ANNUAL
REPORT
1999
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
<PAGE>
Dear Stockholders:
Enclosed you will find the Annual Report of Firetector Inc. for the fiscal year
ended September 30, 1999. We are pleased with our progress in 1999 and are
excited about our potential in 2000 and beyond. During 1999 we:
* Increased working capital to approximately $5.5 million from $4.6
million at the end of 1998.
* Increased Book Value per share to approximately $2.39.
* Built our product sales order position to a record $10.3 million from
$9.6 million at the end of 1998 on top of a 27% increase in product
sales. The order position represents a healthy balance of projects both
large and small across all of our marketing categories in both New York
and Texas. This order position has increased further to a new record of
approximately $10.7 million at December 31, 1999.
* Realized significant increases in revenues, earnings and earnings per
share notwithstanding significant disruption from an industry wide
strike, sudden relocation of our vital New York City Field Service
Office and planning and implementation for Y2K.
As we have commenced Fiscal 2000, we are actively pursuing new product
applications, product lines and channels of distribution and of course, new
customers as we continue to book exciting new projects such as:
* Fire alarm/life safety system for a major NYC area College;
* New or upgraded on-board communication systems for several transit
systems in the United States and Europe;
* Communication systems for a new Times Square multi-media entertainment
complex;
* Fire alarm/life safety and communication systems for an airport
terminal at JFK International Airport;
* Communication systems in New York's Pennsylvania Station Rail Complex;
* Replacement/upgrade of fire alarm/life safety systems for a major New
York City office building owned by a large REIT.
<PAGE>
* Continuing or additional service work and/or product additions for
several New York City area medical centers, universities, a museum and
auction house.
* A variety of systems for numerous educational facilities and financial
institutions in Texas.
We have continued to grow the Long Island market and have recently
completed projects for a major sports/entertainment complex and have started a
life-safety project for a major hospital complex.
We are confident that our strong marketing, cost controls and top notch
engineering and service personnel will enable us to continue to build
stockholder value.
We invite all of our Stockholders to attend our Annual Meeting of
Stockholders at 11:00 a.m. on March 23, 2000 at 96 Spring Street, 8th Floor, New
York City, New York. On behalf of the Board of Directors, we thank you for your
continued support.
Daniel S. Tamkin, Chairman and CEO Joseph Vitale, President and COO
<PAGE>
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 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.
<PAGE>
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 Metropolitan 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 in prior periods.
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>
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>
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
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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
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Income from operations before provision
for income taxes 510,000 261,000
Provision for income taxes:
Current 128,000 50,000
Deferred 72,000
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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 CAPITAL RETAINED
STOCKHOLDERS' PREFERRED STOCK COMMON STOCK IN EXCESS EARNINGS
EQUITY SHARES AMOUNT SHARES AMOUNT OF PAR (DEFICIT)
------------ --------- -------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $3,910,000 $675,000 $675,000 3,523,287 $4,000 $5,157,000 ($1,926,000)
Issuance of shares from exercise
of options 552,000 1,840,000 2,000 550,000
Debt restructing (675,000) (675,000) (675,000)
Retirement of Shares (552,000) (650,000) (1,000) (551,000)
Reverse stock split (1 for 3) 0 (3,142,190) (3,000) 3,000
Net Income 211,000 211,000
----------- --------- --------- ---------- -------- --------- ----------
Balance at September 30, 1998 $3,446,000 $0 $0 1,571,097 $2,000 $5,159,000 ($1,715,000)
Net Income 310,000 310,000
----------- --------- --------- ---------- -------- --------- ----------
Balance at September 30, 1999 $3,756,000 $0 $0 1,571,097 $2,000 $5,159,000 ($1,405,000
============ ========= ========= ========== ======== ========= ==========
</TABLE>
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
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
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>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
$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 Genterra 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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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:
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
10. Other Matters
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
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
13. 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.
<PAGE>
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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.
<PAGE>
FIRETECTOR INC.
CORPORATE DATA
SECURITIES TRADING
Common Stock Nasdaq symbol - FTEC
TRADING RANGES of COMMON STOCK
Quarter Ending High Low
- -------------- --------------------
December 31, 1997 1 1/8 5/8
March 31, 1998 1 1/4 3/4
June 30, 1998 1 1/4 25/32
September 30, 1998 1 1/4 1/4
December 31, 1998 1 3/8 1/16
March 31, 1999 2 3/16 1 1/32
June 30, 1999 2 1/8 1 1/8
September 30, 1999 3 3/4 1 5/16
The above quotations represent inter-dealer prices, without adjustment for
retail mark-ups, mark-downs or commissions and do not necessarily represent
actual transactions.
RECORD HOLDERS
As of December 17, 1999, there were 452 record holders of Common Stock.
DIVIDENDS
Firetector Inc. has never paid any cash dividends on its Common Stock and the
payment of cash dividends is not expected in the foreseeable future. Firetector
Inc.'s loan agreements prevent the payment of dividends. The payment of future
dividends will depend on earnings, capital requirements, financial conditions
and other factors considered relevant by the Board of Directors.
Annual Report on Form 10-KSB
Firetector Inc.'s Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on December 29, 1999 will provide additional information
about Firetector Inc. A copy of the report is available without charge to
Stockholders upon request to:
Corporate Secretary
Firetector Inc.
262 Duffy Avenue
Hicksville, New York 11801
(516) 433-4700
TRANSFER AGENT OF ALL CLASSES
American Stock Transfer & Trust Company
GENERAL COUNSEL
Dolgenos Newman & Cronin LLP
INDEPENDENT AUDITORS
Moore Stephens, P.C.
DIRECTORS AND EXECUTIVE OFFICERS
Daniel S. Tamkin, Chairman of the Board, Chief
Executive Officer, General Counsel, Audit
Committe; Executive Vice President of Forum
Financial Corporation
Joseph Vitale, President, Director
John A. Poserina, Chief Financial Officer, Secretary,
Treasurer and Director
Dennis P. McConnell, Director, Audit Committee;
Dolgenos Newman & Cronin LLP
Henry Schnurbach, Director, Audit Committee,
President of Cantar/ Polyair Inc.
