ANNUAL
REPORT
2001
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
FIRETECTOR INC.
Dear Stockholders:
We are pleased to report on the results of our Fiscal Year Ended September 30th
2001.
This past year was a successful year and we are confident about our long-term
strategies. However, our short-term outlook dimmed at the end of our Fiscal Year
and into our first Fiscal Quarter as a result of the slowing real estate market
and overall economy in New York and Dallas even before September 11th. The
events of September 11th have adversely impacted our business. Contrary to the
common assumption that the tragedy would result in immediate business
opportunities for Firetector, we have seen a significant decline in leasing
activity which triggers demand for products and services for tenants. In
addition, several large projects have been delayed as government agencies
involved in such projects were impacted by the tragedies or have other
infrastructure priorities.
During 2001 and subsequent to year-end, we have continued to invest in product
development and new talented sales and engineering personnel to support our
growing transit communication and audio-visual divisions. We continue to secure
new bookings in both these product areas and from our fire alarm/life safety
units in New York and Dallas.
While fire alarm/life safety remains as a key element of our business, we are
focused on a broader array of communication products and services. Consequently,
at our upcoming Annual Meeting of Stockholders scheduled for May 22, 2002, we
are asking our stockholders to approve a change of our corporate name to Synergx
Systems Inc. or such other name as is approved at the Meeting. Our Board of
Directors has approved this change believing that the new name will better
reflect our current business. While fire alarm/life safety is still an important
and growing part of our business, we are a diversified technology company and
systems integrator. Moreover, to help the performance of our stock long-term and
to improve return on equity, we are looking at other investments, and channels
both in and out of the communication sectors that could provide synergies with
our assets, channels of distribution, employees and managers. Consistent with
this strategy, the Board of Directors has nominated two additional candidates
for director with varied business backgrounds.
On behalf of our employees, officers and directors, we would like to thank you
for your continued support of Firetector Inc.
April 22, 2002
Daniel S. Tamkin, Chairman and CEO Joseph Vitale, President and COO
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
LIQUIDITY AND CAPITAL RESOURCES
Firetector Inc. ("Firetector" or the "Company"), has a $3 million dollar
credit facility with Citizens Business Credit of Boston (the "Credit Facility")
that expires in December, 2004. The Credit Facility had an interest rate of
prime plus 3/4% on outstanding balances. Effective October 1,2001, the interest
rate was reduced to prime plus 1/4%. 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.
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, 2001, the Company was not in default with any of its financial
covenants and at such time owed $1,310,000 under the Credit Facility.
Net cash provided by operations for the twelve months ended September 30,
2001 amounted to $630,000 as compared to $810,000 for the comparable prior
period. The primary reason for the lower amount of cash being provided by
operations was due to a decrease of $102,000 in operating profit before taxes.
The $630,000 cash from operations was primarily used to pay off borrowing under
a Note Payable to Mirtronics by $243,000 and to reduce borrowings under the
Company's Credit Facility to a level of $1,310,000. The Company anticipates
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
2002.
The ratio of the Company's current assets to current liabilities declined
to approximately 2.45 to 1 at September 30, 2001 compared to 2.55 at September
30, 2000. This decrease is primarily due to the increase in 2001 of certain
costs due to subcontractors and a corresponding increase in customer receivables
related to their projects.
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) extends 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. This could be considered an area of risk and
concern. However, due to the proprietary nature of Firetector's systems, many
projects require Firetector's cooperation to secure a certificate of occupancy
and/or to activate/operate a life safety system, thus assisting Firetector's
collection of a significant portion or even total payment, even when
Firetector's immediate account debtor's (contractor) creditors have seized a
project.
RESULTS OF OPERATIONS
Revenues
Total revenues in 2001 were $19.9 million, an increase of 4% compared to
revenues of $19.1 million in 2000. This increase was primarily due to a 4%
increase in both product and service revenues in 2001.
The increase in product revenue is the result of the Company's intensified
and broadened marketing program, which maintained product revenues at record
levels. During 2001, the Company continued to experience strong shipments on
commercial audio/visual projects that included a New York City auction house,
several professional organizations, a securities firm and the continuation of
the second phase of a major airport facility. The Company also continued to
experience a higher level of revenues in 2001 from its fire alarm product line;
due in part from expansion into the Long Island, NY market area.
Service revenues increased 4% in 2001 to $4,349,000. The increase in
service revenues is a result of higher service contract revenue on life safety
systems.
Gross Profit
Gross profit dollars from product revenues increased 1% in 2001 to
$5,069,000 as a result of the 4% increase in product sales. Gross profit margin
as a percentage of product revenues was only 33.0% in 2001 compared to 34.0% in
2000. This decrease in gross profit percentage was due to a change in product
mix. This product mix change reflects a decline in tenant renovations in 2001 as
leasing activity in New York City had slowed significantly following a very
active 2000. In contrast, 2000 benefited from an engineering and product
management contract (professional service with no material content) which
carried a higher gross margin.
Gross profit margin on service revenues decreased in 2001 to 27.9% from
29.7% in 2000. This decrease reflects the effect of certain wage increases to
service technicians in both New York and Dallas. These wage increases could not
be fully passed on to customers by increases in service contract revenue.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses (S G & A) increased by 5% in
2001 over 2000 primarily as a result of the Company's expanded marketing
program. This expansion in marketing effort has resulted in higher revenues and
related profitability during 2001 and 2000. The increase in S G & A reflects
increased commission expense related to higher product revenues and additional
staffing related to the Company's railcar transit communication group as it
addresses a marketing opportunity for future business over the next 3 to 5
years. However, selling, general and administrative expenses as a percent of
sales remained at 26.3% of revenues during both years.
Income Before Tax
Operating income decreased in 2001 to $733,000 compared to $834,000 in
fiscal 2000. While there was a slight improvement in gross profit in 2001 there
was a decline in operating income due to the 5% increase in selling general and
administrative expenses in 2001 as noted above. Offsetting the increase in S G &
A was a $103,000 reduction in interest costs due to the payoff of notes payable
and a reduction in bank debt coupled with lower interest rates in 2001. Also
favorably affecting operating income was lower depreciation and amortization in
2001 as certain assets became fully depreciated.
Tax Provisions
The Company's current income tax provision represents Federal, state and
local income taxes. During 2000, the Company fully utilized the balance of its
net operating loss carry forwards. Deferred taxes represent the net increase in
deferred tax assets as it relates to certain book provisions to be deducted in
future tax returns.
Order Position
Firetector's order position, excluding service, remained at $7.8 million at
September 30, 2001 compared to the $7.8 million level at September 30, 2000. The
Company expects to fulfill the majority of its backlog over the next twelve
months. However, the backlog includes $2.2 million of recent orders for
communication and announcement systems from several transit car manufacturers,
that will be shippable over the next 24 month period. While quotation activity
is brisk, there is no assurance when orders will be received and whether the
order position will increase. 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 2002, Management intends to continue to focus on its
intensified marketing programs that began in 1998 and to continue to contain or
monitor fixed overhead as well as to reduce variable costs through improved
efficiency and productivity. Management anticipates reduced demand in 2002 and
likely reduced profitability due to the overall decline in economic activity,
layoffs and real estate vacancies. The events of September 11th resulted in the
loss of a limited amount of direct revenue from service contracts in certain
affected buildings. Since most affected tenants relocated to existing built out
space elsewhere in New York City, moved out of New York City or downsized, the
catastrophe has not resulted in immediate business to offset the overall decline
in demand. In addition, various large projects with or related to government
agencies including airport terminal expansion which were likely to generate
significant revenue in 2002 have been deferred until 2003 or beyond. Longer
term, Management expects increased demand from the Company's audio-visual,
public address and other communication products. 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.
INFLATION
The impact of inflation on the Company's business operations has not been
material in the past. Casey's labor costs are normally controlled by union
contracts covering a period of two years and its material costs have remained
relatively stable. However in July of 1999, after a brief work stoppage
(strike), the Company and its union agreed to a new three year contract that
provides for wage/benefits increases of 5% in each year. During 2001, certain
union members, upon passing certain test requirements, will be moving up to
higher paying categories that have multiple salary steps per year in excess of
the 5% contractual level. In addition, the demand for highly skilled
professionals has resulted in the need to assess salary levels in order to
remain competitive in both Dallas, Texas and the New York City, New York
metropolitan areas. It is expected that required salary adjustments will exceed
normal increases given in the past. The Company will try to mitigate the effect
of these increases in labor costs by price increases, if possible, and expense
reductions.
Report of Independent Auditors
To the Stockholders and Board of Directors of
Firetector Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Firetector Inc.
and its subsidiaries as of September 30, 2001 and the related consolidated
statements of income, stockholders' equity, and cash flows for years ended
September 30, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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
inthe 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, 2001 and the consolidated results of
their operations and their cash flows for the years ended September 30, 2001
and2000, in conformity with accounting principles generally accepted in the
United States of America.
December 6, 2001 MARCUM & KLIEGMAN LLP
New York, NY
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 299,000
Accounts receivable, principally trade, less allowance
for doubtful accounts of $328,000 6,457,000
Inventories 2,291,000
Deferred taxes 251,000
Prepaid expenses and other current assets 238,000
-----------
TOTAL CURRENT ASSETS $9,536,000
-----------
PROPERTY, PLANT AND EQUIPMENT -net 361,000
OTHER ASSETS 191,000
DEFERRED TAXES 60,000
------------
TOTAL ASSETS $10,148,000
============
See accompanying Notes to the Consolidated Financial Statements
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Other notes payable - principally to related party $117,000
Accounts payable and accrued expenses 3,306,000
Unearned service revenue 454,000
Current portion of capital lease obligations 24,000
-----------
TOTAL CURRENT LIABILITIES 3,901,000
-----------
Note payable to bank 1,310,000
Notes payable - principally to related party,
less current portion 89,000
Capital lease obligations, less current portion 65,000
-----------
TOTAL LIABILITIES 5,365,000
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 2,000,000 shares authorized-
none issued and outstanding
Common stock, 10,000,000 shares authorized, $.001
par value; issued and outstanding 1,704,425 shares 2,000
Capital in excess of par 5,279,000
Deficit (498,000)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,783,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,148,000
===========
See accompanying Notes to the Consolidated Financial Statements
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended
September 30,
2001 2000
----------- ------------
Net sales $15,578,000 $14,921,000
Service revenue 4,349,000 4,166,000
------------ ------------
Total revenues 19,927,000 19,087,000
------------ ------------
Cost of sales 10,510,000 9,896,000
Cost of service 3,136,000 2,928,000
Selling, general and administrative 5,252,000 5,016,000
Interest expense 146,000 249,000
Depreciation and amortization expense 150,000 164,000
------------ ------------
19,194,000 18,253,000
------------ ------------
Income from operations before provision
for income taxes 733,000 834,000
Provision for income taxes:
Current 334,000 335,000
Deferred (34,000) 25,000
------------ ------------
300,000 360,000
------------ ------------
Net Income $ 433,000 $ 474,000
============ ===========
Earnings Per Common Share
Basic Earnings Per Share $0.25 $0.28
Diluted Earnings Per Share $0.24 $0.26
===== =====
Weighted Average Number of Common Shares Outstanding 1,704,425 1,682,198
Weighted Average Number of Common and Potential Dilutive
Common Shares Outstanding 1,784,089 1,853,792
See accompanying Notes to the Consolidated Financial Statements
FIRETECTOR INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001 and 2000
TOTAL
STOCKHOLDERS' PREFERRED STOCK COMMON STOCK
EQUITY SHARES AMOUNT SHARES AMOUNT
------------ ---------- -------- ---------- ----------
Balance at September 30, 1999 $3,756,000 0 0 1,571,097 $2,000
----------- -------- --------- ----------- --------
Issuance of shares from exercise
of options 120,000 133,333 0
Net Income 474,000
----------- -------- --------- ----------- --------
Balance at September 30, 2000 4,350,000 0 0 1,704,430 2,000
Net Income $433,000
----------- -------- --------- ----------- --------
Balance at September 30, 2001 $4,783,000 0 $0 1,704,430 $2,000
=========== ======== ========= =========== ========
See accompanying Notes to the Consolidated Financial Statements
FIRETECTOR INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001 and 2000
(continued)
CAPITAL
IN EXCESS
OF PAR DEFICIT
----------- -------------
Balance at September 30, 1999 $5,159,000 $(1,405,000)
Issuance of shares from exercise
of options 120,000
Net Income $474,000
------------ -------------
Balance at September 30, 2000 $5,279,000 $( 931,000)
------------ -------------
Net Income 433,000
------------ ------------
Balance at September 30, 2001 $5,279,000 $(498,000)
============ ============
See accompanying Notes to the Consolidated Financial Statements
FIRETECTOR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30,
2001 2000
----------- ----------
OPERATING ACTIVITIES
Net income $433,000 $474,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 150,000 164,000
Deferred income tax (benefit) expense (34,000) 25,000
Provision for doubtful accounts (21,000) 128,000
Changes in operating assets and liabilities:
Accounts receivable (319,000) (712,000)
Inventories, prepaid expenses and other current assets (66,000) (34,000)
Other assets (39,000) 1,000
Accounts payable and accrued expenses 446,000 731,000
Unearned service revenue 80,000 33,000
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 630,000 810,000
------------ -----------
INVESTING ACTIVITIES
Purchases of property, and equipment (148,000) (97,000)
------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (148,000) (97,000)
------------ -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 120,000
Principal payments on revolving line of credit,
long-term debt, notes payable and capital lease
obligations (271,000) (719,000)
Proceeds from revolving line of credit, notes payable
and capital lease obligations 92,000 80,000
Notes payable to affiliated companies (243,000) (189,000)
------------ -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (422,000) (708,000)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 60,000 5,000
Cash and cash equivalents at beginning of period 239,000 234,000
------------ -----------
Cash and cash equivalents at end of period $299,000 $239,000
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $389,000 $67,000
Interest $145,000 $234,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended September 30, 2001, the Company incurred no capital lease
obligations for the acquisition of equipment. During the year ended September
30, 2000, the Company incurred capital lease obligations of $94,000 for the
acquisition of equipment.
See accompanying Notes to the Consolidated Financial Statements
Firetector Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2001
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, 2001, 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"). Effective October 1,
1999, the operations of Pyrotech and Amco became part of the operation of SST
and these two companies became inactive. 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 in the acquisition of certain subsidiaries. The excess of
cost over the fair value of the assets acquired approximates $110,000 (net of
accumulated amortization of $64,000) and relates principally to the 1990
acquisition of GenSound. This amount is being amortized over forty years under
the straight line method.
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.
Advertising Costs
Advertising Costs are expensed as incurred during the year. Advertising Costs
for the years ended September 30, 2001 and 2000 amounted to $26,000 and $20,000,
respectively.
Research and Development Cost
Research and development costs are expensed as incurred during the year.
Research and development costs for the years ended September 30, 2001 and 2000
amounted to $142,000 and $135,000, respectively.
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, and warrants.
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 84% of such
outstanding receivables at September 30, 2001 are due from customers in New
York.
At September 30, 2001, the Company had approximately $381,000 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 9).
2. Transactions with Related Parties
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 has outstanding warrants to purchase 310,000 shares of
the Company's Common Stock, which were issued in 1998, and are exercisable at
any time until December 31, 2003 at an exercise price of $1.02 per share.
Notes Payable Principally to Related Party includes $105,000 due to a former
officer/director of the Company under a seven year installment promissory note
dated January 1, 1997 that bears interest at 4% per annum.
3. Property and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
September 30,
2001
----------------------
Machinery and equipment $1,342,000
Furniture and fixtures 136,000
Leasehold improvements 16,000
----------------------
1,494,000
Less accumulated depreciation and amortization
1,133,000
----------------------
$361,000
======================
Annual amortization of equipment under capital leases is included with
depreciation and amortization expense.
Depreciation and amortization expense was $129,000 and $127,000 for the years
ended September 30, 2001 and 2000, respectively.
4. Long-Term Debt
In 1998, the Company entered into a revolving credit facility with Citizens
Business Credit Company of Boston, Massachusetts (the "Credit Facility"). The
Credit Facility was revised in September 2000 and provides for a $3,000,000
revolving line of credit through December 2004 and carries an interest rate of
prime plus 3/4% on outstanding balances (6% at September 30, 2001). The interest
rate was reduced to prime plus 1/4% effective October 1, 2001. The Credit
facility limits capital expenditures to $250,000 in each year. At September 30,
2001 $1,310,000 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.
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, 2001, 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
------------ ----------
2002 $ $117,000
2003 -- 67,000
2004 -- 17,000
2005 1,310,000 5,000
-------------- -----------
Total $1,310,000 $206,000
============== ===========
The Company previously had a 10% note payable to Mirtronics, which was paid off,
with accrued interest, on March 5, 2001.
5. Leases
The Company leases certain office and warehouse space under noncancelable
operating leases expiring at various times through 2007. In February 2000, the
Company signed a new lease for office, manufacturing and warehouse space in
Syosset, New York. This lease expires in June 2007. In September 2000, the
Company also entered into a new lease for its service center in New York City.
This lease expires in August 2003. However, either party may terminate the lease
with six months notice. The Company also leases certain office equipment and
vehicles under noncancelable capital and operating leases expiring in various
years through fiscal 2005.
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, 2001:
Capital Leases Operating Leases
2002 $33,000 $353,000
2003 31,000 326,000
2004 26,000 180,000
2005 21,000 186,000
2006 192,000
2007 148,000
--------------------------------------
Total minimum lease payments 111,000 $1,385,000
==================
Less amount representing interest 22,000
--------------------
Present value of net minimum lease payments (including current
portion of $24,000) $89,000
====================
Rental expense amounted to $343,000 and $307,000 for 2001 and 2000,
respectively.
6. Significant Customers
During fiscal 2001 and 2000, no customer accounted for more than 10% of sales.
7. Income Taxes
During the year ended September 30, 2001, the Company recorded a tax provision
of $300,000 compared to $360,000 for the year ended September 30, 2000. A
reconciliation of such with the amounts computed by applying the statutory
federal income tax rate is follows:
Year ended September 30,
2001 2000
---------------------------
Statutory federal income tax rate 34% 34%
Computed expected tax from income $249,000 $284,000
Increase in taxes resulting from:
State and local income taxes, net of Federal tax benefit 53,000 97,000
Nondeductible expenses 8,000 8,000
(Decrease) in taxes resulting from
benefit of future tax deductible items (10,000) (29,000)
----------------------------
Provision $300,000 $360,000
============================
The Company provided $14,000 and $13,000 for state and local franchise and
capital taxes for the years ended September 30, 2001 and 2000, respectively.
These expenses have been included in selling, general and administrative
expenses for each of the years presented.
The Company has recorded a deferred tax asset at September 30, 2001 and 2000
related to certain book provisions to be deducted in future tax returns.
Management anticipates profitable operations to continue at a level that will
result in the utilization of the entire deferred tax asset.
The components of deferred tax assets at September 30, 2001 and 2000 consist of
the following:
Allowance for doubtful accounts $131,000 $140,000
Inventory reserve 120,000 103,000
Depreciation and amortization 60,000 34,000
-------- ---------
Total deferred tax asset $311,000 $277,000
========= =========
8. Earnings Per Share
Shown below is a table that presents for 2001 and 2000 the computation of basic
earnings per share, diluted earnings per share, weighted shares outstanding, and
weighted average shares after potential dilution.
Year Ended
Basic EPS Computation 2001 2000
--------------------- ---------------------------
Net Income available to common
shareholders $433,000 $474,000
Weighted average outstanding shares 1,704,425 1,682,198
Basic EPS $.25 $.28
==== ====
Diluted EPS Computation
-----------------------
Income available to common
shareholders $433,000 $474,000
Diluted net income $433,000 $474,000
Weighted-average shares 1,704,425 1,682,198
Plus: Incremental shares from
assumed conversions
Non Employee Stock Options 10,242
Employee Stock Options 18,640 40,693
Warrants* 61,024 120,659
------ -------
Dilutive potential common shares 79,664 171,594
------ -------
Adjusted weighted-average shares 1,784,089 1,853,792
--------- ---------
Diluted EPS $.24 $.26
===== =====
*Warrants convertible into 16,667 shares were antidilutive in the years ended
September 30, 2001 and 2000, respectively.
9. Employee Stock Options, Options, and Warrants
On April 30, 1997, the Company and its stockholders 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).
The Company applies the intrinsic value base method of accounting for options
issued to employees rather than the fair value based method of accounting. On
December 29, 2000, options on 43,375 shares of common stock were extended for
five more years and the option price was reset from $1.00 to $1.03 per share. 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 for 2001 would be reduced to the pro forma amounts indicated below:
2001 2000
Net Income:
As reported $433,000 $474,000
Pro forma 404,000 474,000
Earnings per common share:
As reported
Basic $0.25 $0.28
Diluted $0.24 $0.26
===== =====
Pro forma
Basic $0.24 $0.28
Diluted $0.23 $0.26
===== =====
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 2001: dividend yield of zero;
expected volatility of 75% and expected life of 5 years. The weighted average
risk fee interest rates for 2001 were 4.64%. The weighted average fair value of
options granted during 2001, for which the exercise price equaled the market
price on the grant dates, was $1.03.
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, 1999 107,958 $1.04
Balance September 30, 2000 107,958 1.04
Options granted 43,375 1.03
Options expired 43,375 1.00
Balance September 30, 2001 107,958 $1.05
There were 93,958 exercisable options at September 30, 2001 and 75,402
exercisable options at September 30, 2000. . The following table summarizes
information concerning currently outstanding and exercisable stock options.
Outstanding at Weighted Average Exercisable at
Exercise Price September 30, 2001 Contractual Life September 30, 2001
1.00 4,500 .3 years 4,500
1.00 25,083 1.0 years 25,083
1.13 35,000 3.0 years 21,000
1.03 43,375 4.3 years 43,375
The Company granted Mirtronics warrants to purchase 310,000 shares of the
Company's Common Stock which are exercisable at a price of $1.02 per share at
any time until December 31, 2001. (See Note 2 - Transactions with Related
Parties)
In May 1995, the Company granted Judson Enterprises, Ltd. 33,334 options to
purchase common stock at a price of $3.00 per share in exchange for investment
banking services. In April 1997, the Company entered into an agreement to
exchange 16,667 of these options for 16,667 new options to purchase common stock
at a price of $4.50 and these options will expire in April 2002. The remaining
16,667 options expired in May 2000. 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, 1999 486,667 $1.17
Balance September 30, 2000 326,667 1.20
Balance September 30, 2001 326,667 $1.20
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, 2001 Contractual Life September 30, 2001
4.50 16,667 .5 years 16,667
1.02 310,000 2.3 years 310,000
10. 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.
11. Other
Approximately 34% of the Company's employees are covered by collective
bargaining agreements. The present contract expires in June 2002.
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 2001 and 2000 a profit sharing
contribution of $44,000 and $44,000, respectively, was charged to expense.
12. 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.
13. Authoritative Pronouncements
The Financial Accounting Standards Board (FASB) has issued SFAS 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, gains 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 requirements
do not have a material impact on the Company's results of operations, financial
position, or cash flows.
In July 2001, the ("FASB") issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS No. 141 will have
significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for all fiscal years beginning after December 15,
2001; however, early adoption is permitted for fiscal years beginning after
March 15, 2001. SFAS No. 142 require, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairment of goodwill. The Company is required to adopt SFAS No. 142 in fiscal
2003. The Company is currently assessing but has not yet determined the impact
of SFAS No. 142 on its financial position and results of operations.
The Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets in August 2001. SFAS No. 144
changes the accounting for long-lived assets to be held and used by eliminating
the requirement to allocate goodwill to long-lived assets to be tested for
impairment, by providing a probability weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of possible future cash flows and by establishing a
primary-asset approach to determine the cash flow estimation period for a group
of assets and liabilities that represents the unit of accounting for long-lived
assets to be held and used. SFAS No. 144 changes the accounting for long-lived
assets to be disposed of other than by sale by requiring that the depreciable
life of a long-lived asset to be abandoned be revised to reflect a shortened
useful life and by requiring the impairment loss to be recognized at the date a
long-lived asset is exchanged for a similar productive asset or distributed to
owners in a spin-off if the carrying amount of the asset exceeds its fair value.
SFAS No. 144 changes the accounting for long-lived assets to be disposed of by
sale by requiring that discontinued operations no longer be recognized on a net
realizable value basis (but at the lower of carrying amount or fair value less
costs to sell), by eliminating the recognition of future operating losses of
discontinued components before they occur and by broadening the presentation of
discontinued operations in the income statement to include a component of an
entity rather than a segment of a business. A component of an entity comprises
operations and cash flows that can be clearly distinguished, operationally, and
for financial reporting purposes, from the rest of the entity. The effective
date for SFAS No. 144 is for fiscal years beginning after December 15, 2001.
The Company expects that the adoption of the new statement will not have a
significant impact on its financial statements. It is not possible to quantify
the impact until the newly issued statement has been studied.
FIRETECTOR INC.
CORPORATE DATA
SECURITIES TRADING
Common Stock Nasdaq symbol - FTEC
TRADING RANGES of COMMON STOCK
Quarter Ending High Low
December 31, 1999 2.000 1.125
March 31, 2000 4.000 1.563
June 30, 2000 1.938 1.313
September 30, 2000 1.875 1.250
December 31, 2000 1.438 0.084
March 31, 2001 1.719 1.000
June 30, 2001 1.469 1.170
September 30, 2001 1.780 1.180
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 14, 2001, there were 431 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 27, 2001 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.
209 Lafayette Drive
Syosset, New York 11791
(516) 433-4700
TRANSFER AGENT OF ALL CLASSES
American Stock Transfer & Trust Company
GENERAL COUNSEL
Dolgenos Newman & Cronin LLP
INDEPENDENT AUDITORS
Marcum & Kliegman LLP
DIRECTORS AND EXECUTIVE OFFICERS
Daniel S. Tamkin, Chairman of the Board, Chief Executive Officer, General
Counsel, Audit Committee; 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.