES AMOUNT SHARES AMOUNT
---------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $3,435,000 675,000 $675,000 3,548,399 $4,000
Issuance of shares from exercise
of options 200
Retirement of Shares (327,000) (25,312)
Net Income 802,000
------------ ----------- ---------- ---------- ---------
Balance at September 30, 1997 $3,910,000 675,000 $675,000 3,523,287 $4,000
Issuance of shares from exercise
of options $552,000 1,840,000 2,000
Debt restructuring ($675,000) (675,000) (675,000)
Retirement of Shares ($552,000) (650,000) (1,000)
Reverse stock split (1 for 3) $ 0 (3,142,190) (3,000)
Net Income $211,000
----------- ----------- --------- ----------- ---------
Balance at September 30, 1998 $3,446,000 0 0 1,571,097 2,000
=========== =========== ========= =========== =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. and
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
(continued)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
CAPITAL RETAINED
IN EXCESS EARNINGS
OF PAR (DEFICIT)
--------------- ------------
<S> <C> <C>
Balance at September 30, 1996 $5,484,000 ($2,728,000)
Issuance of shares from exercise
of options
Retirement of Shares (327,000)
Net Income 802,000
------------ ------------
Balance at September 30, 1997 $5,157,000 ($1,926,000)
Issuance of shares from exercise
of options 550,000
Debt restructuring
Retirement of Shares (551,000)
Reverse stock split (1 for 3) 3,000
Net Income 211,000
------------ -----------
Balance at September 30, 1998 5,159,000 (1,715,000)
============ ===========
</TABLE>
<PAGE>
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $211,000 $802,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 225,000 246,000
Provision for doubtful accounts 113,000 72,000
Changes in operating assets and liabilities:
Accounts receivable (1,144,000) (642,000)
Inventories, prepaid expenses and other current assets (44,000) 394,000
Accounts receivable from affiliated companies 493,000 (80,000)
Other assets (13,000) (25,000)
Accounts payable and accrued expenses 395,000 57,000
Unearned service revenue 6,000 (236,000)
Due to affiliated companies (509,000) 19,000
------------ -----------
NET CASH PROVIDED (USED IN) BY OPERATING ACTIVITIES (267,000) 607,000
------------ -----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (54,000) (153,000)
------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (54,000) (153,000)
------------ -----------
FINANCING ACTIVITIES
Borrowings under new revolving credit agreement 1,748,000
Principal payments on revolving line of credit, long-term
debt, notes payable and capital lease obligations (2,004,000) (450,000)
Proceeds from revolving line of credit, notes payable and
capital lease obligations 119,000 78,000
Issuance of common stock in connection with exercise of options 552,000
Repurchase of common stock (552,000)
------------ ----------
NET CASH (USED IN) FINANCING ACTIVITIES (137,000) (372,000)
------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (474,000) 82,000
Cash and cash equivalents at beginning of period 579,000 497,000
----------- -----------
Cash and cash equivalents at end of period $105,000 $579,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 211,000 225,000
Income tax 159,000 106,000
</TABLE>
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended September 30, 1998 and 1997, the Company incurred capital
lease obligations of $11,000 and $36,000 respectively, in connection with lease
agreements to acquire equipment.
On December 1, 1996, the Company reacquired 8,437 shares of its common stock
from an officer/director of the Company, with the total purchase amount of
$327,000 paid through the issuance of a 4% seven year installment promissory
note payable monthly commencing January 1, 1997.
The Company exchanged preferred stock and notes payable to Mirtronics by the
issuance of $845,000 of new notes. (See Note 2 - Transactions with Related
Parties).
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
1. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at September 30, 1998, and reported amounts of
revenues and expenses during the fiscal year. Actual results could differ from
those estimates.
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", which began operating as a division of Casey during 1998), 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"),
an Ontario publicly-held corporation.
Business
The Company operates in one industry segment: the design, manufacture, marketing
and service of a variety of data communications product and systems with
applications in the fire alarm, life safety, transit, security and
communications industry .
Revenue Recognition
Sales are recognized when product is shipped to customers. Service revenue from
maintenance contracts is recognized on a straight-line basis over the terms of
the respective contract, which is generally one year. Non-contract service
revenue is recognized when services are performed.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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, 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 $129,000 (net of accumulated amortization of
$45,000) and relates principally to the 1990 acquisition of GenSound. This
amount is being amortized over forty years under the straight line method. The
acquisition cost of the service contracts ($191,000) was completely amortized on
the straight line method over five years which commenced October 1, 1992. The
acquisition costs of selected assets and service contracts ($201,000) are being
amortized under the straight line method over periods of three to fifteen years
which commenced April 1, 1994.
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the
asset and 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
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Shares" which requires companies to report basic and diluted earnings per share
("EPS") computations effective with the quarter ended December 31, 1997. Basic
EPS excludes dilution and is based on the weighted-average common shares
outstanding and diluted EPS gives effect to potential dilution of securities
that could share in the earnings of the Company. Diluted EPS reflects the
assumed issuance of shares with respect to the Company's employee stock options,
non-employee stock options, warrants and convertible notes and preferred stock.
The computation for 1997 has been restated to conform to the requirements of
SFAS No. 128. (See Note 10). The EPS and Weighted Average Shares Outstanding
have been retroactively adjusted to give effect to a 1 for 3 reverse split of
common stock that was effective in September 1998.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
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 86% of such
outstanding receivables at September 30, 1998 are due from customers in New
York.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk (continued)
At September 30, 1998, the Company had approximately $160,000 based on checks
that had not cleared the financial institutions that are subject to insured
amount limitations. The Company does not require collateral to support financial
instruments subject to credit risk.
Stock Options and Similar Equity Instruments
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", for stock options and similar equity instruments (collectively,
"Options") issued to employees; however, the Company will continue to apply the
intrinsic value based method of accounting for options issued to employees
prescribed by Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issues to Employees", rather than the fair value based method of
accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods or services
from non-employees. Those transactions must be accounted for based on the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured. (see Note 12).
2. Transactions with Related Parties
In consideration of collateral support for a previous credit facility for the
Company and various loans over several years, the Company had granted to
Mirtronics options to purchase the Company's Common Stock. Mirtronics had the
right to acquire up to an aggregate of 613,333 shares of common stock at an
exercise price of $.90 per share, a portion of which were held for the benefit
of the Company's Chairman. These options were to expire on December 31, 1998
(See Note 12). In addition, the Company had previously entered into a
Debt/Equity Agreement with Mirtronics, that provided for the retirement of debt
and the issuance to Mirtronics of 225,000 shares of Preferred Stock, which could
also be converted into 450,000 shares of common stock (675,000 and 1,350,000
respectively, before giving effect to the one for three reverse split).
In February 1998, the Company and Mirtronics reached an agreement to reorganize
the options, convertible debt and preferred stock held by Mirtronics so as to
reduce the potential dilution of these securities by 366,667 shares of common
stock. Under this agreement, Firetector redeemed the $675,000 of Convertible
Preferred Stock and $170,000 of convertible debt for an aggregate price of
$845,000. These securities were convertible into 563,333 shares of common stock.
In satisfaction thereof, Firetector issued a $620,000 Convertible Note with
interest at 10% (payable upon demand and convertible into 413,333 shares of
common stock at a conversion price of $1.50 per share until December 31, 2002),
and a $225,000 Note (without a convertible feature), with interest at 10%,
payable upon demand. The foregoing notes are limited as to repayment based upon
covenant requirements and borrowing availability under the terms of the
Company's Credit Facility. Also in connection with this reorganization,
Mirtronics exercised 613,333 options for common stock for an aggregate
consideration of $552,000 and Firetector simultaneously repurchased and retired
216,667 of the newly issued shares for $552,000.
In September 1998, the Company entered into a Debt Matching Agreement with
Mirtronics whereby an aggregate of $508,619 due by Mirtronics to Firetector was
applied to reduce the notes payable and interest due by Firetector to
Mirtronics. As a consequence of this debt matching agreement, the $225,000
Non-Convertible note with interest of $13,870 was satisfied in full and the
$620,000 Convertible Note with interest of $38,219 was reduced to a new balance
of $392,973. In addition, the right to convert this note into 413,333 shares of
common stock was surrendered in consideration for a new warrant to purchase
310,000 shares of common stock (the "1998 warrants"). These 1998 warrants are
exercisable at anytime until December 31, 2003 at an exercise price of $1.02 per
share.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Transactions with Related Parties (continued)
In consideration of collateral support for the Company's Credit Facility in
1994, the Company granted Gentura Capital Corporation, an Ontario Corporation,
("GCC" formerly known as First Corporate Capital Inc.) options for 166,667
unregistered shares of the Company's common stock at $.90 per share through
December 31, 1999. In July 1996, GCC exercised 33,334 of these options at $.90
per share. An officer of GCC is also a director of Mirtronics (See Note 12).
At the termination of employment of an officer/director of the Company (other
than for cause), the officer was granted the right to cause the Company to
repurchase up to 8,437 shares of common stock from the officer/director at a
price of $38.88 per share by means of a seven year installment promissory note
bearing interest of 4% per annum. On December 1, 1996 the officer exercised the
option and, commencing January 1, 1997, the Company repurchased 8,437 shares at
a price of $38.88 payable monthly over seven years at an interest rate of 4% per
annum. In October 1991, the Company, as a provision of a new four-year
employment agreement with the officer/director, granted options to purchase
2,917 shares of common stock at $1.00 per share exercisable through March 15,
2001.
3. Property, Plant and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
September 30,
1998
--------------
Machinery and equipment $942,000
Furniture and fixtures 126,000
Equipment under capitalized leases 48,000
Leasehold improvements 42,000
-------------
1,158,000
Less accumulated depreciation and amortization
812,000
------------
$346,000
==============
Annual amortization of equipment under capital leases is included with
depreciation and amortization expense.
Depreciation expense was $168,000 and $154,000 for the years ended September 30,
1998 and 1997, respectively.
4. Software Development Costs
Certain software development costs amounting to $184,000, principally incurred
in connection with the development of certain of the Company's products, have
been capitalized in 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 $19,000 and $37,000 for the years ended September 30, 1998 and
1997, respectively, has been included in cost of sales. Accumulated amortization
was $181,000 at September 30, 1998.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
In 1998, the Company entered into a new revolving credit facility with Citizens
Business Credit Company of Boston, Mass (the "Credit Facility"). The new credit
facility provides for a $3,000,000 revolving line of credit through June 2001
and carries an interest rate of prime plus 3/4% on outstanding balances (9.25%
at September 30, 1998). The Credit facility limits capital expenditures to
$250,000 in each year. At September 30, 1998 $1,748,000 was outstanding under
this facility. 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 $300,000 letter of credit provided by Mirtronics.
The Credit Facility includes certain restrictive covenants, which among other
things, impose limitations on declaring or paying dividends, acquisitions and
capital expenditure. The Company is also required to maintain certain financial
ratios. At September 30, 1998, the Company was not in default of any of its
financial covenants.
Annual maturities of Loans and Notes Payable are as follows:
Bank Other Notes
Loan Payable
------------- -----------------
1999 $463,000
2000 54,000
2001 1,748,000 54,000
2002 51,000
2003 47,000
Thereafter 16,000
============= =============
Total $1,748,000 $685,000
============= =============
For debt classified as current, it was assumed that the carrying amount
approximated fair value for these instruments because of their short maturities.
The fair value of long-term debt is based on current rates at which the Company
could borrow funds with similar remaining maturities. The carrying amount of
long-term debt approximates fair value.
At September 30, 1998, the notes payable to Mirtronics totaled $393,000. While
these notes are payable on demand, they are subordinate to and subject to a
payment restriction under the Company's Credit Facility with its bank. These
notes are subordinate to and repayment was not permitted under the Company's
previous loan agreement, therefore, they were previously classified as a
non-current liability.
6. Leases
The Company leases certain office and warehouse space under noncancelable
operating leases expiring at various times through 2004. The Company also leases
certain office equipment and vehicles under noncancelable capital and operating
leases expiring in various years through fiscal 2001.
The following is a schedule of future minimum payments, by year and in the
aggregate, under non cancelable capital and operating leases with initial or
remaining terms of one year or more at September 30, 1998:
Capital Leases Operating Leases
1999 38,000 260,000
2000 10,000 178,000
2001 2,000 119,000
2002 112,000
2003 88,000
Thereafter 26,000
------------ ===========
Total minimum lease payments 50,000 $783,000
===========
Less amount representing interest 8,000
=============
Present value of net minimum
lease payments (including current
portion of $33,000) $42,000
=============
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Rental expense amounted to $237,000 and $237,000 for 1998 and 1997,
respectively.
7. Significant Customers
During fiscal 1998, no customer accounted for more than 10% of sales. In fiscal
1997, one customer accounted for approximately $1,900,000, or 12%, of revenues.
8. Income Taxes
During the year ended September 30, 1998 the Company recorded a tax provision of
$50,000 compared to $100,000 for the year ended September 30, 1997. A
reconciliation of such with the amounts computed by applying the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
---------- ---------
<S> <C> <C>
Statutory federal income tax rate 34% 34%
Computed expected tax from income $89,000 $306,000
Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit 31,000 78,000
Alternative minimum tax 7,000 19,000
Nondeductible expenses 2,000 3,000
----------- ----------
Actual tax applicable to income 129,000 406,000
Increase (decrease) in taxes resulting from:
Reduction in valuation allowances to give effect to use of net
operating loss carryforwards (136,000) (531,000)
Reduction of state tax benefit for future use of net operating losses
57,000 225,000
---------- ----------
Provision $50,000 $100,000
=========== ==========
</TABLE>
The Company provided $25,000 and $6,000 for state and local franchise and
capital taxes for the years ended September 30, 1998 and 1997, respectively.
These expenses have been included in selling, general and administrative
expenses for each of the years presented.
The Company has accumulated approximately $908,000 of net operating losses as at
September 30, 1998 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 between fiscal years 2008 to
2010.
<PAGE>
8. Income Taxes (continued)
The Company has recorded a deferred tax asset of approximately $374,000 at
September 30, 1998 related principally to its net operating loss carryforwards.
In 1999 the Company expects to realize all of the deferred tax asset, as a
consequence the valuation allowance was decreased by $136,000 to zero during the
year ended September 30, 1998. The expected realization is based on experiencing
four consecutive years of profits. Management anticipates profitable operations
to continue at a level that will result in the utilization of the entire
deferred tax asset.
The following summarizes the operating tax loss carryforwards by year of
expiration:
Expiration Date of Tax Loss Carryforward
Amount
$338,000 September 30, 2008
$570,000 September 30, 2010
9. Stock Split
On September 24, 1998, the Company effected a one for three reverse stock split
of the outstanding shares of common stock of the Company. All references in the
accompanying financial statements to the number of common shares and per share
amounts have been restated to reflect the reverse stock split.
10. Earnings Per Share
Shown below is a table that presents for 1998 and 1997 the computation of basic
earnings per share, diluted earnings per share, weighted shares outstanding, and
weighted average shares after potential dilution. All earnings per share data,
stock option data, and weighted shares outstanding have been restated to give
effect to the Company's 1 for 3 reverse stock split that was effective in
September 1998.
Year Ended
Basic EPS Computation 1998 1997
- --------------------- ------------ ------------
Net Income available to common
shareholders $211,000 $802,000
Weighted average outstanding shares 1,420,045 1,176,522
Basic EPS $.15 $.68
Diluted EPS Computation
Income available to common
shareholders $211,000 $802,000
Impact of convertible notes 26,000 10,000
Diluted net income $237,000 $812,000
Weighted-average shares 1,420,045 1,176,522
Plus: Incremental shares from
assumed conversions
Non Employee Stock Options 251,724 589,818
Convertible preferred stock 172,602 450,000
Convertible debt 254,795 112,000
Employee Stock Options 46,036 36,956
Warrants* 7,358
----------- ----------
Dilutive potential common shares 725,157 1,196,132
----------- ----------
Adjusted weighted-average shares 2,145,202 2,372,654
----------- ----------
Diluted EPS $.11 $.34
=========== ==========
*Warrants convertible into 33,334 and 16,667 shares were antidilutive in the
years ending September 30, 1998 and 1997, respectively.
11. Other Matters
a. Product development costs charged to income approximated $128,000 and
$113,000, for the years ended September 30, 1998 and 1997, respectively.
b. Selling, general and administrative expenses include provisions for
doubtful accounts amounting to $113,000 and $87,000 for the years ended
September 30, 1998 and 1997, respectively.
12. Employee Stock Options, Options, and Warrants
On April 30, 1997, the Company and its shareholders adopted a nonqualified stock
option plan ("1997 Plan"), which expires September 30, 2002, except as to
options then outstanding under the 1997 Plan. Under the 1997 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. The number of shares of Common Stock that may be issued shall not
exceed an aggregate of up to 10% of its issued and outstanding shares from time
to time. Options vest at a rate of 20% per year commencing one year after date
of grant. Issuances under the 1997 Plan are to be reduced by options outstanding
under a 1990 nonqualified stock option plan (replaced by the 1997 Plan).
Effective September 30, 1998, all outstanding employee stock options were reset
to an exercise price of $1.00 per share.
The Company applies the instrinsic value base method of accounting for options
issued to employees rather than the fair value based method of accounting. If
the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net income and net income per
share would be reduced to the pro forma amounts indicated below:
1998 1997
Net Income:
As reported $211,000 $802,000
Pro forma 211,000 751,000
Earnings per common share:
As reported $0.11 $0.34
Pro forma 0.11 0.32
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period for purposes of future pro forma disclosures, and additional
options may be granted in future years. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for both 1998 and 1997: dividend
yield of zero; expected volatility of 92% and 81% and expected life of 4 years.
The weighted average risk fee interest rates for 1998 and 1997 were 6.30% and
6.00%, respectively. The weighted average fair value of options granted during
1997, for which the exercise price equaled the market price on the grant dates,
was $3.06. However, the option price for all employee stock options outstanding
was reset to $1.00 effective September 30,1998.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected price volatility. Because the
Company's employees' stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements'
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
Transactions involving stock options are summarized as follows:
Weighted Average
Exercise Price of
Stock Options Outstanding Options Outstanding
Balance October 1, 1996 175,000 $1.10
Granted 88,750 1.02
Exercised/Expired 44,875 1.13
Balance September 30,1997 218,875 1.06
1 for 3 Reverse Stk Split (145,917) 3.18
Balance September 30, 1998 72,958 1.00
There were 42,709 exercisable options at September 30, 1998 and 23,325
exercisable options at September 30, 1997. These employee stock options are
exercisable at a newly reset option price of $1.00 per share.
<PAGE>
Note 12. Employee Stock Options, Options and Warrants (continued)
The following table summarizes information concerning currently outstanding and
exercisable stock options.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 1998 Contractual Life September 30, 1998
$1.00 27,250 2.5 years 27,250
1.00 16,125 2.5 years 8,063
1.00 4,500 3.3 years 1,125
1.00 25,083 4.0 years 6,271
Mirtronics is the largest shareholder of the Company. In 1994 and 1995,
Mirtronics provided financial assistance to the Company by way of a Letter of
Credit in support of the Company's Credit Facility, further advances to the
Company, and an exchange of debt for equity. In connection with this financial
assistance, the Company granted Mirtronics options to acquire common stock and
issued Series 1 Preferred Stock in exchange for debt. In February 1998, the
Company and Mirtronics agreed to restructure the options, convertible debt and
preferred stock, and in September 1998, the Company and Mirtronics entered into
a Debt Matching Agreement to offset obligations with each other and for
Mirtronics to surrender the conversion option on 413,333 shares of common stock
for a new warrant for 310,000 shares of common stock.
(See Note 2 - Transaction with Related Parties).
In February 1994, the Company issued options to purchase 166,667 unregistered
shares of common stock at a $.90 per share to GCC in consideration of providing
an income guaranty to support the Company's Credit Facility. 33,334 of these
options were exercised in July 1996. (also see Note 2 "Transactions with
Related Parties").
In May 1995, the Company granted Judson Enterprises, Ltd. 33,334 options to
purchase common stock at a price of $3.00 per share in exchange for investment
banking services. In April 1997, the Company entered into an agreement to
exchange 16,667 of these options for 16,667 new options to purchase common stock
at a price of $4.50. Based on calculations done in accordance with the
requirements of SFAS 123, stock based compensation expense resulting from this
transaction was immaterial.
12. Employee Stock Options, Options, and Warrants (continued)
Transactions involving non-employee stock options and warrants are summarized as
follows:
Weighted Average
Options and Warrants Exercise Price of
Outstanding Options Outstanding
Balance October 1, 1996 2,377,500 $ .33
Granted 50,000 1.50
Exercised/Expired (50,000) 1.00
Balance September 30,1997 2,377,500 .34
Exercised/Expired (1,847,500) .30
1 for 3 Reverse Stk Split (353,333) 1.30
Effect of Debt Matching 310,000 1.02
Balance September 30, 1998 486,667 $1.17
All of these options were exercisable at the end of the periods indicated in the
above schedule.
The following table summarizes information concerning currently outstanding and
exercisable non-employee stock options and warrants.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 1998 Contractual Life September 30, 1998
$.90 143,333 .2 years 143,333
3.00 16,667 2.5 years 16,667
4.50 16,667 3.5 years 16,667
1.02 310,000 5.3 years 310,000
13. Contingencies
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. Management does
not expect, based upon consultation with legal counsel, that any material item
exists that will affect the Company's business or financial condition.
14. Other
Approximately 39% of the Company's employees are covered by collective
bargaining agreements. The present contract will expire in July 1999.
14. Other (continued)
Effective January 1, 1996, the Board of Directors instituted a 401K plan for
nonunion employees. The plan includes a profit sharing provision at the
discretion of the Board of Directors. In 1998 there was no profit sharing
contribution and in 1997 a contribution of $22,500 was charged to expense .
15. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, and short-term debt, it was assumed that the carrying
amount approximated fair value because of the near term maturities of such
obligations. The fair value of long-term debt was determined based on current
rates at which the Company could borrow funds with similar remaining maturities,
which amount approximates its carrying value.
16. Authoritative Pronouncements
In June 1997 the Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information".
Both are effective for financial statements for fiscal years beginning after
December 15, 1997. The Company will adopt both statements on October 1, 1998.
Adoption is not expected to have a material impact on financial position and
results of operations.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. Earlier application is
permitted. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Management is in the process of
determining its preferred format.
The adoption of SFAS No. 130 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
SFAS No. 131 changes how operating segments are reported in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for periods beginning after December 15, 1997, and comparative
information for earlier years is to be restated. SFAS No. 131 need not be
applied to interim financial statements in the initial year of its application.
The Company is in the process of evaluating the disclosure requirements.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
The FASB has issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of derivative and
how it is designated, for example, gain or losses related to changes in the fair
value of a derivative not designated as a hedging instrument is recognized in
earnings in the period of the change, while certain types of hedging may be
initially reported as a component of other comprehensive income (outside
earnings) until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No, 133.
Earlier application of all of the provisions of SFAS No. 133 is not to be
applied retroactively to financial statements of prior periods. The Company will
evaluate the new standard to determine any required new disclosures or
accounting.
CREDIT AGREEMENT
Agreement made as of June 23, 1998 among FIRETECTOR INC., a Delaware
corporation (the "Company"); GENERAL SOUND (TEXAS) COMPANY, a Delaware
corporation ("General"); CASEY SYSTEMS INC., a New York corporation ("Casey");
and PYROTECH SERVICE INC., a New York corporation ("Pyrotech" and collectively
with the Company, General and Casey, the "Borrowers") as co-borrowers and
CITIZENS BUSINESS CREDIT COMPANY, a division of Citizens Leasing Corporation, a
Rhode Island corporation (hereinafter referred to as "Citizens") as lender.
WHEREAS, the Company is a partially-owned subsidiary of Mirtronics, Inc., a
corporation incorporated under the Ontario Business Corporations Act (the
"Parent Guarantor") which will provide a limited guaranty of the obligations of
the Borrowers under this Agreement;
WHEREAS, General, Casey and Pyrotech are wholly-owned subsidiaries of the
Company;
WHEREAS, System Service Technology Corporation, a New York corporation
("SST"); and Amco Maintenance Corporation, a New York corporation ("Amco") are
wholly-owned subsidiaries of the Company (collectively, the "Subsidiary
Guarantors") and will provide guarantees of the obligations of the Borrowers
under this Agreement;
WHEREAS, the Borrowers and Subsidiary Guarantors are financially integrated
using centralized cash management and providing financial support to each other;
WHEREAS, Citizens has agreed to establish a credit facility for the
Borrowers;
NOW, THEREFORE, the parties agree as follows:
ARTICLE I. AMOUNT AND TERMS OF THE CREDIT.
Section 1.01. The Credit.
Subject to the terms and conditions hereof, and in reliance on the
representations and warranties contained herein, Citizens hereby establishes a
credit facility in favor of the Borrowers in the principal amount of $3,000,000
(the "Credit"). The Credit consists of a revolving line of credit ("Revolving
Credit").
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Section 1.02. The Revolving Credit.
(a) Amount. Provided no Event of Default (as defined in
Article V), or event which with the passage of time or notice or both would
become an Event of Default, has occurred and is continuing, the Borrowers in the
aggregate may from time to time from the date hereof up to June 23, 2001 (the
"Maturity Date") borrow and reborrow from Citizens, and Citizens shall advance
funds under the Revolving Credit to the Company (an "Advance" or the
"Advances"); provided that the aggregate of all Advances outstanding at any time
shall not exceed the lesser of (i) $3,000,000 (the "Maximum Credit") or (ii) the
"Borrowing Base" (as defined below).
(b) Borrowing Base. The Borrowing Base shall consist of (i)
twenty five percent (25%) of Qualified Inventory; (ii) with respect to the
Company, Casey and Pyrotech, eighty percent (80%) of Qualified Accounts not
outstanding for more than 90 days, plus forty percent (40%) of Qualified
Accounts outstanding for more than 90 days but not more than 120 days; and (iii)
with respect to General, fifty eight percent (58%) of Qualified Accounts not
outstanding for more than 120 Days; provided however, in no event shall the
contribution of Qualified Accounts of General to the Borrowing Base exceed
$500,000.
"Qualified Accounts" means accounts receivable of any of the Borrowers
which (a) arise from providing design, manufacture, sale and servicing of
engineered life safety systems and engineered sound systems to account debtors
(which products have been provided and/or which services have been performed);
(b) are not outstanding for more than 120 days after the date of invoice for
such products or services; (c) are not past due for more than 90 days beyond the
due date specified in the invoice; (d) are not represented by a note or other
negotiable instrument; (e) are not subject to any setoff or dispute; (f) the
account debtor is credit worthy and not subject to any insolvency proceedings;
(g) are not due from a Subsidiary (as hereinafter defined) or an Affiliate (as
hereinafter defined); (h) are unconditionally due within 30 days of the date of
the invoice; (i) are not subject to any hold back or delivery in payment such as
retainage; and (j) are subject to a first priority perfected security interest
in favor of Citizens. In addition, the accounts receivable must be due from an
account debtor located in the United States; provided, however with respect to
any account debtor located in New Jersey, Minnesota or West Virginia (or any
other state that requires a creditor to qualify to do business or file a report
in order to enforce remedies against an account debtor), such accounts are
Qualified Accounts only if the Borrower owed the accounts has complied with the
requirements of such state so as to be authorized to bring suit and enforce
remedies through judicial process against such account debtor.
"Qualified Inventory" means inventory (a) owned by the Borrowers (b)
located at facilities of the Borrowers (c) subject to a first priority perfected
security interest in favor of Citizens (d) valued at the lower of cost or market
on a first in, first out basis, (e) consisting of
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finished goods saleable in the ordinary course of Borrowers' business (excluding
samples) or purchased raw materials or parts which are to be processed into
finished goods (excluding any raw materials or purchased parts in the process of
conversion to finished goods).
The Company shall furnish Citizens a computation of the Borrowing Base
on the form attached as Exhibit 1.02(b) ("Borrowing Base Certificate"), together
with supporting schedules acceptable to Citizens, every Tuesday computed as of
the close of business of the previous Friday covering the week just ended,
signed by the Company's chief financial officer, for the term of this Agreement
or as long as any Advances are outstanding under this Agreement. If an Event of
Default has occured, Citizens may require daily Borrowing Base Certificates
whether or not an Advance is requested. Citizens shall be under no obligation to
make any Advance if the Company fails to furnish a current Borrowing Base
Certificate in either the weekly or daily mode as required hereunder.
In calculating the Borrowing Base, the Company shall deduct from
Qualified Accounts the amount of any (i) deposit which an account debtor may
have paid with respect to the services to which such account receivable relates;
(ii) potential setoff; (iii) dispute; and (iv) advertising or other allowance
that will be deducted from the receivable in the ordinary course of collection.
Any accounts in foreign currency shall be converted to U.S. dollars based upon
the exchange rate on the date of the Borrowing Base Certificate.
Citizens, in its reasonable discretion, may from time to time by thirty
(30) days prior notice to the Company modify the percentages applied to any
component of the Borrowing Base. Citizens, in its reasonable discretion, may
from time to time by seven (7) days prior notice to the Company (a) determine
that any item included in the Borrowing Base is unacceptable for inclusion in
the Borrowing Base in the future; or (b) establish reserves against the
collection of any accounts receivable where Citizens has a reasonable basis to
doubt the full and timely collectability of such accounts receivable.
(c) Revolving Credit Payment. The aggregate Advances
outstanding at any time shall not exceed the lesser of the Borrowing Base as
reflected in the most recent Borrowing Base Certificate or the Maximum Credit.
If the aggregate Advances outstanding at any time exceed such limit, then the
Borrowers shall immediately pay such excess. Citizens may, without prior notice
to the Borrowers, charge any of the Borrowers' accounts under the control of
Citizens in order to effect such payment.
(d) The Revolving Credit Note. Amounts owed by the Borrowers
with respect to Advances made by Citizens shall be evidenced by Citizens's books
and records and may, at the request of Citizens, be further evidenced by a
revolving credit note, in the form of Exhibit 1.02(d), in the maximum principal
amount of the Revolving Credit (the "Revolving Credit Note"). The unpaid
principal balance of the Revolving Credit may be voluntarily
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prepaid in whole or in part during the continuation of the Revolving Credit;
provided that if the Revolving Credit is to be terminated by the Borrowers,
thirty (30) days prior notice shall be given to Citizens. Upon termination, the
Borrowers shall (i) satisfy the provisions of Section 6.01 and (ii) pay the
prepayment fee provided in Section 1.9. The Revolving Credit Note is subject to
mandatory repayments, as provided in Section 1.02(c).
(e) Interest. Advances made by Citizens shall bear interest
prior to maturity or default (computed on the basis of actual number of days
elapsed over a 360 day year) on the unpaid principal balances outstanding from
time to time at a rate per annum equal to the Prime Rate plus seventy-five
hundredths percent (.75%).
After the Maturity Date or the occurrence of an Event of
Default, the unpaid principal balance shall bear interest at the Prime Rate plus
five (5%) percent. Interest shall be payable monthly in arrears on the last day
of each month. The effective rate of interest shall change on each day the Prime
Rate changes.
(f) Requests for Advances. Each Advance shall be made on the
Banking Day on which Citizens receives notice from the Company, if such notice
is received prior to 11:00 a.m. Boston time on such Banking Day, and otherwise
on the next Banking Day. Each request for an Advance shall be accompanied by a
current Borrowing Base Certificate and made to Citizens in writing or by
telephone by a duly authorized representative of the Company. Citizens may rely
upon any telephone request which it believes is made by such a representative.
The Borrowers agree to indemnify and hold Citizens harmless for any action,
including the making of Advances hereunder, or loss or expense, taken or
incurred by Citizens in good faith reliance upon such telephone request. At the
time of the initial request for an Advance, the Company shall have provided
Citizens with a Compliance Certificate (as hereinafter defined). Citizens shall
be entitled to rely upon the most recent Compliance Certificate in its
possession until it is superseded by another certificate.
(g) Method of Advances. In order to facilitate Advances, the
Company shall maintain a disbursing account with Citizens Bank Rhode Island (the
"Depository Bank" or "Citizens RI"). The Company shall be responsible for all
bank charges in connection with the maintenance or operation of such account.
Unless otherwise agreed upon between Citizens and the Company, every Advance
shall be made by transferring funds to the Company's disbursing account with the
Depository Bank.
(h) Expiration. The Revolving Credit shall expire on the
Maturity Date and all Advances then outstanding under the Revolving Credit shall
be due and payable without notice on such date. In the event Citizens continues
Advances after the Maturity Date without a written extension of the Maturity
Date, all such Advances (i) shall be made within the sole discretion of
Citizens; (ii) the entire Credit shall be due on demand; and (iii) the entire
Credit
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shall earn interest at the rate specified to be earned prior to the Maturity
Date in Section 1.02(e) unless otherwise agreed.
(i) Overadvances. Citizens may from time to time in its sole
discretion permit Advances to exceed the limitations set forth in this
Agreement, including, without limitation, Advances in excess of the Maximum
Credit or the Borrowing Base and Advances after the Maturity Date or the
occurrence of an Event of Default. All such Advances shall be deemed part of the
Credit secured by any collateral securing the Credit and supported by any
guaranties or other credit enhancements supporting the Credit. The making of an
Advance on one or more occasion will not operate to limit, waive or otherwise
modify any rights of Citizens hereunder on any future occasion unless otherwise
agreed in writing. Even where Citizens consciously makes such Advance, the
existence of Advances in excess of the Borrowing Base shall be an Event of
Default.
(j) Agency. Each of the Borrowers hereby irrevocably appoints
the Company as its agent for purposes of administration of this Agreement. The
Company is authorized to provide Borrowing Base Certificates, Compliance
Certificates and all other reports under this Agreement on behalf of all
Borrowers and to take any and all actions under this Agreement on behalf of the
Borrowers.
(k) Joint and Several Obligations. All obligations under this
Agreement shall be the joint and several obligation of each of the Borrowers.
(l) Separate Loans. Citizens reserves the right, upon seven
(7) days prior notice to the Borrowers, to require separate Borrowing Base
Reports for each of the Borrowers and to maintain separate loans to each or to
some aggregate of Borrowers limited in accordance with such separate Borrowing
Base Reports which loans in the aggregate shall not exceed the Maximum Credit.
Section 1.03. Definitions.
"Banking Day" shall mean any day which Citizens is open to conduct
commercial banking business in Boston, Massachusetts and the Depository Bank is
open to conduct commercial banking business in Providence, Rhode Island.
"Notes" shall mean the Revolving Credit Note and any other notes issued
by the Borrowers to Citizens pursuant to this Agreement.
"Prime Rate" shall mean the rate of interest per annum from time to
time specified by Citizens RI as its prime rate, it being understood that such
rate is a reference rate, not
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necessarily the lowest, which serves as the basis upon which effective rates of
interest are calculated for obligations making reference thereto.
The following terms are defined in the following sections:
Advance Section 1.02(a)
Affiliate Section 4.17
Banking Day Section 1.03
Base Financial Statement Section 2.04
Borrowing Base Section 1.02(b)
Borrowing Base Certificate Section 1.02(b)
Citizens RI Section 1.03
Closing Fee Section 1.06
Compliance Certificate Section 3.01(k)
Credit Section 1.01
Debt Section 4.20
Depository Bank Section 1.02(g)
EBITDA Section 4.21
ERISA Section 2.10
Event of Default Article V
Interest Changes Section 4.21
Liabilities Section 4.20
Maturity Date Section 1.02(a)
Maximum Credit Section 1.02(a)
Notes Section 1.03
Pledge Agreements Section 3.01(d)
Prepayment Fee Section 1.09
Prime Rate Section 1.03
Qualified Accounts Section 1.02(b)
Restricted Payments Section 4.23
Revolving Credit Section 1.01
Revolving Credit Note Section 1.02(d)
Security Agreements Section 3.01(c)
Service Fee Section 1.07
Special Counsel Section 3.01(b)
Stock Section 4.23
Subordinated Debt Section 4.20
Subsidiaries Section 2.02
Tangible Assets Section 4.20
Tangible Capital Base Section 4.20
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Section 1.04. Payments.
All payments and prepayments of principal and interest due with respect
to the Credit and all other sums due hereunder shall be made by the Borrowers in
immediately available funds to the Depository Bank.
Payments received by the Depository Bank after 11:00 a.m. Boston time
shall be deemed received on the next succeeding Banking Day. Citizens is
authorized to make all such payments by Advances under the Revolving Credit.
Section 1.05. Credit For Uncollected Items.
Citizens will give the Borrowers credit for uncollected items deposited
with the Depository Bank (a) the next Banking Day for purposes of computing
availability under the Revolving Credit and (b) two (2) Banking Days after
deposit for purposes of computing interest and fees with respect to the Credit.
Section 1.06. Closing Fee.
On the date hereof, the Borrowers shall pay Citizens a one-time
non-refundable closing fee (the "Closing Fee") of $15,000 (.5% of the Credit).
Section 1.07. Service Fee.
On the first day of each month, the Borrowers shall pay Citizens a
Service Fee for monitoring collateral of $1,250 on account of the projected
continuation of the Credit during the next month. Such fee shall be fully earned
at the commencement of each month and shall not be refunded or pro-rated upon
termination of the Credit.
Section 1.08. Audit Expenses.
The Borrowers shall pay Citizens on demand Citizens's customary fee for
audit reviews by employees of Citizens (currently $600/per man-day plus
out-of-pocket expenses). Prior to the occurrence of an Event of Default,
Citizens will not seek reimbursement of audit expenses in excess of $10,000
during any 365 day period.
Section 1.09. Prepayment Fee.
The Borrowers shall pay Citizens a prepayment fee if the Credit is
terminated by the Company prior to the Maturity Date of one percent (1%) of the
amount of the Credit.
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Section 1.10. Usury.
It is the intention of Citizens to comply strictly with any applicable
usury law. In no event shall Citizens be entitled to receive interest, fees,
charges or other payments equivalent to interest in excess of the maximum rate
Citizens may lawfully charge. In the event Citizens ever receives payments that
would be excessive interest under applicable law, such excess shall be applied
in reduction of principal, and if the principal is paid in full, any remaining
excess shall be refunded to the Borrowers.
ARTICLE II. REPRESENTATIONS AND WARRANTIES.
The Borrowers, jointly and severally, represent and warrant as follows:
Section 2.01. Corporate Existence and Power.
The Company and each of its Subsidiaries (as defined in Section 2.02)
are corporations duly incorporated, validly existing and in good standing under
the laws of the respective jurisdictions of their incorporation and have full
corporate and other power and authority to conduct their businesses and own
their properties as now conducted and owned. The Company and each of its
Subsidiaries are licensed or qualified as foreign corporations in each
jurisdiction where the conduct of their respective businesses or the ownership
of their respective properties require such licensing or qualification and where
the failure to be so licensed or qualified would have a material adverse effect
on the business, finances or operations of the Company or any Subsidiary.
Section 2.02. Subsidiaries.
Any corporation, business trust, partnership or other business entity
in which the Company or any Subsidiary owns or has options to acquire 50% or
more of the voting control shall constitute a Subsidiary. The Company currently
has no Subsidiaries except as set forth in Schedule 2.02. The Company's
ownership of each Subsidiary is set forth on Schedule 2.02.
Section 2.03. Power and Authority Relative to Borrowing; Legal and Binding
Nature; Compliance with Other Instruments.
Each of the Borrowers has full power and authority and has taken all
required corporate and other action necessary to permit such Borrower to execute
and deliver and perform all of its obligations contained in this Agreement and
all documents or instruments required hereby or incident or collateral hereto,
and to borrow hereunder, and none of such actions will violate any provision of
law applicable to, or of the charter or by-laws of, the Company or any other
Borrower, or result in the breach of or constitute a default under any agreement
or instrument
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to which the Company or any Borrower is a party or by which any of them is
bound. This Agreement and all documents or agreements required hereby or
incident hereto to which any of the Borrowers is a party are the valid and
binding obligations of such Borrower enforceable in accordance with their terms
subject to bankruptcy, insolvency or laws effecting the rights of creditors
generally. Neither the execution, delivery nor performance by the Company or any
other Borrower of any of the obligations contained in this Agreement or in any
document or instrument required hereby or incident or collateral hereto requires
the consent, approval or authorization of any person or governmental authority.
Neither the Company nor any other Borrower is in violation of any term
of its charter or by-laws, or any agreement, instrument, mortgage, indenture,
contract, judgment, decree, order, statute, rule or governmental regulation
applicable to the Company or such Borrower, except for possible minor violations
none of which could, either individually or in the aggregate, have any material
adverse effect on the business, financial condition or assets of the Company or
any other Borrower and except as otherwise disclosed on a Schedule to this
Agreement. The execution, delivery and performance of this Agreement, all
agreements incident or collateral hereto, and the Credit will not result in the
creation of any security interest, lien, charge or encumbrance upon any of the
properties or assets of the Company or any other Borrower except in favor of
Citizens.
Section 2.04. Financial Condition.
The financial statement dated March 31, 1998 previously delivered to
Citizens (the "Base Financial Statement") has been prepared with due diligence
and in accordance with generally accepted accounting principles and practices.
The Base Financial Statement fairly presents the financial condition of the
Company and its Subsidiaries as of the date of such statement and the results of
their operations for the period then ending. The Company and its Subsidiaries
have no material contingent liability (including, without limitation, contingent
tax and environmental liability) nor any burdensome agreement or commitment
which could have a material adverse effect on its business or financial
condition except as disclosed in the Base Financial Statement or in this
Agreement.
Section 2.05. No Material Adverse Change.
Since the date of the Base Financial Statement, there has been no
material adverse change in the condition (financial or otherwise), properties or
business operations of the Company or any of the Subsidiaries and neither the
Company nor any of the Subsidiaries has paid any dividends or made any
distributions on or purchased or otherwise acquired any shares of the capital
stock of the Company or any Subsidiary.
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Section 2.06. Litigation.
Except as set forth in Exhibit 2.06 hereto, there are no suits or
proceedings pending or, to the best knowledge of the Company, threatened against
or affecting the Company or any Subsidiary which could have a material adverse
effect on the business, assets or financial condition of the Company or any
Subsidiary. Moreover, there are no suits or proceedings pending or, to the
knowledge of the Company, threatened with respect to the transactions
contemplated by this Agreement.
Section 2.07. Title.
Except as set forth in Exhibit 2.07, the Company and the Subsidiaries
have good and marketable title to all of the properties and assets reflected in
the Base Financial Statement or acquired since such date, (except for materials
used, inventory sold, accounts receivable collected and other items disposed of,
all in the ordinary course of business) free and clear of all mortgages, liens
and encumbrances except liens permitted by Section 4.14; easements, restrictions
and minor defects in title which do not, either individually or in the
aggregate, materially detract from the value or materially limit the use of any
real property; and certain assets listed on Exhibit 2.14 which are not owned but
which are reflected on the balance sheet as capitalized leases.
Section 2.08. Tax Returns and Payments.
Except as set forth on Exhibit 2.08 attached hereto, all of the tax
returns and tax reports relating to taxes on income and, to the best knowledge
of the Company, all other tax returns and reports of the Company and the
Subsidiaries required by law to be filed have been duly filed, or extensions of
the time for filing have been duly obtained, and, except as set forth in Exhibit
2.08 hereto, the Company and Subsidiaries have paid all taxes shown due thereon.
Except as set forth in Exhibit 2.08 attached hereto, the federal income tax
returns of the Company and Subsidiaries have never been audited by the Internal
Revenue Service. Except as set forth on Exhibit 2.08 attached hereto, there are
in effect no waivers of the applicable statutes of limitations for federal taxes
for any period. No deficiency assessment or proposed adjustment of the federal
income taxes of the Company or of any of the Subsidiaries is pending except as
set forth in Exhibit 2.08 and the Company has no knowledge of any proposed
liability of a substantial nature for any tax to be imposed upon any of its
properties or assets, for which there is not an adequate reserve reflected in
its Base Financial Statement or which accrued in the ordinary course of business
since the date of such financial statement.
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Section 2.09. Compliance with Law.
The Company and the Subsidiaries have all necessary franchises,
permits, licenses and other rights to allow them to conduct their businesses as
presently conducted, and are not in default with respect to any order or decree
of any court, or under any law, order or regulation of any governmental
authority, or under the provisions of any contract or agreement to which any of
them is a party or by which they may be bound, which default would have a
material adverse effect on the business, finances or operations of any of them.
Section 2.10. Pension Matters.
Except as set forth on Exhibit 2.10, neither the Company nor any
Subsidiary has incurred (a) any material accumulated funding deficiency within
the meaning of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or (b) any material liability to the Pension Benefit Guaranty
Corporation in connection with any employee benefit plan established or
maintained by it; nor has the Company or any Subsidiary had any tax assessed
against it by the Internal Revenue Service for any alleged violation under
Section 4975 of the Internal Revenue Code. Neither the Company nor any
Subsidiary has any material unfunded liability under a pension plan or a
contingent liability for withdrawal from a multi-employer pension plan except as
disclosed in the Base Financial Statement.
Section 2.11. Environmental Matters.
Except as set forth on Exhibit 2.11, neither the Company nor any
Subsidiary has (a) been named as a potentially responsible party or received
notice of an investigation that could lead to such designation under any
proposed environmental cleanup; (b) incurred any unsatisfied liability
(contingent or otherwise) in connection with the release, spill, generation,
use, storage, treatment, transportation, manufacture, handling, production or
disposal of hazardous materials, toxic substances or solid waste under any state
or federal environmental law; or (c) occupied in the past or currently occupies
any site designated as environmentally contaminated. The Company and all
Subsidiaries have all licenses, permits, certificates and similar authorizations
required to conduct its business under applicable environmental laws and is not
subject to any pending investigation or proceeding to revoke, limit or terminate
such authorizations.
Section 2.12. Compliance with Regulation U.
None of the proceeds of the Credit will be used to purchase, carry or
refinance any borrowing the proceeds of which were used to purchase or carry any
"margin securities" within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System.
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Section 2.13. Credit Agreements.
Set forth on Exhibit 2.13 is a complete and correct list of all
existing loan agreements, indentures, purchase agreements, leases, guarantees or
other instruments relating to extensions of credit or money borrowed for an
amount in excess of $25,000 under which the Company or any Subsidiary is or may
become directly or indirectly obligated.
Section 2.14. Leases and Options to Purchase.
Set forth on Exhibit 2.14 is a complete and correct list of all
existing leases with respect to, or options to purchase any, real estate or any
equipment involving a commitment or potential commitment in excess of $25,000
under which the Company or any Subsidiary is or may become directly or
indirectly obligated.
Section 2.15. Real Estate Owned.
Set forth on Exhibit 2.15 is a complete and correct list of all real
estate owned by the Company or any Subsidiary.
Section 2.16. Year 2000.
The Company and each Subsidiary has identified all hardware, software,
embedded microchips and other processing capabilities it uses, directly or
indirectly, using date information before, during and after January 1, 2000. The
Company and each Subsidiary has also identified all hardware, software, embedded
microchips and other processing capabilities it uses, directly or indirectly,
using date information before, during and after January 1, 2000 for engineered
life safety systems and engineered sound systems for which they design,
manufacture or service, or to which the Company or any Subsidiary has any
current or continuing obligations.
ARTICLE III. CONDITIONS.
Section 3.01. Conditions to the First Advance.
The obligation of Citizens to make the first Advance is subject to the
fulfillment of the following conditions:
(a) The Note. The Borrowers shall have executed and delivered
the Revolving Credit Note to Citizens.
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(b) Legal Opinions from Counsel for the Company. Citizens
shall have received the written opinion of Dolgenos Newman & Cronin LLP counsel
for the Borrowers, in form and substance satisfactory to Citizens and Goodwin,
Procter & Hoar LLP special counsel to Citizens (said special counsel and any
successor counsel shall be hereinafter referred to as "Special Counsel").
(c) Security Agreements. The Borrowers and Subsidiary
Guarantors shall have executed and delivered to Citizens security agreements in
form and substance satisfactory to Citizens and Special Counsel (the "Security
Agreements"), granting to Citizens a first security interest in substantially
all the assets of the Borrowers and Subisidary Guarantors and all financing
statements and other documents in connection therewith shall have been duly
filed or recorded.
(d) Pledge Agreements. The Borrowers and Subisidary Guarantors
shall have executed and delivered to Citizens pledge agreements in form and
substance satisfactory to Citizens and Special Counsel ("Pledge Agreements")
with respect to the stock of the Subsidiaries indicated on Schedule 2.02. The
Pledge Agreements will be accompanied by the stock certificates and stock powers
representing all of the shares pledged under the Pledge Agreement.
(e) Guaranties. The Parent Guarantor and Subsidiary Guarantors
shall have executed and delivered guarantees in form and substance satisfactory
to Citizens and Special Counsel ("Guarantees") guaranteeing all or parts of the
debts, fees, penalties or any other payments of the Borrowers assumed and
incurred under this Agreement.
(f) Blocked Account Arrangements. The Borrowers shall have
delivered to Citizens agreements providing Citizens with a collateral assignment
of the Borrowers' and Subsidiary Guarantors' bank accounts in a form and
substance satisfactory to Citizens and Special Counsel.
(g) Irrevocable Letter of Credit. Citizens shall have received
on or prior to the Closing an irrevocable letter of credit in the amount of
$300,000 in favor of Citizens securing the guaranty of the Parent Guarantor
expiring no sooner than the Maturity Date and otherwise satisfactory in form and
substance to Citizens and Special Counsel.
(h) Minimum Availability. The Borrowers shall have the ability
to borrow not less than $200,000 under the Revolving Credit plus an amount equal
to the sum of all accounts payable of the Company which are greater than thirty
(30) days past due after the payment of all obligations to be paid in connection
with the execution of this Agreement.
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(i) Closing Fee. Citizens shall have received the Closing Fee
from the Borrowers.
(j) Officer's Insurance Certificate. The Borrowers and
Subsidiary Guarantors shall have delivered to Citizens a list of all insurance
required by Section 4.07 which is in force showing the insurer, the face amount
and the nature of the coverage in substantially the form of Exhibit 3.01(j)
hereto ("Insurance Certificate").
(k) Officer's Compliance Certificate. The Borrowers and
Subsidiary Guarantors shall have delivered to Citizens a certificate dated the
date of the first Advance in substantially the form of Exhibit 3.01(k) hereto
("Compliance Certificate").
(l) Officer's Certificate re Places of Business and
Collateral. The Borrowers and Subsidiary Guarantors shall have delivered to
Citizens a certificate in substantially the form of Exhibit 3.01(l) hereto.
(m) Legal Existence. Each Borrower and Subsidiary Guarantor
shall have delivered to Citizens a Certificate of Legal Existence and Good
Standing.
(n) Bylaws and Resolutions. Each Borrower and Subsidiary
Guarantor shall have delivered to Citizens a copy of its bylaws and corporate
resolutions authorizing this Agreement certified by an officer of the Company.
(o) Charter Documents. Each Borrower and Subsidiary Guarantor
shall have delivered to Citizens a copy of its charter documents certified by an
appropriate governmental official.
(p) Borrowing Base Certificate. The Borrowers shall have
delivered to Citizens a current Borrowing Base Certificate substantially in the
form of Exhibit 1.02(b) hereto.
(q) Request for Loan. The Borrowers shall have delivered to
Citizens a written request specifying the amount of the initial Advance.
(r) No Default. No Event of Default and no event which, with
the giving of notice or the lapse of time, or both, would become an Event of
Default, has occurred and is continuing.
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Section 3.02. Conditions to Subsequent Advances.
Each request for a subsequent Advance shall be deemed to be a
representation by the Borrowers to Citizens that all representations and
warranties contained in Article II hereof or in any Exhibit, Schedule or
Certificate attached hereto or delivered to Citizens in connection herewith were
true and correct when made, and continue to be true and correct except those
items which relate to a specific date and except as disclosed to Citizens by the
Borrowers, and that no Event of Default, and no event which, with the giving of
notice or the lapse of time, or both, would become an Event of Default, has
occurred and is then continuing.
ARTICLE IV. COVENANTS OF THE COMPANY
The Borrowers, jointly and severally, covenant that:
Section 4.01. Payment of Amounts Due.
The Borrowers and Subsidiary Guarantors will make all payments of
principal and interest on the Credit in accordance with the terms hereof and
thereof and will observe, perform and comply with each and every one of the
covenants, terms and conditions contained herein, in the Credit or in any other
document or instrument required hereby or incident or collateral hereto to be
observed, performed or complied with by it.
Section 4.02. Corporate Existence.
The Company and each of the Subsidiaries will maintain and preserve in
full force and effect their respective corporate existences and, insofar as
reasonable and practicable, will maintain and preserve in full force and effect
all material rights, licenses, patents and franchises, and comply with all
applicable regulations in all jurisdictions necessary for the conduct of their
businesses.
Section 4.03. Maintenance of Properties.
The Company and each of the Subsidiaries will maintain, preserve,
protect and keep all properties used or useful in the conduct of their
businesses in good repair, working order and condition, and from time to time
make such repairs, renewals, replacements, betterments and improvements thereto
as are necessary to permit such businesses to be properly and advantageously
conducted at all times.
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Section 4.04. Payment of Taxes.
The Company and each of the Subsidiaries will pay and discharge all
lawful taxes, assessments and governmental charges or levies imposed upon them
or upon their income or profits, or upon any property belonging to them before
the same shall become past due, as well as all lawful claims for labor,
materials and supplies, which, if not paid when due, might become a lien or
charge upon such property or any part thereof; provided, however, that neither
the Company nor any Subsidiary shall be required to pay and discharge any such
tax, assessment, charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and an adequate reserve for
the payment thereof is established on the books of the Company or such
Subsidiary in accordance with generally accepted accounting principles.
Section 4.05. Compliance with ERISA.
The Company and each of its Subsidiaries will satisfy, or cause to be
satisfied, the minimum annual funding standard required by ERISA for any
employee benefit plan established or maintained by it which is subject to ERISA
and the Company or the Subsidiary will not permit any tax or penalty to be
incurred by it as a result of any failure to satisfy any such minimum funding
requirement or as a result of any violation of the provisions of the Internal
Revenue Code or any regulation issued thereunder.
Section 4.06. Compliance with Laws.
The Company and each of the Subsidiaries at all time in all material
respects will comply with applicable provisions of laws, rules, regulations,
licenses, permits, approvals and orders and observe all requirements of federal,
state, local and other governmental authorities including, without limitation,
all provisions of the Fair Labor Standard Rules of 1938, the Occupational Safety
and Health Act of 1970 and all applicable environmental laws.
Section 4.07. Insurance.
The Company and each of the Subsidiaries will keep their insurable
properties insured by financially sound and reputable insurers satisfactory to
Citizens against such risks and in such amounts as are deemed prudent by the
Company and are reasonably acceptable to Citizens and will obtain a secured
party's endorsement naming Citizens as a Loss Payee under all insurance policies
maintained with respect to insurable properties subject to a security interest
or lien in favor of Citizens. The Company and each of the Subsidiaries will
maintain in full force and effect public liability insurance against claims for
bodily injury, death or physical property damages occurring upon, in, about, or
in connection with the use of any properties occupied or controlled by them, or
through the operation of any motor vehicles by their agents
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or employees or arising in any manner out of the businesses carried on by them
in such amounts and with such coverages as are deemed prudent by the Company and
are reasonably acceptable to Citizens.
Section 4.08. Accounts and Reports.
The Company will furnish or cause to be furnished to Citizens the
following reports:
(a) Annual Reports. As soon as available, and in any event
within one hundred and five (105) days after the end of each fiscal year,
audited consolidated and unaudited consolidating financial statements of the
Company and its Subsidiaries, together with all notes thereto, prepared in
reasonable detail and in accordance with generally accepted accounting
principles consistently applied (except there will be no required notes to the
consolidating balance sheets and income statements) such consolidated statements
to be duly audited by Moore Stephens, P.C. or other certified, independent
public accountants selected by the Company and acceptable to Citizens. Such
statements shall be accompanied by a statement of such certified, independent
public accountants that the examination made in certifying such statements did
not disclose the existence of any condition or event which constitutes an event
of default under this Agreement or which, after notice or lapse of time or both,
would constitute such an event of default, or a statement specifying the nature
and period of existence of any such condition or event disclosed by such
examination. As soon as available and in any event within sixty (60) days after
the end of each fiscal year, consolidated and consolidating unaudited financial
statements of the Company and its Subsidiaries prepared in reasonable detail and
in accordance with generally accepted accounting principles consistently
applied, certified by the chief financial officer of the Company.
(b) Quarterly Reports. As soon as available, and in any event
within sixty (60) days after the end of each quarterly accounting period in each
fiscal year, unaudited financial statements of the Company prepared in
reasonable detail and in accordance with generally accepted accounting
principles consistently applied (except that such statements need not contain
notes thereto) certified by the chief financial officer of the Company, which
statements shall contain balance sheets as of the end of such accounting period
and statements of profit and loss for the period from the beginning of such
fiscal year to the end of such accounting period. With the quarterly financial
statements furnished pursuant to this subsection (b), (i) a Compliance
Certificate and (ii) a list of the names and addresses of all customers of the
Company.
(c) Monthly Reports. As soon as available, and in any event
within thirty (30) days after the end of each monthly accounting period in each
fiscal year, unaudited financial statements of the Company and each of its
Subsidiaries prepared in reasonable detail in a form acceptable to Citizens
(except that such statements need not contain notes thereto and
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except as may be otherwise required hereby) certified by the chief financial
officer, which statements shall contain balance sheets as of the end of such
accounting period and statements of profit and loss for the period from the
beginning of such fiscal year to the end of such accounting period.
(d) Periodic Reports. With the monthly financial statements
furnished pursuant to subsection (c) hereof, (i) summary of all Advances
outstanding at the end of such period, (ii) consolidated and consolidating
accounts receivable aging based on invoice date, (iii) inventory analysis, (iv)
a schedule detailing any LIFO reserve, if any, and any fixed assets, if any,
included in the Borrowing Base, and (v) such other reports as Citizens shall
reasonably request. With the quarterly financial statements furnished pursuant
to subsection (b) hereof, a list of the names and addresses of all customers of
the Company.
(e) Auditor's Management Letter. Promptly after receipt by the
Company, copies of the management letter, if any, provided by the independent
certified public accountants who audit the annual financial statements.
(f) Public Information. Promptly, copies of all reports and
financial statements which the Company sends to its stockholders as a class or
which the Company, or any of the Subsidiaries, file with the Securities and
Exchange Commission or any other public body.
(g) Projections. At least forty-five (45) days after the end
of each fiscal year of the Company, projections for the next fiscal year
indicating the Company's expected operating results (on a consolidated and
consolidating basis), cash flow and proposed capital expenditures. Such
projections shall be made on a month-by-month basis.
(h) Accounting Principles. Reports furnished under this
Agreement shall be prepared in accordance with generally accepted accounting
principles except that unaudited statements shall be subject to normal year end
adjustments and there shall be no requirement for notes thereto. Any accounting
terms not otherwise defined shall have the same meaning provided by generally
accepted accounting principles. Compliance with the covenants set forth in this
Agreement will be determined on the basis of accounting principles used in the
preparation of the Base Financial Statements. In the event that any subsequent
reports shall have been prepared in accordance with accounting principles
different than those used in the Base Financial Statements, the Company shall
inform Citizens of such changes in accounting principles and shall provide to
Citizens, with such subsequent reports, such supplemental reconciling financial
information as may be required to ascertain performance by the Company and the
Subsidiaries with the covenants contained in this Agreement.
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Section 4.09. Information and Inspection.
At all reasonable times and as often as Citizens shall reasonably
request, the Company will furnish to Citizens from time to time with reasonable
promptness full information pertinent to any covenant, provision or condition
hereof or to any matter in connection with its business and permit any
authorized representative designated by Citizens to visit and inspect any of its
properties and those of the Subsidiaries, including their books (and to make
extracts therefrom), and to discuss their affairs, finances and accounts with
their officers. The Company and its Subsidiaries, will, in addition, furnish to
Citizens with reasonable promptness such financial information as Citizens shall
reasonably request. Without limiting the generality of the foregoing, Citizens
shall be entitled to conduct field audits of the accounts receivable and
inventory of the Company and the Subsidiaries.
Section 4.10. Additional Advice.
The Company will promptly advise Citizens of (i) any material casualty
loss whether or not insured; (ii) the threat of or commencement of any material
litigation; (iii) the assertion by any governmental authority or private party
of a material violation of or material liability arising under any environmental
law; (iv) any change which constitutes or, after notice or lapse of time or
both, would constitute an Event of Default of this Agreement; and (v) each
waiver, consent or amendment granted or made with respect to instruments or
agreements relating to borrowed money in excess of $100,000 and each request by
the Company therefor.
Section 4.11. Payment of Citizens Expenses.
The Borrowers will bear all reasonable expenses incurred by Citizens in
connection with the negotiation, preparation, execution, amendment,
interpretation, administration, termination or enforcement of this Agreement
(whether or not the Credit is consummated) and the making and collection of the
Credit including, without limitation, the reasonable fees and disbursements of
Special Counsel and appraisers employed by Citizens.
Section 4.12. Limitation on Indebtedness.
Neither the Company nor any Subsidiary will create, incur, assume, or
become, be or remain liable in any manner in respect of, or allow to exist, any
indebtedness (which term includes all indebtedness, obligations and liabilities
which in accordance with generally accepted accounting principles would be
reflected on the balance sheet of the Company or any Subsidiary as a liability
and any negative cash balance; all indebtedness, obligations and liabilities,
whether or not assumed by the Company or any Subsidiary, secured by any
mortgage, pledge or lien existing on property owned by the Company or any
Subsidiary; and
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all amounts representing rental payments which, in accordance with generally
accepted accounting principles, would be classified as a liability on its
balance sheet), except for:
(a) the Credit and any other obligations owed to Citizens
in connection with this Agreement;
(b) indebtedness representing trade debt, wages, employee
benefits and similar indebtedness incurred in the ordinary course of business;
(c) indebtedness secured by liens to the extent permitted
by Section 4.14;
(d) liabilities for taxes, assessments, governmental charges,
liens or claims to the extent that payment thereof is not required by Section
4.04;
(e) indebtedness in respect of final judgments for the payment
of money not in excess of $50,000 in the aggregate at any time outstanding
(excluding sums covered by insurance) which has been in force for less than the
applicable appeal period or less than sixty (60) days, whichever is sooner,
provided that such indebtedness may remain outstanding if the Company or the
appropriate Subsidiary at the time shall in good faith be prosecuting an appeal,
or proceedings for review or pending and in respect of which a stay shall have
been obtained pending such appeal or review;
(f) indebtedness of the Company and Subsidiaries which is
specifically disclosed in Schedule 4.12(f) attached hereto; and
(g) such other indebtedness not exceeding in the aggregate
$50,000 incurred in the ordinary course of business.
Section 4.13. Limitation on Liability for Obligations of Others.
Neither the Company nor any Subsidiary will assume, guarantee, endorse
or otherwise be or become liable, contingently or otherwise, for the obligations
of any other corporation, firm or entity or other person, except those
contemplated hereby:
(a) for the endorsement of negotiable instruments for
deposit or collection in the normal course of its business; and
(b) guarantees and other contingent liabilities which are
disclosed on Schedule 4.13(b).
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Section 4.14. Limitation on Liens.
Neither the Company nor any Subsidiary will create, incur, assume or
allow to be created, incurred or assumed, or to exist, any pledge of, or any
mortgage, lien, charge or encumbrance of any kind on, any of its property or
assets, or subject any of such assets to prior payments of any other
indebtedness whether by subordination agreement, transfer of assets or
otherwise, or own or acquire or agree to acquire any property of any character
subject to or upon any mortgage, conditional sale agreement or other title
retention agreement except:
(a) mortgages, liens, or encumbrances which existed on the
date hereof and which are specifically permitted by Section 2.07 hereof or set
forth in Schedule 2.07 hereto;
(b) liens in favor of Citizens;
(c) liens securing the purchase price of fixed assets to be
used in the business of the Company or any Subsidiary (which may be in the form
of leases), but not any renewal, extension or refunding of any such lien or the
indebtedness secured thereby, provided that each such lien shall at all times be
confined solely to the item of property so acquired;
(d) liens for taxes, assessments, governmental charges and
levies or for claims to the extent that payment thereof is not then required by
Section 4.04;
(e) liens in respect of judgments which had been in force for
less than the applicable appeal period or less than sixty (60) days, whichever
is sooner, so long as execution is not levied thereunder, or in respect of which
the Company or the appropriate Subsidiary at the time shall in good faith be
prosecuting an appeal, or proceedings for review are pending and in respect of
which a stay of execution shall have been obtained pending such appeal or
review;
(f) liens on deposits made in connection with, or to secure
payment of, workmen's compensation, unemployment insurance or similar programs;
liens, charges or encumbrances imposed by law, such as carriers', warehousemen's
and mechanics' liens and similar involuntary liens arising in the ordinary
course of business which do not, individually or in the aggregate, materially
detract from the value or limit the use of any property subject thereto;
landlords' liens in respect of rent not in default; and liens on deposits made
to secure the performance of bids, appeal bonds and surety bonds; and
(g) liens and encumbrances which are disclosed on Schedule
4.14(g).
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Section 4.15. Sale of Accounts Receivable.
Neither the Company nor any Subsidiary will sell or transfer any of its
accounts receivable, whether with or without recourse.
Section 4.16. Loans and Investments.
Neither the Company nor any Subsidiary will purchase or otherwise
acquire or retain any stock, partnership interest, or obligations of, or make
any loans or advances to, or investments in any corporation or other entity or
person, including loans or advances to or investments in the Company or in any
Subsidiary, other than:
(a) the Company's and its Subsidiaries' present investments
in Subsidiaries;
(b) loans and advances from one Borrower to another Borrower;
(c) open account transactions between the Company and
Subsidiaries and between Subsidiaries in the ordinary course of business;
(d) loans or advances for reimbursable expenses to employees
not exceeding $100,000 outstanding in the aggregate at any time;
(e) obligations of the United States of America, or any agency
thereof, maturing not more than one (1) year from the date of issue thereof,
provided that Citizens shall acquire a perfected first security interest in such
obligation simultaneously with its purchase or acquisition;
(f) certificates of deposit or other obligations maturing not
more than one (1) year from the date of issue thereof issued by a bank, provided
that Citizens have a perfected first security interest in such obligation.
Section 4.17. Transactions With Affiliated Persons.
Neither the Company nor any Subsidiary will enter into any transaction
with any Affiliate, except on terms no less favorable to the Company or such
Subsidiary than would be available in a bona fide arm's length transaction with
a non-affiliated person or entity. "Affiliate" means any officer, director or
shareholder who owns ten percent (10%) or more of any class of securities of the
Company or any Subsidiary; any entity where the Company owns directly or
indirectly ten percent (10%) or more of any class of securities or interest
issued by such entity; or any entity that controls, is controlled by or under
common control with the Company or any of the Subsidiaries.
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Section 4.18. Consolidation, Merger and Disposition of Assets.
Neither the Company nor any Subsidiary will consolidate with or merge
into or with another corporation, partnership or other entity; directly or
indirectly issue, sell, assign, pledge or otherwise encumber or dispose of any
shares of its capital stock or the capital stock of any Subsidiary; sell, lease
or otherwise dispose of all or any material portion of its properties or assets
(other than in the ordinary course of its business) to any firm, person or
corporation; or acquire any material portion of the properties or assets of any
other corporation, partnership or entity, whether in one or a series of related
transactions, except:
(a) any Subsidiary may merge into or consolidate with any
Borrower (provided that the Borrower shall be the surviving corporation);
(b) any Subsidiary may sell, lease, exchange, transfer or
dispose of any of its assets to a Borrower which has granted to Citizens a lien
in substantially all of its assets;
(c) the Company may issue capital stock for cash and may issue
options or warrants to any person for cash or to employees for services;
(d) the Company may, with notice to Citizens, liquidate and
dissolve a Subsidiary if the Subsidiary is an inactive entity without revenue or
tax benefit from any source or if the Subsidiary's business is transferred to
another Subsidiary;
provided that in each case no Event of Default as set forth in Article V hereof,
and no condition or event which after notice or lapse of time, or both, would
constitute an Event of Default, would exist immediately after any such
transaction or series of related transactions.
Waiver from this provision will not be unreasonably withheld by
Citizens with regard to a Subsidiary's ability to consolidate with or merge into
or with another corporation, partnership or other entity; directly or indirectly
issue, sell, assign, pledge or otherwise encumber or dispose of any shares of
its capital stock or the capital stock of any Subsidiary; sell, lease or
otherwise dispose of all or any material portion of its properties or assets
(other than in the ordinary course of its business) to any firm, person or
corporation should such an event, in the opinion of Citizens, not adversely
affect the Borrowers' credit standing with Citizens.
Section 4.19. Changes in Business.
Neither the Company nor its Subsidiaries will materially alter the
nature of its business.
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Section 4.20. Tangible Capital Base.
The ratio of Liabilities to the Tangible Capital Base of the Company
shall not exceed 1.35 to 1.0 during each fiscal quarter ending during the term
of this Agreement.
"Debt" shall mean the sum of all liabilities both short-term and
long-term, of the Company and all Subsidiaries including liabilities to
Citizens, but excluding stockholders equity and Subordinated Debt.
"Soft Assets" means the sum of all assets, repayments, loans, dividends
or distributions of any nature due from Affiliates, investments in the stock of
an Affiliate, or any similar items reasonably deemed to be Soft Assets by
Citizens.
"Subordinated Debt" means the outstanding principal amount of the
Company's debt subordinated to the obligations of the Company to Citizens in
form and substance satisfactory to Citizens and Special Counsel.
"Tangible Assets" shall mean the sum of all assets of the Company and
all Subsidiaries, but excluding intangible assets such as goodwill, organization
expenses, patents, trademarks, copyrights, research and development costs,
training costs, unamortized debt discount, unamortized offering costs, customer
lists and similar items deemed to be intangible by Citizens.
"Tangible Capital Base" shall mean Tangible Assets, less Soft Assets
and Debt.
Section 4.21. Cash Flow.
The ratio of EBITDA to Interest Charges of the Company computed at the
end of each fiscal quarter shall be not less than 2.2 to 1.0. "EBITDA" shall
mean (a) all net income before interest and taxes, plus (b) depreciation and
amortization of assets deducted in determining net income and (c) excluding any
extraordinary gains or losses. "Interest Charges" shall mean (a) all interest on
the Revolving Credit, plus (b) all interest on money borrowed from any sources
other than the Revolving Credit, plus (c) the interest component on all
capitalized assets. For purposes of this Section, EBITDA and Interest Charges
shall be computed on a retroactive basis for the prior four fiscal quarters and
be on a consolidated basis for the Company and all Subsidiaries.
Section 4.22. Capital Expenditure.
The Company and its Subsidiaries shall not make or incur expenditures
which are properly chargeable to capital account under generally accepted
accounting principles
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(including leases which are capitalized) in an aggregate amount in excess of
$250,000 in any fiscal year.
Section 4.23. Restricted Payments.
The Company and its Subsidiaries will not, directly or indirectly,
declare, order, pay or make any Restricted Payment (as hereinafter defined),
except the Company may, prior to the occurrence of an Event of Default or an
event which with notice or the passage of time will constitute an Event of
Default, so long as such Event of Default or event remains uncured, and provided
that such Restricted Payment will not constitute such an event, but not after
such occurrence so long as such Event of Default remains uncured:
(a) declare and pay dividends on its Stock payable solely
in Stock;
(b) make exchanges of one or more classes of Stock of the
Company provided that no cash or other property is distributed in such exchange
by the Company; or
(c) retire Stock out of the net proceeds of the simultaneous
sale of other Stock; and
(d) pay interest and scheduled principal payments on account
of Subordinated Debt.
For the purposes of this Section 4.23, the following terms shall have
the following respective meanings:
(i) Restricted Payments shall mean:
(a) any payment or declaration of any dividend on any
class of Stock of the Company or any other distribution on account of any class
of Stock;
(b) any redemption, purchase or other acquisition by the
Company, directly or indirectly, of any shares of its Stock; and
(c) any payments of principal or interest made by the Company
in respect of any Subordinated Debt.
(ii) "Stock" shall mean capital stock and warrants or options to
purchase stock.
25
<PAGE>
Section 4.24. Restriction on Use of Proceeds.
None of the proceeds of the Credit shall be used by the Company to
purchase commodities except for use in the ordinary course of the Company's
business or for the purpose of purchasing or carrying, or refinancing any
borrowing the proceeds of which were used to purchase or carry any "margin
securities" within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System.
Section 4.25. Accounts.
The Borrowers shall maintain at all times an account with the
Depository Bank and its principal operating accounts with banks approved by
Citizens. A complete list of all existing bank, mutual fund, brokerage or other
accounts containing cash, cash equivalents or marketable securities for the
Company and all subsidiaries is set forth on Schedule 4.25. Neither the Company
nor any Subsidiary will open any further account of the type required to be
listed on Schedule 4.25 without prior notice in writing to Citizens.
Section 4.26. Controlling Interest.
The stockholders of the Company designated in Schedule 4.26 will at all
times own a Controlling Interest in the Company and its Subsidiaries.
"Controlling Interest" shall mean sufficient voting control to designate a
majority of the board of directors. Notwithstanding anything to the contrary
contained herein, the stockholders of the Company designated in Schedule 4.26
shall be permitted to reduce their aggregate beneficial ownership to 40% of the
Company's equity provided that at any time during this Agreement no other person
or entity has greater voting power.
Section 4.27. Further Security.
The Borrowers agree to provide Citizens with such security interest or
liens as Citizens may hereafter reasonably request with respect to the assets of
the Company or any Subsidiary.
Section 4.28. Year 2000 Compliance.
The Company and each Subsidiary shall, not later than September 30,
1999, have taken all necessary action to correct all hardware, software,
embedded microchips and other processing capabilities it uses, directly or
indirectly, to ensure that it will be able to function accurately and without
interruption or ambiguity using date information before, during and after
January 1, 2000. The Company and each Subsidiary shall, not later than September
30, 1999, have also taken all necessary action to assess, evaluate and correct
all hardware, software, embedded microchips and other processing capabilities it
uses, directly or indirectly,
26
<PAGE>
to ensure that it will be able to function accurately and without interruption
or ambiguity using date information before, during and after January 1, 2000 for
engineered life safety systems and engineered sound systems for which they
design, manufacture or service, or to which the Company or any Subsidiary has
any current or continuing obligations.
ARTICLE V. EVENTS OF DEFAULT.
If, while any part of the principal of or interest on the Credit
remains unpaid or while this Agreement shall be in effect, any one of the
following "Event of Default" shall occur:
(a) nonpayment of principal of the Advances when due;
(b) failure to pay any Advances in excess of the Borrowing Base as required
by Section 1.02(c)
(c) failure to pay any fees or amounts due with respect to letters of
credit when due;
(d) nonpayment of interest on the Advances when due;
(e) any Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or of all or a substantial part of its
assets; (ii) admit in writing its inability to pay its debts as they mature;
(iii) make a general assignment for the benefit of creditors; (iv) be
adjudicated a bankrupt or insolvent; (v) file a voluntary petition in bankruptcy
or a petition or an answer seeking reorganization or an arrangement with
creditors to take advantage of any insolvency law; (vi) file any answer
admitting the material allegations of a petition filed against it in any
bankruptcy, reorganization or insolvency proceeding or fail to dismiss such
petition within sixty (60) days after the filing thereof; or (vii) take any
corporate action for the purpose of effecting any of the foregoing;
(f) an order, judgment or decree shall be entered, without the application,
approval or consent of a Borrower by any court of competent jurisdiction,
approving a petition seeking reorganization or liquidation of any Borrower or
appointing a receiver, trustee or liquidator of any Borrower or of all or a
substantial part of its assets;
(g) any representation or warranty made by any Borrower herein or hereunder
or in any certificate, document or instrument furnished pursuant hereto shall
prove to have been false or incorrect in any material respect when made;
(h) default by any Borrower in the performance of any covenan or agreement
contained in Article IV hereof;
27
<PAGE>
(i) except as otherwise set forth herein, default by any Borrower in the
performance of any other covenant or agreement contained herein or in any
document or instrument required hereby or incidental or collateral hereto which
shall not have been remedied within thirty (30) days after written notice
thereof shall have been given to the Borrower by Citizens;
(j) default by any Borrower in the performance of any covenant or agreement
contained in any agreement to which it is a party or by which it is bound
involving a liability in excess of $100,000 of the Borrower which shall not be
remedied within the period of time (if any) within which such other agreement
permits such default to be remedied without the consent or waiver of the other
party thereto, unless such default is waived or excused as a matter of law;
(k) failure by any Borrower to make any payment of principal or interest
beyond the period of grace contained in the respective instrument or agreement
evidencing any indebtedness for money borrowed in excess of $100,000 to which it
is a party or by which it may be bound (unless such default is the result of a
good faith dispute arising under such agreement or instrument), or default by
any Borrower in the performance of any other covenant or agreement contained in
any such agreement or instrument which results in the acceleration of the
maturity of any indebtedness to others of the Borrower under such agreement or
instrument;
(l) default by any Borrower in the performance of any covenant or agreement
contained in any of the Security Agreements or other documents in favor of
Citizens executed in connection with this Agreement which continues beyond any
grace period provided therein;
(m) any guarantor of any Borrower's obligations shall take any action to
terminate a guarantee or there shall exist any default thereunder;
(n) all or any substantial part of the property of any Borrower shall be
condemned, seized or otherwise appropriated by any governmental authority or any
officer or instrumentally thereof; or
(o) a judgment or judgments for the payment of money in excess of the sum
of $50,000 in the aggregate (not covered by insurance) shall be rendered against
any Borrower and such judgment or judgments shall remain unsatisfied and in
effect for any period of sixty (60) days without a stay of execution;
(p) any Borrower shall fail to deposit proceeds, in excess of
$2,000 per individual deposit and $10,000 aggregate per year, of Citizens's
collateral with Citizens;
28
<PAGE>
(q) any Borrower shall deliver a materially inaccurate Borrowing Base
Certificate adverse to Citizens; or
(r) there shall occur any material adverse change in the financial
condition of any Borrower;
then and in every such event, while such event shall be continuing,
Citizens may, by written notice to the Company, declare the Credit (and any
Notes issued) to be forthwith due and payable, whereupon the Credit shall
forthwith become due and payable and the right to borrow hereunder shall
terminate; provided, however, that upon the happening of any event under
Subsections (e) or (f) of this Article V, then the Credit shall, without the
taking of any action by Citizens, immediately become due and payable and the
right to borrow hereunder shall immediately terminate.
ARTICLE VI. MISCELLANEOUS.
Section 6.01. Term of Agreement.
This Agreement shall terminate whenever all of the following conditions
shall have been met: (i) all principal of and interest of the Credit and all
other amounts due and payable under this Agreement have been paid and discharged
in full, (ii) all other financial accommodations provided by Citizens under this
Agreement shall have been terminated or an indemnity provided in a form
acceptable to Citizens, (iii) the Borrowers shall have provided indemnity by
cash or other collateral satisfactory to Citizens for any projected fees,
expenses and other contingent liabilities, (iv) the Borrowers shall have no
further right to borrow under the Credit; and (v) the Borrowers shall have
provided Citizens with a general release in form acceptable to Citizens. Until
each of the foregoing contributions are satisfied, Citizens shall have no
obligation to release financing statements or guarantees or return any other
collateral securing the obligations of the Borrowers' to Citizens. The
provisions of this Article VI shall survive termination of this Agreement.
Section 6.02. Indemnity.
Each of the Borrowers agrees to indemnify and hold harmless Citizens,
its participants and each of their directors, officers, agents, employees and
counsel, from and against any and all losses, claims, damages, liabilities or
expenses imposed on or incurred by any of them in connection with the lending
relationship reflected in this Agreement except as a result of such indemnified
parties' gross negligence or willful misconduct.
Section 6.03. Reinstatement.
29
<PAGE>
All obligations of any Borrower, and of any guarantor or other person
liable, under this Agreement or related documents shall be reinstated as though
payment had never been received by Citizens if after any payment all or a
portion of the amounts paid are voided, rescinded or otherwise returned upon the
Borrowers insolvency, bankruptcy or reorganization.
Section 6.04. Consent to Jurisdiction.
EACH OF THE BORROWERS AND ANY GUARANTOR OF ANY BORROWER'S OBLIGATIONS
UNDER THIS AGREEMENT IRREVOCABLY CONSENTS AND SUBMITS TO THE NON-EXCLUSIVE
JURISDICTION OF THE SUPERIOR COURT IN THE COMMONWEALTH OF MASSACHUSETTS AND THE
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MASSACHUSETTS IN
CONNECTION WITH ANY ACTION, PROCEEDING OR CLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR OTHER DOCUMENT EXECUTED IN CONNECTION WITH THIS AGREEMENT. IN
ANY SUCH LITIGATION, EACH OF THE BORROWERS AND ALL GUARANTORS WAIVE PERSONAL
SERVICE AND AGREE THAT SERVICE MAY BE MADE BY CERTIFIED MAIL, IN THE CASE OF THE
BORROWERS, TO THE PLACE SPECIFIED FOR NOTICES UNDER THIS AGREEMENT AND, IN THE
CASE OF GUARANTORS, TO THEIR LAST KNOWN ADDRESS.
Section 6.05. Waiver of Jury Trial.
EACH OF THE BORROWERS AND ANY GUARANTOR OF THE COMPANY'S OBLIGATIONS
UNDER THIS AGREEMENT WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR OTHER DOCUMENT EXECUTED IN
CONNECTION WITH THIS AGREEMENT.
Section 6.06. Notices.
Except as otherwise specifically provided in this Agreement, all
notices hereunder shall be deemed to have been given when delivered in person
or, if mailed, when actually received by the party to whom addressed; provided,
however, that any written notice given pursuant to Article V hereof shall be
deemed to be effective when mailed, so long as such notice is mailed by
registered or certified mail, addressed to any party at its address set forth
below or at any other address notified in writing to the other parties hereto.
Actual receipt shall be conclusively presumed if such notice shall be mailed by
registered or certified mail, addressed to any party at its address set forth
below or at any other address notified in writing to the other parties hereto by
notice pursuant to this Section, and if the sender shall have received back a
return receipt.
30
<PAGE>
To Citizens: Citizens Business Credit Company
28 State Street
Boston, Massachusetts 02109
Attention: Ralph L. Letner, V.P.
Fax: (617) 725-5827
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attention: Jon D. Schneider, P.C.
Fax: (617) 570-8150
To the Borrowers: Firetector Inc.
262 Duffy Avenue
Hicksville, NY 11801
Attention: John Poserina, C.F.O.
Fax: (516) 433-1131
With a copy to: Dolgenos Newman & Cronin LLP
96 Spring Street, 8th Floor
New York, NY 10012
Attention: Dennis P. McConnell, Esq.
Fax: (212) 925-0690
Section 6.07. No Waiver.
No failure to exercise, and no delay in exercising, on the part of
Citizens, any right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies provided by
law.
Section 6.08. Setoff.
Any sums due from Citizens, Citizens RI or other affiliate of Citizens
to any of the Borrowers, any property of any of the Borrowers in the possession
of Citizens, Citizens RI or other affiliate of Citizens and any balance in any
of the Borrowers' account with the Depository Bank may be held and treated as
collateral security for the payment of the obligations of the Borrowers to
Citizens and may be applied to the payment of such obligations regardless of the
adequacy of other collateral. Any sums due from any financing institution
31
<PAGE>
that may participate in the Credit or property of the Borrowers in the
possession of such institution may be held as collateral security for the
payment of the obligations of the Borrowers to Citizens as if such institution
had extended the Credit directly to the Borrowers and may be applied to the
payment of such obligations regardless of the adequacy of other collateral.
Section 6.09. Construction.
This Agreement shall be deemed to be a contract made under the laws of
the Commonwealth of Massachusetts, and shall be construed in accordance with the
laws of the Commonwealth of Massachusetts. The descriptive headings of the
several Sections hereof are for convenience only and shall not control or affect
the meaning or construction of any of the provisions hereof.
Section 6.10. Entire Agreement. This Agreement and the other documents
referred to in this Agreement represent the entire agreement between Citizens,
the Borrowers, and any Guarantors and are intended to supersede and replace any
prior proposals, commitments, agreements or negotiations whether written or
oral.
Section 6.11. Amendments, Waivers and Consents.
The parties contemplate an arrangement which will involve frequent oral
discussion. However, the Borrowers and other parties interested in this lending
relationship understand and agree that this Agreement and other documents
executed in connection with this Agreement may be amended only in writing signed
by Citizens and that Citizens will not be legally bound with respect to any
aspect of the lending relationship except as set forth in writing signed by
Citizens. Compliance by the Borrowers with any term, covenant or condition of
this Agreement may be omitted or waived (either generally or in a particular
instance and either retroactively or prospectively) only by a consent or
consents in writing signed by Citizens.
Section 6.12. Counterparts.
This Agreement may be executed in any number of counterparts which
together shall constitute one Agreement.
{SIGNATURE PAGE FOLLOWS}
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.
BORROWERS:
FIRETECTOR INC.
By:
Name:
Title:
GENERAL SOUND (TEXAS) COMPANY
By:
Name:
Title:
CASEY SYSTEMS INC.
By:
Name:
Title:
PYROTECH SERVICE INC.
By:
Name:
Title:
LENDER:
CITIZENS BUSINESS CREDIT COMPANY
Ralph L. Letner
ice President
DOCSC\628024.5
33
AMENDED DEBT/EQUITY CONVERSION
AGREEMENT
THIS AMENDED DEBT/EQUITY CONVERSION AGREEMENT (the "Agreement"), dated as
of February 19, 1998 by and between FIRETECTOR INC., a Delaware corporation
having its executive offices at 262 Duffy Avenue, Hicksville, New York 11801
("Firetector") and Mirtronics Inc., an Ontario corporation having its executive
offices at 106 Avenue Road, Toronto, Ontario M5R 2H3 ("Mirtronics") will replace
all previous versions of the Debt/Equity Agreement dated as of March 15, 1995
and subsequent extensions, modifications and amendments.
Recitals
A. Firetector has issued two (2) promissory notes to Mirtronics in face
amounts of $620,000 and $225,000 ("Note A" and "Note B", respectively), in
connection with the execution and delivery of a Securities Exchange Agreement,
dated as of the date hereof.
B. From time to time, Mirtronics may desire to convert Note A into
shares of Firetector's common stock, $.001 par value per share (the "Common
Stock") and Firetector would benefit from such a conversion of debt into equity.
NOW THEREFORE, in consideration of the foregoing and of the premises herein
contained, the mutual covenants and agreements and certain other good and
valuable consideration, the receipt and sufficiency of which each of the parties
hereby acknowledges, and subject to the terms and conditions provided in this
Agreement, Firetector and Mirtronics agree as follows:
1. Conversion Right. Mirtronics shall have the right, exercisable from time
to time and until the close of business on December 31, 2002, to convert all or
part of Note A into shares of Common Stock at the conversion price of $0.50 per
share, or two (2) shares of Common Stock for each dollar of Note A so converted
(the "Conversion Right"). All shares of Common Stock acquired by Mirtronics
pursuant to the Conversion Right are referred to herein as "Converted Shares".
Mirtronics shall have the right to specify which portion of Note A is being
converted. No Conversion Right shall apply to Note B, in whole or in part.
<PAGE>
2. Investment Representations and Covenants
2.1 Investment Representation. Mirtronics will acquire the Converted Shares
for its own account and for investment only and not with a view to distribution
or resale thereof within the meaning of such phrase as defined under the
Securities Act of 1933, as amended (the "1933 Act"). Mirtronics will not dispose
of any part or all of the Converted Shares in violation of the provisions of the
1933 Act and the rules and regulations promulgated under such Act by the
Securities and Exchange Commission and all applicable provisions of State
securities laws and regulations.
2.2 Legend. The certificate or certificates representing all Converted
Shares shall bear a legend in substantially the following terms:
"The Shares represented hereby have not been registered under
the Securities Act of 1933, as amended (the "1933 Act") and have been
acquired for investment and not with a view to distribution or resale.
Such shares may not be sold, mortgaged, pledged, hypothecated or
otherwise transferred except pursuant to an effective registration
statement under the 1933 Act or an opinion of counsel satisfactory to
Firetector Inc. to the effect that an exemption from the registration
requirement under the 1933 Act is available.
2.3 Acknowledgment of Restrictions. Mirtronics acknowledges being informed
that the Converted Shares will be unregistered and must be held indefinitely
unless subsequently registered under the 1933 Act or an exemption from such
registration is available and that Firetector has no obligation to register the
Converted Shares for Mirtronics's account.
3. Amendments; Etc. No amendment or waiver of any provision of this
Agreement, or consent to any departure therefrom, shall be effective against any
party unless the same shall be in writing and signed by such party, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
4. Addresses for Notices. All notices and other communications provided for
hereunder shall be in writing and addressed to the parties at the address of
such parties specified in the recitals to this Agreement or, as to either party,
at such other address as shall be designated by such party in a written notice
to each other party complying as to delivery with the terms of this Section. All
such notices and other communications shall be effective when delivered in
writing, addressed as aforesaid.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to its
conflict of law provisions.
<PAGE>
6. Headings. Section headings have been inserted only as a matter of
convenience of reference and shall not be used in the interpretation of any
provision of this Agreement.
7. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one and the same instrument
and any party hereto may execute this instrument by signing one or more
counterparts.
8. Assignment. Assuming compliance with applicable law, Mirtronics may
assign all or any part of its rights and obligations under this Agreement, the
Debt and the Preferred Stock to any person or persons.
9. Further Assurances. Each of the parties agrees that at any time and from
time to time, it will execute and deliver such further documents or cause to be
done such further acts and things as any party may reasonably request in order
to effect the purposes of this Agreement.
Execution
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
FIRETECTOR INC.
By
Name: John A. Poserina
Title: Vice President and Treasurer
MIRTRONICS INC.
By
Name: Stan Abramowitz
Title: Secretary
DEBT MATCHING AGREEMENT
THIS DEBT MATCHING AGREEMENT (the "Agreement"), dated as of
September 30, 1998 by and between Firetector Inc., a Delaware corporation having
its executive offices at 262 Duffy Avenue, Hicksville, New York 11801
("Firetector") and Mirtronics Inc., an Ontario corporation having its executive
offices at 106 Avenue Road, Toronto, Ontario M5R 2H3 ("Mirtronics").
Recitals
A. Firetector is indebted to Mirtronics in an amount aggregating
$897,089.04 and evidenced by two (2) promissory notes in principal face amounts
of $620,000 and $225,000 ("Note A" and "Note B", respectively), issued pursuant
a Securities Exchange Agreement, dated as of February 17, 1998 between
Firetector and Mirtronics. The balances owing on Notes A and B, inclusive of
accrued interest as of the date hereof are $658,219.16 and $238,869.88
respectively.
B. Note A is convertible into shares of Firetector common stock, $0.001
par value per share (the "Common Stock") at a conversion price of $1.50 per
share, pursuant to the terms of the Amended Debt/Equity Conversion Agreement,
dated as of February 17, 1998 between Firetector and Mirtronics (the "Conversion
Right").
C. Mirtronics and its subsidiaries are indebted to Firetector for an
aggregate of $508,618.89 (the "Mirtronics Debt").
D. Firetector and Mirtronics wish to satisfy the Mirtronics Debt by
matching said amount against amounts owed to Mirtronics pursuant to Notes A and
B.
E. On September 23, 1998, Firetector effected a one for three reverse
recapitalization of the Common Stock which caused a modification of the
Conversion Right.
NOW THEREFORE, in consideration of the foregoing and of the premises herein
contained, the mutual covenants and agreements and certain other good and
valuable consideration, the receipt and sufficiency of which each of the parties
hereby acknowledges, and subject to the terms and conditions provided in this
Agreement, Firetector and Mirtronics agree as follows:
1. Debt Matching. The parties hereby agree to apply the Mirtronics Debt in
the following manner: First, $237,482.89 of the Mirtronics Debt shall be applied
to fully satisfy the principal and accrued interest represented by Note B; and
second, $261,424.60 of the
1
<PAGE>
Mirtronics Debt shall be applied to reduce the principal and accrued interest
represented by Note A. The aggregate balance owed on Note A, as so reduced,
shall then be $392,972.64. Each of Mirtronics and Firetector agree to withhold
and pay the requisite withholding taxes that shall become due and payable on the
transactions contemplated herein.
2. Warrant. Mirtronics agrees to surrender the Conversion Right in
consideration of warrants to purchase up to 310,000 shares of the Common Stock
(the "Warrants") . Said Warrants shall be exercisable from time to time and
until the close of business on December 31, 2003, at an exercise price of $1.02
per share. The exercise price shall be satisfied in cash, by wire transfer of
immediately available funds or by certified or official bank check. The Warrants
shall contain such other terms and conditions as shall be reasonable and
customary.
3. Amendments; Etc. No amendment or waiver of any provision of this
Agreement, or consent to any departure therefrom, shall be effective against any
party unless the same shall be in writing and signed by such party, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
4. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to its
conflict of law provisions.
5. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one and the same instrument
and any party hereto may execute this instrument by signing one or more
counterparts.
6. Assignment. Assuming compliance with applicable law, Mirtronics may
assign all or any part of its rights and obligations under this Agreement, the
Debt and the Preferred Stock to any person or persons.
7. Further Assurances. Each of the parties agrees that at any time and from
time to time, it will execute and deliver such further documents or cause to be
done such further acts and things as any party may reasonably request in order
to effect the purposes of this Agreement.
2
<PAGE>
Execution
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
FIRETECTOR INC.
By
Name: John A. Poserina
Title: Chief Financial Officer and Treasurer
MIRTRONICS INC.
By
Name: Stan Abramowitz
Title: Secretary
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as at September 30, 1998 and the Consolidated
Statements of Operations at September 30, 1997 and 1998 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-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 105
<SECURITIES> 0
<RECEIVABLES> 5,058
<ALLOWANCES> 190
<INVENTORY> 1,902
<CURRENT-ASSETS> 7,168
<PP&E> 1,158
<DEPRECIATION> 812
<TOTAL-ASSETS> 8,002
<CURRENT-LIABILITIES> 2,568
<BONDS> 0
0
0
<COMMON> 1,571
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,002
<SALES> 14,299
<TOTAL-REVENUES> 14,299
<CGS> 9,427
<TOTAL-COSTS> 14,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260
<INCOME-PRETAX> 261
<INCOME-TAX> 50
<INCOME-CONTINUING> 211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211
<EPS-PRIMARY> .15
<EPS-DILUTED> .11
</TABLE>
