SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB-QUARTERLY OR TRANSITIONAL REPORT
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-12873
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FIRECOM, INC.
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(Exact name of Small Business Issuer in its charter)
New York 13-2934531
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39-27 59th Street, Woodside, New York 11377
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(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (718) 899-6100
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
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As of December 1, 1997, the Registrant had 5,908,194 shares of Common
Stock outstanding.
1
INDEX
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet-October 31, 1997 3-4
Consolidated Statements of Income-
Three Months and Six Months Ended
October 31, 1997 and 1996 5
Consolidated Statements of Cash Flows-
Six Months Ended October 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-9
Item 2: Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-10
PART II OTHER INFORMATION 10-11
2
FIRECOM, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
(unaudited)
OCTOBER 31, 1997
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,623,000
Accounts receivable, net of allowance for doubtful
accounts of $319,000 3,239,000
Inventories 1,767,000
Deferred tax asset 466,000
Prepaid expenses and other 98,000
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Total current assets $8,193,000
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FIXED ASSETS
PROPERTY, PLANT AND EQUIPMENT $1,320,000
Less: Accumulated Depreciation & Amortization 744,000
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Total Fixed Assets $ 576,000
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OTHER ASSETS
Product Enhancement $ 668,000
Less: Accumulated Amortization 463,000
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Total Product Enhancement $ 205,000
Prepaid Loan Fees $ 17,000
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Total Other Assets $ 222,000
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TOTAL ASSETS $8,991,000
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3
FIRECOM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET
(unaudited)
OCTOBER 31, 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 325,000
Accounts payable 611,000
Revolving Loan - Chase Bank 500,000
Accrued expenses 607,000
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Total current liabilities $2,043,000
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LONG-TERM LIABILITIES:
Notes payable $1,540,000
Accrued compensation 229,000
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Total Long-Term liabilities $1,769,000
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MANDATORY REDEEMABLE COMMON STOCK 590,000
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SHAREHOLDERS' EQUITY
Preferred Stock, par value $1;
authorized 1,000,000 shares, none issued $ -0-
Common Stock, par value $.01:
Authorized 10,000,000 shares
Issued: 6,939,188 Outstanding: 5,908,194 69,000
Additional Paid-In Capital 2,765,000
Retained Earnings 2,981,000
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Sub-Total $5,815,000
Less: Treasury Stock, at cost, 1,030,994 shares 1,226,000
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Total Shareholders' Equity $4,589,000
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TOTAL LIABILITIES & EQUITY $8,991,000
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4
FIRECOM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
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OCTOBER 31 OCTOBER 31
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1997 1996 1997 1996
---- ----- ---- ----
NET SALES:
Product $ 1,785,000 $ 2,451,000 $ 3,241,000 $ 4,358,000
Service 1,694,000 1,693,000 3,244,000 3,291,000
----------- ----------- ----------- -----------
Total Sales 3,479,000 4,144,000 6,485,000 7,649,000
----------- ----------- ----------- -----------
COST OF SALES:
Product 1,165,000 1,289,000 2,144,000 2,369,000
Service 826,000 794,000 1,605,000 1,569,000
----------- ----------- ----------- -----------
Total Cost of Sales 1,991,000 2,083,000 3,749,000 3,938,000
----------- ----------- ----------- -----------
GROSS PROFIT 1,488,000 2,061,000 2,736,000 3,711,000
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OPERATING EXPENSES:
Selling, general and administrative 982,000 1,075,000 2,012,000 1,996,000
Research and development 140,000 219,000 293,000 368,000
----------- ----------- ----------- -----------
Total operating expenses 1,122,000 1,294,000 2,305,000 2,364,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 366,000 767,000 431,000 1,347,000
----------- ----------- ----------- -----------
OTHER EXPENSES (INCOME)
Interest 26,000 13,000 73,000 21,000
Other (24,000) 65,000 (27,000) 87,000
----------- ----------- ----------- -----------
Total Other Expenses (Income) 2,000 78,000 46,000 108,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 364,000 689,000 385,000 1,239,000
INCOME TAX EXPENSE 171,000 386,000 181,000 645,000
NET INCOME $ 193,000 $ 303,000 $ 204,000 $ 594,000
=========== =========== =========== ===========
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 193,000 $ 273,000 $ 204,000 $ 538,000
NET INCOME PER COMMON SHARE $ .03 $ .05 $ .04 $ .09
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN COMPUTING EPS 6,171,000 5,745,000 5,494,000 5,720,000
5
FIRECOM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
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OCTOBER 31
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 204,000 $ 594,000
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Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization 82,000 47,000
Provision for doubtful accounts 26,000 123,000
Deferred income tax credits -0- -0-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,075,000 (693,000)
(Increase) in inventories (503,000) (404,000)
(Increase) in other current and noncurrent assets (11,000) (37,000)
Increase (decrease) in accounts payable,
accrued expenses & other (507,000) 490,000
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Total adjustments 162,000 (474,000)
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 366,000 120,000
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (78,000) (88,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (177,000) (88,000)
Increase in debt 500,000 -0-
Preferred Stock Dividend (905,000) -0-
Proceeds from stock issue 452,000 58,000
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NET CASH (USED IN) FINANCING ACTIVITIES (130,000) (30,000)
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NET INCREASE IN CASH
AND CASH EQUIVALENTS 158,000 2,000
CASH AND CASH EQUIVALENTS:
Beginning of year 2,465,000 2,165,000
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End of six months $ 2,623,000 $ 2,167,000
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NON-CASH INVESTING ACTIVITY:
Debt incurred as a result of
acquisition of assets $ 135,000 --
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6
FIRECOM, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1: ACCOUNTING POLICIES:
The accounting policies followed by the Company are set forth in Note
1 of the Company's financial statement on Form 10-KSB for the fiscal
year ended April 30, 1997.
In the opinion of management the accompanying consolidated financial
statements contain the necessary adjustments, all of which are of a
normal and recurring nature, to present fairly Firecom Inc. and its
subsidiaries' financial position at October 31, 1997 and the results
of operations and cash flows for the three and six months ended
October 31, 1997 and 1996, and statement of cash flows for the six
months ended October 31, 1997 and 1996.
NOTE 2: INVENTORIES
Inventories consist of the following at October 31, 1997:
Raw materials and sub-assemblies $1,760,000
Work-in-process 7,000
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$1,767,000
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NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at
October 31, 1997:
Building improvements $ 268,000
Machinery and equipment 590,000
Furniture and fixtures 462,000
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$1,320,000
Less accumulated depreciation and amortization 744,000
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$ 576,000
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NOTE 4: NOTES PAYABLE
The Company's long-term debt consists of the
following at October 31, 1997:
Notes payable to banks and other:
First mortgage note payable $ 351,000
Note payable to Norwood Venture 1,203,000
Note payable to May Family 185,000
Other note payable 126,000
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$1,865,000
Less current portion 325,000
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$1,540,000
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On June 26, 1997, the Company acquired certain service contracts
and intellectual property rights from a New York supplier of Life
Safety systems. The purchase price was $285,200. $150,000 was
7
paid at closing of the acquisition. The balance of the purchase
price, $135,000, is payable quarterly through August 2000, with
interest of 10% per annum.
On July 22, 1997, the Company borrowed $500,000 on its revolving
line of credit with the Chase Manhattan Bank primarily to support
the increased inventory level of its National Product.
NOTE 5: INCOME TAXES
The components of the Company's deferred tax assets and liabilities at
August 31, 1997 under SFAS 109 are as follows:
Deferred Assets:
Tax benefit attributable to:
Allowance for doubtful accounts $ 137,000
Stock appreciation rights 115,000
Accrued incentive bonuses 124,000
Inventories 86,000
Other 59,000
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521,000
Deferred tax liability, tax
depreciation in excess of book depreciation (55,000)
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$466,000
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NOTE 6: STOCKHOLDERS' EQUITY TRANSACTIONS
On June 21, 1995 the Company signed a Stock Purchase Agreement to
purchase 536,494 shares of the Company's $.01 par value common stock
held by certain members of the May family (the "Shareholders") at $.90
per share. Terms of the agreement provide for a cash payment in the
amount of $174,448 and a five (5) year note in the amount of $308,397,
bearing interest at 12% per annum. Interest is payable monthly. The
principal is to be paid in five equal annual installments of $61,679.
The purchase of these shares was completed on July 18, 1995. The
Company's obligation under the note is secured by a pledge by the
Company to the noteholder of 342,663 shares of the Company's common
stock.
At the same time, the Company and the Shareholders entered into an
Option and Escrow Agreement relative to an additional 536,495 shares
of the Company's common stock (the "Option Shares"). Under the terms
of this agreement, on September 1, 1998 the Shareholders have the
right, but not the obligation, to require the Company to purchase, in
whole or in part, their Option Shares (the "Put Option") at a price of
$1.10 per share. The Put Option is conditional upon the Company
meeting certain financial targets. At any time under this agreement,
the Company shall have the right, but not the obligation, to purchase
all of the Option Shares, in whole or in part, (the "Call Option") at
a purchase price of $1.25 per share. Payment for the Put Option or the
Call Option shall be one-half (1/2) in cash and one-half (1/2) with a
five (5) year note bearing interest at prime plus 3%. Upon execution
of this agreement, the Shareholders delivered to the Company
irrevocable proxies to permit Mr. Paul Mendez, Chairman of the
Company, to vote the Option Shares until the expiration of this
agreement.
On July 22, 1997, the Company exchanged all of the Series A Preferred
Stock having a liquidation preference of $1,437,000 for an aggregate
of 1,149,600 shares of the Company's common stock.
On June 11, 1997, the Board of Directors declared all of the
cumulative dividends in arrears on the Series A Preferred Stock which
approximated $905,000. These dividends were paid on July 22, 1997. In
addition, 50% of the payment was used to exercise warrants which
expired on July 31, 1997 for 377,250 share of the Company's common
stock.
8
NOTE 7: COMMITMENTS AND CONTINGENCIES:
On December 31, 1992, the Company entered into an employment agreement
with the Chairman of the Company, which was amended on March 28, 1995,
providing for base salary plus incentive compensation and fringe
benefits as defined in the agreement, through April 30, 2000. At
October 31, 1997, the Company has accrued $140,000 of incentive
compensation and $122,000 of accrued fringe benefits.
NOTE 8: SUBSEQUENT EVENT:
The Company approved an amendment to the Corporation's Certificate of
Incorporation to (i) authorize a new class of Class A common stock
consisting of 10,000,000 shares and having thirty votes per share and
(ii) to increase the aggregate number of shares of Common Stock the
Corporation is authorized to issue from 10,000,000 to 30,000,000.
The Company declared a share dividend on its Common Stock, par value
$.01 per share (the "Common Stock"), payable in shares of the newly
authorized Class A Common Stock, par value $.01 per share (the "Class
A Common Stock"), at the rate of one share of the Class A Common Stock
for each share of the Common Stock issued and outstanding at the close
of business on December 5, 1997. The dividend shares will be issued on
December 17, 1997.
The Class A Common Stock, which was authorized by shareholders of the
Company at an annual meeting held on November 18, 1997, entitle the
holders to vote together with the holders of the Common Stock as a
single class and to cast thirty votes per share. Shares of the Class A
Common Stock are non-transferable, but convertible at any time at the
option of the holder into the Company's regular Common Stock.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
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LIQUIDITY
Net cash provided by operations for the six months ended October 31,
1997 was $366,000 primarily due to a decrease in accounts receivable,
a decrease in accounts payable and accrued expenses, which were
partially offset by increases in inventories. The Company's revolving
financing agreement with a major New York bank, dated July 8, 1994,
was amended on April 1, 1996. This amendment provided the Company with
a revolving line of credit not to exceed $2 million (there was an
outstanding balance of $500,000 as of October 31, 1997) and a first
mortgage note of $429,000 at April 30, 1996 (the balance was $351,000
as of October 31, 1997). These loan facilities are collateralized by
substantially all of the Company's assets and are subject to certain
covenants.
Availability of funds under the terms of revolving line of credit is
based on eligible accounts receivable and inventory. The initial
commitment for $2 million, under the terms of the note, is reduced by
$500,000 each six months commencing on October 1, 1999.
Management believes that it will be able to maintain adequate working
capital and cash balances to meet its current needs.
RESULTS OF OPERATIONS
Consolidated sales and net income for the quarter ended October 31,
1997 were $3,479,000 and $193,000 respectively as compared to
$4,144,000 and $303,000 for the quarter ended October 31, 1996.
9
Consolidated sales and net income for the six months ended October 31,
1997 were $6,485,000 and $204,000 respectively as compared to
$7,649,000 and $594,000 for the six months ended October 31, 1997.
Sales declined by 15% during the six months ending October 31, 1997
versus the same period last year. These lower sales reflect the lower
backlog of orders as of April 30, 1997 versus the same period in 1996
which was due to the poor new construction environment and highly
competitive New York market for fire protection systems and services.
The Company's backlog for its life safety and other systems totaled
$2,445,000 at October 31, 1997 as compared to $1,853,000 at April 30,
1997. The increase in the Company's backlog during the first six
months is encouraging but management remains cautious about predicting
continued growth in the fiscal year. Orders continue to be booked on
the Company's fire safety system being marketed outside of New York
City, and management is very encouraged about future growth in this
product category.
Operating income for the six months ended October 31, 1997 was
$431,000 as compared to $1,347,000 for the six months ended October
31, 1996. As a percentage of revenue, the operating income for the six
months ended October 31, 1997 was 6.6% versus 17.6% in the same period
in 1996. The decrease in operating income and its percentage to
revenue was primarily due to the decline in revenues and gross profit
on the Company's life safety and service businesses and higher sales
and marketing costs to support the National Product.
Significant changes in balance sheet items from April 30, 1997 to
October 31, 1997 are highlighted as follows:
1: Cash increased primarily to the borrowing on the Revolving
Loan. Accounts receivable decreased due to lower sales and an
improvement in collections.
2: Inventories increased as a result of stocking requirements for
the National Product.
3: The decrease in accrued expenses reflect a decline in pretax
income and the resulting decline in the management bonus accrual
and accrued corporate taxes.
4: The changes in Equity reflect the July 22, 1997 exchange of
all of the Series A Preferred Stock having a liquidation
preference of $1,437,000 for an aggregate of 1,149,600 shares of
the Company's common stock and the payment of the cumulative
dividends in arrears on this stock of approximately $905,000. 50%
of the payment of the cumulative dividend was used to exercise
warrants for 377,250 shares of the Company's common stock.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
The Certificate of Incorporation of the Company was amended in
November 1997 to authorize the issuance of a Class A Common
Stock which would vote with the Common Stock but on the basis
of thirty votes per share of Class A Common and one vote per
share of ordinary Common Stock. The Series A Common Stock is
being distributed on December 17, 1997 to holders of ordinary
Common Stock on a share-for-share basis. Reference is hereby
made to Exhibit 3(i) hereto for the full terms of the relative
rights of these classes.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) (c) At the Annual Meeting of the Shareholders of the Company
held on November 18, 1997, the shareholders approved an
amendment to the Company's Certificate of Incorporation to
(i) authorize a new class of common stock consisting of tem
million shares and having 30 votes per share and (ii)
increase the number of shares of Common Stock which the
Company is authorized to issue from ten million to 30
million shares. The votes cast were 4,586,699 shares in
favor, 110,800 shares against and 49,392 abstentions or
broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 3(i) Certificate of Amendment to Certificate of
Incorporation, filed November 1997.
SIGNATURES
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Firecom, Inc.
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Dated: December 8, 1997 /s/ Paul Mendez
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Paul Mendez
Chairman of the Board
President and Chief Executive Officer
/s/ Jeffrey Cohen
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Jeffrey Cohen
Vice President-Finance,
Chief Financial Officer, and
Principal Accounting Officer
11
EXHIBIT INDEX
EXHIBIT
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EXHIBIT 3(i) CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION,
FILED NOVEMBER 1997
EXHIBIT 27 FINANCIAL DATA SCHEDULE