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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from_________ to___________
Commission file number 0-21633
BRISTOL RETAIL SOLUTIONS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 58-2235556
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $32,196,708 for the
year ended December 31, 1998.
The aggregate market value of the voting common equity held by
non-affiliates was approximately $4,718,291 (computed using the closing price of
$1.00 per share of Common Stock on November 30, 1998 as reported by The Nasdaq
Stock Market, based on the assumption that directors and officers and more than
5% stockholders are affiliates). The Company has no non-voting common equity.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
There were 6,920,519 shares of the registrant's Common Stock, par value
$.001 per share, and 718,750 of the registrant's Class A Redeemable Common Stock
Purchase Warrants outstanding on February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company is a dealer of retail point-of-sale ("POS") systems in the
United States with operations in 17 cities in eight states. The Company sells,
installs and supports POS systems, which retail establishments use to collect
and process data at the "point-of-sale" during sales transactions with
customers. The Company has installed systems in more than 15,400 retail
locations, primarily in supermarkets, table-service and fast food restaurants,
and golf courses and resorts, which are the three markets of the retail industry
on which the Company currently focuses. The Company installs POS systems
manufactured by NCR Corporation ("NCR"), International Business Machines Corp.
("IBM"), Matsushita Electronic Corporation of America ("Panasonic"), ICL Retail
Systems ("ICL-Fujitsu"), Micro Systems, Incorporated ("Micros"), and several
other manufacturers. The Company has developed and is marketing software
specifically designed for golf course and resort applications and has license
agreements with several software companies for specific applications for its
other target markets.
The POS computer systems installed by the Company serve a range of
valuable functions required by retailers to be competitive today. These include
speedier customer checkout service, tracking customer purchases and preferences,
monitoring inventory on a real-time basis, integrating scanning, promotional and
electronic funds transfer (EFT) systems and security monitoring. Retailers who
outgrow the limitations of electronic cash registers (ECRs) represent a major
source of new revenue for the Company. The Company also expects additional
demand for its products to come from retailers seeking to upgrade existing,
under-performing POS systems as well as from new retailers.
The Company's original plan was to become a national distribution
organization for POS systems through selective acquisitions of independent
dealers and systems integrators that sell, install, and support POS systems for
use in retail establishments. On March 19, 1999, the Company signed a letter of
intent to acquire Hayman Systems ("Hayman") and Micros of South Florida, ("South
Florida"). Completion of the acquisition will be predicated upon the completion
of a definitive agreement, completion of due diligence, completion of financing
and the approval of Bristol's shareholders. Mr. Richard Hayman will become the
new Chief Executive Officer and President. Upon completion of the merger the
Company's strategy for the future will be defined.
The Company has acquired seven dealers since its establishment in April
1996. The following table sets forth certain information with respect to the
Company's acquisitions to date.
<TABLE>
<CAPTION>
ACQUISITIONS DATE BUSINESS LOCATIONS
- -------------------------------------------------- ------------- ----------------- -------------
<S> <C> <C> <C>
Cash Registers, Incorporated ("CRI") June 1996 POS Dealer Kentucky/Ohio
Automated Register Systems, Inc. ("ARS") December 1996 POS Dealer Washington
MicroData, Inc. ("MICRODATA") April 1997 POS Dealer Illinois
Smyth Systems, Inc. ("SMYTH") May 1997 POS Dealer and VAR Ohio/California/Colorado/Utah
Electronic Business Machines, Inc. ("EBM") June 1997 POS Dealer Indiana
Pacific Cash Register and Computer, Inc. ("PCR") August 1997 POS Dealer California
Quality Business Machines ("QBM ") May 1998 POS Dealer California
</TABLE>
INDUSTRY OVERVIEW
The driving forces in retailing in the United States are the need to
attract and retain new customers with a variety of goods and services that meet
the ever-changing tastes of consumers, to increase the average sale per visit,
and to maximize internal productivity and efficiency in order to generate higher
operating profits. Retailers need the ability to quickly identify the buying
history and preferences of the consumer. Access to such information allows
retailers to match or to adjust their current products and services to the
ever-changing demands of consumers. These trends have accelerated the
requirement for enterprise-wide access to information and have heightened the
demand for automated information systems. The Company believes this is due, in
part, to the shift in consumer preferences toward variety, value, and
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convenience. Furthermore, consumers are demanding speedier checkout times, the
ability to accept credit and debit cards at the point-of-sale, and the
convenience of performing a POS transaction without human intervention.
Retailers have long sought new uses of technology to help them improve
efficiency. The first specialized apparatus was the cash register. Electronic
cash registers (ECR) used by many retailers are incapable of handling the
increasing need to capture and process detailed information or the demand for
faster service. For many types of retailers, automation did not make economic or
business sense until the price of computing power and the cost of implementation
declined. Computing power has become increasingly flexible and easy to use.
Today, the computer has made the modern POS system practical, providing the
means to capture and process enormous amounts of information while at the same
time performing the basic cash control duties of a cash register. The initial
investment in a POS system is offset by reduced labor and transaction costs.
Retail automation has become an important tool for creating strategic
advantage. There is a growing trend among retailers to implement local area
networks ("LANs") and wide area networks ("WANs") in retail establishments. The
LANs serve a range of valuable functions, including speeding customer checkout
service, tracking customer purchases and preferences, monitoring inventory on a
real-time basis, integrating scanning, promotional and electronic funds transfer
systems, security monitoring, and in-store accounting. WANs integrate several
LANs into a corporate headquarters' information system to permit management to
review individual store operations by analyzing the data that a sophisticated
POS system produces.
The Company believes that as a consequence of competitive pressures
within the retail industry and the Year 2000 problem, demand for POS systems is
strong and will be into the next millenium. The Company believes that the
majority of retailers plan to increase capital spending and increase retail
automation expenditures as a percentage of sales. The Company also believes that
retail automation spending increased by 3% in 1996 over the previous year and is
estimated to have increased by 11% in 1997 to 0.82% of sales among retailers. No
data is currently available for 1998. In addition, the Company also believes
that average retailers dedicate approximately 23% of total information
technology funds to POS systems. The Company believes that 30% of retailers are
planning to buy or upgrade POS systems in 1999, due to retail mergers, expansion
plans and the Year 2000 requirements.
The Company targets supermarkets, table-service and fast food
restaurants, and golf courses and resorts. The Company believes the portion of
the annual market for POS systems addressable by the Company and other dealers
is approximately $350 million for supermarkets, $1.2 billion for table-service
and fast food restaurants, and $75 million for golf courses and resorts. In
addition, the Company believes that the total annual market for POS system
maintenance and related services is approximately 35% of systems sales.
The Company believes that approximately 800,000 units (POS systems and
ECRs) are sold per year. In 1997, there were more than 5.6 million POS systems
and ECRs in use in the United States. The Company also believes that only 70%
have an automated POS system in place. The Company believes the current average
life of a POS system is five to seven years. However, the Company anticipates
that retailers with ECRs or older POS systems will replace their units or
systems more rapidly than in the past in order to take advantage of new product
features that are being introduced more frequently than in the past.
The channels of distribution for retail automation systems in the
United States are fragmented and overlapping. The two principal distribution
channels for POS systems and ECR products to reach the end user currently are:
(i) the "Direct" channel and (ii) the "Indirect" channel. The Direct channel
consists of manufacturers that sell directly to large, national "major retail"
chains. The Direct channel represents less than half of all units sold. The
Indirect channel consists of a variety of independent businesses, which sell to
all types of retail end-users. The two principle components of the Indirect
channel are dealers and Value Added-Resellers (VARs). Dealers in the Indirect
channel generally take title to equipment that they resell and do not, as a
rule, engage in software development. In contrast, VARs are typically
compensated with a commission from the manufacturer and need not take title to
equipment or provide hardware service. VARs sometimes also act as software
developers. All manufacturers use dealers or VARs to distribute at least a
portion of their products to the retail market, and some manufacturers use
dealers or VARs as their exclusive means of distributing their products. The
Company believes that by the Year 2000, POS dealers and VARs will sell the
majority of POS systems because major suppliers are relying increasingly on the
Indirect channel for distribution since dealers and VARs can operate at a lower
cost than the major manufacturers.
The typical POS or ECR dealer is privately held, is licensed to
represent and to resell only one or two manufacturers for its key products and
sells, and services those products on a restricted, regional basis. Typical
dealership functions are sales, in-house and on-site service, and
administration. Based on the Company's experience in evaluating dealers as
acquisition candidates, the Company believes that the typical dealer derives its
revenue from the sale of hardware, software, and service. The Company believes
there are more than 3,000 independent POS and ECR dealers in the United States
that sell to customers in one or several segments of the retail industry.
Because restaurants and supermarkets have been among the first markets in the
retail industry to adopt retail automation tools, the majority of POS and ECR
dealers have some sales to one or both of these markets.
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Systems integrators, who integrate different manufacturers' hardware
and software products into one system, also play a role in distributing POS
systems. Systems integrators generally market turnkey solutions directly to
retailers, primarily through their own sales force of specialists with in-depth
knowledge of their targeted markets. They seek to deliver solutions for many of
the demanding operating challenges facing retailers in today's competitive
environment. The Company believes its expanding network of POS dealers will
provide additional POS sales leads and on-site service opportunities for the
Company's systems integration applications for golf courses and resorts.
The Company believes that there is a direct relationship between the
size of the retailer and the strategy it employs in purchasing a POS system.
Large chains tend to purchase system components directly from manufacturers and
utilize an in-house staff to perform system integration. Smaller retailers tend
to buy integrated systems from a single source. The Company expects
manufacturers to increasingly concentrate their direct sales efforts on the
largest retail chains and to rely increasingly on the Indirect channel to reach
the balance of the retail marketplace. The Company also expects a fundamental
shift in marketing strategies to develop as retail automation systems become
more complex as software, installation, maintenance support, and systems
integration as opposed to hardware become a larger share of the total cost of
purchase.
The Company believes that consolidation among potential POS end-users
could impact the number of participants and the structure of the distribution
system for POS systems. There has been an increase in consolidation activity
among retailers in recent years, including a record-breaking 180 transactions
involving the merger or acquisition of restaurant companies in 1997, following
177 mergers in 1996. Although less intensive, similar consolidation is taking
place among supermarkets and grocery stores as evidenced by the combinations of
regional chains such as Safeway Stores/Vons Cos. and Smith's Food &
Drug/Smitty's Food Stores, among others. The Company believes that increasingly
sophisticated and geographically dispersed retailers will expect to leverage
volume purchases in order to lower operating costs, and that a national dealer
will be able offer the convenience and consistency that local vendors cannot
match.
For the year ended December 31, 1998, approximately 62% of the
Company's total revenues were attributable to POS sales and support,
approximately 10% were attributable to systems integration sales and support and
approximately 1% were attributable to ECR sales and support. The remaining sales
were attributable to maintenance service contracts and supplies.
COMPANY STRATEGY
The Company's original, strategic plan was to develop a national
organization for the distribution of POS systems through selective acquisitions
of independent dealers and systems integrators who sell, install, and support
POS systems at retail establishments. The Company's objective was to leverage
already established regional channels, customer relationships, and market
expertise to achieve synergistic growth of revenue and improve profit
performance. On March 19, 1999, the Company signed a letter of intent to acquire
Hayman Systems ("Hayman") and Micros of South Florida ("South Florida").
Completion of the acquisition will be predicated upon the completion of a
definitive agreement, completion of due diligence, completion of financing and
the approval of Bristol's shareholders. Mr. Richard Hayman will become the new
Chief Executive Officer and President. Upon completion of the merger, the
Company's strategy for the future will be defined.
The Company currently focuses on sales to supermarkets, table-service
and fast food restaurants, and golf courses and resorts. These groups were
chosen because the Company believes they represent large vertical business
segments that offer the best opportunity for future sales growth and improved
margins. The Company believes that with its existing operations, it is in
regional markets that have growth opportunities. Therefore, the Company is
focusing on its sales efforts to grow internally until such time as the
acquisition of Hayman and South Florida has been completed at which time the
Companies strategy will be defined.
GROWTH STRATEGIES
PURSUING STRATEGIC ACQUISITIONS. The Company intended to capitalize
upon the significant consolidation opportunities available in the highly
fragmented POS systems dealer industry by acquiring additional dealers and
improving their performance and profitability through the implementation of the
Company's operating strategies. One of the Company's original, primary goals was
to establish, prior to the end of 1998, a national network of operations that
will enhance its ability to attract regional and national retailers in the three
markets the Company has targeted, to its customer base. Generally, the regional
and national retailers are either franchisee store owners or corporate-owned
stores such as Cinnabon, Certified Grocers, Fazoli's or Wendy's that have stores
throughout the United States. The Company believes that the consolidation of
acquired dealers enables it to capitalize on the experience and customer
contacts of the personnel of acquired companies, eliminate redundant costs, and
achieve greater productivity and more effective utilization of resources. The
Company estimates that there are approximately 300 POS dealers in the United
States with annual revenue in excess of $2.0 million each. Though the Company
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believes that the acquisition strategy is viable, additional acquisitions, other
than Hayman and South Florida, is currently on hold due to the need for
additional capital and the completion of its centralization strategy.
OFFERING ADDITIONAL PRODUCT LINES AND SERVICES. When permitted by
manufacturer agreements, the Company plans to offer throughout its existing and
acquired dealerships, product lines that previously have been offered only at
certain of its locations. The Company also intends to create a uniform group of
products and support services that can be provided from each of its locations.
In addition, the Company expects to increase revenue and improve profitability
through enhanced financing packages, such as a customized lease program, and
long-term service and support agreements designed to better serve customers.
OPERATING STRATEGIES
ACHIEVING OPERATING EFFICIENCIES AND SYNERGIES. The Company plans to
further increase the operating efficiencies of its dealerships to enhance
internal growth and profitability. The Company has consolidated payroll,
insurance services, employee benefits and finances. The Company implemented a
wide-area network and selected an integrated, software package utilized by one
of its wholly-owned subsidiaries. The Company converted the acquisition in
Sacramento to this software. The Company, in 1999, will convert the other,
remaining subsidiaries to this software with the goal to centralize certain
administrative functions at the corporate level, such as accounting, finance,
purchasing, inventory control, warehousing and distribution. Centralization of
functions should serve to reduce duplicative expenses and permit the dealerships
to benefit from a level of scale and expertise that would otherwise be
unavailable to them individually. For example, the Company expects to realize
cost savings from reduced inventory carrying costs through a centralized
warehouse, the exchange of technical knowledge on the equipment and software it
sells and the expanded opportunity for volume discounts on selected products and
supplies, however, there can be no assurance that this opportunity can be
realized. By eliminating responsibility for administrative functions, the
dealerships can focus their full attention on generating revenue from sales and
support activities.
UTILIZING TECHNOLOGY THROUGHOUT OPERATIONS. The Company continues to
install the management information system to enhance the Company's ability to
integrate successfully and quickly the operations of acquired dealerships and
future acquisitions. In addition to handling the range of centralized functions,
the management information system also will facilitate the interchange of
information and enhance cross-selling opportunities throughout the Company,
however, there can be no assurance that this opportunity can be realized. It
also will serve as a management tool to monitor performance at the dealer and
distributor locations and quickly identify those situations requiring additional
attention.
EMPHASIZING CUSTOMER SATISFACTION AND LOYALTY. The Company seeks to
achieve a high level of customer satisfaction and to enhance long-term loyalty
of its customers by offering the systems that best serve their needs while
supporting each sale with the highest quality of service and training. The
Company maintains ongoing training programs for its service and support
personnel to enable them to assess effectively customer requirements and deliver
effective solutions to retailers.
IMPLEMENTING BEST PRACTICES. The Company strives to implement the "best
practices" of its dealers. These practices include successful selling techniques
and incentives, programs to promote increased maintenance and support services,
and employee motivation programs.
PRODUCTS AND SERVICES
SYSTEMS
A POS system is used at the "point-of-sale" in a retail establishment
to collect and process data with communications capability. A POS system leads
or prompts the retail clerk through a sales transaction with a customer and
collects detailed information, including credit information, consumer
preferences and inventory. Standard components of a POS system include a display
terminal to view the transaction, a keyboard for data processing, a scanner
(supermarket applications), a credit or debit card reader and coordinating
communications, and software to guide the clerk through the entire transaction.
A POS system leads or prompts the retail clerk through a sales transaction with
a customer and collects detailed information, including credit information about
the transaction. Typically, a number of sophisticated POS "registers" are
installed in a retail establishment, which allows multiple departments or
locations to enter transactions simultaneously.
SERVICES AND SUPPLIES
The Company offers its customers a variety of value-added services,
such as consulting, integration, and support services. Consulting and
integration services include system design, performance analysis and security
analysis; migration planning, product procurement, configuration and testing;
and systems installation and implementation. Through the acquisition of Smyth
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Systems, Inc, the Company believes that it will be in a position to expand on
Smyth Systems, Inc.'s current capacity to provide systems integration services
for golf courses and resorts and offer such services to a broader range of
customers.
The Company also offers its customers continued support, customer
service, and supplies from installation through the life span of the products it
sells. Support services include network management, 7 days x 24-hour "help-desk"
support and enhancement, and maintenance and repair of POS systems. Upon
conversion of its management information systems, the Company will be
consolidating its support and customer service efforts in order to enable the
Company to provide a consistent national level of support to its customers.
Additionally, the Company is working with a large third-party POS supplies
vendor to establish a strong centralized telemarketing capability for marketing
supplies.
SALES, MARKETING AND DISTRIBUTION
The Company identifies its customers in a number of ways, including
referrals from existing customers, advertising in local Yellow Pages and
industry publications, through the Company's direct sales personnel, by means of
customer upgrades and replacements, and referrals from suppliers. Once the
Company identifies a potential customer, the lead is assigned to a Company sales
person who will follow-through and attempt to complete the sale. It is the sales
person's responsibility to identify the needs of the customer and to sell to the
customer a total POS systems solution. The typical sales cycle, from
introduction to installation, ranges from six months to nine months for a POS
sale and six months to two years for its golf course and resort VAR application.
The Company currently has a small telemarketing sales staff selling
supplies to a limited number of customers. The Company intends to expand this
sales approach into selling supplies company-wide as well as to generate new
sales leads for POS systems. The Company, has periodically made marketing
presentations at several trade shows for the golf and resorts market. The
Company intends to explore other avenues to sell and market its products.
CUSTOMERS
The Company concentrates its sales efforts on three principle markets
of the retail industry, which are supermarkets, fast food and table service
restaurants, and golf courses/resorts. Typically, the Company's customers tend
to be a regional franchisee or a group of several stores with the same owner.
Generally, when the Company receives an order for POS systems, it will be for a
group of stores to be installed over a relatively, short period of time. After
completion of the installation of these stores, future revenues from the
customer will be for maintenance service contracts or supplies.
The majority of the Company's customers in the supermarket market are
regional supermarket chains and ethnic supermarkets. A typical installation
order for a supermarket would be for three to five lanes, with each lane
typically consisting of a display screen, cash drawer, scanner, printer and
electronic funds transfer terminal. Other possible devices to be installed could
include coin dispensers, hand held scanners, and pole displays. All of these
devices are connected to a LAN and are supported by POS software, which captures
the information, calculates totals, prints out the transaction receipt for the
customer, and interfaces with the retailer's financial and management
information systems.
The Company also sells, installs and supports POS systems for both
table service and fast food restaurants. Typical among the Company's customers
are franchisee restaurants for many major fast-food chains. The typical
installation order for these restaurants consists of the countertop POS cash
registers with drawers, kitchen printers, drive through systems, and local
management servers. In addition, the Company also installs the operating
software for these POS systems. The average installation order for table service
restaurants, where customers order their meals from a waiter or waitress as
opposed to at a counter, consists of touch screen terminals at one or two floor
stations and another one at the bar area if there is one. In addition there is
normally a printer installed in the kitchen.
The third market targeted by the Company is golf courses and resorts.
In this market the Company installs products used to automate the retail
requirements of a golf course or resort, which include dining room activities,
checkout for golf or pro shop merchandise and other requirements such as setting
and managing a schedule for tee times.
No customer accounted for more than 10% of the Company's total revenue
for the year ended December 31, 1998.
COMPETITION
The POS industry is highly fragmented and competitive. Competitive
factors within the industry include product offerings and prices, quality of
products, customer service levels, reputation, and geographic location of
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dealers. The Company primarily competes with independent POS dealers, many of
which have greater financial resources available to them than does the Company.
In addition, some manufacturers of POS equipment and software compete in certain
product areas by distributing their products directly to the end-users that the
Company serves.
The Company's ability to make acquisitions also will be subject to
competition. The Company believes that other independent POS dealers may seek
growth through consolidation with entities other than the Company during the
next few years. 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 to increase distribution
directly to many of the retail accounts of the Company in the markets served by
the Company.
SUPPLIERS
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 the Company's ability to
purchase equipment in sufficient quantities necessary and upon competitive terms
in order to enable it to meet the needs of its end-user customers. During the
year ended December 31, 1998, the Company purchased a significant portion of the
hardware products that it resold from Panasonic, ERC Parts, Inc. ("ERC"), a
distributor of Panasonic products, and NCR. The Company believes that these two
manufacturers and supplier are among the best-qualified to meet the hardware
needs of the Company's customers. Sales of products purchased from Panasonic,
ERC, and NCR accounted for approximately 26% of total revenue for the year ended
December 31, 1998, with sales of Panasonic and NCR products accounting for 9%
and 17% of the Company's total revenue in that year, respectively. The Company
has supply agreements with these and other manufacturers and suppliers such as
IBM, ICL-Fujitsu and Micros. The agreements are non-exclusive, may have
geographic limitations and may have renewable one-year terms, depending on if
the Company achieves a previously-agreed-to procurement quota. Geographical
limitations are the assignment of sales territories that define the
municipalities and states where the Company subsidiaries can sell a
manufacturer's hardware or software. The actual sales territories for each
manufacturer is subsidiary specific and some subsidiaries may not have
permission to sell hardware or software of certain manufacturers in certain
regions or territories of the country. The Company's strategy is to develop
long-term relationships with quality and brand-recognizable manufacturers such
as NCR and Panasonic with the goal of establishing a standard product offering
for our customers. There can be no assurance that the relationships with these
and other manufacturers and suppliers will continue or that the Company's supply
requirements can be met in the future. The Company has experienced some delays
in obtaining equipment because of cash flows and the continuing inability to
obtain equipment, software, parts or supplies on competitive terms from its
current or other major manufacturers could have a material adverse effect on the
Company's business, results of operations, financial condition, and cash flows.
SEASONALITY
The Company's business can be subject to seasonal influences. The POS
dealers and systems integrators which the Company has acquired to date typically
have had lower revenue in the quarters ending March 31 and December 31 primarily
due to the lower level of new store openings or replacement of existing POS
systems by customers. The Company believes that this pattern of seasonality will
continue in the foreseeable future.
RESEARCH AND DEVELOPMENT
As a systems integrator, the Company offers completely integrated
software and hardware systems that include financial, operational, and
information processing capabilities for its golf course and resort customers.
The core software components have previously been developed and annual research
and development expenditures are normally expended for system enhancements and
specific customer requirements. The Company spent $739,000 in research and
development for the year ended December 31, 1998.
EMPLOYEES
As of February 26, 1999, the Company had 257 full-time and 6 part-time
employees, of whom 163 were employed in customer services, 42 in finance and
administrative services, and 58 in sales and marketing. Of the total full-time
employees, 6 were employed at the Company's corporate office, 77 were employed
at CRI (including MicroData and EBM), 30 were employed at ARS, 28 were employed
at QBM, 91 were employed at Smyth and 25 were employed at PCR. No employee of
the Company is covered by a collective bargaining agreement or is represented by
a labor union. The Company considers its employee relations to be good.
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ITEM 2. DESCRIPTION OF PROPERTIES.
The Company's general policy is to lease, rather than own, its business
locations. The Company leases numerous properties for administration, sales and
service, and distribution functions. The terms vary under the respective leases,
although, in general, the Company's lease agreements require it to pay its
proportionate share of taxes, common area expenses, insurance, and related costs
of such rental properties.
The Company leases its 3,980 square foot headquarters facility in
Newport Beach, California. The Company also leases approximately 43,500 square
feet of office and warehouse facilities in Kentucky, Illinois, Indiana and Ohio
for its CRI operations (including facilities utilized by MicroData and EBM), of
which 12,000 square feet is leased from Coye D. King, a director of CRI, and
12,400 is leased from Floyd Shirrell, the former owner of EBM. The leases expire
in October 2007 and November 1999, respectively. The Company's ARS operations
utilize approximately 11,800 square feet of leased property, which includes an
approximately 11,200 square foot office facility in Seattle, Washington which is
leased from certain officers of ARS. The lease expires in December 2003. In
addition, its QBM operations utilize approximately 9,000 square feet of office
and warehouse facilities in Sacramento, California and is leased from the former
owner and current officer of QBM. The lease expires in May 2001. The Company's
Smyth subsidiary leases approximately 31,700 square feet of office and warehouse
facilities in Canton, Ohio, Irvine, California and Colorado. The Company's PCR
subsidiary in San Francisco, California leases approximately a 7,000 square foot
office and warehouse facility.
The Company believes that its leased facilities are adequate for its
present needs and that suitable additional or replacement space will be
available on commercially reasonable terms, as required.
ITEM 3. LEGAL PROCEEDINGS.
The Company's subsidiaries have been from time to time a party 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
and its counsel, although the outcomes of these claims and suits are not
presently determinable, in the aggregate they should not have a material adverse
affect on the Company's business, financial position or results of operations.
In September 1993, a judgement was entered in Bell Circuit Court,
Kentucky, on behalf of James J. Kreuger, a former employee of CRI, against CRI
and Coye D. King and Barbara King, former stockholders of CRI, in the amount of
$107,726 and accrued interest. The judgement arises from an alleged partnership
formed by the Kings and Mr. Kreuger, and is currently on appeal. The former
stockholders of CRI have agreed to pay any and all amounts of the judgement in
excess of $83,000; provided, however, that the Company can only collect such
amounts from the former stockholders by offsetting amounts owed by CRI and/or
the Company to such stockholders pursuant to (i) the new lease of the new
London, Kentucky facility (discussed in "Business Item 2. Description of
Properties") and (ii) bonus arrangements described in certain employment
agreements between the Company and the Kings. At December 31, 1997, CRI had
$83,000 accrued in connection with the lawsuit. In February 1998, CRI paid
$50,213 as settlement of the Court of Appeals affirming the award of $31,950
plus interest of $18,263. The final remaining claim was settled in July 1998,
where the Company paid $28,810 as agreed to above and the case was dismissed.
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 determinable, 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 consolidated financial statements.
On September 30, 1998, Maurice R. Johnson filed a complaint against the
Company, Automated Retail Systems, Inc. and Cash Registers, Incorporated
alleging violation of the Age Discrimination in Employment Act, 29 U.S.C., Sec.
Et. Seq. The case is pending in the United States District Court for the
Southern District of Ohio. The plaintiff, Mr. Maurice R. Johnson, is claiming
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that the Company owes Mr. Johnson, $534,498 in lost salary, guaranteed bonuses
per his employment agreement and lost stock options. The Company denies that it
has any liability and intends to vigorously defend itself.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock and Warrants trade on the Nasdaq SmallCap
Market under the symbols "BRTL" and "BRTLW," respectively. The following table
sets forth the high and low closing sale prices for the Company's Common Stock
and Warrants for the periods indicated as reported by the Nasdaq National Market
System.
1998: HIGH LOW
1ST QUARTER
Common Stock $ 3 - 5/8 $ 2 - 1/4
Warrants 1 - 1/16 0 - 1/2
2ND QUARTER
Common Stock 3 - 1/2 2 - 1/4
Warrants 0 - 13/16 0 - 9/16
3RD QUARTER
Common Stock 2 - 7/8 1 - 13/16
Warrants 0 - 5/8 0 - 3/8
4TH QUARTER
Common Stock 1 - 1/2 0 - 7/16
Warrants 0 - 7/16 0 - 1/32
1997: HIGH LOW
1ST QUARTER
Common Stock $ 13 $ 11 - 5/32
Warrants 7 - 3/8 5 - 1/4
2ND QUARTER
Common Stock 11 - 7/8 3 - 1/16
Warrants 6 - 5/8 0 - 5/8
3RD QUARTER
Common Stock 3 - 13/16 2 - 3/4
Warrants 0 - 7/8 0 - 1/4
4TH QUARTER
Common Stock 5 - 7/8 3
Warrants 2 0 - 1/2
HOLDERS
As of February 26, 1999, the approximate number of record holders of
the Company's Common Stock and Warrants was 714 and 192, respectively. The
Company believes that a significant number of beneficial owners hold substantial
shares of Common Stock and Warrants in depository or nominee form.
DIVIDENDS
Under its obligation, the Company paid dividends on its preferred stock
as of December 31, 1998. No dividends were paid on its common stock as of
December 31, 1998. The Company is obligated to pay, quarterly, cumulative
dividends at a rate of six percent (6%) per annum of the issue price of the
Series A Convertible Preferred Stock, payable, at the holders' option, in cash
or in common stock at the conversion price of the Series A Preferred Stock. So
long as any of shares Series A 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 Series A Preferred Stock, voting together as a
single class, declare or pay any dividend 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, the current line
of credit does prohibit the Company from paying cash dividends and the line of
credit does contain certain covenants which restrict the reduction or depletion
of the Company's capital. The Company obtained a waiver on the above Series A
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Preferred Stock. The Company anticipates that future financing, including any
lines of credit, may further restrict or prohibit the Company's ability to pay
dividends. The Company paid no dividends on its preferred stock or common stock
for the year ended December 31, 1997.
Recent Sales of Unregistered Securities
(a) The following is a summary of transactions by the Company during the
year ended December 31, 1998, involving sales or issuances of the
Company's securities that were not registered under the Securities
Act.
(1) On March 18, 1998, the Company sold 10,000 shares of its
Series A Convertible Preferred Stock, $.001 par value per
share (the Preferred Stock), to Precision Capital Investors
Limited Partnership I (Precision), for a purchase price of
$100 per share. The total offering price was $1,000,000. In
addition, the Company agreed to issue to Precision, subject to
the satisfaction of certain conditions, up to an additional
10,000 shares of Preferred Stock (the Additional Preferred
Stock) for a purchase price of $100 per share. The Additional
Preferred Stock will be issued in two separate tranches on a
date no later than thirty (30) and sixty (60) days following
the effective date of the Registration Statement (defined
below), respectively, unless otherwise agreed to by the
Company and Precision. As of December 31, 1998, the second and
third installments have not been funded. Based on the
conditions required to be met in the purchase agreement, the
Company does not expect that the two remaining installments
will fund.
The shares of Preferred Stock are convertible into shares of
common stock at a conversion price equal to seventy-eight
percent (78%) of the lowest non-consecutive five-day average
closing bid price during the twenty-five day period prior to
conversion; provided, however, that in no event shall the
conversion price be greater than $3.26 (110% of the average
closing bid price during the five-day period prior to the
purchase of the shares of Preferred Stock). The shares of
common stock into which the shares of Preferred Stock are
convertible have been registered by the Company on Form S-3
(No. 333-50385) (the Registration Statement), filed with the
Securities and Exchange Commission (the "Commission") on April
17, 1998. The SEC declared the registration statement
effective on August 14, 1998. 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 H D Brous & Co., Inc., ("H.D.
Brous") as compensation for services provided by them as
placement agents (Section (c)(3) below).
On March 18, 1998, concurrently with the sale of the shares of
Preferred Stock, the Company issued to Precision warrants to
purchase 125,000 shares of common stock (the Investor
Warrants). The shares of common stock into which the Investor
Warrants are exercisable have been registered by the Company
on the Registration Statement. In addition, the Company agreed
to issue to Precision, subject to the satisfaction of certain
conditions, warrants to purchase an additional 125,000 shares
of common stock (the Additional Investor Warrants). The
Additional Investor Warrants were to be issued in two separate
tranches on a date no later than thirty (30) and sixty (60)
days following the effective date of the Registration
Statement, respectively, unless otherwise agreed to by the
Company and Precision. As of December 31, 1998, the second and
third installments have not been funded.
The Investor Warrants are exercisable at an exercise price
equal to the lessor of (i) $3.26 (110% of the average closing
bid price of the common stock during the five days preceding
the date of issuance) or (ii) 110% of the closing bid price
of the common stock on the date the Registration Statement
becomes effective. The exercise price of the Investor Warrants
is subject to adjustment.
On March 18, 1998, concurrently with the sale of the shares of
Preferred Stock, the Company issued 25,000 warrants to
purchase common stock (the Placement Agent Warrants) to each
of Wharton Capital Partners, Ltd., and H D Brous as
compensation for services provided by them as placement agents
in the sale of the Preferred Stock. The shares of common stock
into which the Placement Agent Warrants are exercisable were
registered by the Company on the Registration Statement. The
exercise price of the Placement Agent Warrants is initially
$3.556 per share. The exercise price of the Placement Agent
Warrants is subject to adjustment.
As of December 31, 1998, 9,450 shares of the Preferred Stock
were converted into 1,060,715 shares of common stock and the
remaining 550 shares were redeemed by the Company in a
separate agreement with H D Brous, wherein the Company
negotiated the conversion of the 550 shares of Preferred Stock
into 101,633 shares of common stock for the amount of $70,762.
On April 15, 1999, the Company issued 500,000 shares of Series
B Preferred Stock for $500,000 to an accredited investor. The
holders of shares of Series B Preferred Stock shall be
entitled to receive semi-annually commencing January 15, 2000
and each July 15 and January 15, thereafter, cumulative
dividends, at the rate of twelve (12%) per annum of the
original issue price of the Series B Preferred Stock. The
Series B Preferred Stock is not convertible, has no voting
rights, has a liquidation preference and is redeemable at the
option of the Company. The purchaser will receive warrants at
an exercise price of $1.00. The number of warrants to be
issued has not been agreed to.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 Annual
Report on Form 10-KSB. This Annual Report on Form 10-KSB 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."
YEARS ENDED DECEMBER 31, 1998 AND 1997
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 net revenue for the year ended December 31, 1998 was $32,197,000
and was comprised of revenue from the Company's six wholly-owned subsidiaries
for the entire year and QBM from the date of acquisition. This represents an
increase of 53% from the Company's total net revenue of $21,088,000 for the year
ended December 31, 1997. The increase in total net revenue is primarily
attributable to the revenue contributed by QBM (a 1998 acquisition), Smyth and
PCR due to the fact that in 1997, only six months of Smyth's revenue and two
months of PCR's revenue was recognized. Additionally, the Company began its
distributor program in the third quarter of 1998 with NCR, where the Company's
wholly-owned subsidiary, Smyth Systems became the U.S. Distributor of NCR 2170
cash registers and other peripheral products. This program contributed to 2%
percent of the increase in revenue. 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 year ended December 31, 1998 was comprised of 65%
Systems Revenue and 35% Service Revenue, as compared to a revenue composition of
64% Systems Revenue and 36% Service Revenue for the year ended December 31,
1997. The mix of revenue change from 1997 to 1998 was due primarily to the
efforts by the Company to expand Systems Revenue in new regions.
No customer accounted for more than 10% of total revenue for years
ended December 31, 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 26% of total revenue for the year ended December 31, 1998, and
approximately 32% of total revenue for year ended December 31, 1997. 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 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. The Company has experienced some delays
in obtaining equipment because of cash flows and the continuing inability will
significantly alter the Company's or its subsidiaries' relationship with these
principal vendors and may have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
GROSS MARGIN
Gross margin for the year ended December 31, 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 year ended December 31, 1997 was
30% and was comprised of gross margin for Systems Revenue of 34% and gross
margin for Service Revenue of 23%. As a percentage of revenue, the increase in
Service Revenue gross margin is primarily attributable to increases in hourly
billing rates for service.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses for 1998 of
$11,228,000 increased by $2,272,000 from the comparable prior-year and
represented 35% of total revenue, versus 42% of total revenue in the comparable
prior year period. The increase in expenses in absolute dollars for year ended
1998 as compared to the comparable year in 1997 was primarily due to the QBM
Smyth and PCR acquisitions. 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.
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GOODWILL WRITE-DOWN
The Company reviews its assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. During the fourth quarter of 1997, the Company determined that
certain amounts recorded for goodwill from prior acquisitions were impaired and
were no longer recoverable. Such determination was made on an analysis of each
acquisition's projected revenues, profits and undiscounted cash flows at the
date of acquisition compared to actual and projected revenues, profit or loss
and undiscounted cash flows as of December 31, 1997. For the purposes of this
analysis, each subsidiary was identified as a separate asset group as each
subsidiary is independent. From this analysis, an estimate was made as to the
amount of goodwill which could be recoverable from future operations. This
estimate was compared to the recorded amounts of goodwill at December 31, 1997
and a write-down was recorded for the difference.
The total goodwill write-down recorded separately in the accompanying
statement of operations was approximately $1,871,000, which consisted of
$1,442,000 related to Smyth, $419,000 related to CRI and $10,000 related to
other subsidiaries.
The goodwill write-downs are primarily due to fourth quarter decisions
by the Company based on operating losses and lack of sales growth at both Smyth
and CRI. Prior to the time of the acquisition, Smyth Systems had begun a
marketing effort to penetrate the apparel and sporting goods markets. These
markets were expected to grow rapidly and represented the major reason that the
Company paid a purchase price in excess of book value for Smyth which was
allocated to goodwill at the acquisition date. However, by mid-fourth quarter of
1997, it was apparent that Smyth was not able to penetrate these markets due to
lack of sales caused by an insufficient product line and that the costs to
successfully sell into these markets were not reasonable given Smyth's operating
losses. As a result, in the fourth quarter, a decision was made to discontinue
the sales, marketing and promotional activities to penetrate these markets and a
goodwill impairment charge was recorded.
At the date of CRI's acquisition of EBM, it was anticipated that sales
from EBM would continue to expand and that EBM would move towards profitability
as it expected an increase in sales volume to the fast-food and table-service
restaurant market because of the ability to offer a certain product to a wider
geographical area. However, the product did not sell as anticipated due to
quality problems and by the fourth quarter of 1997, several key people
associated with the marketing of this product had left the Company. This
resulted in larger losses than anticipated and led to the impairment of the
goodwill.
After such write-downs, the Company believes that the remaining
goodwill amounts recorded for each subsidiary are recoverable over the remaining
amortization periods.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $739,000 during the year ended
December 31, 1998 compared to $554,000, incurred during year ended December 31,
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 $78,000 for the year ended
December 31, 1998 compared to $131,000 for the year ended December 31, 1997. For
the years ended December 31, 1998, interest income primarily related to the
recognition of finance charges on delinquent accounts and dividend income
received from a purchasing cooperative of cash register dealers. For the year
ended December 31, 1997, the Company 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. In addition, the
Company had other income in 1998 of approximately $504,000 relating to proceeds
received from a company paid life insurance policy.
The Company had interest expense of $479,000 for the year ended
December 31, 1998 compared to $111,000 for the year ended December 31, 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 income tax provision for 1998 and 1997 consisted of minimum state
taxes as the Company had a taxable loss for federal income tax purposes.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The Company's net loss applicable to common stockholders for the year
ended December 31, 1998, was $2,225,000, consisting of the Company's net loss
for the year of $1,732,000, 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 comprehensive net
loss applicable to common stockholders for the year ended December 31,1997 was
$4,969,000, the same as its loss for the year.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company had cash and cash equivalents of $146,000 and negative
working capital of $176,000 at December 31, 1998, compared to cash and cash
equivalents of $349,000 and working capital of $264,000 at December 31, 1997. In
the year ended December 31, 1998, the Company used $1,791,000 of cash in
operations; used $138,000 for the purchase of property and equipment and used
$562,000 for the acquisition of QBM; and generated $2,190,000 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 stock. In the
year ended December 31, 1997, the Company used $1,942,000 of cash in operations;
used $208,000 for the purchase of property and equipment and used $3,008,000 for
the acquisitions of MicroData, Smyth, EBM and PCR; and generated $881,000 from
financing activities, which consists of the net impact of borrowings and
repayments under the Company's various debt agreements and the purchase of
treasury stock. In addition, the Company used $1,100,000 during the year ended
December 31, 1997, for an acquisition which was later rescinded, where $250,000
was refunded to the Company in cash. The remaining funds were recorded as
$600,000 in receivables and $250,000 in other assets at December 31, 1997, and
will be returned to the Company as provided in the Rescission Agreement (see
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, NOTE 3, ACQUISITIONS).
At December 31, 1997, the Company recorded a provision of $451,000 for
slow-moving replacement parts mainly due to the acquisition of EBM and
subsequent consolidation of EBM's inventories into the Company's wholly-owned
subsidiary, CRI. After such consolidation and because of the lower than planned
level of sales, the Company determined that it had excess replacement parts
inventory as of December 31, 1997 and took the appropriate write-down.
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
eligible accounts receivable and inventories. Ineligible accounts receivable
includes any customer invoice that is ninety-days past due or any customer
account where 25% or more of the amount due is ninety-days delinquent. 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) acquiring or selling any assets over $50,000 excluding
purchases of dealers; (ii) selling or transferring any collateral except for
finished inventory in the ordinary course of business; (iii) selling inventory
on a sale-or-return, guaranteed sale, consignment, or other contingent basis;
(iv) incurring any debts, outside the ordinary course of business, which would
have a material adverse effect; (v) guaranteeing or otherwise become liable with
respect to obligations of another party or entity; (vi) paying or declaring any
dividend (except for dividends payable solely in stock); and (vii) making any
change in the Company's capital structure that would have a material adverse
effect. 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 $3,160,000 and $2,031,000 bearing interest at
9.75% and 10.25% at December 31, 1998 and 1997, respectively. As of December 31,
1998, the Company was in compliance with the covenants under this credit
facility and obtained the necessary waivers for material transactions.
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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 was up to $2,000,000 and was to 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 were to 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 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.
As of December 31, 1998, the second and third installments have not been funded.
Based on conditions required to be met in the purchase agreement, the Company
does not expect that the two remaining installments will fund.
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 and are exercisable at $3.26 per share. 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.
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 December 31, 1998, 9,450 shares of the Preferred Stock were
converted into 1,060,715 shares of common stock and the remaining 550 shares
were redeemed by the Company in a separate agreement with H D Brous, wherein the
Company negotiated the conversion of the 550 shares of Preferred Stock 101,633
shares of common stock for the amount of $70,762. In addition, the Company
issued 5,993 shares in common stock representing the accrued but unpaid
dividends on the preferred shares being converted. The Company paid cash
dividends of $24,000.
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock for $500,000 to an accredited investor. The holders of shares of
Series B Preferred Stock shall be entitled to receive semi-annually commencing
January 15, 2000 and each July 15 and January 15, thereafter, cumulative
dividends, at the rate of twelve (12%) per annum of the original issue price of
the Series B Preferred Stock. The Series B Preferred Stock is not convertible,
has no voting rights, has a liquidation preference and is redeemable at the
option of the Company. The purchaser will receive warrants at an exercise price
of $1.00. The number of warrants to be issued has not been agreed to.
The Company believes that the additional capital infusion along with
its availability on the Company's current asset base line of credit will be
sufficient to meet its working capital requirements until December 31, 1999. At
December 31, 1998, approximately $812,000 of eligible collateral 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 1999. 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. At December 31, 1998, those financial
targets were met and the 36,655 shares of common stock were taken out of escrow.
The $10,000 was paid in February 1999. The transaction was recorded under the
purchase method of accounting.
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LEGAL PROCEEDINGS
The Company's exposure to litigation claims is discussed in Item 3.
Legal Proceedings and Commitments and Contingencies, Note 8 to the consolidated
financial statements.
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 determinable, 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 consolidated financial statements.
On September 30, 1998, Maurice R. Johnson filed a complaint against the
Company, Automated Retail Systems, Inc. and Cash Registers, Incorporated
alleging violation of the Age Discrimination in Employment Act, 29 U.S.C., Sec.
Et. Seq. The case is pending in the United States District Court for the
Southern District of Ohio. The plaintiff, Mr. Maurice R. Johnson, is claiming
that the Company owes Mr. Johnson, $534,498 in lost salary, guaranteed bonuses
per his employment agreement and lost stock options. The Company denies that it
has any liability and intends to vigorously defend itself.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain executive officers
and employees, the terms of which expire at various times through 2002 and
provide for minimum salary levels. In addition, certain officers of the acquired
companies receive a portion of the acquired company's pre-tax profits greater
than the amount defined in the officer's employment agreement. At December 31,
1998, no provision for bonus payments were made for these certain employment
agreements due to the fact that that the acquired companies incurred pre-tax
losses. The aggregate commitment for future salaries and the guaranteed bonus
amounts was $2,019,455 at December 31, 1998 excluding bonus contingent on
achieving certain pre-tax profits. The Company believes payment of these
contingent bonuses will not have a material adverse effect on results of
operations, financial condition or cash flows. In addition, the Company has
entered into an employment contract with a former owner of a subsidiary,
expiring in 2009, that provides for a minimum salary that is payable even in the
event of termination for cause or upon death. The aggregate commitment for
future salaries and guaranteed bonus amounts under this contract at December 31,
1998, as amended in March 1999 was $246,573.
The Company has a independent contractor agreement, with a former owner
of a subsidiary, expiring in 2002. The commitment for future payments under this
contract at December 31, 1998, as amended in March 1999 was $280,847. At
December 31, 1998, the Company has accrued $103,754 for future payment under
this contract.
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
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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.
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 and
the March 19, 1999 signed letter of intent to acquire Hayman Systems ("Hayman")
and Micros of South Florida ("South Florida"). 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 currently put on hold 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 1997 and involved checking each module and program to
make sure it is in compliance and changing those that needed to be updated. As
of December 31, 1998, the Company had completed 90% 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 and 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 expensed
approximately $150,000 to $200,000 in 1998 to make such software Year 2000
compliant. Beginning in the quarter ending June 30, 1999, the Company will be
sending program upgrades to its current, installed customer base to make their
system 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. In general, the Company has received statements
indicating that our vendors' applications, both hardware and software, do or
will soon meet Year 2000 requirements. 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. However, based on recent inquiries, the Company does not believe
that replacement of existing vendors is required at this time. 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.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal year 2000, but earlier adoption is permitted. SFAS
133 will require the Company to record all derivatives on the balance sheet a
fair value. For derivatives that are hedges, changes in the fair value of
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derivatives will be offset by the changes in the fair value of hedged assets,
liabilities or firm commitments. The Company believes the impact of adopting
this standard will not be material to its results of operations or equity.
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
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 ANNUAL REPORT ON FORM 10-KSB 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 "Seasonality,
Quarterly Information and Inflation," the following factors also may materially
affect the Company's business, results of operations, financial condition and
cash flows and therefore should be considered.
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LIMITED OPERATING HISTORY. The Company was founded in April 1996 and,
prior to the acquisition of CRI in June 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 February 26, 1999, 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
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 that have either 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. At December 31, 1998, none of the acquired companies met the
performance standards, and accordingly, the Company did not make any bonus
payments or incur a liability under any of such employment agreements.
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 included the geographic transfer of
one employee, the 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 issuances 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 for 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 MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 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.
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SUBSTANTIAL COMPETITION. The POS industry is highly fragmented and
competitive. Competitive factors within the industry include product prices,
quality of products, service levels, and 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 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.
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 an automation retail
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 results of operations.
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 the Company's ability to purchase equipment in the quantities
necessary and upon competitive terms so that it will be able to meet the needs
of its end user customers. For the year ended December 31, 1998, the Company
purchased its hardware principally from three main vendors, Panasonic, ERC, a
distributor of Panasonic products, and NCR. Sales of Panasonic, ERC and NCR
products accounted for approximately 26% of net revenue for the year ended
December 31, 1998. 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, 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.
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.
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.
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
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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
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, at an issue price of $100 per share. Each share of
Series A 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 Series A
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 at least 66-2/3% of the then outstanding shares
of Series A Preferred Stock, (i) redeem, purchase or otherwise acquire for value
any share of the Series A 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 Series A 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 Series A Preferred Stock; or (ix) alter or change the rights, preferences or
privileges of the shares of Series A 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 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, $1,000,000 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. On
January 20, 1999, the Company was notified by Nasdaq that the Company's shares
of common stock have failed to maintain a closing bid price greater than or
equal to $1.00 over the last thirty consecutive trade dates. To be eligible for
continued listing, the Company's shares of common stock must maintain a minimum
bid price of $1.00 for a minimum of ten consecutive trading days, it will then
have complied with the minimum bid price requirement. If the Company is unable
to demonstrate compliance with the minimum $1.00 bid price on or before April
20,1999, the Company's securities will be subject to delisting, effective with
the close of business on April 20, 1999. To stay the delisting, the Company may
request a hearing by the close of business on April 20, 1999. In addition, at
December 31, 1998, the Company had $1,319,000 in net tangible assets. As the
Company currently does not meet the maintenance standards, there is no assurance
that the Company will be able to comply and/or maintain the standards for Nasdaq
SmallCap Market inclusion with respect to its securities. If the Company fails
to maintain Nasdaq SmallCap Market listing, the market value of the Company's
common stock likely 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
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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 redemptions 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.
DIVIDENDS. The Company has not paid dividends on its common stock to
date. Under its obligation, the Company has paid quarterly, cumulative dividends
at a rate of six percent (6%) per annum of the issue price of the Series A
Convertible Preferred Stock, payable, at the holders' option, in cash or in
common stock at the conversion price of the Series A Convertible Preferred
Stock. So long as any shares of Series A Convertible 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 Series A Preferred
Stock, voting together as a single class, declare or pay any dividend 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, the current line of credit does prohibit the Company from paying
cash dividends and the line of credit does contain certain covenants which
restrict the reduction or depletion of the Company's capital. The Company
obtained a waiver on the above Series A Preferred Stock. 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 THE 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 for
engaging in certain transactions without first obtaining the written consent of
the lender. Such transactions include, but are not limited to: (i) acquiring or
sell any assets over $50,000; (ii) selling or transferring any collateral under
the line credit, except for sale of items in the Company's finished inventory in
the ordinary course of business; (iii) selling of inventory on a sale-or-return,
guaranteed sale, consignment, or other contingent basis; (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. It does not however prohibit or restrict the Company
from acquiring other companies (including acquisitions for amounts greater than
$50,000) pursuant to its acquisition strategy.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required to be filed hereunder are included
under Item 13(a)(1) of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Michael S. Shimada.................. 49 Vice President, Chief Financial Officer and Acting Chief Operating Officer
Lawrence Cohen...................... 54 Chairman of the Board, Director and Acting Chief Executive Officer
Dr. Jack Borsting................... 70 Director
Peter Stranger...................... 49 Director
</TABLE>
MICHAEL S. SHIMADA has served as Vice President and Chief Financial
Officer of the Company since February 1998. On January 18, 1999, the Board of
Directors named Mr. Shimada as acting Chief Operating Officer until a
replacement has been made. Before he joined the Company, Mr. Shimada was Chief
Financial Officer of Spectrum Laboratories, Inc., a medical products company.
Prior to that, he served as Chief Financial Officer of Elexsys International
from 1993 to 1997. From 1981 to 1993, at Elexsys, he served as Controller,
Corporate Controller and Vice President of Finance of this multi-division
manufacturer of circuit boards and back panels.
LAWRENCE COHEN is a founder of the Company and has served as Vice
Chairman of the Board since its inception in April 1996. On January 18, 1999,
the Board of Directors named Mr. Cohen as acting Chief Executive Officer until a
replacement has been made. From November 1990 to September 1996, Mr. Cohen
served as Chairman of the Board of BioTime, Inc. ("BioTime"), a biotechnology
company engaged in the artificial plasma business. Mr. Cohen has also served as
a director of ASHA Corporation, a publicly traded supplier of traction control
systems, from April 1995 to present; a director of Apollo Genetics Inc., a
company founded by Mr. Cohen which is engaged in the genetic pharmaceutical
business, from January 1993 to the present; a director of Registry Magic Inc., a
company founded by Mr. Cohen which develops voice recognition equipment, from
November 1995 to present; and a director of Kaye Kotts Associates, Inc. from
April 1995 to the present.
DR. JACK BORSTING has served as a director of the Company since
November 1996. From August 1988 to the present, Dr. Borsting has been an E.
Morgan Stanley Professor of Business Administration at the University of
Southern California ("USC"). Since January 1995, Dr. Borsting has served as
Executive Director of the Center of Telecommunications at USC. Dr. Borsting
served as the Dean of the USC School of Business Administration from August 1988
to January 1994. From January 1994 to January 1995, Dr. Borsting was on
sabbatical. A former Assistant Secretary of Defense, Dr. Borsting is also a
director of Northrup Grumman Corporation, Whitman Medical and TRO Learning, Inc.
PETER STRANGER has been President of the Los Angeles office of J.
Walter Thompson & Company, a worldwide advertising agency and a subsidiary of
the WWP Group, London since December 1997. He was a managing partner of Bozell
Worldwide, a communications firm, from August 1995 to December 1997. Mr.
Stranger was president of the Los Angeles office of Euro RSCG, an international
communications holding company, from September 1989 until November 1994, and he
was an officer of Della Famina, Travisano & Partners, an advertising agency, for
the prior 15 years.
All directors hold office until the next meeting of stockholders and
the election and qualification of their successors. Officers are elected by the
Board of Directors and serve at the discretion of the Board.
23
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following tables present information concerning the cash
compensation paid and stock options granted to the Company's Chief Executive
Officer and each additional executive officer of the Company whose total
compensation exceeded $100,000 for the year ended December 31, 1998 ("1998") and
for the year ended December 31, 1997 ("1997"). The notes to these tables provide
more specific information regarding compensation.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------- ----------------------- -------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
FISCAL OTHER ANNUAL STOCK OPTIONS/ LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) SARS(#) PAYOUTS($) ($)
- --------------------------- ------ ----------- --------- ---------------- ----------- ---------- ----------- ------------
<S> <C> <C> <C>
Richard H. Walker (2) 1998 244,528(1) --
President, Chief Executive 1997 244,803(1) 200,000
Officer & Director
Paul Spindler (3) 1998 135,475(1) --
Executive Vice President, 1997 162,550(1) 200,000
Chairman of the Board of
Director and Secretary
N. Douglas Mazza (4) 1998 175,000 --
Senior Vice President and 1997 7,400 100,000
Chief Operating Officer
Michael S. Shimada (5) 1998 103,365 200,000
Vice President and Chief 1997 -- --
Financial Officer
</TABLE>
- ------------------
(1) Includes compensation reported to the Internal Revenue Service as
compensation for the use of automobiles leased by the Company for Mr. Walker
and Mr. Spindler.
(2) Mr. Walker was terminated as President and Chief Executive Officer on
January 18, 1999.
(3) Mr. Spindler resigned November 1, 1998 as Executive Vice President and
signed a one year consulting contract. Mr. Spindler was paid $15,980 for
investor relations consulting services.
(4) Mr. Mazza resigned from the Company on January 15, 1999.
(5) Mr. Shimada joined the Company in February 1998.
24
<PAGE>
The following table sets forth certain information concerning grants of
stock options to each of the Company's executive officers named in the Summary
Compensation Table during the year ended December 31, 1998.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------------
% OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE
- --------------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Richard H. Walker -- -- -- --
Paul Spindler -- -- -- --
N. Douglas Mazza -- -- -- --
Michael S. Shimada 200,000 3.1875 02/27/08
</TABLE>
- ------------------
(1) All options vest and become exercisable at the rate of 25% per year
commencing on the first anniversary of the date of grant.
OPTION EXERCISES. No options were exercised by any of the Company's
executive officers named in the Summary Compensation Table during the year ended
December 31, 1998.
The following table includes the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
NUMBER OF
SECURITIE VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END($)
SHARE ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
- --------------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Richard H. Walker -- -- 55,363/105,487 --/--
-- -- 44,638/94,512 --/--
Paul Spindler -- -- 55,363/105,487 --/--
-- -- 44,638/94,512 --/--
N. Douglas Mazza -- -- 25,000/75,000 --/--
Michael S. Shimada -- -- --/200,000 --/--
</TABLE>
25
<PAGE>
COMPENSATION OF DIRECTORS
The Company's directors do not receive any cash compensation for
service on the Board of Directors or any committee thereof, but the Company has
and will continue to pay the expenses of its directors incurred in attending
Board and committee meetings. In addition, pursuant to the terms of the
Company's Equity Participation Plan (the "Stock Option Plan"), each non-employee
director of the Company will be granted options to purchase shares of the
Company's Common Stock, at an exercise price equal to the fair market value of a
share of Common Stock as of the date of the option grant. Persons who were
non-employee directors as of the date of the initial public offering of the
Company's Common Stock on November 13, 1996 received an option to purchase ten
thousand (10,000) shares of Common Stock on each of the following dates: (i) the
date of the initial public offering, (ii) the date of the second annual meeting
of the Company's stockholders following the initial public offering, at which
the director was reelected to the Board and (iii) the date that the director is
reelected to the Board at each subsequent annual meeting of stockholders.
Persons who are elected as non-employee directors after the date of the initial
public offering of the Company receive an option to purchase ten thousand
(10,000) shares of Common Stock on the following dates: (i) the date of such
election to the Board, (ii) the date of the second annual meeting following such
meeting at which the director was reelected to the Board and (iii) the date that
the director is reelected to the Board at each subsequent annual meeting of
stockholders. All options granted to non-employee directors under the Stock
Option Plan become exercisable in annual installments of twenty-five percent
(25%) on each of the first, second, third and fourth anniversaries of the option
grant.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
The Company had entered into employment agreements with its Chief
Executive Officer, Richard H. Walker and its Executive Vice President, Paul
Spindler, each containing confidentiality provisions and covenants not to
compete. In addition, both employment agreements have clauses providing for
payment of the amount of unpaid salary that would have been due through the
expiration of the term of the agreement in the event that the agreement is
terminated due to death or disability. In the event of termination of either
agreement for cause, salary shall be paid through the date of termination. Mr.
Walker's employment was terminated for cause by the Board of Directors on
January 18, 1999 and was paid through the date of termination. On February 17,
1999, Mr. Walker resigned from the Board of Directors. Mr. Spindler resigned as
Executive Vice President on November 1, 1998, at which time the Company,
approved by the Board of Directors entered into a one year $100,000 consulting
contract for investor relation services. For the first year the fee is
guaranteed and renewable with the approval of the Company's Board of Directors.
In addition, to the fee, the Company pays one-half of a monthly car lease and
reimbursement of reasonable business expenses.
On October 30, 1997, the Company entered into an employment agreement
with N. Douglas Mazza, Senior Vice President and Chief Operating Officer of the
Company, whereby the Company agreed to pay Mr. Mazza a salary of One Hundred
Eighty-Two Thousand Dollars ($182,000) per year beginning January 1, 1998. On
January 15, 1999, Mr. Mazza resigned from the Company to accept a similar
position at a non-profit organization.
On January 18, 1998, the Company entered into an employment agreement
with Michael S. Shimada, Vice President and Chief Financial Officer of the
Company, whereby the Company agrees to pay Mr. Shimada a salary of One Hundred
Twenty-Five Thousand Dollars ($125,000) per year beginning February 2, 1998. In
addition, Mr. Shimada was awarded incentive stock options to purchase one
hundred thousand (100,000) shares of Common Stock of the Company and additional
incentive and nonqualified stock options to purchase one hundred thousand
(100,000) shares of Common Stock of the Company if Mr. Shimada meets mutually
agreed upon goals which were met during 1998. The agreement contains a clause
guaranteeing a severance payment provided that Mr. Shimada has been employed for
one (1) year and is terminated for reason other than cause, the severance
payment shall be equal to eighteen (18) weeks' salary.
The Company has employment agreements with certain executive officers
and employees, the terms of which expire at various times through 2002 and
provide for minimum salary levels. In addition, certain officers of the acquired
companies receive a portion of the acquired company's pre-tax profits greater
than the amount defined in the officer's employment agreement. At December 31,
1998, no provision for bonus payments were made for these certain employment
agreements due to the fact that that the acquired companies incurred pre-tax
losses. The aggregate commitment for future salaries and the guaranteed bonus
amounts was $2,019,455 at December 31, 1998 excluding bonus contingent on
achieving certain pre-tax profits. The Company believes payment of these
contingent bonuses will not have a material adverse effect on results of
operations, financial condition or cash flows. In addition, the Company has
entered into an employment contract with a former owner of a subsidiary,
expiring in 2009, that provides for a minimum salary that is payable even in the
event of termination for cause or upon death. The aggregate commitment for
future salaries and guaranteed bonus amounts under this contract at December 31,
1998, as amended in March 1999 was $246,573. At December 31, 1998, the Company
has accrued $103,754 for future payment under this contract.
26
<PAGE>
The Company has a independent contractor agreement, with a former owner
of a subsidiary, expiring in 2002. The commitment for future payments under this
contract at December 31, 1998, as amended in March 1999 was $280,847.
REPRICING OF OPTIONS.
On September 11, 1997, the Board of Directors approved a repricing of all
outstanding stock options held by employees, officers, board members and
non-employee service providers with a new exercise price of $2.875, the closing
market price on that date, as reported on the Nasdaq SmallCap Market. The Board
of Directors approved the repricing because it believes that equity interests
are a significant factor in the company's ability to retain directors, executive
officers and employees, by providing an incentive to all such personnel to
devote their utmost effort and skill to the advancement and betterment of the
Company through their participation in the success and increased value of the
Company. Following the grant of such options, however, the price per share of
the Company's Common Stock declined to an amount less than the exercise price of
the options. The Board of Directors believed, that as a result of this decline,
the options granted would not have the desired motivational effect on the
optionees. Accordingly, the Board of Directors approved the repricing as a means
of ensuring that such optionees have a meaningful equity interest in the
Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 26, 1999, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding Common Stock; (ii) each director and nominee of the Company; (iii)
each of the Company's executive officers named in the Summary Compensation
Table; and (iv) all directors and executive officers of the Company as a group.
The Company had 6,920,519 shares outstanding at February 26, 1999.
SHARES BENEFICIALLY OWNED
-------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) PERCENTAGE
NUMBER OUTSTANDING
-------------- -------------
Richard H. Walker(3) 820,477 11.7%
Paul Spindler(4) 795,478 11.3
N. Douglas Mazza (5) 25,000 *
Michael S. Shimada (6) 60,000 *
Larry Cohen(7) 896,178 12.7
Dr. Jack Borsting(8) 52,595 *
Peter Stranger (9) 30,000 *
All directors and executive officers as 2,679,728 36.2
a group (7 persons)(10)
- ------------------
* Less than one percent of the outstanding shares of Common Stock.
(1) Unless otherwise indicated below, the persons in the table above have sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to community property laws where applicable.
(2) Unless otherwise indicated below, the address of each person is c/o the
Company at 5000 Birch Street, Suite 205, Newport Beach, California 92660.
(3) Amount includes: (i) 710,477 shares held of record by the Walker Trust,
which are beneficially owned by Mr. Walker, former President, Chief
Executive Officer and a director of the Company and (ii) 100,000 shares
subject to options and 10,000 warrants exercisable within 60 days of
February 26, 1999.
(4) Amount includes: (i) 695,478 shares held of record by the Spindler Trust,
which are beneficially owned by Mr. Spindler, former Chairman of the Board,
Executive Vice President and Secretary of the Company and (ii) 100,000
shares subject to options exercisable within 60 days of February 26, 1999.
(5) Represents 25,000 shares subject to options exercisable within 60 days
of February 26, 1999.
(6) Includes 50,000 shares subject to options exercisable within 60 days of
February 26, 1999.
(7) Amount includes (i) 740,478 shares held of record by East Ocean, which are
beneficially owned by Mr. Cohen, the Chairman of the Board and Acting
Executive Officer of the Company; (ii) 33,200 shares and 5,000 shares
underlying warrants which are exercisable within 60 days of February 26,
1999, and which are held by Donna Cohen, wife of Mr. Cohen; and (iii)
117,500 shares subject to options and warrants exercisable within 60 days of
February 26, 1999.
(8) Includes 40,000 shares subject to options exercisable within 60 days of
February 26, 1999.
(9) Includes 30,000 shares subject to options exercisable within 60 days of
February 26, 1999.
(10) Includes 462,500 shares subject to options exercisable within 60 days of
February 26, 1999.
27
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company was incorporated on April 3, 1996, and in connection with
its initial capitalization issued an aggregate of 2,648,745 shares of Common
Stock for $.007 per share in the following manner: (i) 785,794 shares were
issued to East Ocean Limited Partnership ("East Ocean"), an investor affiliated
with Lawrence Cohen; (ii) 732,819 shares were issued to the Walker Family Trust,
an investor affiliated with Richard H. Walker; (iii) 732,820 shares were issued
to the Spindler Family Trust dated February 1, 1994, an investor affiliated with
Paul Spindler; and (iv) the remaining 397,312 shares were issued to two other
stockholders of the Company. In August 1996, East Ocean transferred 17,658
shares to each of the Walker Trust and the Spindler Trust for $.007 per share.
Up to April 1998, the Company purchased insurance coverage through an
insurance broker who is the brother-in-law of Mr. Walker. The Company paid
premiums totaling $73,845 for the year ended December 31, 1997 for insurance
coverage expiring at various dates through November 1998.
On June 3, 1996 and in connection with a private placement of the
Company's Common Stock, the Company issued 105,950 shares to Dr. Thomas Lutri, a
director of the Company at the time of the issuance, at a price of $0.94 per
share. On June 28, 1996, the Company issued 13,243 shares to Mr. Maurice
Johnson, Vice President of the Company at the time of the issuance, and on July
1, 1996, the Company issued 10,595 shares to Dr. Jack Borsting, a director of
the Company, in each case at a price of $0.94 per share. The Board of Directors
of the Company determined the price of the shares issued to Messrs. Lutri,
Johnson and Borsting based on the then current financial condition of the
Company and the per share price for such shares equaled the price per share of
Common Stock issued on June 28, 1996, to third parties in connection with the
private placement of the Company's Common Stock.
28
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
The financial statements listed on the index to financial statements on
page 34 are filed as part of this Form 10-KSB.
(a) 3 (b). EXHIBITS
Exhibits marked with an asterisk (*) are filed herewith. The remainder
of the exhibits have heretofore been filed with the Commission and are
incorporated herein by reference. Each management contract or compensation
plan or arrangement filed as an exhibit hereto is identified by a (+).
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger by and among
the Company, Bristol Merger Corporation,
Automated Register Systems, Inc. and the
Shareholders thereof (Incorporated by
reference to Exhibit 2.1 of the Company's
Form 8-K dated December 31, 1996, filed
on January 15, 1997, File No. 000-21633).
2.2 Agreement and Plan of Reorganization by
and among the Company, Smyth Systems
Inc., the Managing Stockholders of Smyth
Systems, Inc. and Smyth Merger Corp.
(Incorporated by reference to Exhibit
10.29 of the Company's Form 8-K dated May
29, 1997 filed on June 12, 1997, File No.
0-21633).
2.3 Second Amendment to Agreement and Plan of
Reorganization by and among the Company,
Smyth Systems Inc., the Managing
Stockholders of Smyth Systems, Inc. and
Smyth Merger Corp. (Incorporated by
reference to Exhibit 10.30 of the
Company's Form 8-K dated May 29,1997,
filed on June 12, 1997, No. 0-21633).
2.4 Agreement and Plan of Merger, as amended,
by and among the Company, Cash Register,
Inc., Floyd Shirrell and Electronic
Business Machines, Inc. (Incorporated by
reference to Exhibit 10.35 of the
Company's Form 8-K dated June 6, 1997,
filed on June 20, 1997, File
No. 0-21633).
2.5 Agreement and Plan of Merger by and among
Bristol Retail Solutions, Inc., Pacific
Merger Corp., Pacific Cash Register and
Company, Inc., Robert Freaney and Abbass
Barzgar dated June 27, 1997,
(Incorporated by reference to Exhibit
10.41 of the Company's Form 10-Q dated
June 30, 1997, filed on August 13, 1997,
File No. 0-21633).
2.6 Closing Agreement by and among the
Company, Pacific Merger Corp., Pacific
Cash Register and Company, Inc., Robert
Freaney and Abbass Barzgar dated August
4, 1997, (Incorporated by reference to
Exhibit 10.43 of the Company's Form 10-Q
dated June 30, 1997, filed on August 13,
1997, File No. 0-21633).
2.7 Rescission Agreement by and among the
Company, International Systems &
Electronics Corporation and Pedro Penton
dated July 23, 1997, (Incorporated by
reference to Exhibit 10.42 of the
Company's Form 10-Q dated June 30, 1997,
filed on August 13, 1997, File No.
0-21633).
3.1 Certificate of Incorporation, as amended,
of the Company (Incorporated by reference
to Exhibit 3.1 of Amendment No. 1 to the
Company's Registration Statement on Form
SB-2, File No. 333-5570-LA).
29
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.2 Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 of Amendment No.
1 to the Company's Registration Statement
on Form SB-2, File No. 333-5570-LA).
4.1 Form of Common Stock Certificate
(Incorporated by reference to Exhibit 4.1
of Amendment No. 1 to the Company's
Registration Statement on Form SB-2, File
No. 333-5570-LA).
4.2 Form of Class A Redeemable Common Stock
Purchase Warrants (Incorporated by
reference to Exhibit 4.3 of Amendment No.
1 to the Company's Registration Statement
on Form SB-2, File No. 333-5570-LA).
4.3 Form of Registration Rights Agreement by
and among the Company and Investors
listed on Schedule 1 thereto
(Incorporated by reference to Exhibit 4.4
of the Company's Registration Statement
on Form SB-2, File No. 333-5570-LA).
4.4 Form of Underwriter's Warrant Agreement
for Shares entered into between the
Company and First Cambridge Securities
Corporation (Incorporated by reference to
Exhibit 4.5 of Amendment No. 1 of the
Company's Registration Statement on Form
SB-2, File No. 333-5570-LA).
4.5 Form of Underwriter's Warrant Agreement
for Warrants entered into between the
Company and First Cambridge Securities
Corporation (Incorporated by reference to
Exhibit 4.6 of Amendment No. 1 of the
Company's Registration Statement on Form
SB-2, File No. 333-5570-LA).
4.6 Form of Warrant Agreement entered into
between the Company and American Stock
Transfer and Trust Company (Incorporated
by reference to Exhibit 4.7 of Amendment
No. 1 to the Company's Registration
Statement on Form SB-2, File No.
333-5570-LA).
10.1 Form of the 1996 Equity Participation
Plan of the Company, dated July 31, 1996,
(Incorporated by reference to Exhibit
10.1 of the Company's Registration
Statement on Form SB-2, File No.
333-5570-LA).
10.2 Amendment to the 1996 Equity
Participation Plan of the Company
(Incorporated by reference to Exhibit A
of the Company's Definitive Proxy
Statement filed on April 14,1997, File
No. 0-21633).
10.3 1997 Employee Stock Purchase Plan of the
Company (Incorporated by reference to
Exhibit B of the Company's Definitive
Proxy Statement filed on April 14, 1997,
File No. 0-21633).
10.4+ Employment Agreement between the Company
and Richard H. Walker dated April 3,
1996, (Incorporated by reference to
Exhibit 10.5 of the Company's
Registration Statement on Form SB-2, File
No. 333-5570-LA).
10.5+ Employment Agreement between the Company
and Paul Spindler dated April 3, 1996,
(Incorporated by reference to Exhibit
10.6 of the Company's Registration
Statement on Form SB-2, File No.
333-5570-LA).
10.6+ Employment Agreement between the Company
and Maurice R. Johnson dated June 28,
1996, (Incorporated by reference to
Exhibit 10.7 of the Company's
Registration Statement on Form SB-2, File
No. 333-5570-LA).
30
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.7+ Employment Agreement between Michael
Pollastro and Automated Register Systems,
Inc., dated January 1, 1997,
(Incorporated by reference to Exhibit
10.27 of the Company's 8-K/A dated
December 31, 1996, filed on March 14,
1997, File No. 0-21633).
10.8+ Employment Agreement between Gary
Pollastro and Automated Register Systems,
Inc., dated January 1, 1997,
(Incorporated by reference to Exhibit
10.28 of the Company's 8-K/A dated
December 31, 1996, filed on March 14,
1997, File No. 0-21633).
10.9+ Employment Agreement between John
Pollastro and Automated Register Systems,
Inc., dated January 1, 1997,
(Incorporated by reference to Exhibit
10.29 of the Company's Form 8-K/A dated
December 31, 1996, filed on March 14,
1997, File No. 0-21633).
10.10+ Employment Agreement by and between
Robert T. Smyth and Smyth Systems, Inc.,
and first Amendment to Employment
Agreement dated June 1, 1997,
(Incorporated by reference to Exhibit
10.31 of the Company's Form 8-K dated May
29, 1997, filed on June 12,1997, File No.
0-21633).
10.11+ Employment Agreement by and between Larry
D. Smyth and Smyth Systems, Inc., and
first Amendment to Employment Agreement
dated June 1, 1997, (Incorporated by
reference to Exhibit 10.32 of the
Company's Form 8-K dated May 29, 1997,
filed on June 12,1997, File No. 0-21633).
10.12+ Employment Agreement by and between
William A. Smyth and Smyth Systems, Inc.,
and first Amendment to Employment
Agreement dated June 1, 1997,
(Incorporated by reference to Exhibit
10.33 of the Company's Form 8-K dated May
29, 1997, filed on June 12,1997, File No.
0-21633).
10.13+ Independent Contractor Agreement by and
between the Company, Cash Registers, Inc.
and Floyd Shirrell, (Incorporated by
reference to Exhibit 10.36 of the
Company's 8-K dated June 6, 1997, filed
on June 20, 1997, File No. 0-21633).
10.14 Lease Agreement between Paul Thompson,
Cash Registers, Incorporated, and Coye D.
King dated October 30, 1987,
(Incorporated by reference to Exhibit
10.10 of the Company's Registration
Statement on Form SB-2, File No.
333-5570-LA).
10.15 Stock Purchase Agreement by and among the
Company, Cash Registers, Inc., and
Maurice R. Johnson, Andrew D. King and C.
Stephen King, dated as of June 26, 1996,
(Incorporated by reference to Exhibit
10.14 of the Company's Registration
Statement on Form SB-2, File No.
333-5570-LA).
10.16 Building Lease dated May 29, 1990, by and
between Automated Register Systems, Inc.,
Michael J. Pollastro, Gary T. Pollastro,
and John and Carmen Pollastro, as amended
by First Amendment to Building Lease
dated January 1, 1997, by and between
Automated Retail Systems, Inc., Michael
Pollastro, Gary T. Pollastro, and John
and Carmen Pollastro, (Incorporated by
reference to Exhibit 10.25 of the
Company's Form 8-K dated December 31,
1996, filed on January 15, 1997, File No.
000-21633).
10.17 Loan and Security Agreement by and
between the Company, Cash Registers,
Inc., Smyth Systems, Inc., Automated
Retail Systems, Inc., and Coast Business
Credit dated December 11, 1997.
10.18 First Amendment to the Loan and Security
Agreement by and between the Company,
Cash Registers, Inc., Smyth Systems,
Inc., Automated Retail Systems, Inc., and
Coast Business Credit dated January 6,
1998.
31
<PAGE>
10.19 Second Amendment to the Loan and Security
Agreement by and between the Company,
Cash Registers, Inc., Smyth Systems,
Inc., Automated Retail Systems, Inc., and
Coast Business Credit dated February 2,
1998.
11* Statement of Computation of Per Share
Earnings.
21* List of Subsidiaries of the Company.
23.1* Consent of Deloitte & Touche LLP.
27* Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
During the fourth quarter of the year covered by this report, the Company
did not file any Current Reports on Form 8-K.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Bristol Retail Solutions, Inc. (Registrant)
By /S/ Lawrence Cohen
-------------------
Lawrence Cohen
Chief Executive Officer and Director
Date: April 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ Lawrence Cohen Chief Executive Officer and Director April 15, 1999
- -------------------------------------- (Principal Executive Officer)
Lawrence Cohen
/S/ Michael S. Shimada Chief Financial Officer April 15, 1999
- -------------------------------------- (Principal Accounting and Financial Officer)
Michael S. Shimada
/S/ Dr. Jack Borsting Director April 15, 1999
- --------------------------------------
Dr. Jack Borsting
/S/ Peter Stranger Director April 15, 1999
- --------------------------------------
Peter Stranger
</TABLE>
33
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BRISTOL RETAIL SOLUTIONS, INC.
PAGE
----
Independent Auditors' Report .......................................... 35
Consolidated Balance Sheets
as of December 31, 1998 and December 31, 1997...................... 36
Consolidated Statements of Operations and Comprehensive Operations
for the years ended December 31, 1998 and December 31, 1997 ....... 37
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998 and December 31, 1997 ....... 38
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 and December 31, 1997........ 39
Notes to Consolidated Financial Statements............................. 41
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Bristol Retail Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Bristol Retail
Solutions, Inc. (the Company) as of December 31, 1998 and 1997 and the related
consolidated statements of operations and comprehensive operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bristol Retail Solutions, Inc. and
subsidiaries at December 31, 1998 and 1997 and the results of their operations
and cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 26, 1999 (April 15, 1999 as to Note 13)
35
<PAGE>
<TABLE>
<CAPTION>
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1998 1997
-------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 146,235 $ 349,461
Accounts receivable, net of allowance for doubtful accounts of $524,356
and $382,990 at December 31, 1998 and 1997 5,526,037 3,202,787
Inventories, net 4,773,366 3,314,029
Prepaid expenses and other current assets 384,068 422,860
Current portion of note receivable 153,153 144,380
-------------- --------------
Total current assets 10,982,859 7,433,517
Property and equipment, net 844,645 759,725
Intangible assets, net of accumulated amortization of $532,223
and $265,801 at December 31, 1998 and 1997 4,538,778 4,160,964
Note receivable - noncurrent portion 185,771 293,839
Capitalized software development costs, net 375,768 243,554
Other assets 356,816 553,563
-------------- --------------
Total assets $ 17,284,637 $ 13,445,162
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,230,266 $ 1,693,673
Accounts payable 3,885,815 1,893,589
Accounts payable to related party -- 133,701
Accrued salaries, wages and related benefits 970,351 775,628
Accrued expenses 436,807 540,703
Deferred service revenue 1,847,563 1,596,296
Customer advances 572,105 399,758
Income taxes payable 98,138 63,229
Current portion of note payable to related party 48,615 --
Current portion of long-term debt 17,190 54,110
Current portion of capital lease obligations 51,802 19,264
-------------- --------------
Total current liabilities 11,158,652 7,169,951
Note payable to related party - noncurrent portion 21,385 --
Long term debt 53,647 --
Capital lease obligation - noncurrent portion 89,873 14,827
Other long-term liabilities 103,754 66,998
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
4,000,000 shares authorized; Series A Convertible Preferred Stock; no
shares issued or outstanding -- --
Common stock, $.001 par value: 20,000,000 shares authorized; 6,920,519 and
6,915,519 shares issued and outstanding at December 31, 1998; 5,548,510
and 5,543,510 shares issued and outstanding at December 31, 1997 6,920 5,548
Additional paid-in-capital 13,185,210 11,287,695
Accumulated deficit (7,310,179) (5,075,232)
-------------- --------------
5,881,951 6,218,011
Less 5,000 shares of treasury stock, at cost (24,625) (24,625)
-------------- --------------
Total stockholders' equity 5,857,326 6,193,386
-------------- --------------
Total liabilities and stockholders' equity $ 17,284,637 $ 13,445,162
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
Years Ended December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Revenue:
System sales and installation $ 20,784,514 $ 13,501,805
Service and supplies sales 11,412,194 7,586,682
-------------- --------------
Net revenue 32,196,708 21,088,487
Cost of revenue:
System sales and installation 13,792,274 8,862,489
Service and supplies sales 8,250,884 5,830,955
-------------- --------------
Total cost of revenue 22,043,158 14,693,444
-------------- --------------
Gross margin 10,153,550 6,395,043
Operating expenses:
Selling, general and administrative expenses 11,228,011 8,955,793
Research and development costs 738,508 554,076
Goodwill writedown -- 1,871,471
-------------- --------------
Total operating expenses 11,966,519 11,381,340
-------------- --------------
Operating loss (1,812,969) (4,986,297)
Other income, net (100,540) (20,190)
-------------- --------------
Loss before income taxes (1,712,429) (4,966,107)
Provision for income tax 19,349 2,500
-------------- --------------
Net loss and comprehensive net loss $ (1,731,778) $ (4,968,607)
============== ==============
Net loss $ (1,731,778) $ (4,968,607)
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 (23,580) --
-------------- --------------
Net loss applicable to common stockholders $ (2,224,863) $ (4,968,607)
============== ==============
Basic and diluted net loss to common stockholders per share $ (0.38) $ (0.96)
============== ==============
Basic and diluted weighted average common shares outstanding 5,826,839 5,198,156
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
<TABLE>
<CAPTION>
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 -- $ -- 4,745,654 $ 4,746 $ 8,276,872
Compensation expense -- -- -- -- 8,021
Issuance of shares in connection
with acquisitions -- -- 802,856 802 3,002,802
Purchase of treasury shares -- -- -- -- --
Net loss -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
Balance at December 31, 1997 -- -- 5,548,510 5,548 11,287,695
Issuance of shares under
Employee Stock plan -- -- 20,392 21 52,438
Issuance of Preferred Stock 10,000 10 -- -- 758,074
Preferred stock accretion -- -- -- -- 241,916
Imputed dividend on Preferred
Stock -- -- -- -- 227,589
Issuance of warrants to brokers -- -- -- -- 69,500
Issuance of warrants to lender -- -- -- -- 38,595
Conversion of Preferred Stock (10,000) (10) 1,162,348 1,162 (492)
Issuance of shares in connection
with acquisition -- -- 183,276 183 499,817
Stock dividend-Preferred Stock -- -- 5,993 6 10,078
Cash dividends-Preferred Stock -- -- -- -- --
Net loss -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
Balance at December 31, 1998 $ -- $ -- 6,920,519 $ 6,920 $ 13,185,210
============== ============== ============== ============== ==============
</TABLE>
(CONTINUED)
<TABLE>
<CAPTION>
TREASURY STOCK
ACCUMULATED --------------
DEFICIT SHARES AMOUNT TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ (106,625) -- $ -- $ 8,174,993
Compensation expense -- -- -- 8,021
Issuance of shares in connection
with acquisitions -- -- -- 3,003,604
Purchase of treasury shares -- (5,000) (24,625) (24,625)
Net loss (4,968,607) -- -- (4,968,607)
-------------- -------------- -------------- --------------
Balance at December 31, 1997 (5,075,232) (5,000) (24,625) 6,193,386
Issuance of shares under Employee
Stock plan -- -- -- 52,459
Issuance of Preferred Stock -- -- -- 758,084
Preferred stock accretion (241,916) -- -- --
Imputed dividend on Preferred
Stock (227,589) -- -- --
Issuance of warrants to brokers -- -- -- 69,500
Issuance of warrants to lender -- -- -- 38,595
Conversion of Preferred Stock -- -- -- 660
Issuance of shares in connection
with acquisition -- -- -- 500,000
Stock dividend-Preferred Stock (10,084) -- -- --
Cash dividends-Preferred Stock (23,580) -- -- (23,580)
Net loss (1,731,778) -- -- (1,731,778)
-------------- -------------- -------------- --------------
Balance at December 31, 1998 $ (7,310,179) (5,000) $ (24,625) $ 5,857,326
============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statement
38
<PAGE>
<TABLE>
<CAPTION>
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,731,778) $ (4,968,607)
Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:
Depreciation 283,566 207,613
Amortization 559,389 415,854
Provision for doubtful accounts 245,952 231,984
Provision for excess and obsolete inventories 40,000 494,863
Stock compensation expense -- 8,021
Goodwill write-down -- 1,871,471
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (2,244,609) (289,471)
Inventories (554,197) (240,234)
Prepaid expenses and other assets (268,212) (123,099)
Accounts payable 1,610,000 (9,956)
Other accrued expenses 5,801 313,284
Deferred service revenue 99,623 152,196
Customer advances 127,176 (38,659)
Other long-term liabilities 36,756 32,969
-------------- --------------
Net cash used in operating activities: (1,790,533) (1,941,771)
Cash flows from investing activities
Cash paid for acquisitions, net of cash acquired (562,305) (3,007,701)
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 (137,768) (207,606)
-------------- --------------
Net cash used in investing activities (602,738) (4,065,307)
Cash flows from financing activities
Repayment of capital lease obligations (39,105) (27,817)
Issuance (repayment) of note payable to related party 70,000 (47,922)
Net borrowings on line of credit 1,353,845 1,005,232
Repayment of long-term debt (51,148) (24,003)
Issuance of preferred stock, net of offering costs 827,574 --
Payment of cash dividends-preferred stock (23,580) --
Issuance (repurchase) of common stock 52,459 (24,625)
-------------- --------------
Net cash provided by financing activities 2,190,045 880,865
-------------- --------------
Net decrease in cash and cash equivalents (203,226) (5,126,213)
Cash and cash equivalents at beginning of period 349,461 5,475,674
-------------- --------------
Cash and cash equivalents at end of period $ 146,235 $ 349,461
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 330,830 $ 111,082
============== ==============
Cash paid for income taxes $ 21,089 $ 40,410
============== ==============
Supplemental disclosure of non-cash transactions:
Capital lease obligations and notes payable to finance capital assets $ 203,823 $ --
============== ==============
Inventory received in payment of rescinded acquisition receivable $ 250,000 $ 68,509
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information (continued):
The Company issued common stock and cash in connection with certain business
combinations completed during the years ended December 31, 1998 and 1997. The
fair values of the assets acquired and the liabilities assumed at the dates of
the respective acquisitions are presented as follows:
Supplemental disclosures of non-cash investing and financing activities:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---------------------- ----------------------
<S> <C> <C>
Acquisitions:
Fair value of assets acquired $ 1,880,861 $ 9,280,347
Liabilities assumed (748,556) (3,269,042)
---------------------- ----------------------
Net assets acquired 1,132,305 6,011,305
Common stock issued (500,000) (3,003,604)
Note payable (70,000) --
====================== ======================
Cash paid for acquisition, net of cash acquired $ 562,305 $ 3,007,701
====================== ======================
</TABLE>
On June 1, 1997, the Company transferred certain land, buildings and building
improvements acquired as part of the EBM acquisition, with a fair value of
$381,000, and certain loans aggregating $381,000, assumed as part of the EBM
acquisition, to the former owner of EBM.
<TABLE>
<CAPTION>
<S> <C> <C>
Warrants issued in connection with line of credit $ 38,595 $ --
====================== ======================
Warrants issued in connection with sale of preferred stock $ 69,500 $ --
====================== ======================
Non-cash transactions relating to Series A Convertible Preferred
Stock:
Preferred Stock Accretion recorded to increase Series A
Preferred Stock to redemption value $ 241,916 $ --
====================== ======================
Imputed Dividend on Series A Convertible Preferred Stock
recorded for value of beneficial conversion feature $ 227,589 $ --
====================== ======================
Preferred stock dividend $ 10,084 $ --
====================== ======================
Preferred stock conversion $ 660 $ --
====================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
BRISTOL RETAIL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
NATURE OF OPERATIONS
Bristol Retail Solutions, Inc. (the Company, formerly Bristol
Technology Systems, Inc.) 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. As of December 31, 1998, the
Company has completed seven acquisitions. 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 service agreements. Sales and service operations are located in
various states throughout the western and midwestern United States.
BASIS OF PRESENTATION
The accompanying consolidated December 31, 1998 financial statements
include the accounts of Bristol Retail Solutions, Inc. (the Company) and its
wholly-owned subsidiaries: Cash Registers, Inc. (CRI), which includes MicroData,
Inc. (MicroData) and Electronic Business Machines, Inc. (EBM); Automated
Register Systems, Inc. (ARS); Smyth Systems, Inc. (Smyth); Pacific Cash Register
and Computer, Inc., (PCR); and Quality Business Machines (QBM) from the date of
acquisition. The accompanying consolidated December 31, 1997 financial
statements include the accounts of the Company and its wholly-owned subsidiaries
CRI and ARS, MicroData, EBM, Smyth and PCR from the date of acquisition. All
intercompany accounts and transactions have been eliminated in consolidation.
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 values. The
allocation of the purchase price included the assignment of approximately
$644,000 and $6,298,000, (SEE NOTE 2, GOODWILL WRITE-DOWN) to excess of cost
over net assets acquired in 1998 and 1997, respectively. 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 period subsequent to the Acquisitions are not comparable to
the financial statements for the periods prior to the Acquisitions (SEE NOTE 3,
ACQUISITIONS).
RECLASSIFICATIONS
Certain reclassifications have been made to prior year information to
conform with the current year presentation.
CASH EQUIVALENTS
Cash equivalents represent highly liquid investments with original
maturities of three months or less.
CUSTOMER ADVANCES
Customer advances represent deposits made in advance of equipment
installation and are applied against invoices when revenue is recorded.
41
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost or market using the
specific identification method for inventories with identifying serial numbers
and the average cost method for all other inventories.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
principally by accelerated methods for income tax and straight-line basis for
financial reporting purposes over the estimated useful lives of the assets which
range from three to ten years. Leasehold improvements are amortized over the
shorter of their useful life or the remaining term of the lease using the
straight-line basis.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill which represents the
excess of cost over the fair value of net assets acquired and is amortized on a
straight-line basis over estimated useful lives of 15 years and 20 years. SEE
NOTE 2 FOR GOODWILL WRITE-DOWN.
LONG-LIVED ASSETS
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of." In accordance
with SFAS No. 121, long-lived assets to be held are reviewed for events or
changes in circumstances that indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of long-lived
assets to determine whether or not an impairment to such value has occurred by
assessing their net realizable values based on estimated cash flows over their
remaining useful lives. Based on its most recent analysis, the Company believes
that no impairment exists at December 31, 1998.
PREPAID LICENSE FEES
The Company has prepaid amounts to a related party for certain software
license agreements. These amounts will be amortized as the licenses are sold.
The Company had prepaid license fees of $102,750 as of December 31, 1998 and
1997 which are included in other assets.
REVENUE RECOGNITION
The Company recognizes revenue for systems revenue upon shipment and
completed installation at which time there are no other significant vendor
obligations. Hardware sales are recognized as revenue upon shipment as there are
no other significant vendor obligations. Training and other services are
recognized as revenue when such items are delivered. Revenue from maintenance
contracts is recognized ratably over the term of the agreement.
Software revenue is recognized in accordance with the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, "Software Revenue Recognition." Pursuant to SOP 97-2, software revenue is
recognized on sales contracts when all of the following conditions are met: a
signed contract is obtained, delivery has occurred, the total sales price is
fixed and determinable, collectibility is probable, and any uncertainties with
regard to customer acceptance are insignificant. For those contracts that
include a combination of software, hardware and/or services, revenue is
allocated among the different elements based on Company-specific evidence of
fair value of each element. Revenue allocated to software and hardware is
recognized as the above criteria are met. Revenue allocated to services is
recognized as services are performed and accepted by the customer or, for
maintenance agreements, ratably over the life of the related contract.
SOFTWARE DEVELOPMENT COSTS
As a systems integrator, the Company provides its customers with
turnkey software solutions including proprietary software products exclusively
for application to retail operations. Purchased software, which generally has
alternative future uses, is included in other assets and amortized, using the
straight-line method, over the estimated economic life of the software of three
to five years. Unamortized purchased software costs at December 31, 1998 and
related amortization expense for the year then ended were not material.
4
<PAGE>
The costs of internal development of proprietary software are expensed
as research and development costs until technological feasibility is
established, pursuant to generally accepted accounting principles. For the years
ended December 31, 1998 and 1997, the Company had $376,000 and $243,000,
respectively, of capitalized internal software development costs. Commencing
upon initial product release, these costs are amortized using the straight-line
method over the estimated useful life of three years. For the year ended
December 31, 1998, the Company recorded $34,000 of amortization of capitalized
software costs. Amortization of capitalized costs is included in cost of
revenues in the accompanying consolidated statement of operations. No software
development costs were amortized during the year ended December 31, 1997.
COMPANY LIFE INSURANCE
The Company's owned wholly-owned subsidiaries purchased life insurance
policies on the lives of certain key employees. All premiums are paid by the
Company. For the year ended December 31, 1998, the Company received life
insurance benefits of $504,000. Amount is included in other income, net.
INCOME TAXES
The Company uses the liability method of accounting for income taxes as
set forth in SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax assets are recognized and measured based on the likelihood
of realization of the related tax benefit in the future. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable and accounts
payable approximated their carrying amounts due to the relatively short maturity
period of time between origination of the instruments and their expected
realization. The fair value of debt approximated its carrying amount at the
balance sheet date based on rates currently available to the Company for debt
with similar terms and remaining maturities.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CREDIT RISK
The Company sells its products on credit terms, performs ongoing credit
evaluations of its customers and generally does not require collateral.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25, Accounting for Stock
Issued to Employees (see NOTE 9 STOCKHOLDERS EQUITY).
To calculate the pro forma information required by SFAS No. 123, the
Company uses the Black-Scholes option-pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
BASIC AND FULLY DILUTED PER SHARE INFORMATION
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods presented.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
43
<PAGE>
presented assuming the exercise of the Company's stock options and warrants.
Common equivalent shares have not been included where inclusion would be
antidilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss $ (1,731,778)
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 (23,580)
--------------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE $ (2,224,863) 5,826,839 $ (0.38)
Effect of Dilutive Securities -- --
-------------- --------------
DILUTED LOSS TO COMMON STOCKHOLDERS PER SHARE $ (2,224,863) 5,826,839 $ (0.38)
============== ============== ==============
FOR THE YEAR ENDED DECEMBER 31, 1997
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE $ (4,968,607) 5,198,156 $ (0.96)
Effect of Dilutive Securities -- --
-------------- --------------
DILUTED LOSS TO COMMON STOCKHOLDERS PER SHARE $ (4,968,607) 5,198,156 $ (0.96)
============== ============== ==============
</TABLE>
Basic and diluted loss per share is based on the weighted average
number of common shares outstanding. Common stock equivalents, which consist of
stock options to purchase 1,539,000 shares of common stock at prices ranging
from $0.91 to $3.188 per share and warrants to purchase 1,106,312 shares of
common stock at prices ranging from $3.26 to $8.70 per share, were not included
in the computation of Diluted loss per share because such inclusion would have
been antidilutive for the year ended December 31, 1998. Common stock
equivalents, which consist of stock options to purchase 1,405,000 shares of
common stock at prices ranging from $2.875 to $3.163 per share and warrants to
purchase 906,250 shares of common stock at prices ranging from $6.00 to $8.70
per share, were not included in the computation of Diluted loss per share
because such inclusion would have been antidilutive for the year ended December
31, 1997.
COMPREHENSIVE OPERATIONS
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting of
comprehensive income and its components. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from transactions
and other events and circumstances from nonowner sources. All periods have been
restated to conform to SFAS No. 130.
SEGMENT DISCLOSURES
In 1998, the Company implemented SFAS 131, "Disclosures about Segment
of an Enterprise and Related Information." SFAS No.131 establishes standards for
reporting information about operating segments and related disclosures about
products, geographics and major customers. As the Company operates in one
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product line and geographic region, the Company determined that there is no
separate segment disclosures necessary at December 31, 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal year 2000, but earlier adoption is permitted. SFAS
133 will require the Company to record all derivatives on the balance sheet at
fair value. For derivatives that are hedges, changes in the fair value of
derivatives will be offset by the changes in the fair value of hedged assets,
liabilities or firm commitments. The Company believes the impact of adopting
this standard will not be material to its results of operations or equity.
2. GOODWILL WRITE-DOWN.
During the fourth quarter of 1997, the Company determined that certain
amounts recorded for goodwill from prior acquisitions was impaired and were no
longer recoverable. Such determination was made on an analysis of each
acquisition's projected revenues, profits and undiscounted future cash flows at
the date of acquisition compared to actual and projected revenues, profit or
loss and undiscounted future cash flows as of December 31, 1997. For the
purposes of this analysis, each subsidiary was identified as a separate asset
group as each subsidiary is independent. From this analysis, an estimate was
made as to the amount of goodwill which could be recoverable from future
operations. This estimate was compared to the recorded amounts of goodwill at
December 31, 1997 and a write-down was recorded for the difference.
The total goodwill write-down recorded separately in the accompanying
statement of operations, was approximately $1,871,000 which consisted of
$1,442,000 related to Smyth, $419,000 related to CRI and $10,000 related to
other subsidiaries.
The goodwill write-downs are primarily due to fourth quarter decisions
by the Company based on operating losses and lack of sales growth at both Smyth
and CRI. Prior to the time of the acquisition, Smyth Systems had begun a
marketing effort to penetrate the apparel and sporting goods markets. These
markets were expected to grow rapidly and represented the major reason that the
Company paid a purchase price in excess of book value for Smyth which was
allocated to goodwill at the acquisition date. However, by mid-fourth quarter of
1997, it was apparent that Smyth was not able to penetrate these markets due to
lack of sales caused by an insufficient product line and that the costs to
successfully sell into these markets were not reasonable given Smyth's operating
losses. As a result, in the fourth quarter, a decision was made to discontinue
the sales, marketing and promotional activities to penetrate these markets and a
goodwill impairment charge was recorded.
At the date of CRI's acquisition of EBM, it was anticipated that sales
from EBM would continue to expand and that EBM would move towards profitability
as it expected an increase in sales volume to the fast-food and table-service
restaurant market because of the ability to offer a certain product to a wider
geographical area. However, the product did not sell as anticipated due to
quality problems and by the fourth quarter of 1997, several key people
associated with the marketing of this product had left the Company. This
resulted in larger losses than anticipated and led to the impairment of the
goodwill.
After such write-downs, the Company believes that the remaining
goodwill amounts recorded for each subsidiary are recoverable over the remaining
amortization periods.
3. ACQUISITIONS.
During 1998 and 1997, the Company acquired the entities described
below, which were accounted for by the purchase method of accounting:
On April 1, 1997, the Company, through its wholly-owned subsidiary CRI,
acquired all of the outstanding common stock of MicroData, a POS dealer with
operations in Illinois and Kentucky, for consideration of $98,000 in cash,
including $19,000 of acquisition costs, and 11,415 shares of non-registered,
restricted common stock of the Company, valued at approximately $136,000 at the
acquisition date. The excess of purchase price over the fair values of the net
assets acquired was $155,000 and was recorded as goodwill, which is being
amortized on a straight-line basis over 20 years.
4
<PAGE>
On May 29, 1997, the Company acquired Smyth for consideration of
$2,369,000 in cash, including $20,000 of acquisition costs, and 569,408 shares
of non-registered, restricted common stock of the Company, valued at
approximately $2,064,000 at the acquisition date. Smyth operates through two
divisions which provide VAR systems to customers throughout the United States
and POS systems to customers in Southern California and Ohio. The excess of
purchase price over the fair values of the net assets acquired was $3,328,000
and was recorded as goodwill, which is being amortized on a straight-line basis
over 20 years.
On June 6, 1997, the Company, through its wholly-owned subsidiary CRI,
acquired EBM, a POS dealer with operations in Indiana and Kentucky, for
consideration of $483,000 in cash, including $62,000 of acquisition costs, and
147,033 shares of non-registered, restricted common stock of the Company, valued
at approximately $579,000 at the acquisition date. The excess of purchase price
over the fair values of the net assets acquired was $838,000 and was recorded as
goodwill, which is being amortized on a straight-line basis over 20 years.
On August 5, 1997, the Company acquired all of the outstanding common
stock of PCR, a POS dealer with operations in Northern California, for
consideration of $165,000 in cash, including $13,000 of acquisition costs, and
75,000 shares of non-registered, restricted common stock of the Company, valued
at approximately $225,000 at the acquisition date. The excess of purchase price
over the fair values of the net assets acquired was $260,000 and was recorded as
goodwill, which is being amortized on a straight-line basis over 20 years.
On May 8, 1998, the Company, through its wholly-owned subsidiary ARS,
acquired all of the outstanding common stock of 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 restricted common
stock of the Company, valued at approximately $500,000 at the acquisition date;
and a promissory note in the principal amount of $70,000 at an interest rate of
8.5%. The excess of purchase price over the fair values of the net assets
acquired was $644,000 and was recorded as goodwill, which is being amortized on
a straight-line basis over 20 years.
The purchase prices have been allocated to the assets acquired and the
liabilities assumed based upon the fair values at the dates of acquisition (SEE
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION).
The following presents the unaudited pro forma consolidated results of
operations of the Company for the year ended December 31, 1997 as if the CRI,
ARS, Smyth and EBM acquisitions had been consummated on January 1, 1997, and
includes certain pro forma adjustments resulting from the acquisitions. Pro
forma adjustments for the year ended December 31, 1997, consist solely of
adjustments to reflect an increase in goodwill amortization expense related to
the Smyth and EBM acquisitions. There is no pro forma disclosure for 1998, as
the QBM acquisition was not significant to the consolidated operations of the
Company.
YEAR
ENDED
DECEMBER 31,
1997 PRO FORMA
AS ADJUSTED
--------------
Net revenue $ 26,882,849
Net income (loss) (5,153,593)
Basic and diluted net income (loss) per share (0.94)
Shares used in computing basic and dilute
net income (loss) per share 5,491,352
The unaudited pro forma consolidated results of operations are
presented for comparative purposes only and do not necessarily reflect the
results that would have occurred had the acquisitions occurred on January 1,
1997 or the results which may occur in the future.
On May 9, 1997, pursuant to a merger agreement dated April 30, 1997,
the Company acquired all of the outstanding common stock of International
Systems & Electronics Corporation (ISE), a POS dealer with operations in
Florida, for consideration of $1,192,000 in cash, including $92,000 of
acquisition costs, and 130,434 shares of non-registered, restricted common stock
of the Company, valued at approximately $750,000. On July 23, 1997, the Company
entered into a Rescission Agreement whereby the merger agreement and all of the
transactions contemplated thereunder were rescinded in their entirety effective
as of April 30, 1997. In accordance with the Rescission Agreement, (i) all of
the 130,434 shares of common stock have been returned to the Company and
canceled; (ii) the shareholder of ISE has refunded to the Company $250,000 in
cash; (iii) the shareholder of ISE has delivered to the Company a promissory
note in the amount of $350,000 bearing interest at 8.5% to be paid in thirty
equal monthly installments commencing in January 1998; (iv) the shareholder of
ISE will from time to time make monthly transfers of finished goods inventory to
the Company, with an aggregate market value of up to $250,000; and (v) a
consulting agreement has been executed by the shareholder of ISE to provide
46
<PAGE>
consulting services to the Company through December 31, 2001 for a fee of
$250,000, which fee has been prepaid by the Company. In the accompanying balance
sheet, the $350,000 promissory note is included in notes receivable, net of
payments received of $97,000 at December 31, 1998; the $250,000 inventory
receivable is included in other current assets, net of inventory received as of
December 31, 1997 of $68,509 and $250,000 at December 31, 1998; and the $250,000
consulting agreement is included in other assets, net of accumulated
amortization at December 31, 1997 of $36,000 and $54,000 at December 31, 1998.
No revenues or expenses of ISE have been included in the accompanying statement
of operations and all costs incurred related to the acquisition and the
subsequent rescission have been expensed by the Company. The shares of common
stock issued for the acquisition of ISE have been returned and cancelled are not
included in the weighted average common shares outstanding used to compute the
Company's basic and diluted net loss per share.
4. CONCENTRATIONS
The Company sells its products primarily to quick-service restaurants,
grocery stores and other retailers. Credit is extended based on an evaluation of
the customer's financial condition and collateral is generally not required.
Credit losses have historically been minimal and such losses have been within
management's expectations.
For the years ended December 31, 1998 and 1997, there was no customer
that accounted for more than 10% of sales. The Company purchases its hardware
primarily from three main vendors. Sales of products from these vendors
accounted for 27% and 32% of net revenue for the years ended December 31, 1998
and 1997, respectively.
5. INVENTORIES
Inventories consist primarily of POS terminals, peripherals, paper and
other supplies for resale to customers, as well as items to support maintenance
contracts. Inventories held by revenue type were as follows:
DECEMBER 31,
1998 1997
-------------- --------------
Systems and installation inventories $ 3,820,084 $ 2,417,472
Services and supplies inventories 953,282 896,557
-------------- --------------
$ 4,773,366 $ 3,314,029
============== ==============
Included in services and supplies inventories at December 31, 1998 and
1997 is approximately $364,639 and $431,479, respectively, of used or
refurbished parts and components which the Company has on hand to fulfill
maintenance contract requirements. Due to the nature of the systems installed
and the longevity of the systems in general, service may be provided for several
years after sale, causing much of the refurbished inventories on hand to be
composed of older items. During the fourth quarter of 1998 and 1997, the Company
recorded a provision for excess and obsolete inventories of $40,000 and
$451,182, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
1998 1997
-------------- --------------
Furniture and equipment $ 965,604 $ 673,251
Automobiles 242,138 215,688
Leasehold improvements 114,108 107,685
-------------- --------------
1,321,850 996,624
Less accumulated depreciation and
amortization (477,205) (236,899)
-------------- --------------
Property and equipment, net $ 844,645 $ 759,725
============== ==============
7. SHORT-TERM BORROWINGS.
On December 17, 1997, the Company entered into a new line of credit
that 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%; terms until December 31, 2000; and is collateralized by the
Company's accounts receivable and inventory. Inelligible accounts receivable
includes any customer invoice that is ninety-days past due or any customer
account where 25% or more of the amount due is ninety-days delinquent. 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) acquiring or selling any assets over $50,000 excluding
purchases of dealers; (ii) selling or
47
<PAGE>
transferring any collateral except for finished inventory in the ordinary course
of business; (iii) selling inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis; (iv) incurring any debts, outside the
ordinary course of business, which would have a material adverse effect; (v)
guaranteeing or otherwise become liable with respect to obligations of another
party or entity; (vi) paying or declaring any dividend (except for dividends
payable solely in stock); or (vii) making any changes in the Company's capital
structure that would have a material adverse effect. In 1997, 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
$3,160,000 and $2,031,000 bearing interest at 9.75% and 10.25% at December 31,
1998 and 1997, respectively.
At December 31, 1998 the Company was in compliance with the covenants on the
line of credit.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, equipment and vehicles under
noncancelable capital leases and operating lease arrangements expiring in
various years through 2008. Certain of the operating leases may be renewed for
periods ranging from one to three years.
Future annual minimum lease payments for noncancelable capital and
operating leases at December 31, 1998 were:
CAPITAL OPERATING
LEASES LEASES
-------------- --------------
1999 $ 74,634 $ 867,999
2000 52,937 582,751
2001 40,618 394,573
2002 12,389 327,943
2003 8,260 325,522
Thereafter -- 270,000
-------------- --------------
Total minimum lease payments 188,838 $ 2,768,788
==============
Less amounts representing interest (47,163)
--------------
Present value of minimum lease payments 141,675
Current portion (51,802)
--------------
Long-term capital lease obligations $ 89,873
==============
Total rent expense under these operating leases was $907,579 for the
year ended December 31, 1998, of which $80,274 was paid to a director of CRI,
$180,760 to a officer of ARS and $81,613 paid to a officer of QBM. Rent expense
for the year ended December 31, 1997 was $581,438, respectively, of which
$48,000 was paid to a director of CRI and $173,760 was paid to a officer of ARS.
The net book value of assets under capital leases at December 31, 1998
and 1997 was $143,280 and $28,967, respectively, and are included in property
and equipment in the accompanying consolidated balance sheet.
In connection with its move from its current location in London,
Kentucky, CRI agreed in good faith to a new definitive lease regarding up to
12,000 square feet of office and warehouse space constructed by two officers and
former owners of CRI. Terms of the lease is for 10 years and the rate is $6.00,
$8.00, and $10.00 dollars per square foot for years one, two, and three through
ten, respectively. The Company has agreed to guarantee these lease payments. The
Company believes that the terms of the contract are equivalent or more favorable
than those that would be obtained under an arm's-length transaction.
In connection with the merger of ARS into the Company on December 31,
1996, an amended lease agreement was executed with the former owners of ARS,
certain of whom are now officers of ARS, for the office facility which ARS
currently occupies. The amended lease is at a monthly rate of $15,063 and
expires in December 2003. The mortgage on this building is guaranteed by ARS.
The mortgage balance outstanding at December 31, 1998 was $318,688.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain executive officers
and employees, the terms of which expire at various times through 2002 and
provide for minimum salary levels. In addition, certain officers of the acquired
companies receive a portion of the acquired company's pre-tax profits greater
than the amount defined in the officer's employment agreement. At December 31,
1998, no provision for bonus payments were made for these certain employment
agreements due to the fact that that the acquired companies incurred pre-tax
losses. The aggregate commitment for future salaries and the guaranteed bonus
amounts was $2,019,455 at December 31, 1998 excluding bonus contingent on
achieving certain pre-tax profits. The Company believes payment of these
contingent bonuses will not have a material adverse effect on results of
48
<PAGE>
operations, financial condition or cash flows. In addition, the Company has
entered into an employment contract with a former owner of a subsidiary,
expiring in 2009, that provides for a minimum salary that is payable even in the
event of termination for cause or upon death. The aggregate commitment for
future salaries and guaranteed bonus amounts under this contract at December 31,
1998, as amended in March 1999 was $246,573. At December 31, 1998, the Company
has accrued $103,754 for future payment under this contract.
The Company has a independent contractor agreement, with a former owner
of a subsidiary, expiring in 2002. The commitment for future payments under this
contract at December 31, 1998, as amended in March 1999 was $280,847.
LITIGATION
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
and its counsel, although the outcomes of these claims and suits are not
presently determinable, in the aggregate, they should not have a material
adverse affect on the Company's business, financial position or results of
operations or cash flows.
In September 1993, a judgement was entered in Bell Circuit Court,
Kentucky, on behalf of James J. Kreuger, a former employee of CRI, against CRI
and Coye D. King and Barbara King, former stockholders of CRI, in the amount of
$107,726 and accrued interest. The judgement arises from an alleged partnership
formed by the Kings and Mr. Kreuger, and is currently on appeal. The former
stockholders of CRI have agreed to pay any and all amounts of the judgement in
excess of $83,000; provided, however, that the Company can only collect such
amounts from the former stockholders by offsetting amounts owed by CRI and/or
the Company to such stockholders pursuant to (i) the new lease of the new
London, Kentucky facility (discussed in "Business Item 2. Description of
Properties") and (ii) bonus arrangements described in certain employment
agreements between the Company and the Kings. At December 31, 1997, CRI had
$83,000 accrued in connection with the lawsuit. In February 1998, CRI paid
$50,213 as settlement of the Court of Appeals affirming the award of $31,950
plus interest of $18,263. The final remaining claim was settled in July 1998,
where the Company paid $28,810 as agreed to above and the case was dismissed.
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 determinable, 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 consolidated financial statements.
On September 30, 1998, Maurice R. Johnson filed a complaint against the
Company, Automated Retail Systems, Inc. and Cash Registers, Incorporated
alleging violation of the Age Discrimination in Employment Act, 29 U.S.C., Sec.
Et. Seq. The case is pending in the United States District Court for the
Southern District of Ohio. The plaintiff, Mr. Maurice R. Johnson, is claiming
that the Company owes Mr. Johnson, $534,498 in lost salary, guaranteed bonuses
per his employment agreement and lost stock options. The Company denies that it
has any liability and intends to vigorously defend itself.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
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 was up to $2,000,000 and was to
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 were to 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 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. As of December 31, 1998, the second and third installments
49
<PAGE>
have not been funded. Based on conditions required to be met in the purchase
agreement, the Company does not expect that the two remaining installments will
fund.
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). Each holder of shares of the Series A 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 at least 66-2/3% of the then outstanding shares of Series A
Preferred Stock, (i) redeem, purchase or otherwise acquire for value any share
of the Series A 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 Series A 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 Series A Preferred
Stock; or (ix) alter or change the rights, preferences or privileges of the
shares of Series A 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.
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 and are exersicable at $3.26 per share. 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 H D 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 $241,916 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 $227,589.
As of December 31, 1998, 9,450 shares of the Preferred Stock were
converted into 1,060,715 shares of common stock and the remaining 550 shares
were redeemed by the Company in a separate agreement with H D Brous wherin the
Company negotiated the conversion of the 550 shares of Preferred Stock into
101,633 shares of common stock for the amount of $70,762. In addition, the
Company issued 5,993 shares in common stock valued at $10,084 representing the
accrued but unpaid dividends on the preferred shares being converted. During
1998, the Company also paid cash dividends of $23,580 to the holders of the
Preferred Stock.
WARRANTS
At December 31, 1998 and 1997, the Company had outstanding 718,750
Class A Redeemable Common Stock Purchase Warrants (Warrants) that entitle each
holder to purchase one share of common stock for $6.00 during a five-year period
commencing December 12, 1997. The exercise price and the number of shares
issuable upon exercise of the Warrants are subject to adjustment in certain
circumstances. Commencing February 12, 1998, the Warrants are redeemable by the
Company at $.01 per Warrant upon thirty-days' prior written notice, provided the
closing bid price of the common stock shall have been at least $10.00 per share
for the twenty consecutive trading days ending on the third day prior to the
date of the notice of redemption.
At December 31, 1998 and 1997, the Company had outstanding 125,000
Underwriters' Stock Warrants which entitle the holders thereof to purchase up to
125,000 shares of common stock at $8.70 per share. In addition, the Company had
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<PAGE>
62,500 Underwriters' Warrants entitling the holders to purchase up to 62,500
Warrants at $.125 per Warrant. The Warrants underlying the Underwriters'
Warrants entitle the holders to purchase up to 62,500 shares of common stock at
$8.70 per share. Both the Underwriters' Stock Warrants and the Underwriters'
Warrants are exercisable during a four-year period commencing November 12, 1996.
The Underwriters' Stock Warrants and Underwriters' Warrants contain antidilution
provisions providing for adjustment upon the occurrence of certain events.
In 1998, 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 the Black-Scholes option pricing model and are being
amortized as part of the debt issued costs in setting up the credit line. The
warrants expire on December 16, 2002.
Holders of the Company's warrants do not possess any rights as
stockholders of the Company until they exercise their warrants and, accordingly,
holders of the Company's warrants are not entitled to vote in matters submitted
to the shareholders and are not entitled to receive dividends.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has not paid dividends on its common stock to date. Under
its obligation, the Company has paid quarterly, cumulative dividends at a rate
of six percent (6%) per annum of the issue price of the Series A Convertible
Preferred Stock, payable, at the holders' option, in cash or in common stock at
the conversion price of the Series A Convertible Preferred Stock. So long as any
shares of Series A Convertible 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 Series A Preferred Stock, voting together as a
single class, declare or pay any dividend 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, the current line
of credit does prohibit the Company from paying cash dividends and the line of
credit does contain certain covenants which restrict the reduction or depletion
of the Company's capital. The Company obtained a waiver on the above Series A
Preferred Stock. The Company anticipates that future financing, including any
lines of credit, may further restrict or prohibit the Company's ability to pay
dividends.
EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan of Bristol Retail Solutions, Inc.
(the 1997 Employees Plan) was adopted by the Board of Directors and approved by
the Company's stockholders at the Annual Meeting of Stockholders held on May 20,
1997. The 1997 Employees Plan allows eligible employees of the Company to
subscribe for, and purchase shares of, the Company's common stock directly from
the Company at a discount from the market price, in installments through
authorized payroll deductions. A total of 200,000 shares of common stock are
authorized to be issued.
Common stock is purchased on each semi-annual purchase date at a
purchase price equal to eighty-five (85%) percent of the lower of (i) the fair
market value per share of common stock on the entry date into that offering
period or (ii) the fair market value per share on that semi-annual purchase
date. The maximum number of shares of common stock purchasable per participant
on any semi-annual purchase date shall not exceed 1,000 shares. Purchase rights
are not granted under the 1997 Employees Plan to any eligible employee if such
individual would, immediately after grant, own or hold outstanding options or
other rights to purchase stock possessing five percent or more of the total
combined voting power of all classes of stock of the Company or any of its
corporate affiliates.
During 1998, the Company issued 20,392 shares of common stock to its
employees under the 1997 Employees Plan. No shares of common stock were issued
to its employees in 1997 under the 1997 Employees Plan.
EQUITY PARTICIPATION PLAN
The 1996 Equity Participation Plan of Bristol Retail Solutions, Inc.
(the Stock Option Plan) was adopted by the Board of Directors and approved by
the written consent of the majority of the stockholders on July 31, 1996. The
Stock Option Plan provides for the grant of stock options, restricted stock,
performance awards, dividend equivalents, deferred stock, stock payments and
stock appreciation rights to employees, consultants and affiliates. Options
granted under the Stock Option Plan may be incentive stock options (ISOs) or
nonstatutory stock options (NSOs). ISOs may be granted only to employees and the
exercise price per share may not be less than 100% of the fair market value of a
51
<PAGE>
share of common stock on the grant date and the term of the options may not be
more than ten years from the date of grant (110% of the fair market value and
five years from the date of grant if the employee owns more than 10% of the
total combined voting power of all classes of stock of the Company). All other
stock awards may be granted to employees, consultants, or affiliates. The
exercise price of NSOs shall be determined by a committee appointed by the Board
of Directors to administer the Stock Option Plan (the Committee) but shall not
be less than the par value of a share of common stock on the grant date. The
term of the NSOs shall be determined by the Committee.
On April 3, 1998, the Board of Directors amended the Stock Option Plan
to increase the number of shares authorized to 3,450,000 from 2,450,000 shares
of common stock. The increase was approved by the stockholders on May 15, 1998.
At December 31, 1998, options to purchase 1,539,000 shares of common stock were
outstanding at exercise prices ranging from $0.91 to $3.188 per share. All
options vest at a rate of 25% per year commencing on the first anniversary of
the grant date. On February 27, 1998, each of the independent directors were
awarded 30,000 of options that vest immediately from the date of grant. No other
stock-based awards have been offered under the Stock Option Plan.
Of the options granted, 50,000 were granted to nonemployees and were
accounted for at their fair value in accordance with SFAS No. 123. The remaining
options were issued to employees and were accounted for in accordance with APB
No. 25. SFAS No. 123 requires the calculation of pro forma information regarding
net loss and net loss per share as if SFAS No. 123 had been adopted for options
issued to employees.
In calculating the pro forma information, the fair value was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for the year ended December 31, 1998 and
1997: risk-free interest rates of 5.2%, and 5.8%, respectively; dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of 80%; and a weighted-average expected life of the options of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Reported net loss applicable to common stockholders $ (2,224,863) $ (4,968,607)
Pro forma net loss $ (2,399,602) $ (5,395,970)
Reported basic and diluted net loss per share $ (0.38) $ (0.96)
Pro forma basic and diluted net loss per share $ (0.41) $ (1.04)
</TABLE>
On September 11, 1997, all outstanding stock options held by employees,
officers, Board members and non-employees were repriced at $2.875, the closing
market price on that date. The number of shares and vesting schedule of the new
option grants is the same as that of the old options replaced. The Company
initiated this repricing arrangement in order to retain and motivate key
employees. A total of 1,092,500 options with exercise prices ranging from $3.63
to $11.16 were repriced. The Company calculated the incremental impact of the
option repricing on pro forma net income in accordance with the provisions of
SFAS 123. The Company's calculation resulted in an incremental pro forma expense
of $30,462 for 1997, which the Company believes is not material to the pro forma
disclosures. The repricing had no impact on historical employee compensation
expense, which the Company records under the provisions of APB No. 25, as the
exercise price of the repriced options equals the stock value at the repricing
date. The Company also calculated the impact of the repricing on non-employee
options accounted for under SFAS 123 and determined the impact to be immaterial.
Option activity under the Stock Option Plan is as follows:
52
<PAGE>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
-------------- --------------
Outstanding - December 31, 1996 418,166 $ 3.00
Granted 1,092,500 3.01
Forfeited (105,666) (2.89)
--------------
Outstanding - December 31, 1997 1,405,000 3.02
Granted 489,850 2.87
Forfeited (355,850) (2.77)
--------------
Outstanding - December 31, 1998 1,539,000 2.97
==============
Exercisable at end of period 510,000 $ 2.95
==============
Weighted-average fair value of $ 1.94
options granted during the year
The weighted-average remaining term of options outstanding as of
December 31, 1998 is 7.6 years.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, 2,840,920 shares of common stock were reserved
for future issuance in connection with outstanding warrants and the Company's
incentive stock option and employee stock purchase plans.
This table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE EXERCISE
PRICE PRICE
<S> <C> <C> <C> <C> <C> <C> <C>
$2.875-$3.163 289,400 6.47 $3.00 144,700 $3.00
$2.875-$3.125 759,750 8.49 $3.02 189,937 $3.00
$0.906-$3.188 489,850 9.33 $2.87 175,363 $2.83
------- -------
$0.906-$3.188 1,539,000 7.6 $2.97 510,000 $2.95
========= =======
</TABLE>
<PAGE>
10. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
Current:
Federal $ -- $ --
State 19,349 2,500
-------------- --------------
Total current 19,349 2,500
Deferred:
Federal (675,040) (1,118,651)
State (209,697) (242,154)
Change in valuation allowance 884,737 1,360,805
-------------- --------------
Total deferred -- --
-------------- --------------
Provision for income taxes $ 19,349 $ 2,500
============== ==============
Deferred income taxes reflect the net tax effect of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
DECEMBER 31,
1998 1997
-------------- --------------
Deferred tax assets:
Net operating loss $ 1,684,216 $ 744,699
Inventories 231,042 309,180
Allowance for doubtful accounts 199,676 164,686
Deferred revenue 51,919 103,839
Accrued compensation 134,460 114,941
Other reserves and allowances 139,159 134,983
-------------- --------------
53
<PAGE>
Total deferred tax assets 2,440,472 1,572,328
Deferred tax liabilities:
Tax over book depreciation -- (16,593)
-------------- --------------
Net deferred tax assets 2,440,472 1,555,735
Valuation allowance on net deferred
tax assets (2,440,472) (1,555,735)
-------------- --------------
Net deferred taxes $ -- $ --
============== ==============
The Company has recorded a valuation allowance against deferred tax
assets as deemed necessary to reduce deferred tax assets to amounts that are
more likely than not to be realized. A portion of the valuation allowance
relates to acquired temporary differences that, when realized, will be recorded
as an adjustment to goodwill.
At December 31, 1998, the Company has federal net operating loss
carryforwards of $3,792,000 that begin to expire in the year 2011. Pursuant to
Section 382 of the Internal Revenue Code, use of the Company's net operating
loss and credit carryforwards for federal and state income tax purposes may be
limited if the Company experiences a cumulative change in ownership of greater
than 50% in a moving three-year period. Ownership changes could impact the
Company's ability to utilize net operating losses and credit carryforwards
remaining at the ownership change date. The limitation will be determined by the
fair market value of common stock outstanding prior to the ownership change,
multiplied by the applicable federal rate. The reconciliation of income tax
computed at the U.S. federal statutory tax rates to income tax provision is:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
AMOUNT PERCENT AMOUNT PERCENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rates $ (599,350) (35.0)% $ (1,738,137) (35.0)%
State income taxes, net of
federal tax benefit (183,041) (10.7) (258,238) (5.2)
Nondeductible goodwill 93,248 5.5 741,541 14.9
Change in valuation
allowance 884,737 51.7 1,360,805 27.4
Officers' Life Insurance (184,924) (10.8) -- --
Other 8,679 0.5 (103,471) (2.1)
-------------- -------------- -------------- --------------
$ 19,349 1.2% $ 2,500 0.0%
============== ============== ============== ==============
</TABLE>
11. EMPLOYEE BENEFIT PLAN
The Company, on December 1, 1998 consolidated the wholly-owned
subsidiaries Section 401(k) employees savings plans into the Bristol Profit
Sharing Plan (the Plan). The Plan covers substantially all full-time employees
who have worked for more than one year. Contributions are based on the
profitability of the Company and are made at the sole discretion of the Company.
There were $26,550 and 46,461 in discretionary contributions for the years ended
December 31, 1998 and 1997, respectively.
12. RELATED PARTY TRANSACTIONS
The Company had various transactions with related parties which were
made in the normal course of business. A summary of these transactions is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Cash register purchases from R.S.M.G , which has an officer of
Smyth as an officer and member of its Board of Directors $ 588,814 $ 421,746
Note paid to RBC, Inc., a company owned by the president
of CRI -- 40,000
Rent paid to a director of CRI 80,274 48,000
Rent paid to Pollastro Properties, Inc., owned by the former
owners of ARS certain of whom are now officers of ARS 180,760 173,760
54
<PAGE>
Rent paid to Schroeter, owned by former owner of QBM is now
an employee of QBM 81,613 --
Auto leases paid to ARS Leasing Co, owned by an officer
of ARS 12,234 18,628
Payment received from president of ARS -- (47,767)
Insurance premiums paid for insurance coverage
purchased through a broker who is a family
member of a director and officer of the Company -- 73,845
</TABLE>
Facility lease transactions with related parties are further discussed
in Note 8, Commitments and Contingencies.
Amounts payable to (due from) related parties were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Insurance premiums for insurance coverage
purchased through a broker who is a family
member of a director and officer of the Company $ -- $ 112,088
R.S.M.G., which has an officer of Smyth as an officer and a member of
its Board of Directors -- 21,613
Note payable to former owner of QBM, who is an employee of QBM 70,000 --
</TABLE>
13. SUBSEQUENT EVENTS
On January 20, 1999, the Company was notified by Nasdaq that the Company'
shares of common stock have failed to maintain a closing bid price greater than
or equal to $1.00 over the last thirty consecutive trade dates. To be eligible
for continued listing, the Company's shares of common stock must maintain a
minimum bid price of $1.00 for a minimum of ten consecutive trading days, it
will then have complied with the minimum bid price requirement. If the Company
is unable to demonstrate compliance with the minimum $1.00 bid price on or
before April 20,1999, the Company's securities will be subject to delisting,
effective with the close of business on April 20, 1999. To stay the delisting,
the Company may request a hearing by the close of business on April 20, 1999. In
addition, at December 31, 1998, the Company had $1,714,000 in net tangible
assets. As the Company currently does not meet the maintenance standards, there
is no assurance that the Company will be able to comply and/or maintain the
standards for Nasdaq SmallCap Market inclusion with respect to its securities.
If the Company fails to maintain Nasdaq SmallCap Market listing, the market
value of the Company's common stock likely 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.
On March 22, 1999, the Company announced that it signed a letter of
intent to acquire Hayman Systems of Laurel, Maryland and Micros of South
Florida. The closing is subject to the signing of a definitive agreement,
completion of financing, due diligence and the approval of the Company's
shareholders.
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock for $500,000 to an accredited investor. The holders of shares of
Series B Preferred Stock shall be entitled to receive semi-annually commencing
January 15, 2000 and each July 15 and January 15, thereafter, cumulative
dividends, at the rate of twelve (12%) per annum of the original issue price of
the Series B Preferred Stock. The Series B Preferred Stock is not convertible,
has no voting rights, has a liquidation preference and is redeemable at the
option of the Company. The purchaser will receive warrants at an exercise price
of $1.00. The number of warrants to be issued has not been agreed to.
55
<PAGE>
EXHIBIT 11
<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Computation of Earnings (Loss) per Share
<CAPTION>
Year Ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (1,731,778) $ (4,968,607)
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 (23,580) - -
--------------- ---------------
Net loss applicable to common stockholders $ (2,224,863) $ (4,968,607)
=============== ===============
Weighted average number of common shares outstanding during the
period 5,826,839 5,198,156
=============== ===============
Basic loss to common stockholders per share $ (0.38) $ (0.96)
=============== ===============
DILUTED LOSS PER SHARE
Net loss applicable to common stockholders $ (2,224,863) $ (4,968,607)
Plus: Income impact of assumed conversion-Preferred dividends -- - -
--------------- ---------------
Net loss applicable to common stockholders $ (2,224,863) $ (4,968,607)
=============== ===============
Weighted average number of common shares outstanding during the
period 5,826,839 5,198,156
Effect of stock options, warrants and convertible preferred stock
treated as common stock equivalents under the treasury stock
method - - - -
--------------- ---------------
Total shares 5,826,839 5,198,156
=============== ===============
Diluted loss to common stockholders per share $ (0.38) $ (0.96)
=============== ===============
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME STATE OF INCORPORATION
---- ----------------------
Cash Registers, Incorporated Kentucky
Automated Retail Systems, Inc. Washington
Smyth Systems, Inc. Delaware
Pacific Merger Corp. Delaware
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-5570-LA and No. 333-43899 on Form S-3 and Form S-8, respectively, and in
Amendment No. 3 to Registration Statement No. 333-50385 on Form S-3 of our
report dated March 26, 1999 (April 15, 1999 as to Note 13) appearing in the
Annual Report on Form 10-KSB of Bristol Retail Solutions, Inc. for the year
ended December 31, 1998.
/s/ Deloitte & Touche LLP
- ----------------------------------------------
Costa Mesa, California
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 146,235
<SECURITIES> 0
<RECEIVABLES> 6,050,393
<ALLOWANCES> 524,356
<INVENTORY> 4,773,366
<CURRENT-ASSETS> 10,982,859
<PP&E> 1,321,850
<DEPRECIATION> 477,205
<TOTAL-ASSETS> 17,284,637
<CURRENT-LIABILITIES> 11,158,652
<BONDS> 0
0
0
<COMMON> 6,920
<OTHER-SE> 5,850,406
<TOTAL-LIABILITY-AND-EQUITY> 17,284,637
<SALES> 32,196,708
<TOTAL-REVENUES> 32,196,708
<CGS> 22,043,158
<TOTAL-COSTS> 17,966,519
<OTHER-EXPENSES> (100,540)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,712,429)
<INCOME-TAX> 19,349
<INCOME-CONTINUING> (1,731,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,731,778)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
