<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 MARCH 31, 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 - 6,915,519 shares as of April 30, 1999
Class A Redeemable Common Stock Purchase Warrants - 718,750
as of April 30, 1999
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
Page 1
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BRISTOL RETAIL SOLUTIONS, INC.
Index
Part I --- FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of March 31, 1999 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II --- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Page 2
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Balance Sheet
(Unaudited)
March 31, 1999
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 564,928
Accounts receivable, net of allowance for doubtful accounts of $491,598 4,496,817
Inventories, net 4,498,820
Prepaid expenses and other current assets 381,922
Current portion of note receivable 158,612
-------------
Total current assets 10,101,099
Property and equipment, at cost:
Furniture and equipment 986,132
Automobiles 221,251
Leasehold improvements 114,108
-------------
1,321,491
Accumulated depreciation and amortization (535,601)
-------------
Property and equipment, net 785,890
Intangible assets, net of accumulated amortization of $601,365 4,479,636
Note receivable - noncurrent portion 123,505
Capitalized software development costs, net 369,506
Other assets 330,865
-------------
Total assets $ 16,190,501
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,552,669
Accounts payable 4,243,969
Accrued salaries, wages and related benefits 550,724
Accrued expenses 358,381
Deferred service revenue 1,730,910
Customer advances 1,055,518
Current portion of note payable to related party 35,970
Current portion of long-term debt 16,257
Current portion of capital lease obligations 48,442
-------------
Total current liabilities 10,592,840
Note payable to related party - noncurrent portion 6,297
Long term debt 49,731
Capital lease obligations - noncurrent portion 78,368
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 --
Common stock, $.001 par value:
20,000,000 shares authorized; 6,920,519 and 6,915,519 shares issued and
outstanding 6,920
Additional paid-in capital 13,185,210
Accumulated deficit (7,807,994)
-------------
5,384,136
Less 5,000 shares of treasury stock, at cost (24,625)
-------------
Total stockholders' equity 5,359,511
-------------
Total liabilities and stockholders' equity $ 16,190,501
=============
</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 March 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
System sales and installation $ 5,183,770 $ 3,792,303
Service and supplies sales 2,925,546 2,469,593
------------ ------------
Total revenue 8,109,316 6,261,896
Cost of revenue:
System sales and installation 3,433,533 2,322,228
Service and supplies sales 2,139,696 1,739,654
------------ ------------
Total cost of revenue 5,573,229 4,061,882
------------ ------------
Gross margin 2,536,087 2,200,014
Operating expenses:
Selling, general and administrative expenses 2,673,962 2,427,702
Research and development costs 235,322 165,807
------------ ------------
Total operating expenses 2,909,284 2,593,509
------------ ------------
Operating loss (373,197) (393,495)
Other expense, net 124,618 57,184
------------ ------------
Loss before income taxes (497,815) (450,679)
Provision for income tax -- 2,500
------------ ------------
Net loss and comprehensive net loss $ (497,815) $ (453,179)
============ ============
Net loss $ (497,815) $ (453,179)
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 -- (2,333)
------------ ------------
Net loss applicable to common stockholders $ (497,815) $ (925,017)
============ ============
Basic and diluted net loss to common stockholders per share $ (0.07) $ (0.17)
============ ============
Basic and diluted weighted average common shares outstanding 6,915,519 5,551,654
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (497,815) $ (453,179)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 79,977 67,815
Amortization 145,131 116,220
Provision for doubtful accounts -- 40,459
Changes in operating assets and liabilities:
Accounts receivable 1,029,220 201,377
Inventories 252,595 154,313
Prepaid expenses and other assets (18,045) (92,304)
Accounts payable 358,154 (136,796)
Other accrued expenses (596,191) (232,357)
Deferred revenue (116,653) (19,999)
Customer advances 483,413 62,324
Other long-term liabilities -- 9,189
------------ ------------
Net cash provided by (used in) operating activities 1,119,786 (282,938)
Cash flows from investing activities:
Cash paid for final installment, acquisition (10,000)
Receivables from rescinded acquisition 56,807 31,761
Purchases of property and equipment (22,856) (27,690)
------------ ------------
Net cash provided by investing activities 23,951 4,071
Cash flows from financing activities:
Repayment of capital lease obligations (14,865) (4,421)
Repayment of note payable to related party (27,733) --
Net borrowings (repayments) on line of credit (677,597) 58,693
Repayment of long-term debt (4,849) (17,835)
Issuance of preferred stock, net of offering costs -- 827,584
Issuance of common stock, net of offering costs -- 22,753
------------ ------------
Net cash provided by (used in) financing activities (725,044) 886,774
Net increase in cash and cash equivalents 418,693 607,907
Cash and cash equivalents at beginning of period 146,235 349,461
------------ ------------
Cash and cash equivalents at end of period $ 564,928 $ 957,368
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 96,105 $ 89,815
============ ============
Cash paid for income taxes $ 5,100 $ 4,758
============ ============
Supplemental disclosures of non-cash transactions:
Warrants issued in connection with the sale of preferred
stock $ -- $ 69,500
============ ============
Inventory received in payment of rescinded acquisition
receivable $ -- $ 33,484
============ ============
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
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BRISTOL RETAIL SOLUTIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 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 March 31, 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 locations located in seventeen
cities and eight states, primarily located in the Western and Midwestern region
of the United States.
The accompanying consolidated March 31, 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); Smyth
Systems, Inc. (Smyth); Pacific Cash Register and Computer, Inc. (PCR); and
Quality Business Machines (QBM). The accompanying consolidated March 31, 1998
financial statements include the accounts of the Company and its wholly-owned
subsidiaries CRI, which includes MicroData and EBM, ARS, Smyth and PCR. 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
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
and, therefore, should be read in conjunction with the audited consolidated
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.
RECLASSIFICATIONS
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 months
ended March 31, 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
loss.
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
conversion of outstanding preferred stock and preferred stock dividends on
Series A Convertible Preferred Stock. Common equivalent shares have not been
included where inclusion would be antidilutive.
Page 6
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<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1999
Loss Shares Per-Share
(Numerator) (Denominator) Amount
--------------- --------------- ---------------
<S> <C> <C> <C>
BASIC LOSS PER SHARE
Loss applicable to common stockholders $ (497,815) 6,915,519 $ (0.07)
===============
Effect of Dilutive Securities -- --
--------------- ---------------
DILUTED LOSS PER SHARE
Loss applicable to common stockholders $ (497,815) 6,915,519 $ (0.07)
=============== =============== ===============
FOR THE QUARTER ENDED MARCH 31, 1998
BASIC LOSS PER SHARE
Net loss $ (453,179)
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 (2,333)
---------------
Loss applicable to common stockholders (925,017) 5,551,654 $ (0.17)
===============
Effect of Dilutive Securities -- --
--------------- ---------------
DILUTED LOSS PER SHARE
Loss applicable to common stockholders $ (925,017) 5,551,654 $ (0.17)
=============== =============== ===============
</TABLE>
At March 31, 1999 and 1998, 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, warrants and conversion of preferred stock and preferred stock
dividends, were antidilutive for the three months ended March 31, 1999 and 1998.
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. There were no items of
other comprehensive operations for the quarters ended March 31, 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 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 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 related legal fees, the Company has not made a provision for any liability
in the accompanying consolidated financial statements.
Page 7
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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. The outcome of this
litigation is not currently predictable.
SUBSEQUENT EVENTS
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock for $500,000 to an accredited investor. The holder 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 150,000 warrants at an
exercise price of $1.00.
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 is claiming that the Company owes Mr. Walker,
$1,500,000 in lost salary, employee benefits, paid vacation days, bonuses and
lost stock options. The Company denies that it has any liability and intends to
vigorously defend itself. The outcome of this litigation is not currently
predictable.
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 is requested to be awarded compensatory damages
in excess of $1,000,000, exemplary damages, transfer of 710,477 shares of stock
to the Company and court costs and reasonable attorney fees. The outcome of this
litigation is not currently predictable.
Page 8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 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 quarter ended March 31, 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 expects that
acquisitions will continue to impact the Company's future operating results
based on the Company's current acquisition strategy.
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 March 31, 1999 was $8,109,000 and
was comprised of revenue from the seven companies the Company had acquired prior
to such quarter. This represents an increase of 30% from the Company's total
revenue of $6,262,000 for the quarter ended March 31, 1998. The increase in
revenue from the quarter ended March 31, 1998 to the quarter ended March 31,
1999 was due primarily to the revenue contributed by Quality Business Machines
(QBM) acquired on May 8, 1998.
Total revenue for the quarter ended March 31, 1999 was comprised of 64%
Systems Revenue and 36% Service Revenue, as compared to a revenue composition of
61% Systems Revenue and 39% Service Revenue for the quarter ended March 31,
1998. The mix of revenue changed from 1998 to 1999 primarily due to the
contribution of Systems Revenue by QBM.
No customer accounted for more than 10% of total revenue for the
quarter ended March 31, 1999 and 1998. 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 32% of total revenue for the quarter March 31, 1999, and
approximately 21% of total revenue for the quarter ended March 31, 1998. The
Company has supply agreements with these manufacturers. The agreements 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 are 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 manufacturers in certain
regions or territories of the country. A change in the Company's or its
subsidiaries relationships 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 $2,536,000 for the three months ended March
31, 1999, from $2,200,000 for the three months ended March 31, 1998. As a
percentage of sales, gross margin for the quarter ended March 31, 1999 was 31%
and was comprised of gross margin for Systems Revenue of 34% and gross margin
for Service Revenue of 27%. Gross margin for the quarter ended March 31, 1998
was 35% and was comprised of gross margin for Systems Revenue of 39% and gross
margin for Service Revenue of 30%. As a percentage of revenue, the decrease in
gross margin for Systems Revenue between years was primarily attributable to
product mix. As a percentage of revenue, the decrease in gross margin for
Service Revenue was attributable to lower billable service income over the prior
year period which is at a higher margin as compared to fixed fee service
maintenance contracts.
Page 9
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses in the first quarter
of 1999 of $2,674,000 increased by $246,000 from the comparable prior-year
period and represented 33% of total revenue, versus 39% of total revenue in the
comparable prior year period. The increase in expenses between years was
primarily due to the inclusion of the results of QBM acquired in the second
quarter of 1998. The decrease in selling, general and administrative expenses as
a percentage of revenue during the quarter ended March 31, 1999, compared to the
comparable prior year quarter is primarily due to lower corporate expenses
incurred as a result of management changes.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $235,000 and $166,000 during the
three-month periods ended March 31, 1999 and 1998, respectively. Costs are
attributable to software development costs 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. The Company's policy is to expense such costs until technological
feasibility is established. During the quarter ended March 31, 1999, the Company
recorded $34,000 of amortization of capitalized software costs. No software
development costs were amortized during the quarter ended March 31, 1998.
OTHER EXPENSE (INCOME)
The Company earned interest income of $10,000 for the three-month
period ended March 31, 1999 compared to $33,000 for the quarter ended March 31,
1998. Interest income primarily related to finance charges on delinquent
accounts. In the prior year, the Company earned dividend income received from a
purchasing cooperative of cash register dealers. The Company recognized interest
expense of $135,000 for the three-month period ended March 31, 1999 compared to
$90,000 for the quarter ended March 31, 1998. Interest expense in both years
consisted primarily of interest on outstanding balances on the Company's lines
of credit and amortization of debt issue 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 no income tax provision for the three-month period
ended March 31, 1999 as the Company had a taxable loss for state and federal
income tax purposes, compared to a slight provision for the three-month period
ended March 31, 1998. Income tax expense for the three-month period ended March
31, 1998 consisted solely of state taxes as the Company had a taxable loss for
federal income tax purposes.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The Company's loss applicable to common stockholders for the quarter
ended March 31, 1999 consisted of the Company's net loss for the quarter of
$498,000. The Company's loss applicable to common stockholders for the quarter
ended March 31, 1998, was $925,000, consisting of the Company's net loss for the
quarter of $453,000, accretion of $242,000 to increase the Series A Convertible
Preferred Stock issued on March 18, 1998 to its issuance value of $100 per
share, imputed dividends related to the beneficial conversion feature of the
Series A Convertible Preferred Stock of $228,000 and cumulative preferred
dividends of $2,000.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company had cash and cash equivalents of $565,000, down from
$957,000 at March 31, 1998. During the three months ended March 31, 1999, the
Company generated $1,120,000 of cash from operations; used $10,000 for the final
installment for the acquisition of QBM and generated $34,000 from other
investing activities; and used $725,000 from financing activities, which
primarily related to net repayments under the Company's line of credit
facilities and various debt agreements. During the three months ended March 31,
1998, the Company utilized $283,000 of cash in operations; generated $4,000 from
investing activities; and generated $887,000 from financing activities, which
consisted of the net impact of borrowings and repayments under the Company's
various debt agreements and the issuance of 10,000 shares of Series A
Convertible Preferred Stock.
Page 10
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On December 17, 1997, the Company obtained a 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. The Company had outstanding
borrowings of $2,553,000 and $1,682,000 bearing interest at 9.50% and 10.25% at
March 31, 1999 and 1998, respectively. As of March 31, 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 for $500,000 to an accredited investor. The holder 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 150,000 warrants at an
exercise price of $1.00.
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
March 31, 1999, approximately $732,000 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.
NEED FOR ADDITIONAL FINANCING FOR INTERNAL GROWTH AND TO IMPLEMENT ACQUISITION
STRATEGY
Historically, the Company's acquisitions had annual, average growth
rates of five percent. To grow the business faster than the average growth rate
will require working capital because of the historical cash flow trends. The
current line of credit restricts borrowings based on eligible collateral of
accounts receivable and inventory. Because of the lack of financing to continue
the Company's original growth strategy, the Company has altered its strategy to
grow the businesses internally. The rate of growth will be dependent on the
Company's ability to either generate working capital from operations or to raise
additional working capital. There are no assurances the Company will be
successful with this strategy.
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 letter of intent agreement signed on
March 19, 1999 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. Until additional funds are obtained, the Company
does not have enough cash available to acquire additional dealers and therefore,
its future acquisition activities are contingent on additional financing.
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 the last thirty consecutive trade dates. To
be eligible for continued listing, the Company's shares of common stock had to
maintain a minimum 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. On April 20, 1999, the Company requested a hearing and
has been granted a hearing on June 3, 1999. If the Company fails to maintain
Nasdaq Small Cap Market listing, the market value of the Company's common stock
in all likelihood would decline and stockholders would find it more difficult to
dispose of or obtain accurate quotations as to the market value of the common
stock. In addition, failure to maintain listing requirements could effect the
Company's ability to obtain future financing. (See MAINTENANCE CRITERIA FOR
NASDAQ; RISKS OF LOW-PRICED SECURITIES below).
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.
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<PAGE>
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. The outcome of this
litigation is not currently predictable.
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 is claiming that the Company owes Mr. Walker,
$1,500,000 in lost salary, employee benefits, paid vacation days, bonuses and
lost stock options. The Company denies that it has any liability and intends to
vigorously defend itself. The outcome of this litigation is not currently
predictable.
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 is requested to be awarded compensatory damages
in excess of $1,000,000, exemplary damages, transfer of 710,477 shares of stock
to the Company and court costs and reasonable attorney fees. The outcome of this
litigation is not currently predictable.
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 one year, computer systems
and software used by many 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 upgraded its software for golf course 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 March 31, 1999,
the Company completed 100% of the checking of programs in its software and has
made the necessary programming revisions. 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 March 31, 1999. In addition, beginning in the quarter ending
June 30, 1999, the Company will send program upgrades to its current, installed
customer base to make their system Year 2000 compliant. The Company estimates it
expensed approximately $150,000 to $200,000 in 1998 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 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 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
product 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 is 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 vendor could have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows. However, based on the recent inquiries, the Company does not believe
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<PAGE>
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 continues to assess all of its products it sells and services to
verify Year 2000 compliance. The Company is in the final stages of formulating a
support plan to ensure our customers will be Year 2000 compliant.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business can be subject to seasonal influences. The POS
dealers and systems integrators which the Company has acquired to date have
typically had lower revenues in the quarters ending March 31 and December 31;
however, the Company's quarterly operating results are affected by a number of
other factors, many of which are beyond the Company's control. A substantial
portion of the Company's backlog is typically scheduled for delivery within 90
days. Delivery dates for products sold by the Company are subject to change due
to customers changing the required installation date of a retail automation
solution system. The changing of such delivery dates is beyond the Company's
control primarily due to lower level of new store openings by customers caused
by inclement weather, contractor delays, financing concerns and/or holidays.
Quarterly sales and operating results, therefore, depend in large part on
customer-driven delivery dates, which are subject to change. In addition, a
significant portion of the Company's operating expenses are relatively fixed in
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 assurance that results in a specific
quarter are indicative of future results.
In addition, quarterly results in the future may be materially affected
by the timing and magnitude of acquisitions and costs related to such
acquisitions, the timing and extent of staffing additions at corporate
headquarters necessary to integrate acquired companies and support future growth
and general economic conditions. Therefore, due to these factors and the factors
stated above, results for any quarter are not necessarily indicative of the
results that the Company may achieve for any subsequent quarter or for a full
year.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THAT ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY MATERIALLY AFFECT REVENUES,
EXPENSES AND OPERATING RESULTS INCLUDE, WITHOUT LIMITATION, THE SUCCESS OF THE
COMPANY'S OPERATING SUBSIDIARIES; THE IMPACT OF THE COMPANY'S ACQUISITION
STRATEGY AND THE COMPANY'S ABILITY TO SUCCESSFULLY INTEGRATE AND MANAGE THE
ACQUIRED SUBSIDIARIES; THE ABILITY OF THE COMPANY TO OBTAIN FUTURE FINANCING ON
ACCEPTABLE TERMS; AND SUBSEQUENT CHANGES IN BUSINESS STRATEGY OR PLAN.
The forward-looking statements included herein are based on current
assumptions that the Company will continue to sell and install products on a
timely basis; that the Company will continue to sell maintenance contracts to
service its installed base; that the Company will successfully implement its
acquisition strategy; that competitive conditions within the Company's market
will not change materially or adversely; that demand for the Company's products
and services will remain strong; that the Company will retain existing key
management personnel; that inventory risks due to shifts in market demand will
be minimized; that the Company's forecasts will accurately anticipate market
demand; that the Company will be able to obtain future financing on acceptable
terms when needed; that the Company will be able to maintain key vendor
relationships; and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments that are difficult to predict accurately and are subject to many
factors that can materially affect the Company's business, financial condition,
results of operations and cash flows. Budgeting and other management decisions
are subjective in many respects and are, thus, susceptible to interpretations
and periodic revisions based on actual experience and business developments, the
impact of which may cause the Company to alter its acquisition strategy,
marketing, capital expenditure, or other budgets, which may in turn affect the
Company's business, results of operations, financial condition and cash flows.
In light of the factors that can materially affect the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
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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.
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 May 15, 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 applicable, 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 March 31, 1999, 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.
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" in the Company's Annual Report on
Form 10-KSB for the year 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.
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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 applicable 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.
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. 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 net
revenue for the period ended March 31, 1999. 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.
(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.
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.
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. At
March 31, 1999, the Company had $880,000 in net tangible assets. While 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 is 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. (See LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY)
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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
redemptions of stock other than from lawfully applicable 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. 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 requested
from its asset based lender a waiver from such covenant on its Series B
Preferred Stock issued on April 15, 1999. The Company expects that the waiver
will be granted. 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
selling 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering are also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. The case is
pending in the United States District Court for the Southern District of New
York. In addition to seeking to have themselves declared proper plaintiffs and
having the case certified as a class action, plaintiffs seek unspecified
monetary damages. The plaintiffs' complaint alleges claims under the federal
securities laws for alleged misrepresentations and omissions in connection with
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. The outcome of this
litigation is not currently predictable.
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 is claiming that the Company owes Mr. Walker,
$1,500,000 in lost salary, employee benefits, paid vacation days, bonuses and
lost stock options. The Company denies that it has any liability and intends to
vigorously defend itself. The outcome of this litigation is not currently
predictable.
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 is requested to be awarded compensatory damages
in excess of $1,000,000, exemplary damages, transfer of 710,477 shares of stock
to the Company and court costs and reasonable attorney fees. The outcome of this
litigation is not currently predictable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11* Calculation of Earnings per Share
27* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
During the three months ended March 31, 1999, the Company
filed the following Current Report on Form 8-K.
(i) On February 2, 1999, the Company filed a report
on Form 8-K reporting, under Item 5, the termination
on January 18, 1999 of Richard H. Walker president
and chief executive officer and the resignation of
Paul Spindler as chairman and director. In addition,
the appointment of Lawrence Cohen as acting chairman
and chief executive officer and Michael Shimada as
acting chief operating officer.
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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)
May 15, 1999 By: /s/ MICHAEL S. SHIMADA
- -------------------------- -------------------------------------------
Date Michael S. Shimada
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
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EXHIBIT 11
<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Computation of Loss per Share
<CAPTION>
Three Months Ended March 30,
1998 1997
------------ ------------
(As Restated)
<S> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (497,815) $ (453,179)
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 -- (2,333)
------------ ------------
Net loss applicable to common stockholders $ (497,815) $ (925,017)
============ ============
Weighted average number of common shares outstanding during
the period 6,915,519 5,551,654
============ ============
Basic loss to common stockholders per share $ (0.07) $ (0.17)
============ ============
DILUTED LOSS PER SHARE
Net loss $ (497,815) $ (453,179)
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 -- (2,333)
------------ ------------
Net loss applicable to common stockholders $ (497,815) $ (925,017)
============ ============
Weighted average number of common shares outstanding during
the period 6,915,519 5,551,654
Effect of stock options, warrants and convertible preferred
stock treated as common stock equivalents under the
treasury stock method -- --
------------ ------------
Total shares 6,915,519 5,551,654
============ ============
Diluted loss to common stockholders per share $ (0.07) $ (0.17)
============ ============
</TABLE>
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE UNAUDITED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 IN THE REPORT ON FORM
10-QSB FOR THE THREE MONTHS ENDED MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 564,928
<SECURITIES> 0
<RECEIVABLES> 4,988,415
<ALLOWANCES> 491,598
<INVENTORY> 4,498,820
<CURRENT-ASSETS> 10,101,099
<PP&E> 1,321,491
<DEPRECIATION> 535,601
<TOTAL-ASSETS> 16,190,501
<CURRENT-LIABILITIES> 10,592,840
<BONDS> 0
0
0
<COMMON> 6,920
<OTHER-SE> 5,352,591
<TOTAL-LIABILITY-AND-EQUITY> 16,190,501
<SALES> 8,109,316
<TOTAL-REVENUES> 8,109,316
<CGS> 5,573,229
<TOTAL-COSTS> 8,482,513
<OTHER-EXPENSES> 124,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (497,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (497,815)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
