<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
(Mark One)
( X ) Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
( ) Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to _______________
Commission file number: 0-21633
BRISTOL RETAIL SOLUTIONS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 58-2235556
(State or Other Jurisdiction of (IRS Employer 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)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $.001 par value - 6,963,282 shares as of November 12, 1999
Class A Redeemable Common Stock Purchase Warrants - 718,750 as of November
12, 1999
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
<CAPTION>
Index
<S> <C>
Part I --- FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of September 30, 1999 3
Consolidated Statements of Operations for the three months ended September 30, 1999
and 1998 4
Consolidated Statements of Operations for the nine months ended September 30, 1999
and 1998 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999
and 1998 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-22
Part II --- OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
</TABLE>
Page 2
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Balance Sheet
(Unaudited)
September 30, 1999
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 396,296
Accounts receivable, net of allowance for doubtful accounts of $372,720 7,708,222
Inventories 4,710,967
Prepaid expenses and other current assets 433,561
Current portion of note receivable 156,436
-------------
Total current assets 13,405,482
Property and equipment, at cost:
Furniture and equipment 1,082,547
Automobiles 268,177
Leasehold improvements 114,108
-------------
1,464,832
Accumulated depreciation and amortization (660,490)
-------------
Property and equipment, net 804,342
Intangible assets, net of accumulated amortization of $742,382 4,338,619
Note receivable - noncurrent portion 103,881
Capitalized software development costs, net 345,862
Other assets 289,915
-------------
Total assets $ 19,288,101
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,309,885
Accounts payable 4,196,701
Accrued salaries, wages and related benefits 560,786
Accrued expenses 427,828
Deferred service revenue 2,237,618
Customer advances 1,491,924
Current portion of note payable to related party 24,704
Current portion of long-term debt 12,880
Current portion of capital lease obligations 45,197
-------------
Total current liabilities 13,307,523
Long-term debt 70,646
Capital lease obligations - noncurrent portion 68,548
Other long-term liabilities 103,754
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 --
Preferred stock, $1.00 stated value:
1,000,000 shares authorized;
Series B Preferred Stock: 500,000 shares issued and 400,000 shares outstanding 400,000
Common stock, $.001 par value:
20,000,000 shares authorized; 6,968,282 and 6,963,282 shares issued and outstanding 6,968
Additional paid-in capital 13,259,222
Accumulated deficit (7,903,935)
-------------
5,762,255
Less 5,000 shares of treasury stock, at cost (24,625)
-------------
Total stockholders' equity 5,737,630
-------------
Total liabilities and stockholders' equity $ 19,288,101
=============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Revenue:
System sales and installation $ 6,525,829 $ 6,383,979
Service and supplies sales 3,226,676 3,039,483
------------- -------------
Total revenue 9,752,505 9,423,462
Cost of revenue:
System sales and installation 4,323,826 4,430,008
Service and supplies sales 2,289,341 2,334,270
------------- -------------
Total cost of revenue 6,613,167 6,764,278
Gross margin 3,139,338 2,659,184
Operating expenses:
Selling, general and administrative expenses 2,927,099 2,693,541
Research and development costs 128,958 181,254
------------- -------------
Total operating expenses 3,056,057 2,874,795
------------- -------------
Operating income (loss) 83,281 (215,611)
Other expense, net 143,583 116,392
------------- -------------
Loss before income taxes (60,302) (332,003)
Provision for income tax 1,208 6,991
------------- -------------
Net loss and comprehensive net loss $ (61,510) $ (338,994)
============= =============
Net loss $ (61,510) $ (338,994)
Cumulative dividends for Series A Convertible Preferred Stock -- (7,580)
Cumulative dividends for Series B Preferred Stock (14,333) --
------------- -------------
Net loss applicable to common stockholders $ (75,843) $ (346,574)
============= =============
Basic and diluted net loss to common stockholders $ (0.01) $ (0.06)
============= =============
Basic and diluted weighted average common shares outstanding 6,963,282 5,876,201
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Revenue:
System sales and installation $ 18,262,699 $ 15,291,245
Service and supplies sales 9,238,653 8,312,927
------------- -------------
Total revenue 27,501,352 23,604,172
Cost of revenue:
System sales and installation 12,041,021 10,128,962
Service and supplies sales 6,679,713 5,962,959
------------- -------------
Total cost of revenue 18,720,734 16,091,921
------------- -------------
Gross margin 8,780,618 7,512,251
Operating expenses:
Selling, general and administrative expenses 8,387,364 7,550,927
Research and development costs 532,523 501,775
------------- -------------
Total operating expenses 8,919,887 8,052,702
------------- -------------
Operating loss (139,269) (540,451)
Other expense, net 370,996 237,642
------------- -------------
Loss before income taxes (510,265) (778,093)
Provision for income tax 4,158 9,626
------------- -------------
Net loss and comprehensive net loss $ (514,423) $ (787,719)
============= =============
Net loss $ (514,423) $ (787,719)
Preferred stock accretion and dividends:
Accretion related to Series A Convertible Preferred Stock -- (241,916)
Accretion related to Series B Preferred Stock (52,500) --
Imputed dividends for Series A Convertible Preferred Stock -- (227,589)
Cumulative dividends for Series A Convertible Preferred Stock -- (23,300)
Cumulative dividends for Series B Preferred Stock (26,883) --
------------- -------------
Net loss applicable to common stockholders $ (593,806) $ (1,280,524)
============= =============
Basic and diluted net loss to common stockholders per share $ (0.09) $ (0.22)
============= =============
Basic and diluted weighted average common shares outstanding 6,947,536 5,697,308
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (514,423) $ (787,719)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 208,586 204,604
Amortization 443,661 375,485
Provision for doubtful accounts 19,308 --
Changes in operating assets and liabilities:
Accounts receivable (2,201,493) (3,586,554)
Inventories (3,454) 167,114
Prepaid expenses and other assets (101,352) (557,990)
Accounts payable 310,886 1,552,071
Other accrued expenses (543,515) (124,300)
Deferred revenue 390,055 203,583
Customer advances 919,819 44,519
Other long-term liabilities -- 27,567
------------- -------------
Net cash used in operating activities (1,071,922) (2,481,620)
Cash flows from investing activities:
Cash paid for final installment, acquisition (10,000) --
Cash paid for acquisitions, net of cash acquired -- (572,726)
Receivables from rescinded acquisition 61,807 97,335
Purchases of property and equipment (124,606) (103,435)
------------- -------------
Net cash used in investing activities (72,799) (578,826)
Cash flows from financing activities:
Repayment of capital lease obligations (44,775) (20,795)
Net borrowings on line of credit 1,079,619 2,282,170
Repayment of long-term debt (16,326) (44,481)
Repayment (issuance) of note payable to related party (45,296) 59,141
Issuance of preferred stock, net of offering costs 500,000 827,577
Redemption of preferred stock (100,000) --
Issuance of common stock, net of offering costs 21,560 52,459
------------- -------------
Net cash provided by financing activities 1,394,782 3,156,071
Net increase in cash and cash equivalents 250,061 95,625
Cash and cash equivalents at beginning of period 146,235 349,461
------------- -------------
Cash and cash equivalents at end of period $ 396,296 $ 445,086
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 357,683 $ 290,006
============= =============
Cash paid for income taxes, net $ 9,258 $ 21,424
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Supplemental disclosures of cash flow information (continued): Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Supplemental disclosures of non-cash transactions:
Warrants issued in connection with the line of credit $ -- $ 38,595
============= =============
Warrants issued in connection with the sale of preferred stock $ 52,500 $ 69,500
============= =============
Inventory received in payment of rescinded acquisition receivable $ -- $ 250,000
============= =============
Capital lease obligations and notes to finance capital assets $ 45,860 $ --
============= =============
Non-cash transactions relating to 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 accretion recorded to increase Series B
Preferred Stock to redemption value $ 52,500 $ --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE>
BRISTOL RETAIL SOLUTIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Bristol Retail Solutions, Inc. (the Company) was incorporated on April
3, 1996 in the state of Delaware for the purpose of acquiring and operating a
national network of full service retail automation solution providers. From its
inception through September 30, 1999, 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
maintenance agreements. Currently, the Company has sales and service operations
located in sixteen cities and seven states, primarily located in the Western and
Midwestern regions of the United States.
The accompanying consolidated September 30, 1999 financial statements
include the accounts of 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) which
includes Quality Business Machines (QBM); Smyth Systems, Inc. (Smyth); and
Pacific Cash Register and Computer, Inc. (PCR). All inter-company 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
results of the acquisitions are included in the Company's consolidated financial
statements subsequent to the respective dates of acquisition. Accordingly, the
financial statements for the periods subsequent to the acquisitions are not
comparable to the financial statements for the periods prior to the
acquisitions.
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-QSB and Item 310 of Regulation S-B. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. The accompanying consolidated
financial statements do not include certain footnotes and financial
presentations normally required under generally accepted accounting principles
(GAAP) and, therefore, should be read in conjunction with the audited financial
statements included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
RECLASSIFICATION
Certain reclassifications have been made to prior year information to
conform with the current year presentation.
INCOME TAXES
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete year. For the three and
nine months ended September 30, 1999 and 1998, the estimated effective income
tax rate is less than the U.S. statutory rate primarily due to a 100% valuation
allowance provided against the deferred tax assets that arose from the current
operating losses.
Page 8
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BASIC AND 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
presented assuming the exercise of the Company's stock options and warrants and
preferred stock dividends on Series B Preferred Stock. Common equivalent shares
have not been included where inclusion would be antidilutive.
<TABLE>
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<CAPTION>
Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (61,510)
Cumulative dividends for Series B Preferred Stock (14,333)
-------------
Loss applicable to common stockholders $ (75,843) 6,963,282 $ (0.01)
=============
Effect of Dilutive Securities -- --
------------- -------------
DILUTED LOSS PER SHARE
Loss applicable to common stockholders $ (75,843) 6,963,282 $ (0.01)
============= ============= =============
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
BASIC LOSS PER SHARE
Net loss $ (514,423)
Accretion related to Series B Preferred Stock (52,500)
Cumulative dividends for Series B Preferred Stock (26,833)
--------------
Loss applicable to common stockholders (593,806) 6,947,536 $ (0.09)
=============
Effect of Dilutive Securities -- --
------------- -------------
DILUTED LOSS PER SHARE
Loss applicable to common stockholders $ (593,806) 6,947,536 $ (0.09)
============= ============= =============
</TABLE>
Basic and diluted loss per share is based on the weighted average
number of common shares outstanding and net loss applicable to common
stockholders. Common stock equivalents, which consist of stock options and
warrants were antidilutive for the three- and nine -months ended September 30,
1999.
STOCKHOLDERS' EQUITY
On April 1, 1999, the Company issued 47,763 shares of common stock to
its employees under the 1997 Employee Stock Purchase Plan. On November 1, 1999,
the Board of Directors suspended the 1997 Employee Stock Purchase Plan.
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock (the Series B) for $500,000 to an accredited investor. The
holder of shares of Series B 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. The Series B is not convertible, has no voting
rights, has a liquidation preference of $1.00 per share plus unpaid dividends
and is redeemable at the option of the Company at any time. The purchaser of the
Series B received warrants to purchase 150,000 shares of the Company's common
stock concurrently with the $500,000 investment. These warrants were valued by
the Company at $52,500 using a Black-Scholes option pricing model and are
exercisable at $1.00 per share and were charged against the carrying value of
the Series B. In the event the Company's Series B has not been redeemed by the
Company by December 31, 1999, the exercise price of the warrant shall be reduced
by an amount equal to $0.05 per month for each month that any of the Series B
remains outstanding. The Company recorded accretion of $52,000 to increase the
carrying value to the liquidation value of $500,000. The Company also recorded
cumulative preferred dividends of $27,000 as of September 30, 1999. On September
10, 1999, the Company redeemed $100,000 shares of the Series B.
Page 9
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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 charges in equity (net assets) during a period from transactions
and other events and circumstances from non-owner sources. There were no items
of other comprehensive operations for the three and nine month periods ended
September 30, 1999 and 1998.
CONTINGENCIES
The Company's subsidiaries have been, from time to time, parties to
various lawsuits and other matters involving ordinary and routine claims arising
in the normal course of business. In the opinion of management of the Company,
although the outcomes of these claims and suits are not presently determinable,
in the aggregate, the outcome of any of these matters will not have a material
adverse affect on the Company's business, financial position or results of
operations or cash flows.
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering were 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. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged 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. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court). The
Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and has made a provision of $100,000 in the accompanying
consolidated financial statements for the nine months ended September 30, 1999.
In the United States District Court for the Southern District of Ohio,
Maurice R. Johnson filed on September 30, 1998, a complaint against the Company,
Automated Retail Systems, Inc. dba, and Cash Registers, Inc. alleging breach of
employment contract and violation of the Age Discrimination in Employment Act,
29 U.S.C., Sec Et Seq. The plaintiff, Mr. Maurice R. Johnson, claimed that the
Company owed Mr. Johnson, $534,498 in lost salary, guaranteed bonuses per his
employment agreement and lost stock options. On October 25, 1999, the Company
reached a settlement with Mr. Johnson. Under the settlement agreement, the
Company will pay Mr. Johnson $24,050 in consideration for the case to be
dismissed. In addition, the Company agreed to hire Mr. Johnson as a consultant
until April 1, 2002 at a monthly rate of $1,300 per month and pay approximately
$472 per month for group medical insurance for the duration of his consulting
agreement. Based on this agreement, all claims by either party have been
dismissed.
On April 14, 1999, Richard H. Walker, former President and Chief
Executive Officer of the Company, filed a complaint against the Company for
breach of written contract related to Mr. Walker's employment agreement with the
Company. Mr. Richard H. Walker claimed that the Company owed Mr. Walker,
$1,500,000 in lost salary, employee benefits, paid vacation days, bonuses and
lost stock options. On May 13, 1999, the Company filed a cross-complaint with
the Superior Court of California against Richard H. Walker, individually and as
Trustee of the Walker Family Trust and Paul Spindler, former Chairman of the
Board and Executive Vice President of the Company for breach of fiduciary duty,
mismanagement and waste of corporate assets, negligence, fraud, conspiracy and
injunctive relief. The Company had requested to be awarded compensatory damages
in excess of $1,000,000, exemplary damages, transfer of 710,477 shares of stock
to the Company, court costs and reasonable attorney fees. On July 8, 1999, the
Company entered into Settlement Agreements with Mr. Richard H. Walker and Mr.
Paul Spindler. Mr. Lawrence Cohen, the Company's Chairman was also party to
Page 10
<PAGE>
these Settlement Agreements with Msrs. Walker and Spindler. Under the terms of
the separate Settlement Agreements, the parties dismissed the above pending
actions. The parties exchanged general releases as part of the Settlement
Agreements. Under the terms of the Settlement Agreement, as amended, with Paul
Spindler and the Spindler Family Trust, the Company agreed to pay the
compensation owing to Mr. Spindler under his previous Consulting Agreement with
the Company in the amount of $40,000 no later than September 9, 1999 or prior
thereto in the event the Company completes certain financing. The Spindler
Family Trust has also agreed to sell to the Company 595,478 shares of common
stock of the Company owned by the Trust for $83,366.92 at any time on or prior
to September 9, 1999, in the event that certain financing occurs. On September
9, 1999, the Company and Paul Spindler amended the previous agreement to extend
the previous agreement until December 9, 1999. The Company paid Paul Spindler
one-half of the $40,000 consulting fee on September 9, 1999. Under the
Settlement Agreement with Richard Walker, the Walker Family Trust provided Mr.
Cohen and certain third parties unrelated to the Company the right to purchase
710,477 shares of common stock of the Company for an aggregate consideration of
$100,000 at any time on or prior to September 30, 1999. The 710,477 shares of
common stock, previously owned by Richard Walker, were transferred to the
certain third parties, as approved by the Board of Directors, on September 30,
1999.
SUBSEQUENT EVENT
The Company announced November 22, 1999 that it has signed a definitive
agreement for the sale of its Ohio division to a private company for
approximately $1,600,000 of net proceeds in cash in exchange for certain assets.
Page 11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1999
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
Quarterly Report on Form 10-QSB, as well as the Company's audited consolidated
financial statements for the year ended December 31, 1998.
The Company's financial condition and results of operations have
changed considerably since the Company's inception in April 1996, as a result of
the Company's acquisition strategy. The Company has completed seven acquisitions
since its inception through the end of December 31, 1998, all of which were
accounted for under the purchase method of accounting. No acquisitions were
completed by the Company during the nine months ended September 30, 1999. Due to
the Company's growth through acquisitions, year-to-year comparisons of the
historical results of the Company's operations have been affected primarily by
the addition of acquired companies. The dollar increases in the various revenue
and expense components of the Company's results are due primarily to growth from
acquisitions. Therefore, these year-over-year changes are not necessarily
indicative of changes that will occur in the future. The Company has suspended
its acquisition strategy, however, if the Company obtains financing, it may
pursue acquisitions in the future and expects that acquisitions will continue to
impact the Company's future operating results.
This Quarterly Report on Form 10-QSB contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Additional Factors That May Affect
Future Results."
REVENUE
The Company's consolidated total revenue is comprised of two
components: (i) revenue derived from the sale and installation of hardware and
software (Systems Revenue) and (ii) revenue derived from the sale of services
and supplies (Service Revenue).
Total revenue for the quarter ended September 30, 1999 was $9,753,000
and was comprised of revenue from the seven companies the Company has acquired.
This represents an increase of 4% from the Company's total revenue of $9,423,000
for the quarter ended September 30, 1998. The slight increase in revenue is
primarily attributable to an improvement in Systems Revenue due to increased
demand from wholesale grocers and an improvement in Service Revenue due to an
increase in maintenance contracts as a result of increased demand in systems
sales.
Total revenue for the nine months ended September 30, 1999 was
$27,501,000, a 17% increase over the comparable nine months ended September 30,
1998. The increase in revenue is primarily attributable to the Quality Business
Machines (QBM) acquisition due to the fact that in 1998, only five months of
QBM's revenue was recognized. The remaining increase is attributable to an
improvement in Systems Revenue due to increased demand from franchises and
wholesale grocers and an improvement in Service Revenue due to an increase in
maintenance contracts as result of increased demand in systems sales.
Total revenue for the quarter ended September 30, 1999 was comprised of
67% Systems Revenue and 33% Service Revenue, as compared to a revenue
composition of 68% Systems Revenue and 32% Service Revenue for the quarter ended
September 30, 1998. Total revenue for the nine months ended September 30, 1999
was comprised of 66% Systems Revenue and 34% Service Revenue, as compared to a
revenue composition of 65% Systems Revenue and 35% Service Revenue for the nine
months ended September 30, 1998. The mix of revenue from 1998 to 1999 for both
the three- and nine-month periods were comparable. Future mix of revenue
composition will depend on the timing of systems sales and installation and the
timing of recognizing revenue from maintenance contracts.
Page 12
<PAGE>
One customer, Fleming Companies, Inc., accounted for more than 10% of
total revenue for the three- and nine-month periods ended September 30, 1999. No
customer accounted for 10% of total revenue for the three- and nine-month
periods ended September 30, 1998. 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 34% and 32% of total revenue for the three-and nine-month periods
ended September 30, 1999, and approximately 40% and 32% of total revenue for the
three- and nine-month periods ended September 30, 1998. 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
manufacturer'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 manufacturers in certain
regions or territories of the country. A change in the Company's or its
subsidiaries' relationship with these principal vendors could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
GROSS MARGIN
Gross margin increased to $3,139,000 for the three months ended
September 30, 1999, from $2,659,000 for the three months ended September 30,
1998. As a percentage of sales, gross margin for the quarter ended September 30,
1999 was 32% and was comprised of gross margin for Systems Revenue of 34% and
gross margin for Service Revenue of 29%. Gross margin for the quarter ended
September 30, 1998 was 28% and was comprised of gross margin for Systems Revenue
of 31% and gross margin for Service Revenue of 23%. The improvement in Systems
Revenue gross margin is related to the year-ago efforts to increase business in
existing and new regions by offering new software and point-of-sale products at
reduced prices. As a percentage of revenue, the increase in Service Revenue
gross margin is related to an increase in contract maintenance revenue and time
and material billing rates that offset a year-ago increase in support and
service personnel.
Gross margin increased $1,268,000 to $8,781,000 for the nine months
ended September 30, 1999 from $7,512,000 for the nine months ended September 30,
1999. The increase in Systems Revenue gross margin is primarily attributable to
the QBM acquisition due to the fact that only five month's contribution of gross
margin by QBM being recognized in 1998 compared to a full nine months
contribution in 1999. As a percentage of sales, gross margin for the nine months
ended September 30, 1999 was 32% and was comprised of gross margin for Systems
Revenue of 34% and gross margin for Service Revenue of 28%. Gross margin for the
nine months ended September 30, 1998 was 32% and was comprised of gross margin
for Systems Revenue of 34% and Service Revenue of 28%. The change in gross
margin percentage was comparable and the gross margins for the nine months ended
September 30, 1999 and 1998 are reflective of past performance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses in the third quarter
of 1999 of $2,927,000 increased by $234,000 from the comparable prior-year
period and represented 30% of total revenue, versus 29% of total revenue in the
comparable prior year period. The increase in expenses in absolute dollars
between the third quarter of 1999 as compared to the comparable quarter in 1998
was partly due to an increase in sales commission costs related to improved
gross margins as sales personnel commission is based on achievement of certain
gross margins. The increased in sales costs was partially offset by a decrease
in corporate expenses due to management changes at the beginning of this fiscal
year.
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Total selling, general and administrative expenses for the nine months
ended September 30, 1999 of $8,387,000 increased by $836,000 from the comparable
prior-year period and represented 31% of total revenue, versus 32% of total
revenue in the comparable prior year nine month period. The increase in expenses
in absolute dollars between the nine months of 1999 versus the comparable nine
months of 1998 was primarily due to QBM, an increase in sales commission costs,
and the $100,000 legal provision related to the class action settlement
recognized during the quarter ended June 30, 1999. (SEE LEGAL PROCEEDINGS). The
decrease in selling, general and administrative expenses as percentage of
revenue is a result of lower corporate expenses incurred as a result of
management changes in the beginning of the fiscal year 1999.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $129,000 for the three months ended
September 30, 1999, a $52,000 decrease from the comparable prior-year period and
represents 1% of total revenue, versus 2% for the three months ended September
30, 1998. The decrease is attributable to the completion of work related to
making the software Year 2000.
Research and development costs were $533,000 during the nine-month
period ended September 30, 1999 compared to $502,000 incurred during the
nine-month period ended September 30, 1998. 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 such
software Year 2000 compliant.
OTHER EXPENSE (INCOME)
The Company earned interest income of $2,000 and $20,000 for the three-
and nine-month periods ended September 30, 1999 compared to $23,000 and $93,000
for the three- and nine-month periods ended September 30, 1998. For the periods
ended September 30, 1998, the Company earned dividend income from a purchasing
cooperative of cash register dealers and from finance charges on delinquent
accounts earned and collected. For the periods ended September 30, 1999,
interest income is related to the recognition of finance charges on delinquent
accounts earned and collected. The Company recognized interest expense of
$148,000 and $395,000 for the three-and nine-month periods ended September 30,
1999 compared to $138,000 and $329,000 for the three- and nine-month periods
ended September 30, 1998. Interest expense in both years consisted primarily of
interest on outstanding balances on the Company's lines of credit and
amortization of debt issuance costs. The increase was a direct result of
increased average borrowings under the existing credit facilities over the prior
year.
INCOME TAX PROVISION
The Company recorded a slight income tax provision for the three- and
nine-month periods ended September 30, 1999 and 1998, respectively. Income tax
expense in both years consisted solely of state taxes as the Company had a
taxable loss for federal income tax purposes.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The Company's net loss applicable to common stockholders for the
quarter ended September 30, 1999 was $76,000, consisting of the Company's net
loss for the quarter of $62,000 and cumulative dividends on the Series B
Preferred Stock of $14,000. The Company's net loss applicable to common
stockholders for the nine months ended September 30, 1999, was $594,000,
consisting of the Company's net loss of $514,000, accretion of $53,000 to
increase the Series B Preferred Stock to its liquidation value and cumulative
dividends on the Series B Preferred Stock of $27,000.
The Company's net loss applicable to common stockholders for the
quarter ended September 30, 1998 was $347,000, consisting of the Company's net
loss of $339,000 and cumulative dividends on the Series A Preferred Stock of
$8,000. The Company's net loss applicable to common stockholders for the nine
months ended September 30, 1998, was $1,281,000, consisting of the Company's net
loss of $788,000, accretion of $242,000 to increase the Series A Preferred Stock
issued on March 18, 1998 to its liquidation value of $100 per share, imputed
dividends related to the beneficial conversion feature of the Series A Preferred
Stock of $228,000 and cumulative dividends on the Series A Preferred Stock of
$23,000.
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LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company had cash and cash equivalents of $396,000 and working
capital of $98,000 at September 30, 1999. During the nine months ended September
30, 1999, the Company utilized $1,072,000 of cash from operations; used $10,000
for the final installment for the acquisition of QBM, utilized $125,000 for the
purchase of property and equipment and generated $62,000 from other investing
activities; and generated $1,395,000 from financing activities, which primarily
related to net borrowings under the Company's line of credit facilities,
issuance of Series B Preferred Stock and repayments under various debt
agreements. During the nine months ended September 30, 1998, the Company
utilized $2,482,000 of cash in operations; utilized $573,000 for the acquisition
of QBM and utilized $6,000 from other investing activities; and generated
$3,156,000 from financing activities, which consisted of the net impact of
borrowings under the Company's line of credit, repayments under various debt
agreements and the issuance of Series A Preferred Stock.
On December 17, 1997, the Company obtained a new line of credit which
provides for aggregate borrowings up to $5,000,000 computed based on eligible
accounts receivable and inventories; bears interest at the bank's prime rate
plus 1.75%; matures on December 31, 2000; and the Company's eligible accounts
receivable and inventories are collateral. 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. The Company had outstanding borrowings of $4,310,000 and $4,148,000
bearing interest at 9.5% and 10.25% at September 30, 1999 and 1998,
respectively. As of September 30, 1999, the Company was in compliance with the
covenants under the credit facility.
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock (the Series B) for $500,000 to an accredited investor. The
holder of shares of Series B 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. The Series B is not convertible, has no voting
rights, has a liquidation preference of $1.00 per share plus unpaid dividends
and is redeemable at the option of the Company at any time. The purchaser of the
Series B received warrants to purchase 150,000 shares of the Company's common
stock concurrently with the $500,000 investment. These warrants were valued by
the Company at $52,500 using a Black-Scholes option pricing model and are
exercisable at $1.00 per share and were charged against the carrying value of
the Series B. In the event the Company's Series B has not been redeemed by the
Company by December 31, 1999, the exercise price of the warrant shall be reduced
by an amount equal to $0.05 per month for each month that any of the Series B
remains outstanding. The Company recorded accretion of $52,000 to increase the
carrying value to the liquidation value of $500,000. The Company recorded
cumulative preferred dividends of $27,000 as of September 30, 1999. On September
10, 1999, the Company redeemed $100,000 of the Series B shares.
The Company believes that the additional capital infusion along with
its availability on the Company's current asset based line of credit will be
sufficient to meet its working capital requirements until December 31, 1999. At
September 30, 1999, approximately $909,000 of eligible collateral was available
for the Company to borrow under the credit facilities. However, the Company will
require additional financing in order to acquire additional companies and may
incur additional costs and expenditures to expand operational and financial
systems. 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 and the achievement of sustained profitable
operations.
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NEED FOR ADDITIONAL FINANCING FOR INTERNAL GROWTH AND TO IMPLEMENT ACQUISITION
STRATEGY
Historically, the Company's acquisitions had annual, average growth
rate of five percent. To grow the business faster than the average growth rate
will require working capital because of the requirement to obtain equipment, to
setup equipment, to install software, to customize the system by programming the
software to customer specifications, for burn-in and to run the system for
failure testing and to train the customer how to use their system. Generally,
this requires at a minimum of sixty days. The current asset-based line of credit
restricts borrowings unless eligible collateral of accounts receivable and
inventory exceed the current loan balance. Because of the lack of financing to
continue the Company's original growth strategy, the Company has altered its
strategy to grow the businesses internally. The rate of growth will be dependent
upon the Company's ability to generate working capital from operations or to
raise additional working capital to ensure a steady flow of equipment. 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
providers regarding possible acquisitions, some of which could be material. To
continue this acquisition strategy, the Company will need to obtain additional
financing. Until such funds are obtained, the Company does not have enough cash
available to acquire additional dealers or related businesses and therefore, its
future acquisition activities have been suspended.
MAINTENANCE CRITERIA FOR NASDAQ; RISKS OF LOW-PRICED SECURITIES.
The Company's common stock was 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 had failed to maintain a closing bid price
greater than or equal to $1.00 over a thirty consecutive day trading period. To
be eligible for continued listing, the Company's shares of common stock had to
maintain a minimum closing bid price of $1.00 for a minimum of ten consecutive
trading days by April 20, 1999. According to Nasdaq, the Company did not achieve
this compliance requirement and in addition had failed to meet the $2,000,000
net tangible assets requirement as well. The Company was granted a hearing on
June 9, 1999. The outcome of that meeting resulted in a stay of delisting until
August 9, 1999. By August 9, 1999, Nasdaq required the Company to reverse split
the stock to evidence a closing bid price or at least $1.00 per share for a
minimum of ten consecutive trading days. In addition, the Company had to make a
public filing with the Securities and Exchange Commission of $3,100,000 in net
tangible assets. On August 2, the Company was notified by Nasdaq that the
Company was unable to satisfy the terms of the exception granted, and
accordingly, the Company's securities were delisted from The Nasdaq Stock Market
effective at the close of business on August 2, 1999. The securities of the
Company now trade on the OTC Bulletin Board.
LEGAL PROCEEDINGS
The Company's exposure to litigation claims is discussed in Item 1:
Legal Proceedings and Commitments and Contingencies, Notes 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 were 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. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged 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. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court).
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The Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and has made a provision of $100,000 in the accompanying
consolidated financial statements for the nine months ended September 30, 1999.
In the United States District Court for the Southern District of Ohio,
Maurice R. Johnson filed on September 30, 1998, a complaint against the Company,
Automated Retail Systems, Inc. dba, and Cash Registers, Inc. alleging breach of
employment contract and violation of the Age Discrimination in Employment Act,
29 U.S.C., Sec Et Seq. The plaintiff, Mr. Maurice R. Johnson, claimed that the
Company owed Mr. Johnson, $534,498 in lost salary, guaranteed bonuses per his
employment agreement and lost stock options. On October 25, 1999, the Company
reached a settlement with Mr. Johnson. Under the settlement agreement, the
Company will pay Mr. Johnson $24,050 in consideration for the case to be
dismissed. In addition, the Company agreed to hire Mr. Johnson as a consultant
until April 1, 2002 at a monthly rate of $1,300 per month and pay approximately
$472 per month for group medical insurance for the duration of his consulting
agreement. Based on this agreement, all claims by either party have been
dismissed.
On April 14, 1999, Richard H. Walker, former President and Chief
Executive Officer of the Company, filed a complaint against the Company for
breach of written contract related to Mr. Walker's employment agreement with the
Company. Mr. Richard H. Walker claimed that the Company owed Mr. Walker,
$1,500,000 in lost salary, employee benefits, paid vacation days, bonuses and
lost stock options. On May 13, 1999, the Company filed a cross-complaint with
the Superior Court of California against Richard H. Walker, individually and as
Trustee of the Walker Family Trust and Paul Spindler, former Chairman of the
Board and Executive Vice President of the Company for breach of fiduciary duty,
mismanagement and waste of corporate assets, negligence, fraud, conspiracy and
injunctive relief. The Company had requested to be awarded compensatory damages
in excess of $1,000,000, exemplary damages, transfer of 710,477 shares of stock
to the Company, court costs and reasonable attorney fees. On July 8, 1999, the
Company entered into Settlement Agreements with Mr. Richard H. Walker and Mr.
Paul Spindler. Mr. Lawrence Cohen, the Company's Chairman was also party to
these Settlement Agreements with Msrs. Walker and Spindler. Under the terms of
the separate Settlement Agreements, the parties dismissed the above pending
actions. The parties exchanged general releases as part of the Settlement
Agreements. Under the terms of the Settlement Agreement, as amended, with Paul
Spindler and the Spindler Family Trust, the Company agreed to pay the
compensation owing to Mr. Spindler under his previous Consulting Agreement with
the Company in the amount of $40,000 no later than September 9, 1999 or prior
thereto in the event the Company completes certain financing. The Spindler
Family Trust has also agreed to sell to the Company 595,478 shares of common
stock of the Company owned by the Trust for $83,366.92 at any time on or prior
to September 9, 1999, in the event that certain financing occurs. On September
9, 1999, the Company and Paul Spindler amended the previous agreement to extend
the previous agreement until December 9, 1999. The Company paid Paul Spindler
one-half of the $40,000 consulting fee on September 9, 1999. Under the
Settlement Agreement with Richard Walker, the Walker Family Trust provided Mr.
Cohen and certain third parties unrelated to the Company the right to purchase
710,477 shares of common stock of the Company for an aggregate consideration of
$100,000 at any time on or prior to September 30, 1999. The 710,477 shares of
common stock, previously owned by Richard Walker, were transferred to the
certain third parties, as approved by the Board of Directors, on September 30,
1999.
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, 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's ability to function on a day to day basis.
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The Company upgraded 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 verify that the
software can successfully read a January 1, 2000 date and changing all programs
that needed to be updated. As of September 30 1999, the Company had completed
100% 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 began in the fourth quarter of
1998 and continued through September 30, 1999. During this quarter ended
September 30, 1999, the Company began to send program upgrades to its current
customer base under a support agreement to make their system Year 2000
compliant. The Company also sent letters to its current, known customer base
informing the customer about Year 2000 compliance. There is a risk that
customers who fail to respond to the Company's letters may take legal action
against the Company. The Company has to date upgraded its Year 2000 compliant
software for most of its customers. The Company plans to finish the upgrade for
the remaining customers no later than December 31, 1999. To date, since 1998,
the Company currently estimates it expended approximately $200,000 to $250,000
to make such software Year 2000 compliant. Although the Company believes that
such software is Year 2000 compliant, there can be no assurances that compliance
was 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 continues to make 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 products and services as a result of Year 2000 issues. Manufacturers of
these products were 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 will 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 vendors 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
has taken a proactive approach and has notified customers about Year 2000
problems. The Company is in the process of formulating a support plan to ensure
our customers will be Year 2000 compliant including an emergency response
system.
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 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.
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY MATERIALLY AFFECT REVENUES,
EXPENSES AND OPERATING RESULTS INCLUDE, WITHOUT LIMITATION, THE SUCCESS OF THE
COMPANY'S OPERATING SUBSIDIARIES; THE IMPACT OF THE COMPANY'S ACQUISITION
STRATEGY AND THE COMPANY'S ABILITY TO SUCCESSFULLY INTEGRATE AND MANAGE THE
ACQUIRED SUBSIDIARIES; THE ABILITY OF THE COMPANY TO OBTAIN FUTURE FINANCING ON
ACCEPTABLE TERMS; AND SUBSEQUENT CHANGES IN BUSINESS STRATEGY OR PLAN.
The forward-looking statements included herein are based on current
assumptions that the Company will continue to sell and install products on a
timely basis; that the Company will continue to sell maintenance contracts to
service its installed base; that the Company will successfully implement its
acquisition strategy; that competitive conditions within the Company's market
will not change materially or adversely; that demand for the Company's products
and services will remain strong; that the Company will retain existing key
management personnel; that inventory risks due to shifts in market demand will
be minimized; that the Company's forecasts will accurately anticipate market
demand; that the Company will be able to obtain future financing on acceptable
terms when needed; that the Company will be able to maintain key vendor
relationships; and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments that are difficult to predict accurately and are subject to many
factors that can materially affect the Company's business, financial condition,
results of operations and cash flows. Budgeting and other management decisions
are subjective in many respects and are, thus, susceptible to interpretations
and periodic revisions based on actual experience and business developments, the
impact of which may cause the Company to alter its acquisition strategy,
marketing, capital expenditure, or other budgets, which may in turn affect the
Company's business, results of operations, financial condition and cash flows.
In light of the factors that can materially affect the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition to the factors discussed above
in this section, as well as those discussed under the heading "Fluctuations in
Quarterly Results of Operations," the following factors also may materially
affect the Company's business, results of operations, financial condition and
cash flows and therefore should be considered.
LIMITED OPERATING HISTORY. The Company was founded in April 1996 and,
prior to the acquisition of CRI in 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.)
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RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company's
strategy is to increase its revenue and the markets it serves through the
acquisition of additional POS dealers and value added resellers serving retail
end users. From its inception through August 14, 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 these companies
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 either that have been unprofitable or
that have had inconsistent profitability prior to their acquisition. An
inability of the Company to improve the profitability of these acquired
businesses could have a material adverse effect on the Company.
Finally, the Company's acquisition strategy places significant demands
on the Company's resources and there can be no assurance that the Company's
management and operational systems and structure can be expanded to effectively
support the Company's continued acquisition strategy. If the Company is unable
to implement successfully its acquisition strategy, this inability may have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flows.
In connection with seven of its acquisitions, the Company entered into
employment agreements with certain individuals. Under the terms of such
agreements, if certain performance standards of the acquired companies are met,
the Company is obligated to pay a bonus to these individuals. The performance
standards are based upon, among other things, the acquired companies' pre-tax
profits. As of September 30, 1999, none of the acquired companies have met their
baseline, performance standards and accordingly, the Company has not made any
bonus payments or incurred any 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 includes the geographical transfer
of one employee, placement of other employees on probation, and the
restructuring of two of the acquisitions.
CONSIDERATION FOR ACQUIRED COMPANIES EXCEEDS ASSET VALUE. Valuations of
the companies acquired by the Company have not been undertaken based on
independent appraisals, but have been determined through arm's-length
negotiations between the Company and representatives of such companies. The
consideration for each such company has been based primarily on the judgment of
management as to the value of such company as a going concern and not on the
book value of the acquired assets. Valuations of these companies determined
solely by appraisals of the acquired assets may have been less than the
consideration paid for the companies. No assurance can be given that the future
performance of such companies will be commensurate with the consideration paid.
Specifically, during the fourth quarter of 1997, the Company recorded a goodwill
write-down of approximately $1,871,000 which consisted of $1,442,000 related to
Smyth Systems, $419,000 related to CRI and $10,000 related to its other
subsidiaries. SEE "GOODWILL WRITE-DOWN" IN THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1998. 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.
Page 20
<PAGE>
SUBSTANTIAL COMPETITION. The POS industry is highly fragmented and
competitive. Competitive factors within the industry include product prices,
quality of products, service levels, reputation and geographical location of
dealers. The current trend in the industry is that some manufacturers are
progressing from geographical restrictions towards open territory; thereby
increasing the competitive risk to the Company. 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 to compete in an
`open territory' market. In addition, there are original equipment manufacturers
of POS equipment and value-added resellers that specialized in software
applications for the POS industry that compete in certain product areas. The
Company's ability to make acquisitions will also be subject to competition. The
Company believes that, during the next few years, POS dealers may seek growth
through consolidation with entities other than the Company. In addition, no
assurance can be given that the major manufacturers will not choose to effect or
expand the distribution of their products through their own wholesale
organizations or effect distribution directly to many of the retail accounts of
the Company in the markets served by the Company. Any of these developments
could have a material adverse effect on the Company's business, results of
operations, financial condition and cash flows.
DEPENDENCE ON MANUFACTURERS. A substantial portion of the Company's
total revenue is and will be derived from the sale of POS systems, ECRs and
related equipment, none of which are manufactured by the Company. The Company's
business is dependent upon close relationships with manufacturers of POS
equipment and software and the Company's ability to purchase equipment and
software in the quantities necessary and upon competitive terms so that it will
be able to meet the needs of its end user customers. The Company purchases its
hardware principally from three vendors: Panasonic, ERC (a distributor of
Panasonic products) and NCR. Sales of Panasonic, ERC and NCR products accounted
for approximately 32% of revenues for the nine month period ended September 30,
1999, with sales of Panasonic and NCR products accounting for 9% and 23% of the
Company's total revenue in that nine month period, respectively. There can be no
assurance that the relationships with these manufacturers will continue or that
the Company's supply requirements can be met in the future. The Company's
inability to obtain equipment, software, parts or supplies on competitive terms
from its major manufacturers could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flows.
FIXED FEE CONTRACTS. Many of the Company's service contracts are fixed
fee contracts pursuant to which the customer pays a specified fee for the
Company's performance of all necessary maintenance and remedial services during
the contract's term. Under these agreements, the Company is responsible for all
costs incurred in maintaining and repairing the equipment, including the cost of
replacement parts, regardless of actual costs incurred. Accordingly, the Company
can incur losses from fixed fee contracts if the actual cost of maintaining or
repairing the equipment exceeds the costs estimated by the Company.
POTENTIAL INABILITY TO MARKET NEWLY DEVELOPED PRODUCTS. The technology
of POS systems, ECRs, VARs and related equipment is changing rapidly. There can
be no assurance that the Company's existing manufacturers will be able to supply
competitive new products or achieve technological advances necessary to remain
competitive in the industry. Further, there can be no assurance that the Company
will be able to obtain the necessary authorizations from manufacturers to market
any newly developed equipment or software. The Company's Smyth Systems, Inc.
(Smyth) subsidiary operates in the VAR solutions segment, wherein it develops
customized, turnkey retail automation solutions, consisting of both hardware and
software for the golf course and resort markets. There can be no assurance that
Smyth will be able to develop commercially viable and technologically
competitive VAR solutions at competitive prices to compete in these markets.
RELIANCE ON KEY PERSONNEL. Implementation of the Company's acquisition
strategy is largely dependent on the efforts of a few senior officers including
certain former principals of businesses 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.
Page 21
<PAGE>
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Certificate
of Incorporation (the Certificate) and Bylaws include provisions that eliminate
the directors' personal liability for monetary damages to the fullest extent
possible under Delaware Law or other applicable law (the Director Liability
Provision). The Director Liability Provision eliminates the liability of
directors to the Company and its stockholders for monetary damages arising out
of any violation by a director of his fiduciary duty of due care. Under Delaware
Law, however, the Director Liability Provision does not eliminate the personal
liability of a director for (i) breach of the director's duty of loyalty, (ii)
acts or omissions not in good faith or involving intentional misconduct or
knowing violation of law, (iii) payment of dividends or repurchases or
redemption of stock other than from lawfully available funds, or (iv) any
transaction from which the director derived an improper benefit. The Director
Liability Provision also does not affect a director's liability under the
federal securities laws or the recovery of damages by third parties.
ABSENCE OF DIVIDENDS. The Company has not paid dividends on its common
stock to date. The 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 has
received a waiver from such covenant on its Series B Preferred Stock issued on
April 15, 1999. The Company anticipates that future financing, including any
lines of credit, may further restrict or prohibit the Company's ability to pay
dividends.
RESTRICTIONS ON COMPANY'S ABILITY TO ENTER INTO CERTAIN TRANSACTIONS.
On December 17, 1997, the Company obtained a new line of credit. Pursuant to the
terms of the line of credit, the Company is prohibited from engaging in certain
transactions without first obtaining the written consent of the lender. Such
transactions include, but are not limited to, (i) the sale or acquisition of
assets with a value exceeding $50,000; (ii) the sale or transfer of any
collateral under the line of credit, except for the sale of items in the
Company's finished inventory in the ordinary course of business; (iii) the sale
of inventory on a sale-or-return, guaranteed sale, consignment or other
contingent basis; and (iv) any other transaction outside the ordinary course of
business. No assurance can be given that these restrictions will not impact the
Company's ability to conduct business in the future, even though the line of
credit does not prohibit or restrict the Company from acquiring other companies
(including acquisitions for amounts greater than $50,000) pursuant to its
acquisition strategy.
Page 22
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering were 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. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged 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. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court). The
Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and has made a provision of $100,000 in the accompanying
consolidated financial statements for the nine months ended September 30, 1999.
In the United States District Court for the Southern District of Ohio,
Maurice R. Johnson filed on September 30, 1998, a complaint against the Company,
Automated Retail Systems, Inc. dba, and Cash Registers, Inc. alleging breach of
employment contract and violation of the Age Discrimination in Employment Act,
29 U.S.C., Sec Et Seq. The plaintiff, Mr. Maurice R. Johnson, claimed that the
Company owed Mr. Johnson, $534,498 in lost salary, guaranteed bonuses per his
employment agreement and lost stock options. On October 25, 1999, the Company
reached a settlement with Mr. Johnson. Under the settlement agreement, the
Company will pay Mr. Johnson $24,050 in consideration for the case to be
dismissed. In addition, the Company agreed to hire Mr. Johnson as a consultant
until April 1, 2002 at a monthly rate of $1,300 per month and pay approximately
$472 per month for group medical insurance for the duration of his consulting
agreement. Based on this agreement, all claims by either party have been
dismissed.
On April 14, 1999, Richard H. Walker, former President and Chief
Executive Officer of the Company, filed a complaint against the Company for
breach of written contract related to Mr. Walker's employment agreement with the
Company. Mr. Richard H. Walker claimed that the Company owed Mr. Walker,
$1,500,000 in lost salary, employee benefits, paid vacation days, bonuses and
lost stock options. On May 13, 1999, the Company filed a cross-complaint with
the Superior Court of California against Richard H. Walker, individually and as
Trustee of the Walker Family Trust and Paul Spindler, former Chairman of the
Board and Executive Vice President of the Company for breach of fiduciary duty,
mismanagement and waste of corporate assets, negligence, fraud, conspiracy and
injunctive relief. The Company had requested to be awarded compensatory damages
in excess of $1,000,000, exemplary damages, transfer of 710,477 shares of stock
to the Company, court costs and reasonable attorney fees. On July 8, 1999, the
Company entered into Settlement Agreements with Mr. Richard H. Walker and Mr.
Paul Spindler. Mr. Lawrence Cohen, the Company's Chairman was also party to
these Settlement Agreements with Msrs. Walker and Spindler. Under the terms of
the separate Settlement Agreements, the parties dismissed the above pending
actions. The parties exchanged general releases as part of the Settlement
Page 23
<PAGE>
Agreements. Under the terms of the Settlement Agreement, as amended, with Paul
Spindler and the Spindler Family Trust, the Company agreed to pay the
compensation owing to Mr. Spindler under his previous Consulting Agreement with
the Company in the amount of $40,000 no later than September 9, 1999 or prior
thereto in the event the Company completes certain financing. The Spindler
Family Trust has also agreed to sell to the Company 595,478 shares of common
stock of the Company owned by the Trust for $83,366.92 at any time on or prior
to September 9, 1999, in the event that certain financing occurs. On September
9, 1999, the Company and Paul Spindler amended the previous agreement to extend
the previous agreement until December 9, 1999. The Company paid Paul Spindler
one-half of the $40,000 consulting fee on September 9, 1999. Under the
Settlement Agreement with Richard Walker, the Walker Family Trust provided Mr.
Cohen and certain third parties unrelated to the Company the right to purchase
710,477 shares of common stock of the Company for an aggregate consideration of
$100,000 at any time on or prior to September 30, 1999. The 710,477 shares of
common stock, previously owned by Richard Walker, were transferred to the
certain third parties, as approved by the Board of Directors, on September 30,
1999.
ITEM 5. OTHER INFORMATION
On September 1, 1999, Jack R. Borsting resigned from the Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11* Calculation of Earnings per Share
27* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
During the three months ended September 30, 1999, the Company
did not file any Current Reports on Form 8-K.
Page 24
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bristol Retail Solutions, Inc.
----------------------------------------
(Registrant)
November 22, 1999 By: /s/ MICHAEL S. SHIMADA
- -------------------------------- ----------------------------------------
Date Michael S. Shimada
Vice President and Chief Financial
Officer
(Principal financial and accounting
officer)
Page 25
EXHIBIT 11
<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Computation of Earnings (Loss) per Share
<CAPTION>
Three Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (61,510) $ (338,994)
Accretion related to Series A Convertible Preferred Stock -- --
Accretion related to Series B Preferred Stock -- --
Imputed dividends for Series A Convertible Preferred Stock -- --
Cumulative dividends for Series A Convertible Preferred Stock -- (7,580)
Cumulative dividends for Series B Preferred Stock (14,333) --
------------- -------------
Net loss applicable to common stockholders $ (75,843) $ (346,574)
============= =============
Weighted average number of common shares outstanding during the
period 6,963,282 5,876,201
============= =============
Basic loss to common stockholders per share $ (0.01) $ (0.06)
============= =============
DILUTED LOSS PER SHARE
Net loss applicable to common stockholders $ (75,843) $ (346,574)
Plus: Income impact of assumed conversion-Preferred dividends -- --
------------- -------------
Net loss applicable to common stockholders $ (75,843) $ (346,574)
============= =============
Weighted average number of common shares outstanding during the
period 6,963,282 5,876,201
Effect of stock options, warrants and convertible preferred stock
treated as common stock equivalents under the treasury stock
method -- --
------------- -------------
Total shares 6,963,282 5,876,201
============= =============
Diluted earnings (loss) to common stockholders per share $ (0.01) $ (0.06)
============= =============
Nine Months Ended September 30,
1999 1998
------------- -------------
BASIC LOSS PER SHARE
Net loss $ (514,423) $ (787,719)
Accretion related to Series A Convertible Preferred Stock -- (241,916)
Accretion related to Series B Preferred Stock (52,500) --
Imputed dividends for Series A Convertible Preferred Stock -- (227,589)
Cumulative dividends for Series A Convertible Preferred Stock -- (23,300)
Cumulative dividends for Series B Preferred Stock (26,883) --
------------- -------------
Net loss applicable to common stockholders $ (593,806) $ (1,280,524)
============= =============
Weighted average number of common shares outstanding during the
period 6,947,536 5,697,308
============= =============
Basic loss to common stockholders per share $ (0.09) $ (0.22)
============= =============
DILUTED LOSS PER SHARE
Net loss applicable to common stockholders $ (593,806) $ (1,280,524)
Plus: Income impact of assumed conversion-Preferred dividends -- --
------------- -------------
Net loss applicable to common stockholders $ (593,806) $ (1,280,524)
============= =============
Weighted average number of common shares outstanding during the
period 6,947,536 5,697,308
Effect of stock options, warrants and convertible preferred stock
treated as common stock equivalents under the treasury
stock method -- --
------------- -------------
Total shares 6,947,536 5,697,308
============= =============
Diluted loss to common stockholders per share $ (0.09) $ (0.22)
============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE UNAUDITED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IN THE REPORT ON FORM
10-QSB FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OF BRISTOL RETAIL SOLUTIONS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 396,296
<SECURITIES> 0
<RECEIVABLES> 8,080,942
<ALLOWANCES> 372,720
<INVENTORY> 4,710,967
<CURRENT-ASSETS> 13,405,482
<PP&E> 1,464,832
<DEPRECIATION> 660,490
<TOTAL-ASSETS> 19,288,101
<CURRENT-LIABILITIES> 13,307,523
<BONDS> 0
0
400,000
<COMMON> 6,968
<OTHER-SE> 5,330,662
<TOTAL-LIABILITY-AND-EQUITY> 19,288,101
<SALES> 27,501,352
<TOTAL-REVENUES> 27,501,352
<CGS> 18,720,734
<TOTAL-COSTS> 27,640,621
<OTHER-EXPENSES> (23,888)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394,884
<INCOME-PRETAX> (510,265)
<INCOME-TAX> 4,158
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (514,423)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
