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, 1999
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) 433-4700
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: $16,892,000
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 17, 1999 was $1,247,586.
As of December 17, 1999, 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 the New York metropolitan area and Dallas
Texas.
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 pull stations 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.
<PAGE>
TELTRAK Communications Systems. In the early 1980s, Firetector began
investigating the intercom market and the possibilities of utilizing its
computerized multiplex technology for this market. Significant construction of
new high-rise housing occurred in the 1970s and 1980s and increased the
potential demand for technologically advanced intercom systems. To meet this
demand, Firetector developed a micro-processor-based combination intercom and
security system using Casey's multiplex technology. The TELTRAK I intercom and
security system is capable of a variety of accessory functions in addition to
its basic intercom and security function. Firetector added video capabilities to
its TELTRAK I technology and created the TELTRAK II, for installation in luxury
condominium, cooperative and apartment buildings. Over 16,000 TELTRAK I and II
units have been sold. In 1991, the redesigned TELTRAK III intercom/security
station was introduced, with enhanced features to expand its use and
competitiveness in the face of the reduced market for these products. New
features, such as public address, enable important messages to be given to
building occupants either locally or by groups in case of emergency.
Other Products
In the past 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.
<PAGE>
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, 1999 and 1998, Firetector spent
approximately $129,000 and $128,000, respectively, for research and development
of Firetector's life safety and communication systems.
Customers and Suppliers
For the fiscal years ended September 30, 1999 and 1998, no customer
accounted for more than 10% of Firetector'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.
<PAGE>
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 120 full time employees, including 43
New York hourly employees that are covered by a Collective Bargaining Agreement
expiring June 2002.
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 under a five year lease expiring
February 29, 2000, with a five year renewal option. The rental schedule provides
for monthly rent of $11,950 during the final year of the initial term and
$15,785 during the final year of the renewal term. However the Company is
exploring the lease of new office, manufacturing and warehouse space in the
central Long Island, New York area.
<PAGE>
The Company had a lease for approximately 3,000 square feet of office and
warehouse space in New York City. The lease term ran from May 13, 1994 through
May 12, 2004. The lease agreement provided for annual rental fees of $51,941.
The Company moved to a new location in New York City with approximately 4,000
square feet for a total cost (including electricity) of $84,000 per year. This
new lease can be terminated by the Company giving ninety days notice or by the
landlord giving ninety days notice.
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
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.
None
<PAGE>
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, 1997 through September
30, 1999 which quotations were obtained from the National Association of
Securities Dealers Inc. The prices have 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, 1997 1 1/8 5/8 13/16 22/32
March 31, 1998 1 1/4 3/4 1 5/16 7/8
June 30, 1998 1 1/4 25/32 1 5/16 3/16
September 30, 1998 1 1/4 1/4 11/2 7/16
December 31, 1998 1 3/8 1/16 1 1/2 7/8
March 31, 1999 2 3/16 1 1/32 2 1/4 1 3/32
June 30, 1999 2 1/8 1 1/8 2 3/16 1 3/16
September 30, 1999 3 3/4 1 5/16 3 7/8 1 13/32
The above quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions. As of December 17, 1999, there were 452 record holders of
Firetector's Common Stock.
On December 17, 1999 the bid and ask prices for the Common Stock were 1 3/8
and 1 1/2, 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 assurance can be given
as to the amount or timing of future dividend payments, if any.
<PAGE>
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 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 letter of credit is expected to be released by
the lender in January, 2000 based on the terms of the Credit Facility.
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, 1999, the Company was not in default with any of its financial
covenants and at such time owed $2,040,590 under the credit facility.
Net cash provided by operations for the twelve months ended September 30,
1999 amounted to $3,000 as compared to cash being used by operations of $283,000
for the comparable prior period. The primary reason for the limited amount of
cash provided by operations was due to an increase in trade receivables of
approximately $730,000 resulting from a $2.6 million increase in sales and
higher inventory related to increased backlog of orders. This inventory increase
was funded by an increase in accounts payable. The Company anticipates improving
its future cash position 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 2000.
The ratio of the Company's current assets to current liabilities increased
to approximately 2.83 to 1 at September 30, 1999 compared to 2.79 at September
30, 1998.
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
<PAGE>
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
Total revenues in 1999 were $16.9 million, an increase of 18% compared to
revenues of $14.3 million in 1998. This increase was primarily due to a 28%
increase in product revenues in 1999 to $12.8 million as compared to $10.0
million in 1998. This increase was attributed to significant construction in the
New York City Metropolitain area for both transit and commercial projects
including several large audio/visual projects for a museum, an auction house,
and a major airport facility. The Company's Texas operation also realized
increased sales for fire alarm systems from school construction projects.
Service revenues decreased 4% in 1999 to $4,097,000. The decrease in
service revenues reflects lower than normal call-in maintenance service on
Firetector systems and other systems.
Gross Profit
Gross profit dollars from product revenues increased 29% in 1999 to
$4,233,000 as a result of the 28% increase in product sales. Gross profit margin
on product revenues remained essentially unchanged at 33.0% in 1999 compared to
32.7% in 1998, as competitive pricing offset the volume contribution to the
fixed overhead.
Gross profit margin on service revenues decreased in 1999 from 37.2% to
29.1%. This decrease reflects the effect of lower call-in maintenance service
revenue in 1999 on essentially fixed overhead. Service revenues were also
adversely impacted by flood damage to the New York City service administrative
office and a sudden unplanned relocation of that office. Insurance claims are
pending.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses increased by 7% in 1999 over
1998 as a result of the Company's expanded marketing program. This effort has
resulted in higher revenues and the Company has achieved an improvement in new
order bookings and record backlog of orders, as noted below.
<PAGE>
Income Before Tax
Operating income increased in 1999 to $510,000 compared to $261,000 in fiscal
1998. The improvement in operating income was primarily the result of higher
product revenues in 1999. However, the improvement was limited by reduced
call-in service revenues, increased selling, general and administrative
expenses, and higher depreciation and amortization. In addition, there was a
decrease in interest expense and other income (includes interest income) in 1999
due to a reduction in notes payable to and notes receivable from Mirtronics from
a Debt Matching Agreement in 1998. (See Note 2 - Transactions With Related
Parties) and certain cash repayments during 1999.
Tax Provisions
The Company's current income tax provision represents state and local
income taxes and the alternative minimum tax for Federal income purposes. In
addition deferred taxes were provided in 1999 due to a reduction in the
Company's deferred tax asset. Firetector retains approximately $310,000 of
additional net operating loss carry forwards, the accounting benefits of which
have been realized.
Order Position
Firetector's order position, excluding service, increased to $10.3 million
at September 30, 1999 from $9.6 million at September 30, 1998 reflecting
management's recent intensified marketing efforts. The higher order position
reflects the receipt in 1999 of significant new orders from several major subway
complexes, a major transportation center, and an airport facility. 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 2000, Management intends to continue to focus on its
intensified marketing programs that were begun in 1998 and to continue to
contain or monitor 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 2000 to improve accounts receivable collections in
order to reduce the number of days sales outstanding.
<PAGE>
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 has upgraded and replaced 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 has also
purchased and installed new software for its computer information system that is
Year 2000 compliant. The upgraded computer information system is presently
performing all tasks and is accepting dates in the year 2000. Certain peripheral
personal computers used outside the main computer information system have also
been upgraded or replaced.. 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. The Company estimates that the costs of its
remedial actions taken or to be taken will not be material to the results of
operations or financial condition. In addition, the Company believes that all
the remedial actions being implemented by the Company will be completed by the
time necessary to avoid dating systems problems. However, 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.
The Company continues to review Year 2000 issues with its major suppliers of
product and its service providers. 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 three years and its material costs have remained relatively stable. In July
of this year, after a brief work stoppage (strike), the Company and its union
agreed to a new three year contract that provides for wage increases of 5% in
each year. The Company will try to mitigate the effect of this increase in labor
costs by price increases, if possible, and certain staff reductions.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements required to be filed hereunder are
indexed at Page 15 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
<PAGE>
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 (4)
10.2 Debt Matching Agreement dated as of September 30, 1998 between
Firetector Inc. and Mirtronics Inc. (4)
10.3 Amended Debt/Equity Agreement dated February 19, 1998 between
Firetector Inc. and Mirtronics Inc. (4)
10.4 1997 Non-Qualified Stock Option Plan (Exhibit 10.6)(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.
(4) 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,
1998, 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 28, 1999
- - ---------------------- Chief Executive Officer
Daniel S. Tamkin and Director
/s/Joseph Vitale President, Chief Operating
- ----------------------- Officer and Director December 28, 1999
Joseph Vitale
/s/John A. Poserina Vice President, December 28, 1999
- ---------------------- Chief Financial Officer
John A. Poserina Treasurer, Secretary,
and Director
/s/Henry Schnurbach Director December 28, 1999
- ------------------------
Henry Schnurbach
/s/Dennis P. McConnell Director December 28, 1999
- ------------------------
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, 1999 ...........................
Consolidated Statements of Income
Years Ended September 30, 1999 and 1998 ................................
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1999 and 1998 ................................
Consolidated Statements of Cash Flows
Years Ended September 30, 1999 and 1998 ................................
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, 1999 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, 1999. 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, 1999 and the consolidated results of
their operations and their cash flows for each of the two fiscal years in the
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
New York, NY
December 3, 1999 MOORE STEPHENS, P.C.
<PAGE>
Part I - FINANCIAL INFORMATION
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
1999
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $233,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $221,000 5,533,000
Inventories 2,255,000
Deferred taxes 262,000
Prepaid expenses and other current assets 175,000
-------------
TOTAL CURRENT ASSETS 8,458,000
-------------
PROPERTY, PLANT AND EQUIPMENT -at cost, less
accumulated depreciation of $982,000 280,000
OTHER ASSETS 210,000
DEFERRED TAXES 40,000
-------------
TOTAL ASSETS $8,988,000
=============
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
1999
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to Mirtronics $432,000
Other notes payable - principally to related party 70,000
Accounts payable and accrued expenses 2,128,000
Unearned service revenue 342,000
Current portion of capital lease obligations 16,000
-------------
TOTAL CURRENT LIABILITIES 2,988,000
-------------
Note payable to bank 2,041,000
Notes payable - principally to related party,
less current portion 182,000
Capital lease obligations, less current portion 21,000
-------------
TOTAL LIABILITIES 5,232,000
-------------
COMMITMENTS AND CONTINGENCIES (NOTES 5 and 12)
STOCKHOLDERS' EQUITY
Convertible preferred stock, 2,000,000 shares authorized-
$1.00 par value; none issued and outstanding
Common stock, 10,000,000 shares authorized, $.001
par value; issued and outstanding 1,571,097 shares 2,000
Capital in excess of par 5,159,000
Deficit (1,405,000)
-------------
TOTAL STOCKHOLDERS' EQUITY 3,756,000
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,988,000
=============
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years ended September 30,
1999 1998
------------- ------------
Net sales $12,795,000 $10,025,000
Service revenue 4,097,000 4,274,000
------------- ------------
Total revenues 16,892,000 14,299,000
------------- ------------
Cost of sales 8,562,000 6,745,000
Cost of service 2,873,000 2,682,000
Selling, general and administrative 4,485,000 4,198,000
Interest expense 240,000 260,000
Depreciation and amortization expense 228,000 206,000
Other (income) - net (6,000) (53,000)
------------- ------------
16,382,000 14,038,000
------------- ------------
Income from operations before provision
for income taxes 510,000 261,000
Provision for income taxes:
Current 128,000 50,000
Deferred 72,000
------------- ------------
200,000 50,000
------------- ------------
Net Income $310,000 $211,000
============= ============
Earnings Per Common Share
Basic Earnings Per Share $0.20 $0.15
Diluted Earnings Per Share $0.18 $0.11
===== =====
Weighted Average Number of Common
Shares Outstanding 1,571,097 1,420,045
Weighted Average Number of Common and
Potential Dilutive Common Shares Outstanding 1,723,653 2,145,202
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS' PREFERRED STOCK COMMON STOCK
EQUITY SHARES AMOUNT SHARES AMOUNT
-------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
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 restructing (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
Net Income 310,000
----------- --------- --------- ----------- --------
Balance at September 30, 1999 $3,756,000 $0 $0 1,571,097 $2,000
============ ========= ========= =========== ========
</TABLE>
(continued)
<PAGE>
FIRETECTOR INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(continued)
CAPITAL RETAINED
IN EXCESS EARNINGS
OF PAR (DEFICIT)
----------- ------------
Balance at September 30, 1997 $5,157,000 ($1,926,000)
Issuance of shares from exercise
of options 550,000
Debt restructing
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)
Net Income 310,000
----------- ------------
Balance at September 30, 1999 $5,159,000 ($1,405,000)
=========== ============
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30,
1999 1998
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $310,000 $211,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 228,000 225,000
Provision for doubtful accounts 72,000 113,000
Changes in operating assets and liabilities:
Accounts receivable (736,000) (1,160,000)
Inventories, prepaid expenses and other current assets (388,000) (44,000)
Deferred taxes 72,000
Accounts receivable from affiliated companies 493,000
Other assets 17,000 (13,000)
Accounts payable and accrued expenses 390,000 395,000
Unearned service revenue (1,000) 6,000
Due to affiliated companies 39,000 (509,000)
----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,000 (283,000)
----------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (62,000) (54,000)
----------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES (62,000) (54,000)
----------- ----------
FINANCING ACTIVITIES
Borrowings under new revolving credit agreement 1,716,000
Principal payments on revolving line of credit, long-term
debt, notes payable and capital lease obligations (105,000) (2,004,000)
Proceeds from revolving line of credit and notes payable 292,000 151,000
Issuance of common stock in connection with exercise of option 552,000
Repurchase of common stock (552,000)
----------- ----------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 187,000 (137,000)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 128,000 (474,000)
Cash and cash equivalents at beginning of year 105,000 579,000
----------- ----------
Cash and cash equivalents at end of year $233,000 $105,000
=========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended September 30,
1999 1998
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
<S> <C> <C>
Cash paid during the year for:
Income taxes $73,000 $211,000
Interest $192,000 $159,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended September 30, 1999 and 1998, the Company incurred
capital lease obligations of $26,000 and $11,000 respectively, for the
acquisition of equipment.
In the year ended September 30, 1998, the Company restructured 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>
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, 1999, 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"), 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.
Inventories
Inventories are priced at the lower of cost (first-in, first-out) or market and
consist primarily of raw materials.
Property and Equipment
Property and equipment are stated at historical cost. Leases meeting the
criteria for capitalization are recorded at the present value of future lease
payments.
Depreciation and amortization of machinery and equipment and furniture and
fixtures are provided primarily by the straight-line method over their estimated
useful lives. The Company depreciates machinery and equipment over periods of 3
to 10 years and amortizes leasehold improvements and assets acquired under
capitalized leases over the life of the lease or their economic useful life,
whichever is shorter.
Other Assets
Other assets are comprised principally of the excess of cost over the fair value
of the assets acquired, and selected assets and service contracts in the
formation of SST. The excess of cost over the fair value of the assets acquired
approximates $123,000 (net of accumulated amortization of $51,000) and relates
principally to the 1990 acquisition of GenSound. This amount is being amortized
over forty years under the straight line method. The acquisition 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.
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
SFAS No. 128 "Earnings Per Share" requires companies to report basic and diluted
earnings per share ("EPS") computations. 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 EPS and Weighted Average Shares
Outstanding reflect 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 85% of such
outstanding receivables at September 30, 1999 are due from customers in New
York.
At September 30, 1999, the Company had approximately $235,000 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 ($675,000 before effect of 1 for 3
reverse split) shares of Preferred Stock, which could also be converted into
450,000 shares of common stock.
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.
In consideration of collateral support for the Company's Credit Facility in
1994, the Company granted Gentura Capital Corporation, an Ontario Corporation,
("GCC") 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. Subsequent to September 30, 1999, GCC exercised
the outstanding balance of these options for $120,000 and the Company reduced
its note payable to Mirtronics for a like amount. 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,
1999
------------
Machinery and equipment $1,052,000
Furniture and fixtures 126,000
Equipment under capitalized leases 42,000
Leasehold improvements 42,000
------------
1,262,000
Less accumulated depreciation
and amortization 982,000
------------
$280,000
Annual amortization of equipment under capital leases is included with
depreciation and amortization expense.
Depreciation expense was $173,000 and $168,000 for the years ended September 30,
1999 and 1998, respectively.
4. 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, 1999). The Credit facility limits capital expenditures to
$250,000 in each year. At September 30, 1999 $2,041,000 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,
which is expected to be released by the lender in January 2000 based on terms of
the Credit Facility.
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, 1999, 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
----------- -----------
2000 $504,000
2001 $2,041,000 59,000
2002 57,000
2003 48,000
2004 16,000
------------ -----------
Total $2,041,000 $684,000
============ ===========
At September 30, 1999, the notes payable to Mirtronics totaled $432,000. 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 (See Note
2).
5. Leases
The Company leases certain office and warehouse space under noncancelable
operating leases expiring at various times through 2004. The Company's
Hicksville, New York facility lease expires in February 2000. The Company is
exploring the lease of new office, manufacturing and warehouse space in the
central Long Island, New York area. The Company also leases certain office
equipment and vehicles under noncancelable capital and operating leases expiring
in various years through fiscal 2003.
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, 1999:
Capital Leases Operating Leases
2000 $20,000 $130,000
2001 9,000 71,000
2002 5,000 64,000
2003 5,000 37,000
-------- ---------
Total minimum lease payments 39,000 $302,000
=========
Less amount representing interest 2,000
--------
Present value of net minimum lease payments
(including current portion of $17,000) $37,000
========
Rental expense amounted to $258,000 and $237,000 for 1999 and 1998,
respectively.
6. Significant Customers
During fiscal 1999 and 1998, no customer accounted for more than 10% of sales.
7. Income Taxes
During the year ended September 30, 1999, the Company recorded a tax provision
of $200,000 compared to $50,000 for the year ended September 30, 1998. A
reconciliation of such with the amounts computed by applying the statutory
federal income tax rate is follows:
Year ended September 30,
1999 1998
-------- --------
Statutory federal income tax rate 34% 34%
Computed expected tax from income 173,000 $89,000
Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit 77,000 31,000
Alternative minimum tax 11,000 7,000
Nondeductible expenses 8,000 2,000
--------- --------
Actual tax applicable to income 269,000 129,000
Increase (decrease) in taxes resulting from:
Benefit of future tax deductible items (69,000)
Reduction in valuation allowances to give effect to
use of net operating loss carryforwards (136,000)
Reduction of state tax benefit for future use of net
operating losses 57,000
--------- ---------
Provision $200,000 $50,000
========= =========
The Company provided $32,000 and $25,000 for state and local franchise and
capital taxes for the years ended September 30, 1999 and 1998, respectively.
These expenses have been included in selling, general and administrative
expenses for each of the years presented.
The Company has accumulated approximately $310,000 of net operating losses as at
September 30, 1999 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 in 2010.
The Company has recorded a deferred tax asset of approximately $302,000 at
September 30, 1999 related to its net operating loss carryforwards and certain
book provisions to be deducted in future tax returns. In 1998 the Company
expected 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 was 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.
8. 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.
9. Earnings Per Share
Shown below is a table that presents for 1999 and 1998 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 give effect to the Company's
1 for 3 reverse stock split that was effective in September 1998.
Year Ended
Basic EPS Computation 1999 1998
Net Income available to common
shareholders $310,000 $211,000
Weighted average outstanding shares 1,571,097 1,420,045
Basic EPS $.20 $.15
====== =======
Diluted EPS Computation
Income available to common
shareholders $310,000 $211,000
Impact of convertible notes 26,000
Diluted net income 310,000 237,000
Weighted-average shares 1,571,097 1,420,045
Plus: Incremental shares from
assumed conversions
Non Employee Stock Options 130,725 251,724
Convertible preferred stock 172,602
Convertible debt 254,795
Employee Stock Options 21,831 46,036
Warrants*
---------- ----------
Dilutive potential common shares 152,556 725,157
---------- ----------
Adjusted weighted-average shares 1,723,653 2,145,202
---------- ----------
Diluted EPS $.18 $.11
========== ==========
*Warrants convertible into 33,334 shares were antidilutive in the years ended
September 30, 1999 and 1998, respectively.
10. Other Matters
a. Product development costs charged to income approximated $129,000 and
$128,000, for the years ended September 30, 1999 and 1998, respectively.
Selling, general and administrative expenses include provisions for doubtful
accounts amounting to $72,000 and $113,000 for the years ended September 30,
1999 and 1998, respectively.
11. 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:
1999 1998
Net Income:
As reported $310,000 $211,000
Pro forma 294,000 211,000
Fully diluted earnings per common share:
As reported $0.18 $011
Pro forma 0.17 0.11
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 1999 and 1998: dividend
yield of zero; expected volatility of 85% and 92% and expected life of 4 years.
The weighted average risk fee interest rates for 1999 and 1998 were 5.40% and
6.30%, respectively. The weighted average fair value of options granted during
1999, for which the exercise price equaled the market price on the grant dates,
was $1.125. The option price for all employee stock options outstanding prior to
fiscal 1999 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 management's
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 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
Options granted 35,000 1.13
Balance September 30, 1999 107,958 1.04
There were 54,136 exercisable options at September 30, 1999 and 42,709
exercisable options at September 30, 1998.
The following table summarizes information concerning currently outstanding and
exercisable stock options.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 1999 Contractual Life September 30, 1999
$1.00 27,250 1.5 years 27,250
1.00 16,125 1.5 years 12,094
1.00 4,500 2.3 years 2,250
1.00 25,083 3.0 years 12,542
1.13 35,000 5.0 years - 0 -
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. Options for 33,334
shares were exercised in July 1996 (also see Note 2 - Transactions with Related
Parties) and options for 133,333 were exercised subsequent to September 30, 1999
in December 1999.
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.
Transactions involving non-employee stock options and warrants are summarized as
follows:
Weighted Average
Options and Warrants Exercise Price of
Outstanding Options Outstanding
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
Balance September 30, 1999 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, 1999 Contractual Life September 30, 1999
.90 143,333 .2 years 143,333
3.00 16,667 1.5 years 16,667
4.50 16,667 2.5 years 16,667
1.02 310,000 4.3 years 310,000
12. 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.
3. Other
Approximately 36% of the Company's employees are covered by collective
bargaining agreements. The present contract expired in June 1999. A new contract
has been agreed to and will expire June 2002. The final formal document for this
agreement is still being formalized and will be signed at a later date.
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 1999 a profit sharing contribution of
$28,000 was charged to expense. There was no contribution related to 1998.
14. 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.
15. Authoritative Pronouncements
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 do not
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, 2000. 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.
16. Reclassifications
Certain reclassifications have been made to the prior period's financial
statements in order to conform them to the classifications used for the current
year.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from this
Consolidated Statement of Financial Condition at September 30, 1999 and the
Consolidated Statement of Income for the Year Ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 233,000
<SECURITIES> 0
<RECEIVABLES> 5,754,000
<ALLOWANCES> 221,000
<INVENTORY> 2,255,000
<CURRENT-ASSETS> 8,458,000
<PP&E> 1,262,000
<DEPRECIATION> 982,000
<TOTAL-ASSETS> 8,988,000
<CURRENT-LIABILITIES> 2,988,000
<BONDS> 0
<COMMON> 1,571
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,988,000
<SALES> 16,892,000
<TOTAL-REVENUES> 16,892,000
<CGS> 11,435,000
<TOTAL-COSTS> 16,382,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240,000
<INCOME-PRETAX> 510,000
<INCOME-TAX> 200,000
<INCOME-CONTINUING> 310,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310,000
<EPS-BASIC> .20
<EPS-DILUTED> .18
</TABLE>
