SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
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 January 31, 1998
OR
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-12873
-------
FIRECOM, INC.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer in its charter)
New York 13-2934531
- ------------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39-27 59th Street, Woodside, New York 11377
- ------------------------------------- -----
(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
--- ---
As of March 5, 1998, the Registrant had 5,973,469 shares of Common
Stock outstanding, and 5,842,919 shares of Class A Common Stock
outstanding.
INDEX
-----
PAGE NO.
--------
Safe Harbor Statement 3
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheet-January 31, 1998 4-5
Consolidated Statements of Income-
Three Months and Nine Months Ended
January 31, 1998 and 1997 6
Consolidated Statements of Cash Flows-
Nine Months Ended January 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-10
Item 2: Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-12
PART II OTHER INFORMATION 12-13
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q for the quarter ended January 31, 1998 contains certain
forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," "should" or "continue" or the negative
thereof or other variations thereon or comparable terminology. The
matters set forth under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cautionary
Statements" herein constitute cautionary statements identifying
important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking
statements.
FIRECOM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,546,000
Accounts receivable, net of allowance for doubtful
accounts of $464,000 2,722,000
Inventories 1,662,000
Deferred tax asset 466,000
Prepaid expenses and other 39,000
----------
Total current assets $8,435,000
----------
FIXED ASSETS
PROPERTY, PLANT AND EQUIPMENT $1,320,000
Less: Accumulated Depreciation & Amortization 769,000
----------
Total Fixed Assets $ 551,000
----------
OTHER ASSETS
Product Enhancement $ 668,000
Less: Accumulated Amortization 485,000
----------
Total Product Enhancement $ 183,000
Prepaid Loan Fees $ 14,000
----------
Total Other Assets $ 197,000
----------
TOTAL ASSETS $9,183,000
==========
FIRECOM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET
(unaudited)
JANUARY 31, 1998
----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 330,000
Accounts payable 456,000
Revolving Loan - Chase Bank 500,000
Accrued expenses 799,000
----------
Total current liabilities $2,085,000
----------
LONG-TERM LIABILITIES:
Notes payable $1,471,000
Accrued compensation 345,000
----------
Total Long-Term liabilities $1,816,000
----------
MANDATORY REDEEMABLE COMMON STOCK 590,000
----------
SHAREHOLDERS' EQUITY
Preferred Stock, par value $1; authorized 1,000,000 shares, none issued $ - 0 -
Common Stock, par value $.01: Authorized 30,000,000 shares
Issued: 7,004,463 Outstanding: 5,973,469 70,000
Class A Common Stock, par value $.01: Authorized 10,000,000 shares
Issued: 6,873,913 Outstanding: 5,842,919 68,000
Additional Paid-In Capital 2,765,000
Retained Earnings 3,015,000
----------
Sub-Total $5,918,000
Less: Treasury Stock, at cost, 1,030,994 shares of both Common and Class A 1,226,000
----------
Total Shareholders' Equity $4,692,000
----------
TOTAL LIABILITIES & EQUITY $9,183,000
==========
FIRECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------------------
JANUARY 31 JANUARY 31
---------- ----------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES:
Product $ 2,111,000 $ 2,167,000 $ 5,352,000 $ 6,525,000
Service 1,574,000 1,580,000 4,818,000 4,871,000
----------- ----------- ----------- -----------
Total Sales 3,685,000 3,747,000 10,170,000 11,396,000
----------- ----------- ----------- -----------
COST OF SALES:
Product 1,276,000 1,278,000 3,420,000 3,647,000
Service 754,000 825,000 2,359,000 2,394,000
----------- ----------- ----------- -----------
Total Cost of Sales 2,030,000 2,103,000 5,779,000 6,041,000
----------- ----------- ----------- -----------
GROSS PROFIT 1,655,000 1,644,000 4,391,000 5,355,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,129,000 915,000 3,141,000 2,911,000
Research and development 188,000 174,000 481,000 542,000
----------- ----------- ----------- -----------
Total operating expenses 1,317,000 1,089,000 3,622,000 3,453,000
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 338,000 555,000 769,000 1,902,000
----------- ----------- ----------- -----------
OTHER EXPENSES
Interest 29,000 6,000 102,000 27,000
Other 114,000 64,000 87,000 151,000
----------- ----------- ----------- -----------
Total Other Expenses 143,000 70,000 189,000 178,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 195,000 485,000 580,000 1,724,000
INCOME TAX EXPENSE 92,000 227,000 273,000 872,000
NET INCOME $ 103,000 $ 258,000 $ 307,000 $ 852,000
=========== =========== =========== ===========
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 103,000 $ 226,000 $ 307,000 $ 765,000
NET INCOME PER COMMON SHARE:
Basic $ .01 $ .02 $ .02 $ .08
Diluted $ .01 $ .02 $ .02 $ .07
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN COMPUTING EPS:
Basic 12,571,000 9,865,000 12,347,000 9,698,000
Diluted 13,132,000 11,501,000 13,003,000 11,400,000
FIRECOM, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
-----------------
JANUARY 31
----------
1998 1997
------ -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 307,000 $ 852,000
----------- -----------
Adjustments to reconcile net income to net Cash used in operating
activities:
Depreciation and amortization 129,000 73,000
Provision for doubtful accounts 171,000 120,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,447,000 (785,000)
(Increase) in inventories (398,000) (270,000)
Decrease (Increase) in other current and noncurrent assets 51,000 (9,000)
(Decrease) in accounts payable,
accrued expenses & other (354,000) (9,000)
----------- -----------
Total adjustments 1,046,000 (880,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
1,353,000 (28 ,000
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (78,000) (125,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (241,000) (100,000)
Increase in debt 500,000 -0-
Preferred Stock Dividend (905,000) -0-
Proceeds from stock issuance 452,000 87,000
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (194,000) (13,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
1,081,000 (166,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,465,000 2,165,000
----------- -----------
End of period $ 3,546,000 $ 1,999,000
=========== ===========
NON-CASH INVESTING ACTIVITY:
Debt incurred as a result of acquisition of assets $ 135,000 --
===========
FIRECOM, INC. AND SUBSIDIARIES
------------------------------
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 statements 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 January 31, 1998 and the results
of operations for the three and nine months ended January 31, 1998 and
1997, and cash flows for the nine months ended January 31, 1998 and
1997.
All share information has been restated giving effect to the
distribution of Class A Common Stock (which is convertible on a share
for share basis to Common Stock) which took place on December 17,
1997, and treats the Class A Common Stock as if converted to Common
Stock. The only distinction between the two classes is that the Class
A Common Stock has thirty (30) votes per share and generally cannot be
transferred without conversion into Common Stock.
NOTE 2: INVENTORIES
Inventories consist of the following at January 31, 1998:
Raw materials and sub-assemblies $1,655,000
Work-in-process 7,000
----------
$1,662,000
==========
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at January 31,
1998:
Building improvements $ 268,000
Machinery and equipment 590,000
Furniture and fixtures 462,000
----------
$1,320,000
Less accumulated depreciation and amortization 769,000
----------
$ 551,000
==========
NOTE 4: NOTES PAYABLE
The Company's long-term debt consists of the following at
January 31, 1998:
Notes payable to banks and other:
First mortgage note payable $ 338,000
Note payable to Norwood Venture 1,161,000
Note payable to May Family 185,000
Other note payable 117,000
----------
$1,801,000
Less current portion 330,000
----------
$1,471,000
==========
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
paid at closing of the acquisition. The balance of the purchase
price, $135,000, is payable quarterly through August 2000, with
interest at 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 product being introduced by
the Company into the national market ("National Product").
NOTE 5: INCOME PER COMMON SHARE
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
SFAS No. 128 requires dual presentation of basic and diluted earnings
per share for all periods presented. Basic earnings per share excludes
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Prior period income per share information has
been restated as required as required by SFAS No. 128.
A reconciliation of the income and weighted-average shares used in
both calculations follows:
Periods ended January 31, 1998
------------------------------
Three Months Nine Months
--------------------------- -------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
Basic EPS $103,000 12,570,888 $.01 $307,000 12,346,726 $.02
Effect of
Stock options
and warrants -- 561,487 -- -- 655,968 --
-------- ---------- ---- -------- --------- ----
Diluted EPS $103,000 13,132,375 $.01 $307,000 13,002,694 $.02
-------- ---------- ---- -------- --------- ----
Periods ended January 31, 1997
Three Months Nine Months
--------------------------- --------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
Basic EPS $226,000 9,864,533 $.02 $765,000 9,698,466 $.08
Effect of
Stock options
and warrants -- 1,636,035 -- -- 1,701,562 (.01)
-------- ---------- ---- -------- ---------- ----
Diluted EPS $226,000 11,500,568 $.02 $765,000 11,400,028 1.07
-------- ---------- ---- -------- ---------- ----
Unexercised employee stock options and warrants to purchase 160,660 shares and
500,000 shares of the Company's common stock as of January 31, 1998 and 1997,
respectively, were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
Company's common stock during the respective periods.
NOTE 6: STOCKHOLDERS' EQUITY TRANSACTIONS
On June 21, 1995 the Company signed a Stock Purchase Agreement to
purchase 1,072,988 shares of the Company's $.01 par value common stock
held by certain members of the May family (the "Shareholders") at $.45
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 collateralized by a pledge by
the Company to the noteholder of 685,326 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 1,072,990 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
$.55 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 $.625 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 2,299,200 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 754,500 shares of the Company's common
stock.
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
January 31, 1998, the Company has accrued $118,000 of incentive
compensation and $127,000 of accrued fringe benefits.
NOTE 8: STOCK DIVIDEND:
The Company approved an amendment to the Corporation's Certificate of
Incorporation to (i) authorize new 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 were 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. The
Class A Common Stock participates in the earnings of the Company on
the same basis as the Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
LIQUIDITY
Net cash provided by operations for the nine months ended January 31,
1998 was $1,353,000 primarily due to a decrease in accounts
receivable, which was partially offset by increases in inventories and
a decrease in accounts payable and accrued expenses. 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 January 31, 1998)
and a first mortgage note of $429,000 at April 30, 1996 (the balance
was $338,000 as of January 31, 1998). 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 January 31,
1998 were $3,685,000 and $103,000 respectively as compared to
$3,747,000 and $258,000 for the quarter ended January 31, 1997.
Consolidated sales and net income for the nine months ended January
31, 1998 were $10,170,000 and $307,000 respectively as compared to
$11,396,000 and $852,000 for the nine months ended January 31, 1997.
Sales declined by 11% during the nine months ending January 31, 1998
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.
Operating income for the nine months ended January 31, 1998 was
$769,000 as compared to $1,902,000 for the nine months ended January
31, 1997. As a percentage of revenue, the operating income for the
nine months ended January 31, 1998 was 7.6% versus 16.7% in the same
period in 1997. 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.
The Company's backlog for its life safety and other systems totaled
$1,974,000 at January 31, 1998 as compared to $2,445,000 at October
31, 1997 and $1,853,000 at April 30, 1997. Due to fluctuations in the
Company's backlog in the nine months ended January 31, 1998,
management remains cautious about predicting revenue 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.
Significant changes in balance sheet items from April 30, 1997 to
January 31, 1998 are highlighted as follows:
1: Cash increased primarily to the reduction in accounts receivable
and 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 reflects 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 2,299,200 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 754,500 shares of the Company's common stock.
CAUTIONARY STATEMENTS
Information or statements provided by the Company from time to time
contain certain "forward-looking information" relating to such matters
as liquidity, projected sales and anticipated margins. The cautionary
statements made herein are being made pursuant to the Private
Securities Litigation Reform Act of 1995 (the "Act") and with the
intention of obtaining the benefits of the "safe harbor" provisions of
the Act for any such forward-looking information. The Company cautions
readers that any forward-looking information provided by the Company
is not a guarantee of future performance and that actual results may
differ materially from those in the forward-looking information as a
result of various factors, including but not limited to the acceptance
in what is a new market for the Company, the national market
(historically, the vast majority of the Company's revenues have been
derived from the New York City market) of the Company's
newly-introduced line of safety products for the national market. The
principal manufacturers against whom the Company expects to compete in
the national market are generally better financed, have products
accepted in the market and have long-established distribution and
servicing networks. The Company's future growth is to a large extent
dependent on being able to compete successfully against these
competitors.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
Reference is made to Registrant's report on Form 10QSB for the quarter ended
October 31, 1997 for information regarding a stock distribution on
December 17, 1997.
SIGNATURES
----------
Firecom, Inc.
-------------
Dated: March 11, 1998 /s/ Paul Mendez
-------------------- -------------------------
Paul Mendez
Chairman of the Board
President and Chief Executive
Officer
/s/ Jeffrey Cohen
-------------------------
Jeffrey Cohen
Vice President-Finance,
Chief Financial Officer, and
Principal Accounting Officer