<PAGE>
SECURITES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(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, 2000
( ) Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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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)
3760 KILROY AIRPORT WAY, SUITE 450, LONG BEACH, CALIFORNIA 90806
(Address of Principal Executive Offices) (Zip code)
(562) 988-3660
(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 - 7,501,859 shares as of November 20, 2000
Class A Redeemable Common Stock Purchase Warrants - 718,750 as of November
20, 2000
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
The Financial Statements and Discussions contained herein have not been reviewed
by independent auditors, and, therefore, should be read in conjunction with the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Index
<CAPTION>
<S> <C> <C> <C>
Part I --- FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three months ended September 30, 2000
and 1999 4
Consolidated Statements of Operations for the nine months ended September 30, 2000
and 1999 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2000
and 1999 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-20
Part II --- OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 5. Other Events 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,768 $ 332,959
Accounts receivable, net of allowance for doubtful accounts of $312,043
and $286,497 at September 30, 2000 and December 31, 1999 4,008,345 5,378,202
Inventories, net 3,419,797 3,853,041
Prepaid expenses and other current assets 645,530 395,767
Current portion of note receivable 81,602 82,331
------------- -------------
Total current assets 8,205,042 10,042,300
Property and equipment, net 457,653 596,781
Intangible assets, net of accumulated amortization of $1,373,065 and $808,790 at
September 30, 2000 and December 31, 1999 4,066,076 4,272,210
Note receivable - noncurrent portion 72,046 116,898
Other assets 398,976 192,611
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Total assets $ 13,199,793 $ 15,220,800
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,107,218 $ 3,351,434
Accounts payable 3,615,004 2,506,322
Accrued salaries, wages and related benefits 318,588 643,761
Accrued expenses 50,000 587,322
Deferred service revenue 1,881,109 1,327,066
Customer advances 473,100 652,348
Current portion of note payable to related party -- 15,577
Current portion of long-term debt 454,288 10,293
Current portion of capital lease obligations 27,347 44,205
------------- -------------
Total current liabilities 10,219,790 9,138,328
Long term debt 13,100 66,667
Capital lease obligations - noncurrent portion 65,827 57,586
Other long-term liabilities 67,557
Commitments and contingencies
Series C Convertible Preferred Stock, 500, 000 shares authorized; 500,000 shares
issued and outstanding at September 30, 2000 1,000,000 --
Stockholders' equity
Preferred stock, No par value:
Series B Preferred Stock; 1,000,000 shares authorized; 500,000 shares
issued and 50,000 shares outstanding at September 30, 2000 and 400,000
at December 31, 1999 50,000 400,000
Common stock, $.001 par value:
20,000,000 shares authorized; 8,226,968 and 6,963,282 shares issued and
outstanding at September 30, 2000 and December 31, 1999 8,227 6,968
Additional paid-in capital 13,976,798 13,259,222
Accumulated deficit (12,159,324) (7,750,903)
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3,004,628 5,915,287
Less 5,000 shares of treasury stock, at cost (24,625) (24,625)
------------- -------------
Total stockholders' equity 2,980,003 5,890,662
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Total liabilities and stockholders' equity $ 13,199,793 $ 15,220,800
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
System sales and installation $ 3,186,390 $ 6,977,658
Service and supplies sales 1,980,974 2,775,909
------------ ------------
Total revenue 5,167,364 9,753,567
Cost of revenue:
System sales and installation 2,774,466 5,140,296
Service and supplies sales 1,191,824 1,920,953
------------ ------------
Total cost of revenue 3,966,290 7,061,249
------------ ------------
Gross margin 1,201,074 2,692,318
Operating expenses:
Selling, general and administrative expenses 2,105,040 2,467,325
Research and development costs -- 140,650
------------ ------------
Total operating expenses 2,105,040 2,607,975
------------ ------------
Operating (loss) income (903,966) 84,343
Other expense, net 92,732 144,645
Loss on the Sale of London, KY and Canton OH office assets (233,796) --
------------ ------------
(Loss) income before income taxes (1,230,494) (60,302)
Provision for income tax 152 1,208
------------ ------------
Net (loss) income and comprehensive net (loss) income $(1,230,646) $ (61,510)
------------ ------------
Net (loss) income $(1,230,646) $ (61,510)
Accretion related to Series B Preferred Stock -- --
Cumulative dividends for Series C Preferred Stock (30,000) (14,333)
------------ ------------
Net loss applicable to common stockholders $(1,260,646) $ (75,843)
============ ============
Basic and diluted net loss to common stockholders per share $ (0.17) $ (0.01)
------------ ------------
Basic and diluted weighted average common shares outstanding 7,501,859 6,963,282
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenue:
System sales and installation $ 11,423,071 $ 19,454,837
Service and supplies sales 6,205,153 8,050,509
------------- -------------
Total revenue 17,628,224 27,505,346
Cost of revenue:
System sales and installation 9,908,656 13,917,172
Service and supplies sales 4,346,909 5,807,874
------------- -------------
Total cost of revenue 14,255,565 19,725,046
------------- -------------
Gross margin 3,372,659 7,780,300
Operating expenses:
Selling, general and administrative expenses 6,681,208 7,371,360
Research and development costs -- 544,215
------------- -------------
Total operating expenses 6,681,208 7,915,575
------------- -------------
Operating loss (3,308,548) (135,275)
Other expense, net 319,582 374,990
Loss on the Sale of London, KY and Canton OH office assets (233,796) --
------------- -------------
Loss before income taxes (3,880,682) (510,265)
Provision for income tax 4,452 4,158
------------- -------------
Net loss and comprehensive net loss $ (3,880,682) $ (514,423)
------------- -------------
Net loss $ (3,880,682) $ (514,423)
Preferred stock accretion and dividends:
Accretion related to Series B Preferred Stock -- (52,500)
Accretion related to Series C Convertible Preferred Stock (354,056) --
Cumulative dividends for Preferred Stock (96,970) (26,883)
------------- -------------
Net loss applicable to common stockholders $ (4,331,708) $ (593,806)
============= =============
Basic and diluted net loss to common stockholders per share $ (0.58) $ (0.09)
------------- -------------
Basic and diluted weighted average common shares outstanding 7,498,678 6,947,536
------------- -------------
</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,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,880,682) $ (514,423)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 161,184 208,586
Amortization 247,884 443,661
Provision for excess and obsolete inventories 112,144 --
Changes in operating assets and liabilities:
Accounts receivable net of allowances 1,369,857 (2,182,185)
Inventories 321,100 (3,454)
Prepaid expenses and other assets (455,399) (101,352)
Accounts payable 1,108,682 310,886
Other accrued expenses (519,358) (543,515)
Deferred revenue 554,043 390,055
Customer advances (179,248) 919,819
Other long-term liabilities -- --
------------ ------------
Net cash used in operating activities (1,119,793) (1,071,922)
Cash flows from investing activities:
Cash paid for final installment, acquisition -- (10,000)
Receivables from rescinded acquisition 44,852 61,807
Purchases of property and equipment (63,806) (124,606)
------------ ------------
Net cash used in investing activities (18,954) (72,799)
Cash flows from financing activities:
Repayment of capital lease obligations (8,617) (44,775)
Net (repayments) borrowings on line of credit (244,216) 1,079,619
Net (repayments) borrowings of long-term debt 180,957 (16,326)
Repayment of note payable to related party (15,577) (45,296)
Issuance of preferred stock 1,000,000 500,000
Preferred stock issuance costs (80,000)
Redemption of Preferred Stock (350,000) (100,000)
Payment of cash dividends-preferred stock (87,000) --
Additional Paid in Capital per Issuance of 1,250,000 shares
of common stock 498,750
Issuance of common stock 1,259 21,560
------------ ------------
Net cash provided by financing activities 895,556 1,394,782
Net (decrease) increase in cash and cash equivalents (283,191) 250,061
Cash and cash equivalents at beginning of period 332,959 146,235
------------ ------------
Cash and cash equivalents at end of period $ 49,768 $ 396,296
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 356,128 $ 357,683
============ ============
Cash paid for income taxes, net $ 4,300 $ 9,258
============ ============
</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,
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosures of non-cash transactions:
Warrants issued in connection with the issuance of
preferred stock $ 216,750 $ 52,500
============ ============
Capital lease obligations to finance capital assets $ -- $ 45,860
============ ============
Non-cash transactions relating to Preferred Stock:
Preferred stock accretion recorded to increase Series B
Preferred Stock to redemption value $ -- $ 52,500
============ ============
Preferred stock accretion recorded to increase Series C
Preferred Stock to redemption value $ 354,056 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
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BRISTOL RETAIL SOLUTIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
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. 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 eleven cities
and five states, primarily located in the Western and Midwestern region of the
United States.
The accompanying consolidated September 30, 2000 and 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 Retail
Systems, Inc. (ARS); Smyth Systems, Inc. (Smyth); Pacific Cash Register and
Computer, Inc. (PCR); and Quality Business Machines (QBM).
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. 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 accounting principles
generally accepted in the United States of America and, therefore, should be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
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, 2000 and 1999, 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
preferred stock dividends on Series B and Series C Preferred Stock. Common
equivalent shares have not been included where inclusion would be antidilutive.
At September 30, 2000 and 1999, 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, were antidilutive for
the three and nine months ended September 30, 2000 and 1999, and, accordingly,
were not included in the calculation of dilutive loss per share.
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COMPREHENSIVE OPERATIONS
SFAS No. 130, "Reporting Comprehensive Income" 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. As
of September 30, 2000 and 1999, there is no difference between net loss and
comprehensive loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal year 2001. SFAS No. 133, amended by SFAS. No. 137,
will require the Company to record all derivatives on the balance sheet at fair
value. For derivatives that are hedges, changes in the fair value of derivatives
will be offset by the changes in the fair value of hedged assets, liabilities or
firm commitments. The Company is currently evaluating the impact of adopting
this standard will have on its results of operations or equity.
RECLASSIFICATION
Certain reclassifications have been made to prior year information to
conform to the current year presentation.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Furniture and equipment $ 758,690 $ 742,599
Automobiles 234,788 234,788
Leasehold improvements 147,238 107,066
------------ ------------
1,140,716 1,084,453
Less accumulated depreciation and amortization (683,062) (487,672)
------------ ------------
Property and equipment, net $ 457,653 $ 596,781
============ ============
</TABLE>
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
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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 an accrual of $100,000 in the accompanying
consolidated balance sheet at December 31, 1999. Currently, the settlement money
from the insurance company is in a trust fund. Final disposition of funds to the
plaintiffs will occur when the Company pays the money owed as agreed to per the
settlement. As of September 30, 2000, the Company has paid all $100,000, and any
potential future payments will result in the recognition of additional expenses.
STOCKHOLDERS' EQUITY
COMMON STOCK
On April 11, 2000, the Company issued 8,686 shares of common stock to
its employees under the 1997 Employee Stock Purchase Plan.
On August 21, 2000, the Company received $500,000 in Equity funding. As
of the date of this report the Company had not issued equity certificates
related to this transaction. However, the Board has authorized, and the Company
will issue, 1,250,000 shares of common stock.
PREFERRED STOCK
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, and as of November 16, 2000 there exercise value had been
reduced to $-0-. The Company recorded accretion of $52,500 to increase the
carrying value to the liquidation value of $1.00 per share. As of October 27,
2000, the Company has redeemed $475,000of the Series B shares. The Company
recorded cumulative preferred dividends of $6,970 as of September 30, 2000.
On January 12, 2000, the Company and Berthel SBIC, LLC (Berthel)
entered into an Investment Agreement whereby the Company issued 500,000 shares
of its Series C Convertible Preferred Stock (the Series C) and a warrant to
purchase 425,000 shares of its common stock for $920,000, net of offering costs.
The warrant has an exercise price per share of $0.01 and is exercisable until
January 12, 2005. In connection with the purchase price by Berthel, the Company
and the Chairman of the Board, Larry Cohen agreed to surrender, without
exercise, options held by him for the acquisition of 1,330,000 shares of common
stock of the Company, at which time the Company cancelled the options
Upon certain circumstances, Berthel may put the Company the warrant or
shares underlying the warrant and shares of common stock resulting from the
conversion of all or part of the Series C Preferred Stock. The Company will pay
Berthel a put price equal to the fair market value of the Company, multiplied by
a fraction, the numerator of which is the total of (i) the number of warrant
shares tendered by Berthel, (ii) the number of shares of common stock for which
the portion of the warrant tendered by Berthel remains exercisable, (iii) the
number of conversion shares tendered by Berthel and (iv) the number of shares of
common stock for which the Series C Preferred Stock tendered by Berthel remain
convertible; and the denominator of which is the total of (x) the total shares
of outstanding common stock of the Company, (y) the number of shares of common
stock for which the warrant remains exercisable, and (z) the number of
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conversion shares for which all shares of Series C Preferred Stock held by
Berthel remain convertible. Berthel may exercise it rights to this put at any
time after the fifth anniversary of the closing date and prior to the close of
business on the seventh anniversary of the closing date unless certain events as
defined occur earlier. In addition, at any time after the closing date, the
investor may demand registration of its shares of common stock on Form S-2 or
S-3 or any similar short form registration. In accordance with Emerging Issues
Task Force (EITF) Issue No. 00-7, unless the underlying preferred stock
agreement is modified by December 31, 2000, the fair value of the Series C
Preferred Stock will be recorded as a liability with changes in its fair value
recognized in earnings.
The holder of the Series C Preferred Shares are entitled to receive
cumulative cash dividends at the rate of $0.24 per year per share, payable
quarterly no later than the last business day of each March, June, September and
December. The Company recorded cumulative dividends of $96,970 as of September
30, 2000. The purchaser received warrants to purchase 425,000 shares of common
stock. These warrants were valued by the Company at $216,750 using a
Black-Scholes option-pricing model. The Series C Preferred Stock was recorded at
fair value on the date of issuance less issuance costs. The Company recorded
accretion of $354,056 to increase the carrying value to the redemption value of
$1,000,000.
SUBSEQUENT EVENTS
REGISTRY MAGIC
On November 6, 2000 the Company and Registry Magic (Registry) entered
into an Agreement and Plan of Merger. The Merger Agreement provides, among other
things, that upon the terms and subject to the conditions contained in the
Merger Agreement the Company will merge with and into a subsidiary of Registry
formed solely for the purpose of completing the Merger. In the merger all
outstanding shares of common stock of Bristol will be converted into the right
to receive .65 of a share of Registry's common stock. Certain members of
management and a principal shareholder of the Company are also members of
management and shareholders of Registry Magic.
Effective October 20, 2000 the Company entered into a promissory note
whereby Registry advanced $250,000 to Bristol. The funds shall be used by the
Company for working capital purposes. In the event the proposed merger between
Bristol and Registry does not close, Bristol will repay Registry the amount plus
outstanding interest at the rate of 8% per annum on October 19, 2001. The note
is secured by all of the Bristol's inventory and receivables not subject to and
second to the first lien of Coast Business Credit.
Registry was organized to design, develop, commercialize and market
proprietary products and services that exploit recent advances in speech
recognition technologies. Registry is also developing secured voice enabled
applications that can be incorporated with emerging technologies in wireless
area networks with particular emphasis on point-of -sale equipment. The products
currently offered or under development by Registry have the objective to enable
a user to speak into a telephone or to a computer in a natural conversational
manner and, in turn, have the product listen, understand and respond by
performing tasks or retrieving information in a secured environment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
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-Q, as well as the Company's audited consolidated
financial statements for the year ended December 31, 1999.
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. The Company completed no
acquisitions during the year ended December 31, 1999 and for the nine months
ended September 30, 2000.
This Quarterly Report on Form 10-Q contains forward-looking statements
that 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, 2000 was $5,167,000
and represents a decrease of 47% from the Company's total revenue of $9,754,000
for the quarter ended September 30, 1999. The decrease in revenue from the
quarter ended September 30, 1999 to the quarter ended September 30, 2000 was
attributable to the previously announced sale of the Smyth Imager division
(November 1999, $832,000 of the decrease). The remaining decrease in revenue is
attributable to a slowdown in franchise hospitality revenue when compared to the
prior year quarter ended September 30, 1999. The Company expects this to
continue for the foreseeable future.
Total revenue for the nine months ended September 30, 2000 was
$17,628,000; a 36% decrease over the comparable nine months ended September 30,
1999. The decrease in revenue was attributable to the previously announced sale
of the Smyth Imager division, accounting for $3,908,000 of the decrease. The
remaining difference in revenue is attributable to a slowdown in systems revenue
in the grocery and franchise hospitality markets. The Company has experienced a
reduction this year in the number of sales when compared to 1999, now that the
urgency for buying new systems generated by Y2K has passed.
Total revenue for the quarter ended September 30, 2000 was comprised of
62% Systems Revenue and 38% Service Revenue, as compared to a revenue
composition of 72% Systems Revenue and 28% Service Revenue for the quarter ended
September 30, 1999. Total revenue for the nine months ended September 30, 2000
was comprised of 65% Systems Revenue and 35% Service Revenue, as compared to a
revenue composition of 71% Systems Revenue and 29% Service Revenue for the nine
months ended September 30, 1999. The mix of revenue change from 1999 to 2000 for
both the three- and nine-month periods was primarily due to product mix due to
the sale of the Smyth Imager division.
No customer accounted for more than 10% of total revenue for the three-
and nine-month periods ended September 30, 2000 and 1999. 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 28% and 32% of total revenue for the three-
and nine-month periods ended September 30, 2000, and approximately 31% of total
revenue for both the three- and nine-month periods ended September 30, 1999. The
Company's supply agreements with these manufacturers are non-exclusive, have
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geographic limitations and may have renewable one-year terms depending upon the
Company's achievement of a previously-agreed-to procurement quota. Geographical
limitations exist as a result of the assignment of sales territories that define
the municipalities and states where the Company's subsidiaries can sell a
manufacture's hardware or software. The actual sales territories for each
manufacturer are subsidiary-specific and some subsidiaries may not have
permission to sell hardware or software of certain manufactures in certain
regions or territories of the country. NCR, however, has informed the Company
that effective January 1, 2001; it will eliminate the Company's geographical
limitations, thereby allowing the Company to sell NCR products throughout the
country. A change in the Company's or its subsidiaries' relationship with its
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 decreased to $1,201,000 for the three months ended
September 30, 2000, from $2,692,000 for the three months ended September 30,
1999. As a percentage of sales, gross margin for the quarter ended September 30,
2000 was 23% and was comprised of gross margin for Systems Revenue of 13% and
gross margin for Service Revenue of 40%. Gross margin for the quarter ended
September 30, 1999 was 28% and was comprised of gross margin for Systems Revenue
of 26% and gross margin for Service Revenue of 31%. The decrease in systems and
service gross margin is primarily attributable to decreased revenue available to
cover fixed labor and overhead that are components of cost of sales.
Gross margin for the nine months ended September 30, 2000, was
$3,373,000, a decrease of $4,408,000 compared to the nine months ended September
30, 1999. As a percentage of sales, gross margin for the nine months ended
September 30, 2000 was 19% and was comprised of gross margin for Systems Revenue
of 13% and gross margin for Service Revenue of 30%. Gross margin for the nine
months ended September 30, 1999 was 28% and was comprised of gross margin for
Systems Revenue of 28% and Service Revenue of 28%. As a percentage of revenue,
the decrease in Systems Revenue gross margin is attributable to decreased
revenue available to cover fixed labor and overhead. Based on significant losses
experienced in the first half of the year, management has implemented Cost
Reduction initiatives including a reduction in workforce and has sold two of its
branch local offices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses were $2,105,000 for
the quarter ended September 30,2000, a decrease of $362,000 from the comparable
prior-year period and represented 41% of total revenue, versus 26% of total
revenue in the comparable prior year period. The decrease in expenses in
absolute dollars between years was primarily attributable to the sale of the
Imager division and the two Cash Registers, Inc. offices, and other workforce
reductions.
Total selling, general and administrative expenses for the nine months
ended September 30, 2000 were $6,681,000, a decrease of $690,000 from the
comparable prior-year period and represented 38% of total revenue, versus 27% of
total revenue in the comparable prior year nine month period. The decrease in
expenses in absolute dollars between years was primarily attributable to the
sale of the Imager division and the two Cash Registers, Inc. offices, and other
workforce reductions. The increase in selling, general and administrative
expenses as a percentage of revenue during the nine months ended September 30,
2000, compared to the comparable prior year period, is primarily due to lower
revenues in the first nine months of 2000.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were zero during the three- and nine
month periods ended September 30, 2000 compared to $141,000 and $544,000
incurred during the three- and nine-month periods ended September 30, 1999. The
decrease is due to the sale of the Imager division which costs in 1999 were
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. The Company's policy was to expense such
costs until technological feasibility was established.
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OTHER EXPENSE (INCOME)
The Company earned interest income of $5,000 and $26,000 for the three-
and nine-month periods ended September 30, 2000, compared to $4,000 and $26,000
for the three- and six-month periods ended September 30, 1999. Interest income
primarily related to finance charges earned on delinquent accounts. The Company
recognized interest expense of $147,000 and $405,000 for the three-and
nine-month periods ended September 30, 2000 compared to $148,000 and $395,000
for the three- and nine-month periods ended September 30, 1999. 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.
INCOME TAX PROVISION
The Company recorded a slight income tax provision for the three- and
nine-month periods ended September 30, 2000 and 1999, 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, 2000 was $1,260,000, consisting of the Company's net
loss of $1,230,000 and cumulative dividends on preferred stock of $33,000. The
Company's loss applicable to common stockholders for the nine months ended
September 30, 2000, was $4,331,000, consisting of the Company's net loss for the
six month period of $3,881,000, accretion of $354,000 to increase the Series C
Convertible Preferred Stock issued on January 12, 2000 to its redemption value
of $100 per share and cumulative preferred dividends of $97,000.
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 of $62,000 and cumulative dividends on the 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 for the
nine-month period of $594,000, accretion of $52,000 to increase the Series B
Preferred Stock to its liquidation value and cumulative dividends on the Series
B Preferred Stock of $27,000.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company had cash and cash equivalents of $50,000 at September 30,
2000. During the nine months ended September 30, 2000, the Company utilized
$1,120,000 of cash from operations; utilized $64,000 for the purchase of
property and equipment and generated $45,000 from other investing activities;
and generated $896,000 from financing activities, which primarily related to net
repayments under the Company's line of credit facilities, redemption of $300,000
of its Series B Preferred Stock, the issuance of 500,000 shares of Series C
Convertible Preferred Stock for $920,000, net of issuance costs, receipt of
$500,000 for which the Board has authorized the issuance of 1,250,000 shares of
common stock, payment of dividends of $87,000 and repayments under various debt
agreements. During the nine months ended September 30, 1999, the Company
utilized $1,072,000 of cash in 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.
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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 $3,107,000 and $4,310,000 bearing interest at 10.75% and 9.50% at
September 30, 2000 and 1999, respectively. As of September 30, 2000, the Company
was in compliance with the covenants under the credit facility. The Company has
received notice that at the maturity date, December 31, 2000, the lender will
elect not to renew this credit line. The Company is currently negotiating to
extend the maturity date and is also in discussion with other prospective
lenders to replace the current credit line.
The Company believes that the potential merger with Registry Magic,
detailed elsewhere in this document, will create a more attractive entity to the
capital markets and will afford additional funding opportunities other than
those that would have been available to either firm as separate entities. In
addition, pursuant to the terms of the merger agreement, the Company and
Registry entered into a promissory note whereby Registry advanced $250,000 to
the Company.
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 $53,000 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 $53,000 to increase the
carrying value to the liquidation value of $1.00 per share. As of October 27,
2000, the Company has redeemed $475,000of the Series B shares. The Company
recorded cumulative preferred dividends of $7,000 for the nine months ended
September 30, 2000. The exercise price of the warrants to purchase 150,000
shares of the Company's common stock has been reduced to $-0- per share as of
September 30, 2000.
On January 12, 2000, the Company and Berthel SBIC, LLC (Berthel)
entered into an Investment Agreement whereby the Company issued 500,000 shares
of its Series C Convertible Preferred Stock (the Series C) and a warrant to
purchase 425,000 shares of its common stock for $920,000, net of offering costs.
The warrant has an exercise price per share of $0.01 and is exercisable until
January 12, 2005. In connection with the purchase price by Berthel, the Company
and the Chairman of the Board, Larry Cohen agreed surrender, without exercise,
options held by him for the acquisition of 1,330,000 shares of common stock of
the Company, at which time the Company cancelled the options.
Upon certain circumstances, Berthel may put the Company the warrant or
shares underlying the warrant and shares of common stock resulting from the
conversion of all or part of the Series C Preferred Stock. The Company will pay
Berthel a put price equal to the fair market value of the Company, multiplied by
a fraction, the numerator of which is the total of (i) the number of warrant
shares tendered by Berthel, (ii) the number of shares of common stock for which
the portion of the warrant tendered by Berthel remains exercisable, (iii) the
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number of conversion shares tendered by Berthel and (iv) the number of shares of
common stock for which the Series C Preferred Stock tendered by Berthel remain
convertible; and the denominator of which is the total of (x) the total shares
of outstanding common stock of the Company, (y) the number of shares of common
stock for which the warrant remains exercisable, and (z) the number of
conversion shares for which all shares of Series C Preferred Stock held by
Berthel remain convertible. Berthel may exercise it rights to this put at any
time after the fifth anniversary of the closing date and prior to the close of
business on the seventh anniversary of the closing date unless certain events as
defined occur earlier. In addition, at any time after the closing date, the
investor may demand registration of its shares of common stock on Form S-2 or
S-3 or any similar short form registration. In accordance with Emerging Issues
Task Force (EITF) Issue No. 00-7, unless the underlying preferred stock
agreement is modified by December 31, 2000, the fair value of the Series C
Preferred Stock will be recorded as a liability with changes in its fair value
recognized in earnings.
The holder of the Series C Preferred Shares are entitled to receive
cumulative cash dividends at the rate of $0.24 per year per share, payable
quarterly no later than the last business day of each March, June, September and
December. The Company recorded cumulative dividends of $90,000 as of September
30, 2000. The purchaser received warrants to purchase 425,000 shares of common
stock. This warrant was valued by the Company at $216,750 using a Black-Scholes
option-pricing model. The Series C Preferred Stock was recorded at fair value on
the date of issuance less issuance costs. The Company recorded accretion of
$354,056 to increase the carrying value to the redemption value of $1,000,000.
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, 2000. At
September 30, 2000, approximately $250,000 of eligible collateral was available
for the Company to borrow under the credit facilities. However, if the Company
is unable to achieve profitability in the foreseeable future additional
financing will be required to meet current working capital requirements.
Moreover, the Company may be limited in its ability to grow internally without
additional working capital. The Company has obtained financing with its latest
offering of the Series C Preferred Stock. 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 cost reduction initiatives and the
achievement of sustained profitable operations.
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). 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 an accrual of $100,000 in the accompanying
consolidated balance sheet at December 31, 1999. Currently, the settlement money
from the insurance company is in a trust fund. Final disposition of funds to the
plaintiffs will occur when the Company pays the money owed as agreed to per the
settlement. As of September 30, 2000, the Company has paid all $100,000, and any
potential future payments will result in the recognition of additional expenses
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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 by customers can be 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. It is
these fixed in nature expenses that the companies cost reduction measures are
attempting to control. 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-Q 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.
LIMITED OPERATING HISTORY. The Company was founded in April 1996. In
the three full years that the Company has operated, the Company has incurred
losses. The ability of the Company to become profitable will be dependent on the
Company's ability to control operating costs better than the historical
performance and to improve on the historical pretax profits of the acquired
dealers. 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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CONSIDERATION FOR ACQUIRED COMPANIES EXCEEDS ASSET VALUE. Valuations of
the companies acquired by the Company have not been undertaken based on
independent appraisals, but have been determined through arm's-length
negotiations between the Company and representatives of such companies. The
consideration for each such company has been based primarily on the judgment of
management as to the value of such company as a going concern and not on the
book value of the acquired assets. Valuations of these companies determined
solely by appraisals of the acquired assets may have been less than the
consideration paid for the companies. No assurance can be given that the future
performance of such companies will be commensurate with the consideration paid.
Specifically, during the fourth quarter of 1997, the Company recorded a goodwill
write-down for approximately $1,871,000, which consisted of $1,442,000 related
to Smyth Systems, $419,000 related to CRI and $10,000 related to its other
subsidiaries. See "GOODWILL WRITE-DOWN IN MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." No assurance can be given that
the facts and circumstances surrounding the write-down will not occur in the
future. Moreover, the Company has incurred and expects to incur significant
amortization charges resulting from consideration paid in excess of the book
value of the assets of the companies acquired and companies which may be
acquired in the future.
SUBSTANTIAL COMPETITION. The POS industry is highly fragmented and
competitive. Competitive factors within the industry include product prices,
quality of products, service levels, and reputation and geographical location of
dealers. The Company primarily competes with independent POS dealers and some of
these dealers may have greater financial resources available to them than does
the Company. In addition, there are original equipment manufacturers of POS
equipment that compete in certain product areas. The Company's ability to make
acquisitions will also be subject to competition. The Company believes that,
during the next few years, POS dealers may seek growth through consolidation
with entities other than the Company. In addition, no assurance can be given
that the major manufacturers will not choose to effect or expand the
distribution of their products through their own wholesale organizations or
effect distribution directly to many of the retail accounts of the Company in
the markets served by the Company or to open territories permitting free
accessibility for any dealer who may have greater financial resources than the
Company. Any of these developments could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flows.
SUBSTANTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS. The Company may
experience substantial fluctuations in its annual and quarterly operating
results in future periods. The Company's operating results are affected by a
number of factors, many of which are beyond the Company's control. A substantial
portion of the Company's backlog is typically scheduled for delivery within 90
days. Delivery dates for products sold by the Company are subject to change due
to customers changing the required installation date of an automation retail
solution system. The changing of such delivery dates is beyond the Company's
control. Quarterly sales and operating results therefore depend in large part on
customer-driven delivery dates, which are subject to change. In addition, a
significant portion of the Company's operating expenses are relatively fixed in
nature and planned expenditures are based in part on anticipated orders. Any
inability to adjust spending quickly enough to compensate for any revenue
shortfall may magnify the adverse impact of such revenue shortfall on the
Company's results of operations.
EFFECT OF RECURRING LOSSES. During the nine months reflected herein the
Company has experienced significant and recurring losses. Currently the Company
is operating with negative working capital. If the Company is unable to reverse
this trend it could have a material impact on it's ability to continue to
acquire equipment from it's suppliers. The Company has initiated cost reduction
and workforce reduction measures which it believes will have a positive effect
on that trend. In addition, the Company has entered into a merger agreement with
Registry Magic which, as discussed earlier, it believes will improve it's
opportunities to attract additional capital and debt funding. No assurances can
be given that the company will be successful in its plans.
DEPENDENCE ON MANUFACTURERS. A substantial portion of the Company's
total revenue is and will be derived from the sale of POS systems, ECRs and
related equipment, none of which are manufactured by the Company. The Company's
business is dependent upon close relationships with manufacturers of POS
equipment and the Company's ability to purchase equipment in the quantities
necessary and upon competitive terms so that it will be able to meet the needs
of its end user customers. For the quarter and nine months ended September 30,
2000, the Company purchased its hardware principally from three main vendors,
Panasonic, ERC, a distributor of Panasonic products, and NCR. Sales of
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Panasonic, ERC and NCR products accounted for approximately28% and 32% of net
revenue for the three and nine-month periods ended September 30, 2000. During
1999, the Company experienced some delivery delays from manufacturers due to
cash flows. In particular, the Company had its credit line with several
manufacturers reduced or suspended until such time the Company became current.
The Company believes it is current with its suppliers and has had some credit
lines increased or reinstated and experienced no supply interruptions in the
quarter; however, there can be no assurances that these credit lines will not be
suspended or cancelled in the future should the Company fail to meet its payment
commitments. 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. The Company may also be
required to carry an inventory of backup equipment and replacement parts and the
Company's inability sustain sufficient inventory due to cash flows may impact
the Company's future revenue. 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 or the loss of maintenance revenue
due to the Company's inability to maintain backup and replacement parts
inventory.
POTENTIAL INABILITY TO MARKET NEWLY DEVELOPED PRODUCTS. The technology
of POS systems, ECRs, VARs and related equipment is subject to technological
changes mainly related to software. 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.
RELIANCE ON KEY PERSONNEL. The Company has, in the past relied on the
expertise of the senior management of the dealers acquired. Some of this
management is no longer actively involved with the Company. In June 2000, the
Company appointed a new Chief Executive Officer and Chief Financial Officer. In
addition, the Company has restructured its operations and has made appointments
accordingly. The Company is highly dependent on the expertise of these few
individuals to execute the Company's strategy. In addition, competition for
highly qualified, computer and systems 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.
RISKS OF LOW-PRICED SECURITIES. The Company was delisted from Nasdaq
SmallCap Market on August 3, 1999. The Company's stock currently trades in the
over-the-counter market on the OTC Bulletin Board. As a result, unless the
Company has average revenues of $6,000,000 for the last three years or net
tangible assets of at least $2,000,000 at the end of the fiscal year, the
Company's common stock would be covered by a Securities and Exchange Commission
rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5 million or
individuals with net worth in excess of $1 million or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
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purchaser and receive the purchaser's written agreement to the transaction prior
to the sale. Consequently, since quoted price fell below $5.00 per share, the
rule affects the ability of broker-dealers to sell the Company's securities and
also affects the ability of shareholders to sell their shares in the secondary
market. As of February 29, 2000, the closing price of the common stock was
$0.625.
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 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.
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 Company's line of credit, the Company is prohibited
for engaging in certain transactions without first obtaining the written consent
of the lender. Such transactions include, but are not limited to: (i) acquiring
or sell any assets over $50,000; (ii) selling or transferring any collateral
under the line credit, except for sale of items in the Company's finished
inventory in the ordinary course of business; (iii) selling of inventory on a
sale-or-return, guaranteed sale, consignment, or other contingent basis; (iv)
any other transaction outside the ordinary course of business. No assurance can
be given that these restrictions will not impact the Company's ability to
conduct business in the future. It does not however prohibit or restrict the
Company from acquiring other companies (including acquisitions for amounts
greater than $50,000) pursuant to its acquisition strategy.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents,
accounts receivable and accounts payable. At September 30, 2000, the carrying
values of the Company's financial instruments approximated fair values based on
current market prices and rates. Because of their short duration, changes in
market interest rates would not have a material effect on fair value.
It is our policy not to enter into derivative financial instruments. We
do not currently have any significant foreign currency exposure, as we do not
transact business in foreign currencies. As such, we do not have significant
currency exposure at September 30, 2000.
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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. There have been
no significant changes in these proceedings subsequent to the last notification.
ITEM 5. OTHER EVENTS
Effective September 26, 2000 the Company and Mr. Pollastro mutually
agreed not to renew his employment agreement at its December 31, 2000 maturity
and Mr. Pollastro resigned as the Company's Executive Vice President and Chief
Operating Officer.
On August 21 and August 31, 2000 the Company sold it's London, KY and
Canton OH offices. Both of these transactions were conducted as asset sales
only. No cash consideration was provided. The Company was able to alleviate
certain liabilities in exchange for assets held at the locations. In addition,
the company was able to recognize portions of the deferred revenue. The net
effect of the sales was a loss of $233,000, mostly related to the value of
inventories held at the London office.
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, 2000, the Company filed one
Current Reports on Form 8-K regarding Item 4, changes in certifying
Public Accountants, Effective September 1, 2000, the Company dismissed
its former principal accountants, Deloitte and Touche LLP and appointed
the accounting firm of BDO Seidman, LLO as its principal accountants.
During the period from September 30, 1997 to December 31, 1999 and each
subsequent interim period preceding September 1, 2000, there were no
disagreements with Deloitte and Touche LLP, on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure.
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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)
August 21, 2000 By: /s/ BILL KERECHEK
-------------------------- --------------------------------------------
Date Bill Kerechek
Chief Financial Officer
(Principal financial and accounting officer)
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