<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13732
COMTREX SYSTEMS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2353604
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
102 Executive Drive, Moorestown, NJ 08057-4224
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(609) 778-0090
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 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 _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 24, 1997
- ----- -------------------------------
Common Stock, par value $.001 3,583,072
<PAGE>
COMTREX SYSTEMS CORPORATION
BALANCE SHEETS
These statements are unaudited.
ASSETS
September 30, 1997 March 31, 1997
------------------ --------------
Current assets:
Cash and cash equivalents $ 320,494 $ 142,886
Certificate of deposit 100,000 100,000
Accounts receivable, net of reserve of
$167,816 and $186,710 as of 9/30/1997
and 3/31/1997, respectively 1,073,866 1,040,374
Note receivable and accrued interest 16,340 16,640
Inventories 909,879 1,084,238
Prepaid expenses and other 109,831 73,752
----------- -----------
Total current assets 2,530,410 2,457,890
----------- -----------
Property and equipment:
Machinery, equipment, furniture
and leasehold improvements 1,063,663 1,052,817
Less - accumulated depreciation (935,689) (905,268)
----------- -----------
Net property and equipment 127,974 147,549
----------- -----------
Other assets:
Purchased and capitalized software
and design 1,031,442 1,031,442
Less - accumulated amortization and
depreciation (724,305) (693,670)
----------- -----------
Total other assets 307,137 337,772
----------- -----------
TOTAL ASSETS $ 2,965,521 $ 2,943,211
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 520,216 $ 581,687
Accrued expenses 98,694 102,306
Customer deposits 6,403 22,048
----------- -----------
Total current liabilities 625,313 706,041
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000
shares authorized, none outstanding -- --
Common stock, $.001 par value, 5,000,000
shares authorized, 3,181,522 and 3,164,022
issued and outstanding as of
9/30/1997 and 3/31/1997, respectively 3,182 3,165
Additional paid-in capital 5,322,603 5,315,970
Accumulated deficit (2,985,577) (3,081,965)
----------- -----------
Total shareholders' equity 2,340,208 2,237,170
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,965,521 $ 2,943,211
=========== ===========
The accompanying notes are an integral part of
these financial statements.
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<PAGE>
COMTREX SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
These statements are unaudited.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,365,212 $ 1,468,396 $ 2,619,804 $ 2,954,252
Costs and expenses
Cost of sales 869,843 966,645 1,647,113 1,873,685
Administrative 146,543 186,207 308,585 356,269
Research and
development 63,386 33,526 109,711 62,765
Sales and marketing 125,149 239,163 258,606 436,340
Customer support 77,183 138,474 135,733 247,011
Depreciation and
amortization 30,706 30,529 61,056 57,513
----------- ----------- ----------- -----------
1,312,810 1,594,544 2,520,804 3,033,583
----------- ----------- ----------- -----------
Income (loss)
from operations 52,402 (126,148) 99,000 (79,331)
Interest income, net (1,425) 3,286 (2,612) 7,433
----------- ----------- ----------- -----------
Income (loss)
before income taxes
and extraordinary credit 50,977 (122,862) 96,388 (71,898)
Provision for income taxes (20,390) -- (38,555) --
----------- ----------- ----------- -----------
Income (loss) before
extraordinary credit 30,587 (122,862) 57,833 (71,898)
Extraordinary credit,
reduction of income taxes
arising from carry-
forward of prior years'
operating losses 20,390 -- 38,555 --
----------- ----------- ----------- -----------
Net Income (loss) $ 50,977 $ (122,862) $ 96,388 $ (71,898)
=========== =========== =========== ===========
Per share data:
Income (loss) before
extraordinary credit $ .01 $ (.04) $ .02 $ (.02)
Extraordinary credit .01 .00 .01 .00
----------- ----------- ----------- -----------
Net Income (loss) $ .02 $ (.04) $ .03 $ (.02)
=========== =========== =========== ===========
Weighted average
shares outstanding 3,199,502 3,174,746 3,181,762 3,170,193
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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<PAGE>
COMTREX SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
These statements are unaudited.
<TABLE>
<CAPTION>
Six months ended
September 30,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 96,388 $ (71,898)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities -
Depreciation and amortization 61,056 57,513
Provisions for losses on accounts
receivable 12,613 26,884
Provisions for losses on inventories 8,500 50,000
(Increase) decrease in -
Certificate of deposit -- --
Accounts receivable (46,105) (44,081)
Note receivable 300 29,300
Inventories 165,859 (116,661)
Prepaid expenses and other (36,079) (1,483)
Increase (decrease) in -
Accounts payable (61,471) 152,034
Accrued expenses (3,612) 44,070
Customer deposits (15,645) 6,013
--------- ---------
Net cash provided by (used in)
operating activities 181,804 131,691
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchases) of property and equipment:
Purchases of property and equipment (10,846) (83,299)
Purchases of software and capitalized
software and design -- (83,976)
--------- ---------
Net cash provided by (used in)
investing activities (10,846) (167,275)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit 160,000 --
Repayments under line of credit (160,000) --
Proceeds from issuing equity securities 6,650 --
--------- ---------
Net cash provided by (used in)
financing activities 6,650 --
--------- ---------
Net increase (decrease) in cash 177,608 (35,584)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 142,886 218,166
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 320,494 $ 182,582
========= =========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
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<PAGE>
COMTREX SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Interim financial reporting:
The accompanying financial statements should be read in conjunction
with the financial statements and notes included in the Company's latest
Annual Report on Form 10-KSB.
These interim financial statements reflect all adjustments, of a
normal and recurring nature, which are, in the opinion of management,
necessary for a fair statement of the results for the interim period(s)
presented. The results for the period(s) herein presented are not necessarily
indicative of the results for the entire fiscal year.
2. Inventories:
September 30, March 31,
1997 1997
----------- -----------
Raw materials $ 595,553 $ 1,037,167
Work-in-process 270,023 128,141
Finished goods 203,580 108,127
Reserve for excess and
obsolete inventory (159,277) (189,197)
----------- -----------
$ 909,879 $ 1,084,238
=========== ===========
3. Income taxes:
The consolidated statements of operations reflect a provision for
income taxes at the rate of 40 percent, which represents the federal statutory
rate of 34 percent plus an effective state tax rate of 6 percent. The
provisions for income taxes are offset by tax benefits arising from an
extraordinary credit from the utilization of prior years' operating losses.
The Company has net operating loss carryforwards of approximately
$3,260,000 for financial reporting and for federal income tax purposes, which
begin to expire in 2004. The Company has tax credit carryforwards for federal
income tax purposes of approximately $148,000. Net operating loss
carryforwards are also available for state income tax purposes.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Liquidity and Capital Resources
As of September 30, 1997, the Company had total current assets of
$2,530,410, including cash, cash equivalents and certificates of deposits of
$420,494, as compared to $2,457,890 and $242,886, respectively, as of March
31, 1997. The Company had current liabilities of $625,313, resulting in a
current ratio of 4.0 as of September 30, 1997, compared to $706,041 and 3.5,
respectively, as of March 31, 1997.
The Company reported net income of $50,977 and $96,388, respectively
for the three month and six month periods ended September 30, 1997. The
Company has net operating loss carryforwards of approximately $3,260,000 for
federal income tax purposes, which do not begin to expire until 2004, and tax
credit carryforwards of approximately $148,000.
Operating activities generated $181,804 of cash during the first six
months of fiscal 1998, as compared with cash generation of $131,691 for the
corresponding prior year period. Cash and cash equivalents increased by
$177,608 during the six month period of fiscal year 1998.
In addition to the net income, cash provided by operating activities
was positively impacted by a reduction in inventories, net of reserves, of
$174,359 during the six month period ended September 30, 1997. This decrease
is due primarily to the planned, gradual phase-out of the Company's
SuperSprint product line, which is being replaced by the open architecture
PCS/5000 product series. The PCS/5000 is configured principally with completed
circuit boards and assemblies which are generally available, often with
off-the-shelf delivery to the Company. The Company is able to maintain a lower
level of raw material, component inventory than is required with a proprietary
product series, such as SuperSprint, while maintaining the same delivery
schedule, at comparable sales levels. During the current six month period,
depreciation and amortization contributed $61,056 to cash provided by
operating activities, which was offset by a reduction in accounts payable of
$61,471.
Accounts receivable, net of reserves, rose $33,492 during the current
six month period, although receivables, net of reserves declined by $109,860
during the three month period ended September 30, 1997.
Investing activities consumed $10,846 of cash during the six month
period ended September 30, 1997, as the company improved its Internet presence
and upgraded its in-house network to a Windows NT based system. During the six
month period of the prior fiscal year, both the development expense of the
PCS/5000 and the purchase of the assets of AUBIS Hospitality Systems resulted
in the consumption of $167,275 for investing activities through increases in
property and equipment and purchased and capitalized software and design.
Financing activities generated $6,650 of cash during the six month
period as a result of the exercise of stock options. During the six month
period, the Company borrowed, and repaid, $160,000 under its line of credit.
- 6 -
<PAGE>
Liquidity (continued)
In July of 1997, the Company and Fleet Bank N.A. extended an existing
line of credit agreement through October 31, 1997. The agreement provides for
borrowings of up to $750,000, with a limitation depending on eligible
receivables, as defined in the agreement. Borrowings bear interest at the
bank's prime rate and are collateralized by substantially all assets of the
Company. The Company expects this line of credit to be renewed through July of
1998. The Company expects to utilize the credit facility from time to time for
short term cash requirements.
Effective as of October 1, 1997, the Company purchased all the
outstanding capital stock of Data Systems Terminals LTD (DSL), its distributor
in the United Kingdom. The Company filed a Form 8-K on October 14, 1997
relating to this transaction. The purchase price included 400,000 restricted
shares of the Common Stock of the Company, a Subordinated Convertible
Debenture in the original principal amount of $300,000 and a promissory note
in the original principal amount of $65,000. The promissory note bears
interest at the rate of six percent (6%) per annum, and is payable in twelve
equal monthly installments commencing on November 1, 1997. The Debenture
accrues interest at the rate of eight percent (8%) per annum, which is payable
monthly. No principal payment is payable under the terms of the Debenture for
the first three (3) years following its delivery. The Debenture is convertible
into shares of the Company's Common Stock (in blocks of 20,000 shares), at any
time on or before October 2, 2002, at the rate of $1.00 per share. Any
principal outstanding on the Debenture on October 2, 2002 is to be repaid by
the Company in twelve (12) equal quarterly installments. The Company
anticipates that internal funds, including the cash generated by the operating
activities of its new subsidiary, will be utilized to make all interest and
principal payments under both the promissory note and the Debenture.
Other than its acquisition of DSL, as of September 30, 1997, the
Company had no material commitments for capital expenditures. The Company
believes that its cash balance, together with its line of credit, provides the
Company with adequate liquidity to finance its projected operations for the
current fiscal year.
Results of Operation
Net sales during the second quarter of fiscal year 1998 decreased 7%
to $1,365,212, as compared with corresponding sales of $1,468,396 during the
second quarter of fiscal year 1997. Sales for the six month period ended
September 30, 1997 were $2,619,804, a decrease of 11% over sales of $2,954,252
for the corresponding period during fiscal year 1997. Sales during the second
quarter represented a 9% increase over sales of $1,254,592 during the first
quarter of the current fiscal year.
The Company reported net income of $50,977, or $.02 per share, for
the quarter ended September 30, 1997, and net income for the current six month
period of $96,388, or $.03 per share. For the second quarter and first six
month period of the prior fiscal year, the company reported losses of
$122,862, or $.04 per share, and $71,898, or $.02 per share, respectively. The
turnaround in comparative net income, on the slightly reduced level of sales,
for the most recent quarter is a result of broad reductions in administrative,
sales, marketing and customer support expenditures.
- 7 -
<PAGE>
Results of Operation (continued)
Cost of sales for the second quarter of fiscal year 1998 represented
64% of net sales, compared with 66% of net sales during the second quarter of
the prior fiscal year. For each of the two six month periods, cost of sales
were 63%.
Due to the extremely competitive nature of open architecture
components, as are utilized in the Company's PCS/5000 system, the gross margin
which the Company realizes on the hardware component of its sales is
decreasing. The Company began the separate sale of the software component of
the PCS/5000 system in April of 1997, the beginning of its current fiscal
year. To the extent that its dealers and distributors procure the hardware
component of the system from third party sources, there is a negative impact
on the Company's sales figure. However, the Company realizes a significantly
higher gross margin on software products, which favorably impacts overall cost
of sales. In addition, direct sales through the Company's Atlanta district
office are at greater gross margins than sales through the Company's dealer
and distributor network.
Sales, marketing and customer support expenses during the second
quarter and first six month period of fiscal year 1998 were $202,332, or 15%
of net sales, and $394,339, also 15% of sales, respectively. The comparable
numbers for the prior fiscal year were $377,637, or 26% of sales, and
$683,351, or 23% of sales.
Effective as of October 1, 1997, the Company purchased all the
outstanding capital stock of Data Systems Terminals LTD (DSL), its distributor
in the United Kingdom. Information on the transaction is included in the
Liquidity section of this Form 10-Q, and in the Form 8-K filed by the Company
on October 14, 1997. DSL will operate as a wholly owned subsidiary of the
Company, under the name Comtrex Systems LTD, at the existing headquarters
facility of DSL outside London.
Revenues for DSL during its fiscal year ended June 30, 1997 were
approximately $3,000,000, of which approximately one half related to the sale,
installation and maintenance of Comtrex products. During the Company's fiscal
year ended March 31, 1997, sales to DSL by the Company were approximately
$635,000. During the six month period ended September 30, 1997, sales to DSL
by the Company were approximately $560,000. The Company will begin filing
consolidated financial statements which include the results of operation of
the new subsidiary with its third quarter Form 10-Q, for the period beginning
October 1, 1997. Such consolidated statements will eliminate the intercompany
sales to its subsidiary, while including the sales of the subsidiary to end
users in the United Kingdom.
In addition to continuing the direct sale of Comtrex products in the
U.K., personnel from the new subsidiary will act in a training and support
capacity for the sales and installation activities of the Company's existing
distributors in France, Belgium, Holland, Germany, Portugal and Spain. The
Company anticipates that the proximate availability of such support services
will have a positive impact on the sales levels of its international
distributors.
For comparative purposes, as of October 21, 1997, the Company's
backlog including an intercompany backlog to DSL valued at the pricing
available to international distributors, was approximately $407,200. The
- 8 -
<PAGE>
Results of Operation (continued)
consolidated backlog of the Company, eliminating the intercompany orders from
DSL and including the orders on-hand from end-users of DSL, was approximately
$845,500. These figures compare with the Company's backlog of approximately
$292,000 as of October 31, 1996. The Company's dealers typically place orders
with the Company based on their sales activities with end user customers, and
do not maintain significant inventory levels of the Company's products. Sales
by the Company's District Office are generally placed one or more months
before actual delivery and installation. The Company expects that sales
through its new subsidiary will also be placed one or more months before
actual delivery. The Company expects that substantially all of its current
backlog will be shipped within the next 90 days.
Forward Looking Statements
This Form 10-Q discusses primarily historical information. Statements
included in this Form 10-Q, to the extent they are forward looking, are based
on current management expectations that involve a number of uncertainties and
risks. Potential risks and uncertainties include, without limitation, the
impact of economic conditions generally; the competitive nature of the
intelligent point-of-sale terminal industry; the Company's ability to enhance
its existing products and develop and introduce new products which keep pace
with technological developments in the marketplace; and market demand.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMTREX SYSTEMS CORPORATION
(Registrant)
Date: October 24, 1997 By: /s/ LISA J. MUDRICK
--------------------- ---------------------------------
Lisa J. Mudrick
Chief Financial &
Chief Accounting Officer
Date: October 24, 1997 By: /s/ JEFFREY C. RICE
--------------------- ---------------------------------
Jeffrey C. Rice
Chief Executive Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 320,494
<SECURITIES> 100,000
<RECEIVABLES> 1,241,682
<ALLOWANCES> 167,816
<INVENTORY> 909,879
<CURRENT-ASSETS> 2,530,410
<PP&E> 1,063,663
<DEPRECIATION> 935,689
<TOTAL-ASSETS> 2,965,521
<CURRENT-LIABILITIES> 625,313
<BONDS> 0
0
0
<COMMON> 3,182
<OTHER-SE> 5,322,603
<TOTAL-LIABILITY-AND-EQUITY> 2,965,521
<SALES> 2,619,804
<TOTAL-REVENUES> 2,623,848
<CGS> 1,647,113
<TOTAL-COSTS> 2,520,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,613
<INTEREST-EXPENSE> 6,656
<INCOME-PRETAX> 96,388
<INCOME-TAX> 38,555
<INCOME-CONTINUING> 57,833
<DISCONTINUED> 0
<EXTRAORDINARY> 38,555
<CHANGES> 0
<NET-INCOME> 96,388
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
