<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
(Mark One)
( X ) Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
( ) Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________________to_________________
Commission file number: 0-21633
BRISTOL RETAIL SOLUTIONS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 58-2235556
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No).
5000 Birch Street, Suite 205, Newport Beach, California 92660
(Address of Principal Executive Offices) (Zip Code)
(949) 475-0800
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $.001 par value - 6,215,686 shares as of October 31, 1998
Class A Redeemable Common Stock Purchase Warrants - 718,750 as of July 31,
1998
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
Page 1
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BRISTOL RETAIL SOLUTIONS, INC.
Index
Part I --- FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of September 30, 1998 3
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-21
Part II --- OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Page 2
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, 1998
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 445,086
Accounts receivable, net of allowance for doubtful accounts of $300,553 7,078,888
Inventories, net 4,050,776
Prepaid expenses and other current assets 459,082
Current portion of note receivable 149,907
-------------
Total current assets 12,183,739
Property and equipment, at cost:
Furniture and equipment 877,383
Automobiles 214,449
Leasehold improvements 114,241
-------------
1,206,073
Accumulated depreciation and amortization (413,283)
-------------
Property and equipment, net 792,790
Intangible assets, net of accumulated amortization of $462,802 4,639,837
Note receivable - noncurrent portion 187,901
Other assets 1,039,789
-------------
Total assets $ 18,844,056
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,148,169
Accounts payable 3,757,962
Accounts payable to related party 69,924
Accrued salaries, wages and related benefits 948,045
Accrued expenses 407,460
Deferred service revenue 1,929,105
Customer deposits 496,951
Note payable to related party 34,478
Current portion of capital lease obligations 43,300
Current portion of long-term debt 19,162
-------------
Total current liabilities 11,854,556
Note payable to related party - noncurrent portion 24,663
Capital lease obligations - noncurrent portion 39,864
Long-term debt 29,403
Other long-term liabilities 94,565
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value:
4,000,000 shares authorized;
Series A Convertible Preferred Stock: 10,000 shares issued
and outstanding (aggregate liquidation preference $1,000,000) 3
Common stock, $.001 par value:
20,000,000 shares authorized; 6,215,686 and 6,210,686 shares issued
and outstanding 6,216
Additional paid-in capital 13,182,747
Accumulated deficit (6,363,336)
-------------
6,825,630
Less 5,000 shares of treasury stock, at cost (24,625)
-------------
Total stockholders' equity 6,801,005
-------------
Total liabilities and stockholders' equity $ 18,844,056
=============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Revenue:
System sales and installation $ 6,383,979 $ 4,568,572
Service and supplies sales 3,039,483 2,552,585
-------------- --------------
Total revenue 9,423,462 7,121,157
Cost of revenue:
System sales and installation 4,430,008 2,819,210
Service and supplies sales 2,334,270 1,742,418
-------------- --------------
Total cost of revenue 6,764,278 4,561,628
-------------- --------------
Gross margin 2,659,184 2,559,529
Operating expenses:
Selling, general and administrative expenses 2,693,541 2,574,024
Research and development costs 181,254 163,534
-------------- --------------
Total operating expenses 2,874,795 2,737,558
-------------- --------------
Operating loss (215,611) (178,029)
Other expense 116,392 (16,510)
-------------- --------------
Loss before income taxes (332,003) (194,539)
Provision for income tax 6,991 1,450
-------------- --------------
Net loss $ (338,994) $ (195,989)
============== ==============
Net loss before preferred stock dividends $ (338,994) $ (195,989)
Cumulative dividends for Series A Convertible Preferred Stock (7,580) - -
-------------- --------------
Net loss applicable to common stockholders $ (346,574) $ (195,989)
============== ==============
Basic and diluted net loss to common stockholders per share $ (0.06) $ (0.04)
============== ==============
Basic and diluted weighted average common shares outstanding 5,876,201 5,503,929
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Revenue:
System sales and installation $ 15,291,245 $ 9,409,550
Service and supplies sales 8,312,927 4,956,326
-------------- --------------
Total revenue 23,604,172 14,365,876
Cost of revenue:
System sales and installation 10,128,962 6,098,678
Service and supplies sales 5,962,959 3,521,376
-------------- --------------
Total cost of revenue 16,091,921 9,620,054
-------------- --------------
Gross margin 7,512,251 4,745,822
Operating expenses:
Selling, general and administrative expenses 7,550,927 5,971,986
Research and development costs 501,775 235,636
-------------- --------------
Total operating expenses 8,052,702 6,207,622
-------------- --------------
Operating loss (540,451) (1,461,800)
Other expense (income) 237,642 (60,097)
-------------- --------------
Loss before income taxes (778,093) (1,401,703)
Provision for income tax 9,626 2,500
-------------- --------------
Net loss $ (787,719) $ (1,404,203)
============== ==============
Net loss before preferred stock accretion and dividends $ (787,719) $ (1,404,203)
Preferred stock accretion and dividends:
Accretion related to Series A Convertible Preferred Stock (241,916) - -
Imputed dividends for Series A Convertible Preferred Stock (227,589) - -
Cumulative dividends for Series A Convertible Preferred Stock (23,300) - -
-------------- --------------
Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203)
============== ==============
Basic and diluted net loss to common stockholders per share $ (0.22) $ (0.28)
============== ==============
Basic and diluted weighted average common shares outstanding 5,697,308 5,086,616
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (787,719) $ (1,404,203)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 204,604 138,677
Amortization 375,485 213,278
Provision for doubtful accounts - - 48,946
Provision for excess and obsolete inventories - - 43,681
Stock compensation expense - - 8,021
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable (3,586,554) (312,200)
Inventories 167,114 (92,526)
Prepaid expenses and other assets (557,990) (173,513)
Accounts payable 1,552,071 (55,884)
Other accrued expenses (124,300) 134,545
Deferred revenue 203,583 202,168
Customer advances 44,519 81,254
Other long-term liabilities 27,567 23,969
-------------- --------------
Net cash used in operating activities (2,481,620) (1,143,787)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (572,726) (3,007,702)
Cash paid for rescinded acquisition - - (1,100,000)
Cash received from rescinded acquisition - - 250,000
Receivables from rescinded acquisition 97,335 - -
Purchases of property and equipment (103,435) (173,123)
-------------- --------------
Net cash used in investing activities (578,826) (4,030,825)
Cash flows from financing activities:
Repayment of capital lease obligations (20,795) (16,341)
Net borrowings on line of credit 1,915,702 272,970
Repayment of long-term debt (44,481) (17,298)
Issuance (repayment) of note payable to related party 59,141 (47,922)
Repurchase of stock - - (24,625)
Issuance of preferred stock, net of offering costs 827,577 - -
Issuance of common stock, net of offering costs 52,459 - -
-------------- --------------
Net cash provided by financing activities 2,789,603 166,784
Net decrease in cash and cash equivalents (270,843) (5,007,828)
Cash and cash equivalents at beginning of period 715,929 5,475,674
-------------- --------------
Cash and cash equivalents at end of period $ 445,086 $ 467,846
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 290,006 $ 64,376
============== ==============
Cash paid for income taxes, net $ 21,424 $ 97,959
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Supplemental disclosures of cash flow information (continued): Nine Months Ended September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
Capital assets and lease obligation additions $ 108,804 $ - -
============== ==============
Acquisitions:
Fair value of assets acquired $ 1,845,722 $ 9,221,597
Liabilities assumed (702,996) (3,269,042)
-------------- --------------
Net assets acquired 1,142,726 5,952,555
Stock issued (500,000) (2,944,853)
Note payable (70,000) - -
-------------- --------------
Cash paid for acquisition, net of cash acquired $ 572,726 $ 3,007,702
============== ==============
Warrants issued in connection with the line of credit $ 38,595 $ - -
============== ==============
Warrants issued in connection with the sale of preferred
stock $ 69,500 $ - -
============== ==============
Inventory received in payment of rescinded acquisition
receivable $ 250,000 $ - -
============== ==============
For non-cash transactions relating to Series A Convertible
Preferred Stock, see STOCKHOLDERS' EQUITY
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
BRISTOL RETAIL SOLUTIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1998
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Bristol Retail Solutions, Inc. (the Company) was incorporated on April
3, 1996 in the state of Delaware for the purpose of acquiring and operating a
national network of full service retail automation solution providers. From its
inception through September 30, 1998, the Company has acquired seven companies.
The Company earns revenue from the sale and installation of point-of-sale (POS)
systems and turnkey retail automation (VAR) systems, the sale of supplies and
from service fees charged to customers under maintenance agreements. Currently,
the Company has sales and service operations located in seventeen cities and
eight states, primarily located in the Western and Midwestern region of the
United States.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. The Company's acquisitions
were accounted for in the Company's consolidated financial statements as
purchases in accordance with Accounting Principles Board Opinion (APB) No. 16.
The purchase prices were allocated to the underlying assets and liabilities
based upon their respective fair market values. The results of the acquisitions
are included in the Company's consolidated financial statements subsequent to
the respective dates of acquisition. Accordingly, the financial statements for
the periods subsequent to the acquisitions are not comparable to the financial
statements for the periods prior to the acquisitions.
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-QSB and Item 310 of Regulation S-B. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. The accompanying consolidated
financial statements do not include certain footnotes and financial
presentations normally required under generally accepted accounting principles
(GAAP) and, therefore, should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-KSB/A for the year ended December 31, 1997. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the full year.
The American Institute of Certified Public Accountants (AICPA) recently
adopted Statement of Position (SOP) 97-2, Software Revenue Recognition, that
supersedes SOP 91-1 and becomes effective for years beginning after December 15,
1997. The Company adopted SOP 97-2 at the beginning of the current year. Such
adoption did not have a significant impact on the Company's financial statements
for the three and nine months ended September 30, 1998.
ACQUISITION
On May 8, 1998, the Company, through its wholly-owned subsidiary
Automated Register Systems, Inc., acquired all of the outstanding common stock
of Quality Business Machines Co. (QBM), a POS dealer with operations in
Sacramento, California, for consideration of $564,000 in cash, including $26,000
of acquisition costs; 183,276 shares of common stock of the Company, valued at
$500,000 at the closing date of the acquisition; and a promissory note in the
principal amount of $70,000 at an interest rate of 8.5% executed by the Company
in favor of QBM. Of such consideration, the Company retained 36,655 shares of
common stock, valued at approximately $100,000 and $10,000 in cash, in escrow,
as the purchase price is subject to post-closing reduction in the event certain
financial targets of QBM are not met. The transaction was recorded under the
purchase method of accounting and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based upon the fair
values at the date of acquisition. The excess of the purchase price over the
fair values of the net assets acquired has been recorded as goodwill. Goodwill
acquired as part of the QBM acquisition aggregating $676,000 is being amortized
on a straight-line basis over an estimated life of 20 years. The Company's
consolidated statements of operations include the revenues and expenses of QBM
since the acquisition closing date of May 8, 1998.
INCOME TAXES
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete year. For the three and
nine months ended September 30, 1998 and 1997, the estimated effective income
tax rate is less than the U.S. statutory rate primarily due to a 100% valuation
allowance provided against the deferred tax assets that arose from the current
operating loss.
Page 8
<PAGE>
LOSS PER SHARE INFORMATION
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share, which is effective for financial statements for interim and annual
periods ending after December 15, 1997. SFAS No. 128 redefines earnings per
share under generally accepted accounting principles. SFAS No. 128 requires the
Company to report Basic Earnings per Share (EPS), as defined therein, which
excludes all common share equivalents from the earnings per share computation,
and Diluted EPS, as defined therein, which is calculated similar to the
Company's primary earnings per share computation. All historical earnings per
share information has been restated as required by SFAS No. 128.
Basic net loss per share is computed using the weighted average number
of common shares outstanding during the periods presented. Diluted net loss per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the periods presented assuming the exercise
of the Company's stock options and warrants and conversion of outstanding
preferred stock and preferred stock dividends on Series A Convertible Preferred
Stock. Common equivalent shares have not been included where inclusion would be
antidilutive.
<TABLE>
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss $ (338,994)
Less: Preferred dividends (7,580)
--------------
BASIC EPS
Loss applicable to common stockholders (346,574) 5,876,201 $ (0.06)
==============
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock -- --
-------------- --------------
DILUTED EPS
Income applicable to common
stockholders + assumed conversions $ (346,574) 5,876,201 $ (0.06)
============== ============== ==============
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998
Net loss $ (787,719)
Accretion related to preferred stock (241,916)
Imputed dividends for preferred stock (227,589)
Cumulative preferred dividends (23,300)
--------------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (1,280,524) 5,697,308 $ (0.22)
============== ============== ==============
</TABLE>
Options to purchase 1,545,000 shares of common stock at $2.875-$3.188
per share were outstanding during the period ended September 30, 1998 but were
not included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares. Warrants
to purchase 918,812 shares of common stock at $3.259-$6.00 per share were
outstanding during the period ended September 30, 1998 but were not included in
the computation of diluted EPS because the warrants' exercise price was greater
than the average market price of the common shares. Common stock equivalents
were antidilutive for the three- and nine-months ended September 30, 1998.
STOCKHOLDERS' EQUITY
On December 17, 1997, the Company issued to Coast Business Credit
warrants to purchase 25,062 shares of common stock at an exercise price of $3.99
per share in connection with the $5,000,000 credit line. These warrants were
valued by the Company at $39,000 using a Black-Scholes option pricing model and
are being amortized as part of the debt issue costs in setting up the credit
line. The warrants expire on December 16, 2002.
On January 2, 1998 and July 31, 1998, respectively, the Company issued
8,236 and 12,156 shares of common stock to its employees under the 1997 Employee
Stock Purchase Plan.
Page 9
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On March 18, 1998, the Company entered into a definitive agreement for
a private placement of shares of Series A Convertible Preferred Stock (the
Preferred Stock). The investment commitment is up to $2,000,000 and will be
issued in three installments. The first installment of $1,000,000, consisting of
10,000 shares, funded on March 18, 1998. The second and third installments of up
to $500,000 each will close within thirty and ninety days, respectively, after
the effective date of the Company's registration statement on Form S-3 (No.
333-50385), filed with the Securities and Exchange Commission on April 17, 1998,
assuming that the various conditions set forth in the purchase agreement are
met. The Securities and Exchange Commission has declared the registration
statement effective on August 14, 1998. The Company incurred penalty fees of
$50,000 due to the registration statement not being declared effective after 90
days following the closing date, pursuant to paragraph 2 (b) of the Registration
Rights Agreement.
The Preferred Stock is convertible by the holders into common stock of
the Company at any time into a number of shares of common stock determined by
dividing the issue price by the conversion price, which is defined to be 78% of
the lowest five-day average closing bid price for the 25-day period prior to the
date of the conversion notice. At no time shall the conversion price be greater
than $3.26 (110% of the five-day average bid price prior to the date such shares
were purchased). The dividends on the Preferred Stock are cumulative and are
payable quarterly in stock or in cash, at the holder's option, at the rate of 6%
per annum of the original issue price of the stock. The liquidation preference
of each share of Preferred Stock is $100 plus unpaid dividends. The purchaser of
the Preferred Stock received warrants to purchase 125,000 shares of the
Company's common stock concurrently with the first $1,000,000 installment. These
warrants were valued by the Company at $181,000 using a Black-Scholes option
pricing model. The amounts that may be purchased under the second and third
installments are limited by a provision in the Preferred Stock agreement that
prohibits the purchaser from owning more than 20% of the Company's common stock
on an as-converted basis. In connection with the sale of the Preferred Stock,
the Company issued warrants to purchase 25,000 shares of the Company's common
stock to each of Wharton Capital Partners, Ltd. and HD Brous & Co., Inc., as
compensation for services provided by them as placement agents. These warrants
were valued by the Company at $70,000 using a Black-Scholes option pricing model
and are exercisable at $3.556 per share.
The Preferred Stock was recorded at fair value on the date of issuance
less issue costs. At any time after the date of issuance of the Preferred Stock,
the Company may redeem some or all of the outstanding Preferred Stock. The
Company recorded accretion of $242,000 to increase the carrying value to the
redemption value of $1,000,000. The Preferred Stock is convertible by the
holders at any time into common stock at a conversion rate which is less than
the fair value of the common stock. Accordingly, the Company recorded as imputed
dividends the value of the beneficial conversion feature of $228,000. The
Company also accrued cumulative preferred dividends of $23,000 as of September
30, 1998.
As of September 30, 1998, 6,700 shares of Preferred Stock were
converted into 460,279 shares of common stock at $1.10-$1.67 per share. In
addition, the Company issued 3,229 shares in common stock representing the
accrued but unpaid dividends on the preferred shares being converted.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. The
Company's total comprehensive loss for the nine months ended September 30, 1998,
was $1,281,000, consisting of the Company's net loss for the period of $788,000,
Preferred Stock accretion of $242,000, imputed dividends related to the
beneficial conversion feature of the Preferred Stock of $228,000 and cumulative
preferred dividends of $23,000. For the quarter ended September 30, 1998, the
Company's total comprehensive loss consisted of net loss of $339,000 and
cumulative preferred dividends of $8,000. There were no items of other
comprehensive income for the three and nine months ended September 30, 1997.
CONTINGENCIES
The Company's subsidiaries have been, from time to time, parties to
various lawsuits and other matters involving ordinary and routine claims arising
in the normal course of business. In the opinion of management of the Company,
although the outcomes of these claims and suits are not presently determinable,
in the aggregate, the outcome of any of these matters will not have a material
adverse affect on the Company's business, financial position or results of
operations or cash flows.
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering are also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. The case is
pending in the United States District Court for the Southern District of New
York. In addition to seeking to have themselves declared proper plaintiffs and
having the case certified as a class action, plaintiffs seek unspecified
monetary damages. The plaintiffs' complaint alleges claims under the federal
securities laws for alleged misrepresentations and omissions in connection with
sales of the Company's securities. On December 23, 1997, the Company filed a
motion to dismiss the complaint, and on May 14, 1998, the court denied the
Company's request. The Company denies that it has any liability to the class
Page 10
<PAGE>
action plaintiffs and intends to vigorously defend itself. The outcome of this
litigation is not currently predictable, and the Company believes that all or a
substantial part of the damages, if any, would be covered by insurance. Other
than the related legal fees, the Company has not made a provision for any
liability in the accompanying financial statements.
SUBSEQUENT EVENT
On October 28, 1998, the company received notice of conversion of 2,750
shares of Preferred Stock which converted into 600,437 shares of common stock at
$.458 per share. In addition, the Company issued 2,763 shares of common stock
representing the accrued but unpaid dividends on the preferred shares being
converted.
Page 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
Quarterly Report on Form 10-QSB, as well as the Company's audited consolidated
financial statements for the year ended December 31, 1997.
The Company's financial condition and results of operations have
changed considerably since the Company's inception in April 1996, as a result of
the Company's acquisition strategy. The Company has completed six acquisitions
since its inception through the end of December 31, 1997, all of which were
accounted for under the purchase method of accounting. One acquisition was
completed by the Company during the nine months ended September 30, 1998 and was
accounted for under the purchase method of accounting. Due to the Company's
growth through acquisitions, year-to-year comparisons of the historical results
of the Company's operations have been affected primarily by the addition of
acquired companies. The dollar increases in the various revenue and expense
components of the Company's results are due primarily to growth from
acquisitions. Therefore, these year-over-year changes are not necessarily
indicative of changes that will occur in the future. The Company expects that
acquisitions will continue to impact the Company's future operating results if
the Company continues to pursue its acquisition strategy which has been
suspended due to the lack of financing. Future acquisitions will be reliant upon
the Company obtaining additional financing or if allowable, "pooling of
interest" mergers.
This Quarterly Report on Form 10-QSB contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Additional Factors That May Affect
Future Results."
REVENUE
The Company's consolidated total revenue is comprised of two
components: (i) revenue derived from the sale and installation of hardware and
software (Systems Revenue) and (ii) revenue derived from the sale of services
and supplies (Service Revenue).
Total revenue for the quarter ended September 30, 1998 was $9,423,000
and was comprised of revenue from the Company's seven wholly-owned subsidiaries
for the entire quarter. This represents an increase of 32% from the Company's
total revenue of $7,121,000 for the quarter ended September 30, 1997. Of the
increase in total revenue, 63% is attributable to the revenue contributed by QBM
( a 1998 acquisition) and PCR due to the fact that in 1997, only two months of
PCR's revenue was recognized. Additionally, the Company began its distributor
program with NCR and this program contributed to 12 percent of the increase in
revenue. The remaining increase is due primarily to an improvement in Systems
Revenue by the other acquired businesses over the comparable prior year quarter.
Total revenue for the nine months ended September 30, 1998 was
$23,604,000, a 64% increase over the comparable nine months ended September 30,
1997. Of the increase in total revenue, 90% is attributable to the revenue
contributed by QBM, Smyth and PCR due to the fact that in 1997, only two months
of PCR's revenue and four months of Smyth's revenue was recognized. The
remaining increase is primarily attributable to an improvement in Service
Revenue by the other acquired businesses. Future growth in revenue will be
dependent upon the Company's ability to acquire additional companies or to
expand its hardware and software product offerings as well as increase its
maintenance business.
Total revenue for the quarter ended September 30, 1998 was comprised of
68% Systems Revenue and 32% Service Revenue, as compared to a revenue
composition of 64% Systems Revenue and 36% Service Revenue for the quarter ended
September 30, 1997. Total revenue for the nine months ended September 30, 1998
and 1997 was comprised of 65% Systems Revenue and 35% Service Revenue for both
periods. The mix of revenue change from 1997 to 1998 for the three month period
was due primarily to the efforts by the Company in the third quarter to increase
Systems Revenue.
No customer accounted for more than 10% of total revenue for the three-
and nine-month periods ended September 30, 1998 and 1997. Aggregate sales of
products from the Company's three principal hardware vendors, Panasonic, ERC
Parts, Inc. (ERC), a distributor of Panasonic products, and NCR Corporation
(NCR), accounted for approximately 16% and 32% of total revenue for the
three-and nine-month periods ended September 30, 1998, respectively, and
approximately 26% and 37% of total revenue for the three- and nine-month periods
ended September 30, 1997, respectively. The Company's supply agreements with
these manufacturers are non-exclusive, have geographic limitations and may have
renewable one-year terms depending upon the Company's achievement of a
previously-agreed-to procurement quota. Geographical limitations exist as a
result of the assignment of sales territories that define the municipalities and
states where the Company's subsidiaries can sell a manufacture's hardware or
software. The actual sales territories for each manufacturer are
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subsidiary-specific and some subsidiaries may not have permission to sell
hardware or software of certain manufactures in certain regions or territories
of the country. A change in the Company's or its subsidiaries' relationship with
these principal vendors could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
GROSS MARGIN
Gross margin for the quarter ended September 30, 1998 was 28% and was
comprised of gross margin for Systems Revenue of 31% and gross margin for
Service Revenue of 23%. Gross margin for the quarter ended September 30, 1997
was 36% and was comprised of gross margin for Systems Revenue of 38% and gross
margin for Service Revenue of 32%. As a percentage of revenue, the decrease in
Systems Revenue gross margin is attributable to product mix and a strategic
effort by the Company to focus on internal growth with new software and point-of
sale products in new regions that resulted in price discounting. As a percentage
of revenue, the decrease in Service Revenue gross margin is primarily
attributable to additional support and service personnel and increase of third
party services to maintain a key maintenance account.
Gross margin for the nine months ended September 30, 1998 was 32% and
was comprised of gross margin for Systems Revenue of 34% and gross margin for
Service Revenue of 28%. Gross margin for the nine months ended September 30,
1997 was 33% and was comprised of gross margin for Systems Revenue of 35% and
Service Revenue of 29%. As a percentage of revenue, the decrease in Systems
Revenue gross margin is attributable to product mix changes and a strategic
effort by the Company in the third quarter to focus on internal growth with new
software and point-of sale products in new regions that resulted in price
discounting offset by a price increase in the billing rates of installation
services. As a percentage of revenue, the decrease in Service Revenue gross
margin is attributable to additional support and service personnel and increase
of third-party services to maintain a key maintenance account in the third
quarter offset by a price increase on hourly billing rates for service.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses in the third quarter
of 1998 of $2,694,000 increased by $120,000 from the comparable prior-year
period and represented 29% of total revenue, versus 36% of total revenue in the
comparable prior year period. The increase in expenses in absolute dollars
between the third quarter of 1998 as compared to the comparable quarter in 1997
was primarily due to the QBM acquisition and costs related to the registration
of common stock. This increase was partially offset by cost reductions realized
in 1998 through the consolidation of certain redundant branch locations and job
functions at the other acquired companies.
Total selling, general and administrative expenses for the nine months
ended September 30, 1998 of $7,551,000 increased by $1,579,000 from the
comparable prior-year period and represented 32% of total revenue, versus 42% of
total revenue in the comparable prior year nine month period. The increase in
expenses in absolute dollars between the nine months of 1998 versus the
comparable nine months of 1997 was primarily due to the QBM, PCR and Smyth
acquisitions.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $181,000 and $502,000,
respectively, during the three- and nine-month periods ended September 30, 1998
compared to $164,000 and $236,000, respectively, incurred during the three- and
nine-month periods ended September 30, 1997. The increase in absolute dollars is
attributable to software development costs at Smyth to develop and design
point-of-sale licensed software to run on the latest operating systems
specifically targeted for the golf course and resort markets and to make the
previous version of the Company's golf course and resort proprietary software
Year 2000 compliant. The Company's policy is to expense such costs until
technological feasibility is established.
OTHER EXPENSE (INCOME)
The Company earned interest income of $23,000 and $93,000,
respectively, for the three- and nine-month periods ended September 30, 1998
compared to $16,000 and $124,000, respectively, for the three- and nine-month
periods ended September 30, 1997. For the periods ended September 30, 1997, the
Company had earned interest income on the proceeds from an offering in November
1996. These proceeds were subsequently used to fund the cash consideration for
acquisitions consummated during 1997. For the periods ended September 30, 1998,
interest income primarily related to the recognition of finance charges on
delinquent accounts and dividend income. The Company recognized interest expense
of $138,000 and $329,000, respectively, for the three-and nine-month periods
ended September 30, 1998 compared to $32,000 and $64,000, respectively, for the
three- and nine-month periods ended September 30, 1997. Interest expense in both
years consisted primarily of interest on outstanding balances on the Company's
lines of credit. The increase was a direct result of increased borrowings under
the existing credit facilities over the prior year and amortization in the
current year of the debt issue costs.
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INCOME TAX PROVISION
The Company recorded a income tax provision for the three- and
nine-month periods ended September 30, 1998 compared to a slight tax provision
for the three- and nine-month periods ended September 30, 1997. Income tax
expense in both years consisted solely of state taxes as the Company had a
taxable loss for federal income tax purposes.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The Company's loss applicable to common stockholders for the nine
months ended September 30, 1998, was $1,281,000, consisting of the Company's net
loss for the year of $788,000, accretion of $242,000 to increase the Preferred
Stock issued on March 18, 1998 (see LIQUIDITY AND CAPITAL RESOURCES OF THE
COMPANY) to its liquidation value of $100 per share, imputed dividends related
to the beneficial conversion feature of the Preferred Stock of $228,000 and
cumulative dividends on the Preferred Stock of $23,000. The Company's loss
applicable to common stockholders for the quarter ended September 30, 1998 was
$347,000, consisting of the Company's net loss of $339,000 and cumulated
dividends on the Preferred Stock of $8,000.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company had cash and cash equivalents of $445,000, working capital
of $329,000 and capitalization of $6,801,000 at September 30, 1998. During the
nine months ended September 30, 1998, the Company utilized $2,482,000 of cash in
operations; utilized $573,000 for the acquisition of QBM and utilized $6,000
from other investing activities; and generated $2,790,000 from financing
activities, which consists of the net impact of borrowings and repayments under
the Company's various debt agreements and the issuance of Common and Preferred
Stock. During the nine months ended September 30, 1997, the Company utilized
$1,144,000 for operations; utilized $173,000 for the purchase of property and
equipment; utilized $3,008,000 for the acquisitions of MicroData, Smyth and EBM
and PCR; utilized $850,000 for rescinded acquisition; and generated $167,000
from financing activities, which consisted primarily of net borrowings and
repayments under the Company's various line of credit facilities and the
purchase of treasury stock.
On December 17, 1997, the Company obtained a new line of credit which
provides for aggregate borrowings up to $5,000,000 computed based on eligible
accounts receivable and inventories; bears interest at the bank's prime rate
plus 1.75%; matures on December 31, 2000; and is collateralized by the Company's
accounts receivable and inventories. Pursuant to the terms of the line of
credit, the Company is subject to covenants which, among other things, impose
certain financial reporting obligations on the Company and prohibit the Company
from engaging in certain transactions prior to obtaining the written consent of
the lender. Some of the significant transactions include: (i) acquire or sell
any assets over $50,000 excluding purchases of dealers; (ii) sell or transfer
any collateral except for finished inventory in the ordinary course of business;
(iii) sell inventory on a sale-or-return, guaranteed sale, consignment or other
contingent basis; (iv) incur any debts, outside the ordinary course of business
which would have a material adverse effect; (v) guarantee or otherwise become
liable with respect to obligations of another party or entity; (vi) pay or
declare any cash dividends; or (vii) make any changes in the Company's capital
structure that would have a material adverse effect. As of September 30, 1998,
the Company was in compliance with the covenants under this credit facility. The
Company repaid all amounts outstanding under its previous CRI, ARS and Smyth
credit lines using proceeds from the new line of credit. The Company had
outstanding borrowings of $4,048,000 bearing interest at 10.25% at September 30,
1998 under this credit facility.
On March 18, 1998, the Company entered into a definitive agreement for
a private placement of shares of Series A Convertible Preferred Stock (the
Preferred Stock). The investment commitment is up to $2,000,000 and will be
issued in three installments. The first installment of $1,000,000, consisting of
10,000 shares, funded on March 18, 1998. The second and third installments of up
to $500,000 each will close within thirty and ninety days, respectively, after
the effective date of the Company's registration statement on Form S-3 (No.
333-50385), filed with the Securities and Exchange Commission (SEC) on April 17,
1998, assuming that the various conditions set forth in the purchase agreement
are met. The SEC has declared the registration statement effective on August 14,
1998. The Company incurred penalty fees of $50,000 due to the registration
statement not being declared effective after 90 days following the closing date,
pursuant to paragraph 2 (b) of the Registration Rights Agreement.
The Preferred Stock is convertible by the holders into common stock of
the Company at any time into a number of shares of common stock determined by
dividing the issue price by the conversion price, which is defined to be 78% of
the lowest five-day average closing bid price for the 25-day period prior to the
date of the conversion notice. At no time shall the conversion price be greater
than $3.26 (110% of the five-day average bid price prior to the date such shares
were purchased). The dividends on the Preferred Stock are cumulative and are
payable quarterly in stock or in cash, at the holder's option, at the rate of 6%
per annum of the original issue price of the stock. The liquidation preference
of each share of Preferred Stock is $100 plus unpaid dividends. The purchaser of
the Preferred Stock received warrants to purchase 125,000 shares of the
Company's common stock concurrently with the first $1,000,000 installment. These
warrants were valued by the Company at $181,000 using a Black-Scholes option
pricing model. The amounts that may be purchased under the second and third
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installments are limited by a provision in the Preferred Stock agreement that
prohibits the purchaser from owning more than 20% of the Company's common stock
on an as-converted basis. In connection with the sale of the Preferred Stock,
the Company issued warrants to purchase 25,000 shares of the Company's common
stock to each of Wharton Capital Partners, Ltd. and HD Brous & Co., Inc., as
compensation for services provided by them as placement agents. These warrants
were valued by the Company at $70,000 using a Black-Scholes option pricing model
and are exercisable at $3.556 per share.
At any time after the date of issuance of the Preferred Stock, the
Company may at its option redeem some or all of the outstanding shares of
Preferred Stock. The Company incurred $242,000 of issuance costs which were
charged against the carrying value of the preferred stock. The Company recorded
accretion of $242,000 to increase the carrying value to the liquidation value of
$1,000,000. The Preferred Stock is convertible by the holders at any time into
common stock at a conversion rate which is less than the fair value of the
common stock. The Company recorded imputed dividends related to this beneficial
conversion feature of $228,000.
As of September 30, 1998, 6,700 shares of Preferred Stock were
converted into 460,279 shares of common stock at $1.10-$1.67 per share. In
addition, the Company issued 3,229 shares in common stock representing the
accrued but unpaid dividends on the preferred shares being converted.
The Company anticipates that its current cash on hand, cash flow from
operations and credit facilities will be sufficient to meet the Company's
liquidity requirements for its operations through the end of 1998. At September
30, 1998, approximately $952,000 was available for the Company to borrow under
the credit facilities. However, the Company will require additional financing in
order to continue its acquisition strategy and may incur additional costs and
expenditures to expand operational and financial systems and corporate
management and administration. Moreover, the Company may be limited in its
ability to grow internally without additional working capital. The Company
currently intends to obtain financing through future issuance of debt or equity
securities during the remainder of 1998. However, there can be no assurance that
the Company will be able to successfully obtain financing or that such financing
will be available on terms the Company deems acceptable. The Company's long-term
success is dependent upon its ability to obtain necessary financing, the
successful execution of management's acquisition strategy and the achievement of
sustained profitable operations.
ACQUISITION
On May 8, 1998, the Company, through its wholly-owned subsidiary
Automated Register Systems, Inc., acquired all of the outstanding common stock
of Quality Business Machines Co. (QBM), a POS dealer with operations in
Sacramento, California, for consideration of $564,000 in cash, including $26,000
of acquisition costs; 183,276 shares of common stock of the Company, valued at
$500,000 at the closing date of the acquisition; and a promissory note in the
principal amount of $70,000 at an interest rate of 8.5% executed by the Company
in favor of QBM. Of such consideration, the Company retained 36,655 shares of
common stock, valued at approximately $100,000 and $10,000 in cash, in escrow,
as the purchase price is subject to post-closing reduction in the event certain
financial targets of QBM are not met. The transaction was recorded under the
purchase method of accounting.
LEGAL PROCEEDINGS
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering are also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. The case is
pending in the United States District Court for the Southern District of New
York. In addition to seeking to have themselves declared proper plaintiffs and
having the case certified as a class action, plaintiffs seek unspecified
monetary damages. The plaintiffs' complaint alleges claims under the federal
securities laws for alleged misrepresentations and omissions in connection with
sales of the Company's securities. On December 23, 1997, the Company filed a
motion to dismiss the complaint, and on May 14, 1998, the court denied the
Company's request. The Company denies that it has any liability to the class
action plaintiffs and intends to vigorously defend itself. The outcome of this
litigation is not currently predictable, and the Company believes that all or a
substantial part of the damages, if any, would be covered by insurance. Other
than the related legal fees, the Company has not made a provision for any
liability in the accompanying financial statements.
NEED FOR ADDITIONAL FINANCING FOR INTERNAL GROWTH AND TO IMPLEMENT ACQUISITION
STRATEGY
Historically, the Company's acquisitions had annual, average growth
rates of five percent. To grow the business faster than the average growth rate
will require working capital because of the historical cash flow trends. The
current line of credit restricts borrowings based on eligible collateral of
accounts receivable and inventory. Because of the lack of financing to continue
the Company's original growth strategy, the Company has altered its strategy to
grow the businesses internally. The rate of growth will be dependent on the
Company's ability to either generate working capital from operations or to raise
additional working capital. There are no assurances the Company will be
successful with this strategy.
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The Company has engaged, and in the foreseeable future will likely
continue to engage, in discussions with several other retail automation solution
businesses regarding possible acquisitions, some of which could be material.
However, the Company currently has not entered into any definitive agreements
with respect to any acquisitions that are, individually or in the aggregate,
material to the Company other than the agreement with QBM discussed above. To
continue this acquisition strategy, the Company will need to obtain additional
financing. Currently, the Company has used proceeds of approximately $600,000
from the net proceeds of $870,000 from its Preferred Stock offering on March 18,
1998 to acquire Quality Business Machines on May 8, 1998. Until additional funds
are obtained, the Company does not have enough cash available to acquire
additional dealers and therefore, has suspended its acquisition activities.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than two years, some computer
systems and software used by companies may need to be upgraded to comply with
such "Year 2000" requirements. Most of the POS products sold by the Company have
date sensitive software which may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in report generation or even more
significant operational problems that could hinder a business ability to
function on a day to day basis.
The Company has been upgrading its software for club and resort
applications so that it will run on the latest operating systems. This effort
began in early part of this year and involved checking each module and program
to make sure it is in compliance and changing those that needed to be updated.
The Company expects that this effort will take a year to complete beginning this
year with an estimated completion of all compliance testing by the end of 1998.
As of September 30, 1998, the Company had completed 81% of the checking of
programs in its software. The software is released periodically to customers,
including the enhancements for Year 2000. As programs in each module are
completed, they are sent to the customer in a subsequent release. Release dates
of these various modules will take place through the end of this year with the
final completed modules shipping to customers in the first quarter of 1999. The
key modules completed to date are Tee Time Scheduling, General Ledger, for
budgets out into the future; and Accounts Payable, for payment requirements into
the future. In addition, the point-of-sale software has been changed to comply
and work with credit authorization systems that have credit card expiration
dates into the new millennium. Each of these modules, along with Accounts
Receivable, Member Profile, Tour Event and Job Costing, are among the ones that
have been done and tested. The Company will make every effort and will allocate
more resources to keep it on this time line. The Company currently estimates it
will expend approximately $150,000 to $200,000 in 1998 to make such software
Year 2000 compliant. Although the Company believes that such software will be
Year 2000 compliant, there can be no assurances that compliance will be
achieved. In the event such compliance is not achieved, it may have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
The Company is making inquiries of its vendors of POS systems and cash
registers regarding whether the systems upon which they rely are Year 2000
compliant and whether they anticipate any impairment of their ability to deliver
product and services as a result of Year 2000 issues. Manufacturers of these
products are being required to document Year 2000 compliance for each product
they sell by December 31, 1998. If the Company determines that a particular
vendor will be impacted by this problem, the Company may attempt to identify
additional or replacement vendors, which could delay accessibility of the
products and/or services provided by such vendors. Such delay or failure to
identify an additional or replacement vendor could have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows. In addition, the Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current software systems
for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase hardware and software products such as those offered by
the Company. The Company cannot estimate at this time the potential loss of
revenue based on this uncertainty. The Company will continue to assess all of
its products it sells and services to verify Year 2000 compliance. The Company
is in the process of formulating a support plan to ensure our customers will be
Year 2000 compliant.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business can be subject to seasonal influences. The POS
dealers and systems integrators which the Company has acquired to date have
typically had lower revenues in the quarters ending March 31 and December 31;
however, the Company's quarterly operating results are affected by a number of
other factors, many of which are beyond the Company's control. A substantial
portion of the Company's backlog is typically scheduled for delivery within 90
days. Delivery dates for products sold by the Company are subject to change due
to customers changing the required installation date of a retail automation
solution system. The changing of such delivery dates is beyond the Company's
control primarily due to lower level of new store openings by customers caused
by inclement weather, contractor delays, financing concerns and/or holidays.
Quarterly sales and operating results, therefore, depend in large part on
customer-driven delivery dates, which are subject to change. In addition, a
significant portion of the Company's operating expenses are relatively fixed in
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nature and planned expenditures are based in part on anticipated orders. Any
inability to adjust spending quickly enough to compensate for any revenue
shortfall may magnify the adverse impact of such revenue shortfall on the
Company's business, results of operations, financial condition and cash flows.
The Company believes that due to these factors, quarterly results may fluctuate
accordingly; therefore, there can be no assurances that results in a specific
quarter are indicative of future results.
In addition, quarterly results in the future may be materially affected
by the timing and magnitude of acquisitions and costs related to such
acquisitions, the timing and extent of staffing additions at corporate
headquarters necessary to integrate acquired companies and support future growth
and general economic conditions. Therefore, due to these factors and the factors
stated above, results for any quarter are not necessarily indicative of the
results that the Company may achieve for any subsequent quarter or for a full
year.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY MATERIALLY AFFECT REVENUES,
EXPENSES AND OPERATING RESULTS INCLUDE, WITHOUT LIMITATION, THE SUCCESS OF THE
COMPANY'S OPERATING SUBSIDIARIES; THE IMPACT OF THE COMPANY'S ACQUISITION
STRATEGY AND THE COMPANY'S ABILITY TO SUCCESSFULLY INTEGRATE AND MANAGE THE
ACQUIRED SUBSIDIARIES; THE ABILITY OF THE COMPANY TO OBTAIN FUTURE FINANCING ON
ACCEPTABLE TERMS; AND SUBSEQUENT CHANGES IN BUSINESS STRATEGY OR PLAN.
The forward-looking statements included herein are based on current
assumptions that the Company will continue to sell and install products on a
timely basis; that the Company will continue to sell maintenance contracts to
service its installed base; that the Company will successfully implement its
acquisition strategy; that competitive conditions within the Company's market
will not change materially or adversely; that demand for the Company's products
and services will remain strong; that the Company will retain existing key
management personnel; that inventory risks due to shifts in market demand will
be minimized; that the Company's forecasts will accurately anticipate market
demand; that the Company will be able to obtain future financing on acceptable
terms when needed; that the Company will be able to maintain key vendor
relationships; and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments that are difficult to predict accurately and are subject to many
factors that can materially affect the Company's business, financial condition,
results of operations and cash flows. Budgeting and other management decisions
are subjective in many respects and are, thus, susceptible to interpretations
and periodic revisions based on actual experience and business developments, the
impact of which may cause the Company to alter its acquisition strategy,
marketing, capital expenditure, or other budgets, which may in turn affect the
Company's business, results of operations, financial condition and cash flows.
In light of the factors that can materially affect the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition to the factors discussed above
in this section, as well as those discussed under the heading "Fluctuations in
Quarterly Results of Operations," the following factors also may materially
affect the Company's business, results of operations, financial condition and
cash flows and therefore should be considered.
LIMITED OPERATING HISTORY. The Company was founded in April 1996 and,
prior to the acquisition of CRI in September 1996, the Company had no operations
upon which an evaluation of the Company and its prospects could be based. There
can be no assurance that the Company will be able to implement successfully its
strategic plan, to generate sufficient revenue to meet its expenses or to
achieve or sustain profitability. (See MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company's
strategy is to increase its revenue and the markets it serves through the
acquisition of additional POS dealers and value added resellers serving retail
end users. From its inception through August 14, 1998, the Company has completed
seven acquisitions. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional companies or successfully
integrate the operations of additional companies into those of the Company
without encountering substantial costs, delays or other problems. In addition,
there can be no assurance that companies acquired in the future will achieve
sales and profitability that justify the Company's investment in them or that
acquired companies will not have unknown liabilities that could materially
adversely affect the Company's results of operations or financial condition. The
Company may compete for acquisition and expansion opportunities with companies
that have greater resources than the Company. There can be no assurance that
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suitable acquisition candidates will continue to be available, that financing
for acquisitions will be obtainable on terms acceptable to the Company, that
acquisitions can be consummated or that acquired businesses can be integrated
successfully and profitably into the Company's operations.
Further, the Company's results of operations in quarters immediately
following a material acquisition may be materially adversely effected while the
Company integrates the acquired business into its existing operations. The
Company may acquire certain businesses either that have been unprofitable or
that have had inconsistent profitability prior to their acquisition. An
inability of the Company to improve the profitability of these acquired
businesses could have a material adverse effect on the Company.
Finally, the Company's acquisition strategy places significant demands
on the Company's resources and there can be no assurance that the Company's
management and operational systems and structure can be expanded to effectively
support the Company's continued acquisition strategy. If the Company is unable
to implement successfully its acquisition strategy, this inability may have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flows.
In connection with seven of its acquisitions, the Company entered into
employment agreements with certain individuals. Under the terms of such
agreements, if certain performance standards of the acquired companies are met,
the Company is obligated to pay a bonus to these individuals. The performance
standards are based upon, among other things, the acquired companies' pre-tax
profits. As of September 30, 1998, on average, the acquired companies have
achieved 62% of their baseline, performance standards. Accordingly, the Company
has not made any bonus payment or incurred any liability under any of such
employment agreements. The Company does not expect to accrue bonuses until the
acquired companies achieve an excess of 100 percent of their baseline,
performance standards. At such time, the Company will accrue bonuses based on a
percentage of the improvement over 100 percent.
The employment agreements also allow the Company to take certain
remedial action in the event the acquired companies do not meet their respective
performance standards. With respect to five of the acquisitions, the Company has
taken remedial action against certain employees who did not meet (or whose
company did not meet) the performance standards set out in their respective
employment agreements. Such remedial action includes the geographical transfer
of one employee, placement of other employees on probation, and the
restructuring of two of the acquisitions.
NEED FOR ADDITIONAL FINANCING TO IMPLEMENT ACQUISITION STRATEGY. The
Company currently intends to effect future acquisitions with cash generated from
operations and future issuance of debt or equity securities. There can be no
assurance that the Company will be able to obtain financing if and when it is
needed on terms the Company deems acceptable. The inability of the Company to
obtain financing would have a material adverse effect on the Company's ability
to implement its acquisition strategy, and as a result, could require the
Company to diminish or suspend its acquisition strategy.
CONSIDERATION FOR ACQUIRED COMPANIES EXCEEDS ASSET VALUE. Valuations of
the companies acquired by the Company have not been undertaken based on
independent appraisals, but have been determined through arm's-length
negotiations between the Company and representatives of such companies. The
consideration for each such company has been based primarily on the judgment of
management as to the value of such company as a going concern and not on the
book value of the acquired assets. Valuations of these companies determined
solely by appraisals of the acquired assets may have been less than the
consideration paid for the companies. No assurance can be given that the future
performance of such companies will be commensurate with the consideration paid.
Specifically, during the fourth quarter of 1997, the Company recorded a goodwill
write-down of approximately $1,871,000 which consisted of $1,442,000 related to
Smyth Systems, $419,000 related to CRI and $10,000 related to its other
subsidiaries. SEE "GOODWILL WRITE-DOWN" IN THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB/A FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1997. No assurance can be
given that the facts and circumstances surrounding the write-down will not occur
in the future. Moreover, the Company has incurred and expects to incur
significant amortization charges resulting from consideration paid in excess of
the book value of the assets of the companies acquired and companies which may
be acquired in the future.
SUBSTANTIAL COMPETITION. The POS industry is highly fragmented and
competitive. Competitive factors within the industry include product prices,
quality of products, service levels, reputation and geographical location of
dealers. The Company primarily competes with independent POS dealers and some of
these dealers may have greater financial resources available to them than does
the Company. In addition, there are original equipment manufacturers of POS
equipment and value-added resellers that specialized in software applications
for the POS industry that compete in certain product areas. The Company's
ability to make acquisitions will also be subject to competition. The Company
believes that, during the next few years, POS dealers may seek growth through
consolidation with entities other than the Company. In addition, no assurance
can be given that the major manufacturers will not choose to effect or expand
the distribution of their products through their own wholesale organizations or
effect distribution directly to many of the retail accounts of the Company in
the markets served by the Company. Any of these developments could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flows.
Page 18
<PAGE>
SUBSTANTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS. The Company may
experience substantial fluctuations in its annual and quarterly operating
results in future periods. The Company's operating results are affected by a
number of factors, many of which are beyond the Company's control. A substantial
portion of the Company's backlog is typically scheduled for delivery within 90
days. Delivery dates for products sold by the Company are subject to change due
to customers changing the required installation date of a retail automation
solution system. The changing of such delivery dates is beyond the Company's
control. Quarterly sales and operating results therefore depend in large part on
customer-driven delivery dates, which are subject to change. In addition, a
significant portion of the Company's operating expenses are relatively fixed in
nature and planned expenditures are based in part on anticipated orders. Any
inability to adjust spending quickly enough to compensate for any revenue
shortfall may magnify the adverse impact of such revenue shortfall on the
Company's business, results of operations, financial condition and cash flows.
DEPENDENCE ON MANUFACTURERS. A substantial portion of the Company's
total revenue is and will be derived from the sale of POS systems, ECRs and
related equipment, none of which are manufactured by the Company. The Company's
business is dependent upon close relationships with manufacturers of POS
equipment and software and the Company's ability to purchase equipment and
software in the quantities necessary and upon competitive terms so that it will
be able to meet the needs of its end user customers. The Company purchases its
hardware principally from three vendors: Panasonic, ERC (a distributor of
Panasonic products) and NCR. Sales of Panasonic, ERC and NCR products accounted
for approximately 32% of revenues for the nine month period ended September 30,
1998, with sales of Panasonic and NCR products accounting for 12% and 20% of the
Company's total revenue in that nine month period, respectively. There can be no
assurance that the relationships with these manufacturers will continue or that
the Company's supply requirements can be met in the future. The Company's
inability to obtain equipment, software, parts or supplies on competitive terms
from its major manufacturers could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flows.
FIXED FEE CONTRACTS. Many of the Company's service contracts are fixed
fee contracts pursuant to which the customer pays a specified fee for the
Company's performance of all necessary maintenance and remedial services during
the contract's term. Under these agreements, the Company is responsible for all
costs incurred in maintaining and repairing the equipment, including the cost of
replacement parts, regardless of actual costs incurred. Accordingly, the Company
can incur losses from fixed fee contracts if the actual cost of maintaining or
repairing the equipment exceeds the costs estimated by the Company.
POTENTIAL INABILITY TO MARKET NEWLY DEVELOPED PRODUCTS. The technology
of POS systems, ECRs, VARs and related equipment is changing rapidly. There can
be no assurance that the Company's existing manufacturers will be able to supply
competitive new products or achieve technological advances necessary to remain
competitive in the industry. Further, there can be no assurance that the Company
will be able to obtain the necessary authorizations from manufacturers to market
any newly developed equipment or software. The Company's Smyth Systems, Inc.
(Smyth) subsidiary operates in the VAR solutions segment, wherein it develops
customized, turnkey retail automation solutions, consisting of both hardware and
software for the golf course and resort markets. There can be no assurance that
Smyth will be able to develop commercially viable and technologically
competitive VAR solutions at competitive prices to compete in these markets.
RELIANCE ON KEY PERSONNEL. Implementation of the Company's acquisition
strategy is largely dependent on the efforts of a few senior officers. In
particular, the Company's operations are dependent to a great degree on the
continued efforts of its Chief Executive Officer, Richard H. Walker.
Furthermore, the Company will most likely continue to be dependent on the senior
management of companies that are acquired. Competition for highly qualified
personnel is intense, and the loss of any executive officer or other key
employee, or the failure to attract and retain other skilled employees, could
have a material adverse effect upon the Company's business, results of
operations or financial condition. The Company is a party to an agreement with
Mr. Walker. The agreement with Mr. Walker terminates in 2004, unless terminated
earlier pursuant to the agreement, and contains confidentiality provisions and
covenants not to compete. State laws, however, may limit the enforceability of
the confidentiality and/or non-competition provisions therein. The Company is
currently the beneficiary of a key man life insurance policy in the amount of
$1,000,000 on the life of Mr. Walker. There can be no assurance that the Company
will maintain the policy in effect or that the coverage will be sufficient to
compensate the Company for the loss of the services of Mr. Walker.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. Certain
provisions of the Company's Certificate of Incorporation and Bylaws may have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
These provisions make it more difficult for stockholders to take certain
corporate actions and could have the effect of delaying or preventing a change
in control of the Company. For example, the Company has not elected to be
excluded from the provisions of Section 203 of the Delaware General Corporation
Law, which impose certain limitations on business combinations with interested
stockholders upon acquiring 15% or more of the common stock. This statute may
have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company, even if such event would be beneficial to the
then-existing stockholders. In addition, the Company's Certificate of
Incorporation authorizes the issuance of up to 4,000,000 shares of preferred
stock with such rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors may, without
stockholder approval, issue preferred stock with dividends, liquidation,
conversion, and voting or other rights, which could adversely affect the voting
Page 19
<PAGE>
power or other rights of the holders of the Company's common stock. The issuance
of preferred stock could have the effect of entrenching the Company's Board of
Directors and making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company.
As of March 31, 1998, the Company had issued 10,000 shares of Series A
Convertible Preferred Stock (the Preferred Stock), at an issue price of $100 per
share. Each share of Preferred Stock is convertible at the option of the holder
thereof at any time into a number of shares of common stock determined by
dividing the issue price by the conversion price, which is defined to be 78% of
the lowest non-consecutive five-day average closing bid price for the common
stock for the 25-day period prior to conversion. Each holder of shares of the
Preferred Stock is entitled to the number of votes equal to the number of shares
of common stock into which it could be converted. The Company cannot, without
the vote or written consent of the holders of at least 66-2/3% of the then
outstanding shares of Preferred Stock, (i) redeem, purchase or otherwise acquire
for value any share of the Preferred Stock; (ii) redeem, purchase or otherwise
acquire any of the Company's common stock; (iii) authorize or issue any other
equity security senior to or on parity with the Preferred Stock as to voting
rights, dividend rights, conversion rights, redemption rights or liquidation
preferences; (iv) declare or pay any dividend or make any distribution with
regard to any share of common stock; (v) sell, convey, lease or otherwise
dispose of all or substantially all of its property or business; liquidate,
dissolve or wind up the Company's business; or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary); (vi) effect any
transaction or series of transactions in which more than 50% of the voting power
of the Company is disposed of, unless the Company's stockholders of record as
constituted immediately prior to such transaction will, immediately thereafter,
hold at least a majority of the voting power of the surviving or acquiring
entity; (vii) permit any subsidiary to issue or sell any of its capital stock
(except to the Company); (viii) increase or decrease (other than by redemption
or conversion) the total number of authorized shares of Preferred Stock; or (ix)
alter or change the rights, preferences or privileges of the shares of Preferred
Stock so as to adversely affect the outstanding shares. In the event of any
liquidation dissolution or winding up of the Company, whether voluntary or
involuntary, the holders of the Preferred Stock shall be entitled to receive,
prior and in preference to any distributions to holders of common stock, an
amount per share equal to $100 plus any declared but unpaid dividends.
VOLATILITY OF STOCK PRICE. The stock market from time to time
experiences significant price and volume fluctuations that are unrelated to the
operating performance of the particular companies. These broad market
fluctuations may materially adversely affect the market price of the Company's
common stock. In addition, the market price of the Company's common stock has
been and may continue to be highly volatile. Factors such as possible
fluctuations in the Company's business, results of operations or financial
condition, failure of the Company to meet expectations of security analysts and
investors, announcements of new acquisitions, the timing and size of
acquisitions, the loss of suppliers or customers, the announcement of new or
terminated supply agreements by the Company and its subsidiaries or its
competitors, changes in regulations governing the Company's operations or its
suppliers, the loss of the services of a member of senior management, litigation
and changes in general market conditions all could have a material adverse
affect on the market price of the Company's common stock.
MAINTENANCE CRITERIA FOR NASDAQ; RISKS OF LOW-PRICED SECURITIES. The
Company's common stock is presently traded on the Nasdaq SmallCap Market. To
maintain inclusion on the Nasdaq SmallCap Market, the Company's common stock
must continue to be registered under Section 12(g) of the Exchange Act, and the
Company must continue to have at least $2,000,000 in net tangible assets or
$500,000 in income in two of the last three years, a public float of at least
500,000 shares, $5,000,000 in market value of public float, a minimum bid price
of $1.00 per share, at least two market makers and at least 300 stockholders.
While the Company currently meets the maintenance standards, there is no
assurance that the Company will be able to maintain the standards for Nasdaq
SmallCap Market inclusion with respect to its securities. At September 30, 1998,
the Company had $2,161,000 in net tangible assets. If the Company fails to
maintain Nasdaq SmallCap Market listing, the market value of the Company's
common stock in all likelihood would decline and stockholders would find it more
difficult to dispose of or to obtain accurate quotations as to the market value
of the common stock.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Certificate
of Incorporation (the Certificate) and Bylaws include provisions that eliminate
the directors' personal liability for monetary damages to the fullest extent
possible under Delaware Law or other applicable law (the Director Liability
Provision). The Director Liability Provision eliminates the liability of
directors to the Company and its stockholders for monetary damages arising out
of any violation by a director of his fiduciary duty of due care. Under Delaware
Law, however, the Director Liability Provision does not eliminate the personal
liability of a director for (i) breach of the director's duty of loyalty, (ii)
acts or omissions not in good faith or involving intentional misconduct or
knowing violation of law, (iii) payment of dividends or repurchases or
redemption of stock other than from lawfully available funds, or (iv) any
transaction from which the director derived an improper benefit. The Director
Liability Provision also does not affect a director's liability under the
federal securities laws or the recovery of damages by third parties.
ABSENCE OF DIVIDENDS. The Company has not paid dividends on its common
stock to date. The Company is obligated to pay, quarterly, cumulative dividends
at a rate of six percent (6%) per annum of the issue price of the Preferred
Stock, payable, at the holders' option, in cash or in common stock at the
conversion price of the Preferred Stock. So long as any shares of Preferred
Stock remain outstanding, the Company may not, without the vote or written
consent of the holders of at least 66-2/3% of the then outstanding shares of
Preferred Stock, voting together as a single class, declare or pay any dividend
Page 20
<PAGE>
with regard to any share of common stock. (See ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS, ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW
PROVISIONS) Additionally, although the current line of credit does not expressly
prohibit the Company from paying dividends, the line of credit does contain
certain covenants which restrict the reduction or depletion of the Company's
capital. The Company anticipates that future financing, including any lines of
credit, may further restrict or prohibit the Company's ability to pay dividends.
RESTRICTIONS ON COMPANY'S ABILITY TO ENTER INTO CERTAIN TRANSACTIONS.
On December 17, 1997, the Company obtained a new line of credit. Pursuant to the
terms of the line of credit, the Company is prohibited from engaging in certain
transactions without first obtaining the written consent of the lender. Such
transactions include, but are not limited to, (i) the sale or acquisition of
assets with a value exceeding $50,000; (ii) the sale or transfer of any
collateral under the line of credit, except for the sale of items in the
Company's finished inventory in the ordinary course of business; (iii) the sale
of inventory on a sale-or-return, guaranteed sale, consignment or other
contingent basis; and (iv) any other transaction outside the ordinary course of
business. No assurance can be given that these restrictions will not impact the
Company's ability to conduct business in the future, even though the line of
credit does not prohibit or restrict the Company from acquiring other companies
(including acquisitions for amounts greater than $50,000) pursuant to its
acquisition strategy.
Page 21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 7, 1997, a class action complaint was filed
against the Company and certain of the Company's officers and directors.
Underwriters for the Company's initial public offering are also named as
defendants. The class action plaintiffs are Lincoln Adair, Antique Prints, Ltd.,
and Martha Seamons, on behalf of themselves and all others similarly situated.
The case is pending in the United States District Court for the Southern
District of New York. In addition to seeking to have themselves declared proper
plaintiffs and having the case certified as a class action, plaintiffs seek
unspecified monetary damages. The plaintiffs' complaint alleges claims under the
federal securities laws for alleged misrepresentations and omissions in
connection with the sale of the Company's securities. On December 23, 1997, the
Company filed a motion to dismiss the complaint, and on May 14, 1998, the court
denied the Company's request. The Company denies that it has any liability to
the class action plaintiffs and intends to vigorously defend itself. The outcome
of this litigation is not currently predictable, and the Company believes that
all or substantial part of the damages if any would be covered by insurance.
Other than the related legal fees, the Company has not made a provision for any
liability in the accompanying financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Calculation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended September 30, 1998, the
Company did not file any Current Reports on Form 8-K.
Page 22
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bristol Retail Solutions, Inc.
--------------------------------------------
(Registrant)
November 13, 1998 By: /s/ MICHAEL S. SHIMADA
- -------------------------------- --------------------------------------------
Date Michael S. Shimada
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
Page 23
<PAGE>
EXHIBIT 11
<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Computation of Earnings (Loss) per Share
<CAPTION>
Three Months Ended September 30,
1998 1997
-------------- --------------
(As Restated)
<S> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (338,994) $ (195,989)
Accretion related to Series A Convertible Preferred Stock - - - -
Imputed dividends for Series A Convertible Preferred Stock - - - -
Cumulative dividends for Series A Convertible Preferred Stock (7,580) - -
-------------- --------------
Net loss applicable to common stockholders $ (346,574) $ (195,989)
============== ==============
Weighted average number of common shares outstanding during the
period 5,876,201 5,503,929
============== ==============
Basic loss to common stockholders per share $ (0.06) $ (0.04)
============== ==============
DILUTED LOSS PER SHARE
Net loss applicable to common stockholders $ (346,574) $ (195,989)
Plus: Income impact of assumed conversion-Preferred dividends - - - -
-------------- --------------
Net loss applicable to common stockholders $ (346,574) $ (195,989)
============== ==============
Weighted average number of common shares outstanding during the
period 5,876,201 5,503,929
Effect of stock options, warrants and convertible preferred stock
treated as common stock equivalents under the treasury stock
method - - - -
-------------- --------------
Total shares 5,876,201 5,503,929
============== ==============
Diluted loss to common stockholders per share $ (0.06) $ (0.04)
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
-------------- --------------
(As Restated)
<S> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (787,719) $ (1,404,203)
Accretion related to Series A Convertible Preferred Stock (241,916) - -
Imputed dividends for Series A Convertible Preferred Stock (227,589) - -
Cumulative dividends for Series A Convertible Preferred Stock (23,300) - -
-------------- --------------
Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203)
============== ==============
Weighted average number of common shares outstanding during the
period 5,697,308 5,086,616
============== ==============
Basic loss to common stockholders per share $ (0.22) $ (0.28)
============== ==============
DILUTED LOSS PER SHARE
Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203)
Plus: Income impact of assumed conversion-Preferred dividends -- - -
-------------- --------------
Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203)
============== ==============
Weighted average number of common shares outstanding during the
period 5,697,308 5,086,616
Effect of stock options, warrants and convertible preferred stock
treated as common stock equivalents under the treasury stock
method - - - -
-------------- --------------
Total shares 5,697,308 5,086,616
============== ==============
Diluted loss to common stockholders per share $ (0.22) $ (0.28)
============== ==============
</TABLE>
Page 24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE UNAUDITED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IN THE REPORT ON FORM
10-QSB FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF BRISTOL RETAIL SOLUTIONS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 445,086
<SECURITIES> 0
<RECEIVABLES> 7,379,441
<ALLOWANCES> 300,553
<INVENTORY> 4,050,776
<CURRENT-ASSETS> 12,183,739
<PP&E> 1,206,073
<DEPRECIATION> 413,283
<TOTAL-ASSETS> 18,844,056
<CURRENT-LIABILITIES> 11,854,556
<BONDS> 0
0
3
<COMMON> 6,216
<OTHER-SE> 6,794,786
<TOTAL-LIABILITY-AND-EQUITY> 18,844,056
<SALES> 23,604,172
<TOTAL-REVENUES> 23,604,172
<CGS> 16,091,921
<TOTAL-COSTS> 24,144,623
<OTHER-EXPENSES> 237,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (778,093)
<INCOME-TAX> 9,626
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (787,719)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
