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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[x] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended March 31, 1999
[ ] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission file number 0-13732
COMTREX SYSTEMS CORPORATION
(Name of small business issuer in its charter)
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Delaware 22-2353604
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
102 Executive Drive, Moorestown, NJ 08057
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (609) 778-0090
Securities registered under Section 12 (b) of the Act: None
Securities registered under Section 12 (g) of the Act: Common Stock, par value $.001
(Title of class)
Nasdaq Small Cap Market
(Name of each exchange on which registered)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _x_ No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ x ]
Issuer's revenues for the fiscal year ended March 31, 1999 were $ 8,299,591.
Based on the closing bid price of the registrant's common stock, the aggregate
market value of the voting stock held by non-affiliates of the registrant as of
June 21, 1999 is $ 2,020,984. Shares of common stock held by each executive
officer and director of the registrant, and by each person who may be deemed to
be an affiliate of the registrant, have been excluded from this computation.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of June 18, 1999, there were outstanding 3,599,072 shares of the registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1999 Annual
Meeting of Shareholders, to be filed on or before July 17, 1999 pursuant to
Regulation 14A, are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes___ No_x_
Total number of pages of this report: 65
Index to exhibits located at page: 19
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PART I
Item 1. Business
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The matters discussed in this Form 10-KSB that are
forward-looking statements are based on current management expectations that
involve a number of risks and uncertainties. Potential risks and uncertainties
include, without limitation, the impact of economic conditions generally and in
the intelligent point-of-sale terminal industry; and the risk of unavailability
of adequate capital or financing. Further information is contained in this Item
1 under BUSINESS AND INVESTMENT RISKS; INFORMATION RELATING TO FORWARD-LOOKING
STATEMENTS.
INTRODUCTION
Comtrex Systems Corporation (the "Company") was incorporated in New Jersey
in April, 1981. At the Annual Meeting of Shareholders held November 28, 1988,
the shareholders approved an Agreement and Plan of Merger, pursuant to which the
state of incorporation of the Company was changed to Delaware. In February of
1989 the Company completed the statutory merger, whereby each share of the
outstanding common stock of the New Jersey corporation was exchanged for one
share of common stock of the Delaware corporation.
The Company designs, develops, assembles and markets computer software and
electronic terminals which provide target retailers with transaction processing,
in-store controls and management information. The Company markets these products
through a network of authorized dealers in Canada, France, Belgium, Germany,
Portugal, Holland, Ireland, U.A.E., and Australia, and through a wholly-owned
subsidiary in the United Kingdom. In the United States, the Company markets
these products through a network of dealers and through its own direct sales
offices in Atlanta and the greater Philadelphia area. Between March of 1992 and
February of 1995, the Company's products were marketed in the United States by
Sharp Electronics Corporation, under the Sharp brand name, under an exclusive
distribution agreement signed in December of 1991. Under the agreement, the
Company retained the ability to sell, on a direct basis, to certain large,
national accounts. The Agreement expired at the end of February, 1995, and was
not renewed. The Company began selling in the United States through its own
distribution organization in March of 1995.
On April 1, 1996, the Company acquired substantially all the assets of
AUBIS Hospitality Systems, Inc., an Atlanta, Georgia based company, which relate
to the resale activity of Comtrex point of sale products. As of June 18, 1999,
the Company employed six individuals in its Atlanta District Office. The
personnel are engaged in the direct sale and service of the Company's products
in both the Atlanta metropolitan area and in the southeastern United States.
On October 2, 1997, the Company acquired all the issued and outstanding
capital stock of Data Systems Terminals Limited, ("DSTL") a corporation formed
and existing under the laws of England. DSTL was the former distributor of the
Comtrex product line in the United Kingdom. As a result of such acquisition,
DSTL became a wholly-owned subsidiary of the Company, and formally changed its
corporate name to Comtrex Systems Corporation LTD ("Comtrex U.K."). As of June
18, 1999, Comtrex U.K. employed twenty-five individuals. Comtrex U.K. operates
essentially autonomously, maintaining its own accounting systems, clerical and
administrative staff and sales and service departments. The subsidiary also
provides sales and service support for the Company's distribution network in
Europe.
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PRODUCTS
The Company's principal products are various software programs,
point-of-sale (POS) terminals, printers, computers and peripheral devices which
the Company integrates with its software to provide complete systems to
restaurants, both table service and quick service. Through its various direct
sales offices, the Company provides integration, customization and maintenance
services on these systems for end users of the systems. The Company has
historically designed, developed and manufactured POS terminals, which combine
traditional cash register functions with the control and data gathering
capabilities of a computerized system. The most recent POS terminals introduced
by the Company have been specified by the Company, but designed and manufactured
by third parties. The Company internally develops software programs which
execute on POS terminals, and perform traditional cash register functionality.
In addition, the Company internally develops software which executes on an
in-store computer to provide enhanced reporting capabilities for its terminal
systems and facilitate local and remote polling of information transfer between
computers and the Company's terminal systems. The Company also licenses various
software programs from third parties which interact with the Company's own
software to provide enhanced or additional functionality to the in-store
computer.
The Company began deliveries of the PCS-5000 series in October of 1996. The
product line is based on PC architecture, and generally available
local-area-network technology. Included in the product line is an active matrix,
LCD touch entry terminal, along with touch entry color CRT and a keyboard and
CRT terminal. The use of PC architecture components results in greater
acceptance by the Company's customer base, since the technology is generally
available and not proprietary, as well as allows for greater processing
capabilities at a reduced manufacturing or procurement cost. The product line is
designed to be continuously upgradeable, as PC technology continues to provide
increased capabilities at lower costs, through high volume manufacturing
economies. The PCS-5000 software addresses the needs of both the sit-down dining
and the quick service market segments. The PCS-5000 software and series of
terminals accounted for 75%, 66% and 28% of net sales in fiscal years 1999, 1998
and 1997, respectively.
In February of 1999, the Company introduced the iTP series of POS
terminals. The terminals all utilize the same basic cabinetry and the same
Pentium(TM) motherboard, with an LCD operator display and touch entry overlay.
The series of terminals is differentiated principally by the use of different
LCD panels, including a 10.3" dual scan (DSTN), a 10.4" active matrix (TFT) and
a 12.1" TFT. The hardware series is designed to operate with the Company's
PCS-5000 software set and can also be used with various third party software.
This series of terminals is manufactured to the Company's specifications in
Taiwan, and received by the Company as a finished product, but without certain
optional components such as a magnetic card reader, customer display or hard
disk drive installed. The iTP series of terminals accounted for 6% of sales in
fiscal year 1999.
The Company's Sprint terminal was first introduced in fiscal year 1986, and
was designed principally to be sold to quick service food outlets. The PCS-5000
software set provides substantially all of the operational and reporting
capabilities of the Sprint series, and the PCS-5000 product series is being
offered as the alternative, current product of the Company for quick service
food outlets. Between March of 1992 and February of 1995, the product was sold
in the United States by Sharp Electronics Corporation as the Sharp 4400 series
of terminals, and sold outside the United States by authorized dealers for the
Company. In March of 1995, the Company began selling the product in the United
States through its own distribution organization. During fiscal years 1990 and
1991, the Sprint product was redesigned, and a family of terminals was
introduced, significantly broadening the market potential for the product. The
series was further redesigned in conjunction with the marketing agreement signed
with Sharp in the third quarter of fiscal year 1992, and improvements in program
functionality and available memory were added in fiscal year 1993. Sprint
terminals are typically configured as elements in a communicating network of
printers, video screens and a modem connection to a regional headquarters
computer. The Company also markets several add-on software modules which provide
enhanced reporting, inventory control, labor reporting and a means to track and
reward frequent customers of fast food establishments. There are several
versions of software for the Sprint terminal designed for specific food service
operators, and each of these can additionally be tailored for a specific
operation. The Sprint family of terminals accounted for 10%, 20%, and 27% of net
sales in fiscal years 1999, 1998 and 1997, respectively.
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The Company's SuperSprint terminal was first introduced in fiscal year
1989, and was designed principally to be sold to table service restaurants. The
PCS-5000 software set provides substantially all of the operational and
reporting capabilities of the SuperSprint series, and the PCS-5000 product
series is being offered as the alternative, current product of the Company for
table service restaurants. Between March of 1992 and February of 1995, the
product was sold in the United States by Sharp Electronics Corporation as the
Sharp 4500 series of terminals, and sold outside the United States by authorized
dealers for the Company. In March of 1995, the Company began selling the product
in the United States through its own distribution organization. During fiscal
year 1991, the SuperSprint product line was expanded with the introduction of a
CRT based terminal. The series was further redesigned in the third quarter of
fiscal year 1992, in conjunction with the marketing agreement with Sharp. During
the latter half of fiscal year 1993, the Company began hardware and software
development to expand the product line with the introduction of a touch entry
terminal. During the second quarter of fiscal year 1994, the Company began
initial deliveries of the touch entry terminal, both to Sharp Electronics and to
its international dealer organization. During the third quarter of fiscal year
1995, the Company began initial deliveries of a 14" color touch entry terminal
to the Canadian and International dealers. In March of 1995, the 14" color touch
entry terminal became available to the Company's distribution organization
within the United States. SuperSprint terminals are typically configured as
elements in a communicating network of printers and video screens. The Company
also markets several add-on software modules which provide enhanced reporting,
inventory control, labor reporting and an on-line interface to facilitate the
handling of delivery and take-out orders by tracking customers' addresses and
most recent orders. The SuperSprint family of terminals accounted for 9%, 14%,
and 45% of net sales in fiscal years 1999, 1998 and 1997, respectively.
MANUFACTURING AND TECHNOLOGY
The strategic focus of the Company's manufacturing program is to maintain
flexibility and reduce costs by continuously evaluating the outsourcing of key
products and subassemblies.
The Company's manufacturing operations consist primarily of assembling
various components, parts, sub-assemblies, and assemblies which are purchased by
the Company from third parties. Many of these are manufactured to the Company's
design and specifications. The component parts, sub-assemblies, and finished
assemblies, whether purchased or assembled by the Company, are subject to
quality control testing by the Company. The Company believes that alternative
sources of supply for its components are available and that the loss of its
current sources for components and purchased assemblies would not have a
material adverse effect on the Company's business. The Company cannot estimate
the effect on costs of parts and assemblies if it were required to use
alternative sources, but it believes that such effect would not materially
affect the profit contribution of such products to the Company. The Company
believes that it maintains good relationships with its suppliers.
The most recent point-of-sale (POS) terminal product of the Company is
manufactured to the Company's specifications by CDS Commercial Data Systems, in
Taiwan. The decision to outsource the manufacturing was based upon an extensive
analysis of projected long-term product costs, current and projected terminal
demand relative to internal manufacturing capacity, targeted product quality
levels, and internal design and manufacturing capabilities. The analysis
indicated that the Company could obtain these products from CDS at a lower cost
than the Company could produce. CDS has sufficient assembly capacity to meet the
Company's forecasted sales demand and was capable of achieving targeted product
quality levels. The Company retains its assembly and testing capability and
continues to manufacture several products, including its own touch entry LCD
terminal for the PCS-5000 series. Future material, subassembly and POS terminal
sourcing will be based on availability, service, cost, delivery and quality of
the purchased items from both domestic and international suppliers.
The Company holds all right, title and interest in one patent, on a product
which is not in current production. The Company also has registered four (4)
trademarks, none of which expires prior to 1999.
The Company believes its competitive position is not materially dependent
upon patent protection. The technology used in the design and manufacture of
most of the Company's hardware products is generally known and available to
others. The Company intends to continue to use its best efforts to expand its
existing product offerings and to introduce new products which keep pace with
technological developments in the marketplace.
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The Company has, in the past, released enhanced versions of its software
products at least once each year, although there can be no assurance that this
practice will continue. All of the Company's software products share the same
technological foundation, which makes the enhancement of the entire product line
more efficient. Software enhancements to a product are usually driven by
requests received from existing end-users or by interviews with certain key
end-users, technological developments and by competitive analysis.
The Company estimates that during the 1999, 1998, and 1997 fiscal years, it
expended approximately $277,326, $242,601, and $294,842, respectively, (which
amounts include capital expenditures of $122,481, $48,917, and $163,584,
respectively) on engineering design and development of new products plus
improvements on existing products. The Company anticipates that it will continue
to incur research and development costs in connection with enhancements of its
current products and the development of new products. To supplement its own
personnel, the Company also utilizes outside design services for product
development.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is heavily dependent upon proprietary technology. The
Company relies primarily on a combination of copyright law, patents and trade
secret law to protect its proprietary rights to its technology. Due to the rapid
pace of technological innovation within the point-of-sale industry, the
Company's ability to establish and maintain a position of technological
leadership in the point-of-sale industry is more dependent upon the skills of
its development personnel than upon the legal protection afforded its existing
technology. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar or superior technology. Policing unauthorized use
of the Company's software is difficult, although the Company utilizes hardware
protection devices, which are included with licensed copies of the Company's
software products, which are intended to prevent the unauthorized execution of
the Company's software by unlicensed end-users. The Company is unable, however,
to determine the extent to which piracy of its software products exists, and
software piracy can be expected to be a persistent problem in the software
industry.
In most cases, the Company distributes its software products under
"shrink-wrap" software license agreements which grant end-users licenses to the
Company's software products and which contain various provisions to protect the
Company's ownership of, and the confidentiality of, the underlying technology.
The Company also requires its employees and other parties with access to its
confidential information to execute agreements prohibiting the unauthorized use
or disclosure of the Company's technology. Despite these precautions, it may be
possible for a third party to misappropriate the Company's technology or to
independently develop similar technology. In addition, "shrink-wrap" licenses,
which are not signed by the end-user, may be unenforceable in certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company with respect to current or future
products. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect on the
Company's business, operating results and financial condition.
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SALES, MARKETING AND DISTRIBUTION
During fiscal year 1999, the Company recorded foreign sales of $5,729,776,
representing 69% of net sales. Foreign sales were $4,021,723, representing 63%
of net sales, during fiscal year 1998, and $1,846,275, representing 34% of net
sales during fiscal year 1997. Included in foreign sales during fiscal year 1998
are sales made to Data Systems Terminals LTD (DSTL) prior to its acquisition
(effective October 1, 1997), as well as total sales by the subsidiary company,
Comtrex Systems Corporation LTD ("Comtrex U.K.") subsequent to its acquisition,
through the consolidation of the operations of the subsidiary. During fiscal
year 1999, sales to the Company's distributor in France, Restaurant Data Systems
(RDS) were $1,196,951, and sales to the City Centre Group, a customer of Comtrex
U.K., were $1,424,783, representing 14% and 17% of sales, respectively. These
two customers of the Company and its subsidiary each accounted for approximately
10% of consolidated net sales during fiscal year 1998. Sales to DSTL were
$635,844, or 12% of net sales in fiscal year 1997, while sales to RDS
represented approximately 3% of net sales during fiscal year 1997. No other
customer represented more than 10% of sales during fiscal years 1999, 1998 or
1997.
Sales through the Atlanta District Office during fiscal years 1999 and 1998
were $936,925 and $460,981, or 11% and 7%, respectively, of net sales. During
fiscal year 1997, sales through the Atlanta office were $913,545, or 17% of net
sales. A customer preference for open architecture systems, when compared with
the Company's proprietary Sprint product line, began to gradually impair sales
in the Atlanta District Office beginning in the middle of fiscal year 1997. As a
result of product development specifically for the quick service industry, with
the Company's open architecture PCS-5000 series, the Atlanta office began to
successfully secure several new customers in the third and fourth quarters of
fiscal year 1998, and also began a program to upgrade and implement new store
installations with existing customers. The Company anticipated the increase in
sales in the Atlanta office during fiscal year 1999, and expanded its personnel
in the office during the fiscal year. In addition, the Company leased additional
space for its Atlanta District Office during fiscal year 1999. For additional
information on such leased space, refer to Item 2, Properties, of this Form
10-KSB. During fiscal year 1999, the balance of the Company's net sales were
distributed among the network of U.S. dealers, and there was no single dealer
who purchased product in excess of 10% of net sales.
As of June 18, 1999, the Company's consolidated backlog was approximately
$956,770, as compared with a backlog of $1,053,670 as of June 19, 1998. The
Company recognizes income when an order is shipped to the customer. Deposits, if
any, on orders are not recognized as income until such order is shipped to the
customer. Substantially all of the Company's backlog is expected to be filled
within the current fiscal year, and there is no seasonal or other material
aspects relating to the backlog.
The intelligent point-of-sale terminal industry is highly competitive. The
Company and its dealers and distributors compete with a number of manufacturers.
Many of these competitors have longer operating histories, greater financial
resources, more substantial manufacturing capabilities and greater name
recognition in the marketplace. Management believes that the key to growth will
be the ability of the Company to supply an extremely reliable product, which is
thoroughly tailored to the specific needs of the Company's target foodservice
segment of the retailing industry.
SERVICE AND WARRANTIES
The Company warrants its products to its dealers for a six month period,
including parts and labor, for repair or replacement at the Company's corporate
facility in Moorestown, New Jersey. The products of the Company which are sold
to customers by dealers are serviced on-site by dealer service personnel.
Certain international distributors are provided up to a one year warranty, again
on a repair or replacement basis at the Company's corporate facility. Certain of
the Company's customers have chosen to service their equipment themselves and
ship parts to the Company's facility for repair or exchange.
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance with all applicable
environmental laws and does not anticipate that such compliance will have a
material effect on its future capital expenditures, earnings or competitive
position.
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EMPLOYEES
As of June 18, 1999, Comtrex had thirty-one employees in the United States,
all of whom were employed on a full time basis. Comtrex Systems Corporation LTD,
the Company's wholly-owned subsidiary in the United Kingdom, employed an
additional twenty-five full-time employees. None of the employees of the Company
or of its wholly owned subsidiary are represented by a union and the Company
believes that its employee relations are good.
RECENT DEVELOPMENTS
On June 23, 1999, Comtrex acquired all of the outstanding capital stock of
Cash Register Systems (CRS), Inc., a Michigan corporation, in exchange for
150,000 restricted shares of the Company's common stock. CRS will operate as a
District Office, Comtrex Michigan. Prior to the acquisition, CRS was a
privately-held corporation which sold and serviced point-of-sale equipment,
principally the product lines of the Company. The four selling shareholders of
CRS were all employees within the organization, and will remain as Comtrex
employees pursuant to three year employment agreements. The transaction is not
expected to have an immediate material impact on the financial results of the
Company.
BUSINESS AND INVESTMENT RISKS; INFORMATION RELATING TO FORWARD-LOOKING
STATEMENTS
Due to the competitive nature of the market in which it competes, the
Company continues to experience gross margin pressure on its products and
service offerings in all of its distribution channels. There can be no assurance
that the Company will be able to continue to increase sales through its higher
margin, direct distribution channels or to increase sufficiently sales of its
higher margin products, including software, to prevent future declines in the
Company's overall gross margin. Moreover, the Company's financial results in any
single quarter may be dependent upon the timing and size of customer orders and
the shipment of products for large orders. Large software or software
development orders from customers may account for more than an insignificant
portion of earnings in any quarter. The customers with whom the Company does the
largest amount of business are expected to vary from year to year as a result of
a variety of factors. Furthermore, if a customer delays or accelerates its
delivery requirements or a product's completion is delayed or accelerated,
revenues expected in a given quarter may be deferred or accelerated into
subsequent or earlier quarters.
The market price of the Company's common stock is volatile, and may be
subject to significant fluctuations in response to variations in the Company's
quarterly operating results and other factors such as announcements of
technological developments or new products by the Company, customer roll-outs,
technological advances by existing and new competitors, and general market
conditions in the foodservice industry. In addition, in recent years, conditions
in the stock market in general, and shares of small-cap technology companies in
particular, have experienced significant price and volume fluctuations which
have at times been unrelated to the operating performance of such companies.
The Company's common stock is presently traded on the Nasdaq Small Cap
Market. To maintain inclusion on the Nasdaq Small Cap Market, the Company's
common stock must continue to meet certain criteria, which includes maintaining
a minimum bid price of $1.00 per share. The Company is not currently in
deficiency on any of the various criteria required for continued listing. The
market price of the Company's stock has closed on several business days during
the 1999 fiscal year at a bid price of lower than $1.00 per share. However, a
failure to meet the continued inclusion requirements for minimum bid price only
exists if the deficiency continues for a period of thirty (30) consecutive
business days, after which the issuer is notified of the deficiency. The issuer
then has an additional period of ninety (90) calendar days from notification to
achieve compliance with the minimum bid price by closing with a minimum bid
price of $1.00 for ten (10) consecutive business days during the ninety (90) day
compliance period. If the Company fails to maintain Nasdaq Small Cap Market
listing, the market value of the Company's common stock likely would decline and
stockholders would likely find it more difficult to dispose of or to obtain
accurate quotations as to the market value of the common stock.
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The statements contained herein not based on historic facts are
forward-looking statements that involve risks and uncertainties. Past
performance is not necessarily a strong or reliable indicator of future
performance. Actual results could differ materially from past results,
estimates, projections, or forward looking statements made by, or on behalf of,
Comtrex.
Primary risks are disclosed in the Company's press releases and periodic
SEC filings. Some of the additional risks and uncertainties include the
following:
- - The Company's actions in connection with continued and increasing price and
product competition in many product areas;
- - Difficulties or delays in the development, production, testing and marketing
of products, including a failure to deliver new products and technologies
when generally anticipated; the failure of customers to accept these
products or technologies when planned; any defects in products; the
Company's inability to differentiate its products; and a failure of
manufacturing efforts, whether internal or through any third party
manufacturing entities;
- - Implementation of a cost-effective service structure capable of servicing
increasingly complex software systems in increasingly more remote locations
and additional costs and expenses associated with servicing and supporting
open systems, which generally incorporate third party software products (the
support and service of which may be more difficult and costly);
- - Unanticipated manufacturing, supply, service or labor difficulties
experienced by certain large vendors of the Company, including CDS
Commercial Data Systems, resulting in a disruption or discontinuation of the
services or products provided to the Company;
- - The technological risks of large customer roll-outs, especially where the
contracts involve new technology or third party software;
- - Because more than half of the Company's sales are outside the U.S., the
Company's results could be significantly affected by weak economic
conditions in countries in which it does business, particularly in the
United Kingdom and France, and by changes in foreign currency exchange rates
affecting those countries;
- - The ability of the Company to recruit and retain engineers and other
highly-skilled personnel, especially in light of increasingly tight labor
markets in the technology industry;
- - Controlling expenses associated with the expansion of the Company's
infrastructure necessitated by the acquisition strategies of the Company;
- - Although the Company attempts to protect its proprietary technology through
a combination of trade secrets, patent and copyright law, nondisclosure
agreements and technical measures, such protection may not preclude
competitors from developing products with features similar to the Company's
products;
- - The effects of, and changes in, laws and regulations and other activities of
governments, agencies and similar organizations, particularly in the United
Kingdom and France;
- - Unanticipated impact of Year 2000 issues, particularly the failure of
products from major suppliers to function properly in the Year 2000 and
unanticipated Year 2000 litigation expenses, including suits where the
Company is named as a result of the Company's products interfacing to third
party non-compliant products; and
- - Unanticipated impact of issues relating to the adoption and implementation
of a common currency, the Euro, by the European Economic and Monetary Union;
unanticipated litigation expenses relating to the adoption and
implementation of the Euro, including suits where the Company is named as a
result of the Company's products interfacing to third party non-compliant
products.
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Item 2. Properties
The Company currently leases and occupies approximately 19,000 square feet
of plant and office space in an industrial park in Moorestown, New Jersey. In
June of 1999, the Company renewed its lease through August of 2002. The
Company's property is suitable and adequate for the Company's operations, with
sufficient productive capacity to meet the Company's current needs, and
projected needs over the coming fiscal year. Should additional space be required
to accommodate future growth, the Company believes that additional space is
available in the immediate vicinity of its current location.
In April of 1996, the Company leased approximately 1,800 square feet of
primarily office space in an industrial park in the Powers Ferry area of
Atlanta, Georgia. The lease had a three year term, and the facility served as a
District Office, engaging in the direct sale and service of the Company's
products. In August of 1998, the Company entered into a new lease under similar
terms and conditions, with the same landlord in the same industrial park, for
approximately 2,900 square feet of primarily office space to replace the
existing facility, with no penalties under the prior lease. The lease extends
through September of 2003. The Company believes that additional space would be
made available through its current landlord, on similar terms and conditions to
those currently prevailing, in the immediate vicinity of its current location,
should further expansion be required.
The Company's subsidiary in the U.K., Comtrex Systems Corporation LTD,
currently owns and occupies approximately 4,740 square feet of office and
warehouse space in a two story commercial office complex in Horley, England
(located near Gatwick Airport). The building's ground floor serves as the
warehouse for shipping, receiving and service activities. The building's first
floor provides adequate office and conference space for the sales, support and
administrative groups of the subsidiary. The land and building are covered under
a mortgage, with a term that extends through 2016.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings which, if
adversely determined to the Company, could have a material adverse effect on the
Company's business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted by the Company to a vote of its security holders
during the fourth quarter of fiscal year 1999.
Special Item. Executive Officers of the Registrant
Name Age Position
Jeffrey C. Rice 49 President and Chief Executive Officer
Steven D. Roberts 37 Managing Director, Comtrex U.K.
Brian C. Moseley 52 Vice President of Engineering
Lisa J. Mudrick 37 Treasurer and Chief Financial Officer
Jeffrey C. Rice has been President, Chief Executive Officer and a Director
of the Company since February 1, 1989. From May of 1985 through January of 1989
he was a Director of American Business Computers Corporation, and served as its
President and Chief Executive Officer from May 1, 1985 through April 30, 1986
and as President of a wholly-owned subsidiary, ABC/SEBRN TechCorp, from November
1986 through January 1989. American Business Computers is a public company which
sells computerized equipment and systems to the foodservice industry. From its
founding in 1977 through January 1985, Mr. Rice served as President, Chief
Executive Officer and a Director of MICROS Systems, Inc., a public company which
supplies point-of-sale systems to the hospitality industry. Mr. Rice is a
graduate of the University of Virginia, with a Bachelor of Science degree in
Electrical Engineering.
9
<PAGE>
Steven D. Roberts has been Managing Director of Comtrex Systems Corporation
LTD, the Company's U.K. subsidiary, since its acquisition in October of 1997,
and has served on the Company's Board of Directors since November of 1997. He
had served as Managing Director of the acquired company, Data Systems Terminals
LTD (DSTL), since 1990, and had been an employee of DSTL since 1984. From 1985
to 1987, Mr. Roberts served as President of Electronic Cash Registers, Inc.
(ECR) in Cincinnati, Ohio. ECR was a wholly owned subsidiary of DSTL, engaged in
the distribution of point-of-sale systems for dry cleaning establishments in the
United States.
Brian C. Moseley was promoted to Vice President of Engineering of the
Company in August of 1997. Mr. Moseley has been an employee of the Company since
1985, and has been actively involved in both hardware and software design, in
addition to project management. Prior to his association with Comtrex, he worked
as a Project Engineer for Management Information Concepts. Mr. Moseley is a
graduate of Old Dominion University.
Lisa J. Mudrick has been Vice President of Finance and Administration of
the Company since February of 1994 and Treasurer since August of 1995. Ms.
Mudrick has been a full-time employee of the Company since September of 1989 and
served as Controller and Chief Accounting Officer until her appointment as Chief
Financial Officer in 1994, and as corporate Secretary from 1990 to August of
1995. From 1986 to 1989, Ms. Mudrick was General Accounting Supervisor of
Avant-Garde Computing, Inc., a public company which designs and sells systems to
provide for secure, computer network communications for the financial and
brokerage communities. Prior to her association with Avant-Garde, she held a
position of cost accountant with Sybron Chemicals from 1985 to 1986. Ms. Mudrick
is a graduate of the University of Dayton, with a Bachelor of Science degree in
Business Administration.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Bid and asked prices for the Company's common stock (symbol "COMX") have
been quoted on the Nasdaq Stock Market since July 1, 1985. Prior to May 11,
1988, the stock was traded on the Nasdaq National Market System and since that
time has been traded in the Nasdaq Small Cap Market. The table below shows the
high and low closing bid prices for the period indicated as reported by Nasdaq.
The quotations reflect inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
Bid Prices
----------
Year Ended March 31, 1998 High Low
- ------------------------- ---- ---
4/1/1997 - 6/30/1997 .750 .313
7/1/1997 - 9/30/1997 1.063 .563
10/1/1997 - 12/31/1997 1.063 .688
1/1/1998 - 3/31/1998 1.250 .750
Year Ended March 31, 1999 High Low
- ------------------------- ---- ---
4/1/1998 - 6/30/1998 1.688 .938
7/1/1998 - 9/30/1998 1.188 .719
10/1/1998 - 12/31/1998 1.500 .750
1/1/1999 - 3/31/1999 3.500 .750
10
<PAGE>
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Approximate Number
of Record Holders
Title of Class (as of June 18, 1999)
- -------------- ----------------------
Common Stock, $.001 par value 400 (1)
(1) Included in the number of stockholders of record are shares held in
"nominee" or "street" name.
RECENT SALES OF UNREGISTERED SECURITIES
On February 8, 1999, the Company issued a warrant (the "Warrant") to Alvin
L. Katz which entitles him to purchase, in the aggregate, up to 120,000 shares
of the common stock of the Company, subject to the application of certain
anti-dilution provisions set forth in the Warrant. The Warrant was issued by the
Company in exchange for certain financial advisory and consulting services to be
provided by Mr. Katz to the Company. Mr. Katz will advise the Company in
connection with the Company's general financial and operational needs, the
market for its securities, potential mergers and acquisitions and other areas in
which his expertise would be beneficial to the Company. Mr. Katz will provide an
ongoing review of the Company's operations and plans, its status in the
financial community and the nature and extent of the market for its currently
traded securities.
The Warrant entitles the holder(s) thereof to purchase (a) 40,000 shares of
the common stock at a price of $1.00 per share on or before the February 8,
2001, (b) 40,000 shares of the common stock at a price of $1.50 per share on or
before February 8, 2002, and (c) 40,000 shares of the common stock at a price of
$3.00 per share on or before February 8, 2002.
The Warrant was issued by the Company in reliance upon the exemption from
registration provided for in Section 4(2) of the Securities Act of 1933, as
amended, as a transaction not involving any public offering. The Warrant was
issued to one individual as compensation for services provided by said
individual to the Company. No offer of the securities was made by the Company to
any other person.
DIVIDENDS
The Company has never paid a dividend. Future dividend policy will be
determined by the Board of Directors based on the Company's earnings, financial
condition, capital requirements and other existing conditions. It is anticipated
that cash dividends will not be paid to holders of the common stock in the
foreseeable future.
11
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The matters discussed in this Form 10-KSB that are
forward-looking statements are based on current management expectations that
involve a number of risks and uncertainties. Potential risks and uncertainties
include, without limitation, the impact of economic conditions generally and in
the intelligent point-of-sale terminal industry; and the risk of unavailability
of adequate capital or financing. Further information is contained in the Item 1
section of this Form 10-KSB under BUSINESS AND INVESTMENT RISKS; INFORMATION
RELATING TO FORWARD-LOOKING STATEMENTS..
LIQUIDITY
As of March 31, 1999, the Company had current assets of $3,877,542,
including cash, and cash equivalents of $483,917, as compared to $3,311,888 and
$313,617, respectively, as of March 31, 1998. The Company had current
liabilities of $1,687,809 resulting in a current ratio of 2.3 as of March 31,
1999, compared to $1,441,530 and 2.3, respectively, as of March 31, 1998.
The Company reported net income of $333,430 during fiscal year 1999. The
Company has net operating loss carryforwards of approximately $2,850,000 for
federal income tax purposes, which do not begin to expire until 2004, and tax
credit carryforwards of approximately $148,000.
Cash and cash equivalents increased by $170,300 during fiscal year 1999, as
operating activities generated $103,046 of cash. Inventories increased during
fiscal year 1999 by $76,778, net of reserves. This slight increase, when
evaluated in conjunction with the 30% increase in net sales over the prior
fiscal year, is a result of the strategic direction of the Company's
manufacturing program. As the Company's proprietary product lines, the Sprint
and SuperSprint, are being gradually phased out, these products are being
replaced by the open architecture PCS-5000 product series. The hardware utilized
with 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
the Sprint and SuperSprint, while maintaining the same delivery schedule, at
comparable sales levels. In addition, the Company is continuously evaluating the
outsourcing of key products, in addition to subassemblies. The iTP product of
the Company is manufactured to the Company's specifications by CDS Commercial
Data Systems, in Taiwan, and sold in conjunction with the software for the
PCS-5000 series. The integrated touch entry terminals which comprise the iTP
series are received as essentially complete products, with the Company providing
final assembly of optional components such as hard disk drives, customer
displays and magnetic card reader assemblies.
Accounts receivable increased during the 1999 fiscal year by $331,941, net
of reserves. The 19% increase in receivables is largely a result of the 30%
increase in net sales. The Company extends terms to its U.S. dealer network of
up to sixty days, terms of thirty to sixty days to its direct customers through
the Atlanta district office and terms of thirty to ninety days through Comtrex
U.K.. Accounts payable decreased by $143,296 during fiscal year 1999, funded by
borrowings under the Company's line of credit of $301,000 as of March 31, 1999.
During the 1999 fiscal year, depreciation and amortization contributed $195,938
to cash provided by operating activities. The Company recorded a non-cash
expense of $26,424 in conjunction with the issuance of warrants and
non-qualified stock options, which also contributed to cash provided by
operating activities during fiscal year 1999.
Investing activities consumed $196,133 of cash during fiscal year,
including capitalized software development expenses of $102,453 and purchases of
property and equipment of $94,687. Financing activities provided $263,387 of
cash during the fiscal year ended March 31, 1999, which included the $301,000
outstanding on the Company's line of credit. Payments in the amounts of $32,500
and $12,913 were made against the Promissory Note issued in conjunction with the
acquisition of the U.K. subsidiary and the mortgage note against the U.K. land
and building, respectively. A positive impact on financing activities was the
exercise of options, which generated $7,800 in cash.
12
<PAGE>
LIQUIDITY (continued)
Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the consolidated
statements of cash flows as an adjustment to reconcile net income to cash used
in operating activities. For the fiscal year ended March 31, 1999, these
adjustments resulted in negative impact of $25,882 on the consolidated cash
flow. On the Balance Sheet, these adjustments are recorded in a currency
translation adjustment in the calculation of shareholders' equity, resulting in
contributions to shareholders' equity of $9,030 and $34,912 as of March 31, 1999
and March 31, 1998, respectively.
In March of 1999, the Company's wholly-owned subsidiary in the U.K.,
Comtrex Systems Corporation LTD, renewed its line of credit agreement with
Barclays Bank PLC. The agreement calls for borrowings of up to (pound)150,000,
and expires on March 30, 2000. Borrowings bear interest at the rate of three
percent in excess of the bank's base rate and are collateralized by
substantially all assets of the subsidiary. The parent Company is not a
guarantor on this line of credit.
In October of 1997, the Company and Fleet Bank N.A. extended an existing
line of credit agreement through July of 1998. 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.
In June of 1998, the Company and PNC Bank N.A. entered into a $700,000
credit facility scheduled to expire on July 31, 1999. The agreement provides for
borrowings of up to $650,000, and for the issuance by the bank of up to $50,000
of Irrevocable Letters of Credit. Borrowings bear interest at the bank's prime
rate and are collateralized by substantially all assets of the Company. This
line of credit replaced the credit facility with Fleet Bank N.A. The facility
with PNC Bank N.A. contains no provisions limiting the borrowings amount
depending on eligible receivables, such as were contained in the agreement with
Fleet Bank N.A.
In June of 1999, the Company and PNC Bank N.A. extended the existing credit
facility through September 30, 1999 and increased the credit facility to
$1,050,000. The increase provides for borrowings of up to $650,000, and for the
issuance by the bank of up to $400,000 of Irrevocable Letters of Credit. The
remaining terms and provisions of the facility remained the same. The Company
anticipates that this line of credit will be extended through September 30, 2000
prior to September 30, 1999.
The Company borrowed under its line of credit at various times during the
fiscal year for short term cash requirements, and borrowings of $301,000 were
outstanding as of March 31, 1999. The Company would expect to continue to
utilize the credit facility with PNC Bank N.A. from time to time for short term
cash requirements.
As of March 31, 1999, the Company had no material commitments for capital
expenditures. The Company believes that its cash balance, together with its
lines of credit, provides the Company with adequate working capital to finance
its projected operations for the coming fiscal year.
13
<PAGE>
RESULTS OF OPERATIONS
Year Ended March 31, 1999 Compared to the Year Ended March 31, 1998
Net sales during fiscal year 1999 increased by 30%, to $8,299,591, as
compared with corresponding sales of $6,382,948 during fiscal year 1998. The
Company reported net income of $333,430, or $.09 per share, for the fiscal year
ended March 31, 1999, as compared with net income of $241,399, or $.07 per
share, for the prior fiscal year. Company results for fiscal year 1998
consolidate the operations of the Company's U.K. subsidiary, which was acquired
as of October 2, 1997, for the second two quarters of the fiscal year. A primary
contributing factor to the increase in sales for fiscal year 1999 was the U.K.
acquisition, and the resulting consolidation of sales during the entire 1999
fiscal year. Note 9 to the Notes to Consolidated Financial Statements provides
segment information relating to the two reportable segments of the Company, the
United States and the United Kingdom.
The Company's subsidiary in the U.K., Comtrex Systems Corporation LTD
("Comtrex U.K.") operates autonomously, maintaining its own accounting system,
clerical and administrative staff. While the accounting function within Comtrex
U.K. has day-to-day reporting responsibility to the parent Company, the sales,
support and service departments operate within the reporting structure of the
subsidiary. Comtrex U.K. also provides sales and service support for the
Company's distribution network in Europe.
Administrative expenses increased from $883,759 in fiscal year 1998 to
$1,143,496 for the current fiscal year, while remaining constant at 14% when
expressed as a percentage of sales. Sales, marketing and customer support
expenses increased from $1,288,821, or 20% of sales, during fiscal year 1998, to
$2,043,303, or 25% of sales, during fiscal year 1999. Substantially all of the
operating activities of Comtrex U.K., like the Company's District Office in
Atlanta, relate to the direct sale, installation and service of products to
end-users. The selling and customer support expense required for such direct
sales activities generally represents a higher percentage of sales than is
associated with sales through a dealer or distribution channel. The
consolidation of the results of operation for Comtrex U.K. for the full 1999
fiscal year, as compared to the last two quarters of fiscal year 1988, is the
primary reason for the increase in such expenses both in absolute dollars and
when expressed as a percentage of sales.
Cost of sales decreased during the most recent fiscal year, from 56% of net
sales, for fiscal year 1998, to 52% of net sales, for the most recent fiscal
year. The significant reduction in cost of sales and increase in gross margin is
a result of the consolidation of sales of Comtrex U.K. While selling and support
expenses generally represent a higher percentage of direct sales than sales
through a distribution network, the gross margin on such product sales is
generally significantly greater. In addition to product sales, approximately 30%
of the net sales of Comtrex U.K. represent maintenance, installation and
implementation services. Such service related revenue is at a greater gross
margin than product sales. The market for the Company's products is extremely
competitive, and the Company continues to experience gross margin pressure on
its products and service offerings in all of its distribution channels. The
Company has been successful in increasing its sales through its higher margin,
direct, distribution channels. However, the there can be no assurance that this
continued competitive pressure will not cause future declines in the Company's
overall gross margin.
International sales continued to account for greater than 50% of the
Company's net sales, rising from $4,021,723, or 63% of sales, to $5,729,776, or
69% of sales, for fiscal years 1999 and 1998, respectively. A primary factor in
this increase was the consolidation of sales with the Company's U.K. subsidiary
for the full 1999 fiscal year as compared to the second half of fiscal year
1998. In addition, sales to the Company's French distributor, Restaurant Data
Systems (RDS) approximately doubled during fiscal year 1999 to $1,196,951. In
July of 1997, RDS and Comtrex began a development, evaluation and trial
implementation of the PCS-5000 with Quick Restaurants N.V. in twelve stores in
France and Holland. This process resulted in the PCS-5000 being selected as the
sole approved POS system for new openings and store retrofits of this Belgian
operator of quick service hamburger restaurants. During fiscal year 1999, RDS
installed approximately fifty additional Quick locations with the PCS-5000
system.
14
<PAGE>
RESULTS OF OPERATIONS (continued)
As of June 18, 1999, the Company's consolidated backlog was approximately
$956,770, as compared with a backlog of $1,053,670 as of June 19, 1998. The
Company recognizes income when an order is shipped to the customer. Deposits, if
any, on orders are not recognized as income until such order is shipped to the
customer. Substantially all of the Company's backlog is expected to be filled
within the next ninety (90) days.
Year Ended March 31, 1998 Compared to the Year Ended March 31, 1997
Net sales for the Company increased 18% in fiscal year 1998, to $6,382,948,
when compared with net sales of $5,430,221 for fiscal year 1997. The Company
reported net income of $241,399, or $.07 per share, for the fiscal year ended
March 31, 1998, as compared with a net loss of $89,017, or $.03 per share, for
the prior fiscal year. A significant contributing factor to the increase in
sales was the acquisition, outlined in Note 2 to the Notes to Financial
Statements, of the Company's U.K. distributor, as of October 2, 1997, and the
resulting consolidation of sales.
Administrative expenses increased from $681,859, or 13% of sales, in fiscal
year 1997 to $883,759, or 14% of sales, in fiscal year 1998. Sales, marketing
and customer support expenses increased from $1,207,915, during fiscal year
1997, to $1,288,821 during fiscal year 1998, while declining when represented as
a percentage of sales, from 22% to 20% for fiscal years 1997 and 1998,
respectively.
The primary customer base of the Company's Atlanta District Office is
represented by quick service food restaurants. A customer preference for open
architecture systems, when compared with the Company's proprietary Sprint
product line, began to gradually impair sales beginning in the middle of fiscal
year 1997. As a result of product development specifically for the quick service
industry, with the Company's open architecture PCS-5000 series, the Atlanta
office began to successfully secure several new customers in the third and
fourth quarters of fiscal year 1998. In addition, the District Office began a
program to upgrade and implement new store installations with existing customers
with the PCS-5000.
During fiscal year 1998, the Company determined to focus its dealer sales
activities on those organizations with whom it had an existing sales
relationship, and more specifically, those dealerships which represented
approximately 80% of its dealer sales. This focus in sales and support activity
allowed the Company to implement a reduction in personnel related to dealer
sales in both the U.S. and Canada.
Cost of sales decreased during fiscal year 1998, from 62% of net sales, for
fiscal year 1997, to 56% of net sales. The significant reduction in cost of
sales and increase in gross margin was a result of the consolidation of sales of
Comtrex U.K. While selling and support expenses generally represent a higher
percentage of direct sales than sales through a distribution network, the gross
margin on such product sales is generally significantly greater. In addition to
product sales, approximately 30% of the net sales of Comtrex U.K. represent
maintenance, installation and implementation services. Such service related
revenue is at a greater gross margin than product sales.
International sales increased dramatically from $1,846,275, or 34% of
sales, during fiscal year 1997, to $4,021,723, or 63% of sales, in fiscal year
1998. A primary factor in this increase was the consolidation of sales with the
Company's U.K. subsidiary. In addition, sales to the Company's French
distributor, Restaurant Data Systems (RDS) increased by approximately $475,000.
RDS, introduced the PCS-5000 product in France during the fourth quarter of the
fiscal year 1997, primarily to a quick service restaurant customer base. During
the 1998 fiscal year, RDS successfully implemented the PCS-5000 product in over
one hundred Courte Paille locations, a family dining restaurant chain which is
part of the restaurant division of the Accor Group. In July of 1997, RDS and
Comtrex began a development, evaluation and trial implementation of the PCS-5000
with Quick Restaurants N.V. in twelve stores in France and Holland. This process
resulted in the PCS-5000 being selected as the sole approved POS system for new
openings and store retrofits of this Belgian operator of quick service hamburger
restaurants.
15
<PAGE>
RESULTS OF OPERATIONS (continued)
As of June 19, 1998, the Company's consolidated backlog was approximately
$1,053,670 as compared with a backlog of $295,000 on June 20, 1997.
Year 2000
The Company is currently in the process of performing a review of its
business systems, and is querying its customers, vendors and resellers with
respect to Year 2000 compliancy issues. The "Year 2000 Issue" is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have a
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in normal business
activities.
In 1998, the Company formed a Year 2000 project team with representatives
from the engineering, operations and administrative departments of the Company.
The group analyzed each of the following three sets of issues: (i) Year 2000
compliance issues with respect to Company internal information systems; (ii)
Year 2000 compliance issues with respect to the information systems of certain
key Company vendors and suppliers; and (iii) Year 2000 compliance issues with
respect to Company products that the Company sells and licenses to its worldwide
customer base.
Year 2000 Compliance Issues with respect to Company Internal Information Systems
The primary internal information and accounting system of the Company was
deemed to not be Year 2000 compliant. Accordingly the Company has contracted for
a complete system upgrade of this system from its current supplier, which is
scheduled to be completed by August of 1999. The Company has received assurances
from its supplier that the database of its existing system will be readily
exported to the new database, and that there will be minimal interruption to the
ongoing accounting activities of the Company. The two systems are scheduled to
run in parallel for approximately one month. As part of this implementation, the
Company required certification that the software version to which it was
upgrading was, in fact, Year 2000 compliant, which certification has been
provided.
The accounting system for the Company's wholly-owned subsidiary, Comtrex
U.K., was also deemed to not be Year 2000 compliant. Accordingly the Company, in
1998, contracted for a complete system upgrade of this system from its current
supplier, which was completed in 1998, with minimal disruption to the ongoing
accounting activities of the subsidiary. As part of the implementation, Comtrex
U.K. required certification that the software version to which it was upgrading
was, in fact, Year 2000 compliant, which certification was provided.
The accounting system utilized in the Company's District Office in Atlanta,
and the system which will be utilized in its District Office in Michigan have
been certified by the supplier to be Year 2000 compliant.
Year 2000 Compliance Issues with respect to the Information Systems of Certain
Key Company Vendors and Suppliers
In addition to internal Year 2000 activities and the review and remediation
of the Company's internal information systems, the Company is in contact with
its key suppliers and vendors to assess their compliance. The Company has
received, to date, certain assurances from these suppliers and vendors that any
Year 2000 issues from which they suffer will not materially adversely affect the
products and services provided to the Company. There can, however, be no
absolute assurance that there will not be a material adverse effect on the
Company if third parties do not convert their systems in a timely manner and in
a way that is compatible with the Company's systems. The Company believes that
its current and future actions with suppliers will minimize these risks.
16
<PAGE>
RESULTS OF OPERATIONS (continued)
Year 2000 Compliance Issues with respect to Company Products that the Company
Sells and Licenses to its Worldwide Customer Base
Finally, the Company is currently in the process of completing the testing
of its existing product offerings. The testing includes an analysis of both
standard products, currently offered, and all custom products that have been
offered or developed since 1995, which the Company currently supports. The
testing is not performed with respect to any legacy products that the Company
does not currently sell or support. In the event that the testing determines
that a product may not be Year 2000 compliant, the Company has or will develop
either a fix, or a migration path to a product that is Year 2000 compliant.
While certain potential issues have been identified to date, the expense of
upgrading product applications to be Year 2000 compliant has not been material.
Year 2000 Compliance Costs
Through fiscal year 1999, the Company has expensed all incremental costs
related to the Year 2000 analysis and remediation efforts. Internal and external
costs specifically associated with modifying software for the Year 2000 will be
charged to expenses as incurred. All of these costs are being funded through
operating cash flows. To the extent that hardware upgrades of certain of the
Company's computer systems have been or will be required, these expenses will be
charged to capital equipment expenditures.
The Company believes it is diligently addressing the Year 2000 issues and
that it will satisfactorily resolve significant Year 2000 problems. The Company
anticipates completing substantially all of its Year 2000 projects during
calendar year 1999, with major completion milestones being targeted for the
third quarter of calendar year 1999. In the event that the Company determines
that it may fail to achieve these milestones, additional internal resources will
be focused on completing these projects or developing contingency plans.
Based on preliminary reviews from presently available information, it is
believed that the additional costs of addressing potential problems are not
expected to have a material adverse impact on the Company's results of
operations, liquidity and capital resources. However, if the Company, its large
customers, or significant suppliers are unable to resolve such processing issues
in a timely manner, it could have a material impact on the results of
operations, liquidity or capital resources of the Company.
17
<PAGE>
Item 7. Financial Statements
See Item 13 (a) in Part III of this Report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16 (a) of the Exchange Act
Information regarding the Directors of the Company and the compliance of
the Company's Directors and Executive Officers with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is incorporated herein by reference
from the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders. For information concerning the Company's executive officers, see
"Executive Officers of the Registrant" in Part I of this Report.
Item 10. Executive Compensation
Incorporated herein by reference from the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders.
Item 12. Certain Relationships and Related Transactions
Incorporated herein by reference from the Company's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Financial Statements (included in this report):
Independent Auditors' Report
Auditors' Report to the Members of Comtrex Systems Corporation Limited
Consolidated Balance Sheets at March 31, 1999 and 1998
Consolidated Statements of Operations for the years ended March 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flow for the years ended March 31, 1999,
1998 and 1997
Notes to Financial Statements
(a)2. Financial Statement Schedules (included in this report):
VIII. Valuation and Qualifying Accounts for the years ended March 31,
1999, 1998 and 1997
All schedules, other than those listed above, have been omitted because the
information required therein is not applicable, or is furnished in the financial
statements or notes thereto.
18
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(a)3. Exhibits Filed Pursuant to Item 601 of Regulation S-B:
3.1*(b) Certificate of Incorporation, as amended, of the Company
3.2*(b) By-Laws, as amended, of the Company
4.1*(b) Specimen Common Stock Share Certificate
4.2*(g) Subordinated Convertible Debenture, in the original principal amount
of $300,000 (the "Debenture"), issued by the Company to Norman and
Shirley Roberts
4.3*(g) Promissory note, in the original principal amount of $65,000 (the
"Note"), delivered by the Company to Norman Roberts and Shirley
Roberts
4.4*(a) Warrant to Purchase Shares of Common Stock from Comtrex Systems
Corporation and Exhibit A (Registration Rights Declaration), dated
February 8, 1999, issued to Alvin L. Katz
10.1*(c) 1985 Employee Incentive Stock Option Plan of the Company
10.2*(c) 1985 Non-Qualified Stock Option Plan of the Company
10.3*(d) 1992 Non-Qualified Stock Option Plan of the Company
10.4*(e) 1995 Employee Incentive Stock Option Plan of the Company
10.5*(f) Stock Purchase Agreement, dated October 2, 1997, between the Company,
Norman Roberts, Shirley Roberts and Steven Roberts
10.6*(g) Working Cash Line of Credit Agreement between the Company and PNC Bank
N.A. dated June 12, 1998.
10.7*(g) Security Agreement dated June 12, 1998, delivered by the Company to
PNC Bank N.A.
10.8*(g) Loan Agreement (Business Overdraft Facility) between Comtrex Systems
Corporation LTD and Barclays Bank PLC dated March 30, 1998
10.9*(g) Security Agreement (Debenture), dated March 30, 1998, delivered by
Comtrex Systems Corporation LTD to Barclays Bank PLC
10.10*(a) Comtrex Systems Corporation 1999 Stock Option Plan
10.11*(a) Financial Advisory Agreement, dated February 8, 1999, between Comtrex
Systems Corporation and Alvin L. Katz
21.1*(a) Subsidiaries of the Company
23.1*(a) Consent of Drucker, Math & Whitman, P.C.
24.1*(a) Powers of Attorney
27 *(a) Financial Data Schedules
- -----------------
*(a) Filed herewith.
19
<PAGE>
*(b) Incorporated by reference to the exhibits to the Company's Form 8-K
filed with the Securities and Exchange Commission on May 16, 1989.
*(c) Incorporated by reference to the exhibits from the Company's
registration statement on Form S-18. (File No. 2-97898-NY).
*(d) Incorporated by reference to the exhibits to the Company's definitive
proxy statement filed with the Securities and Exchange Commission on
July 16, 1992.
*(e) Incorporated by reference to the exhibits to the Company's definitive
proxy statement filed with the Securities and Exchange Commission on
July 13, 1995.
*(f) Incorporated by reference to the exhibits to the Company's Form 8-K
filed with the Securities and Exchange Commission on October 14, 1997.
*(g) Incorporated by reference to the exhibits to the Company's Form 10KSB
filed with the Securities and Exchange Commission on June 29, 1998.
b. Reports on Form 8-K
During the fourth quarter of the year ended March 31, 1999, no current
reports on Form 8-K were filed by the registrant with the Securities and
Exchange Commission.
20
<PAGE>
Independent Auditors' Report
Board of Directors
Comtrex Systems Corporation
Moorestown, New Jersey
We have audited the accompanying consolidated balance sheets of Comtrex Systems
Corporation (a Delaware corporation) and subsidiary ("Company") as of March 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three year
period ended March 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of Comtrex Systems Corporation Limited (a corporation formed under
the laws of England) ("Comtrex UK"), a wholly-owned subsidiary, which statements
reflect total assets and revenues constituting 36 percent and 45 percent,
respectively, of the related consolidated totals for 1999. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Comtrex UK, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Comtrex Systems Corporation and
subsidiary as of March 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the years in the three year period ended March 31,
1999 in conformity with generally accepted accounting principles.
In connection with our audits of the financial statements referred to above, we
audited the financial statement schedule for the years ended March 31, 1999,
1998 and 1997 listed under Items 13 (a) 2. In our opinion, based on our audit
and the report of the other auditors, the financial statement schedule presents
fairly, in all material respects, the information stated therein, when
considered in relation to the consolidated financial statements taken as a
whole.
DRUCKER, MATH & WHITMAN, P.C.
North Brunswick, New Jersey
June 24, 1999
21
<PAGE>
AUDITORS' REPORT TO THE MEMBERS OF
COMTREX SYSTEMS CORPORATION LIMITED
YEAR TO MARCH 31, 1999
We have audited the financial statements of Comtrex Systems Corporation Limited
a company incorporated in England, set out on pages 2 to 11 which have been
prepared under the historical cost convention and on the basis of the accounting
policies set out on pages 7 and 8.
RESPECTIVE RESPONSIBILITIES OF THE DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of these financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on these statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Boards. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the company as at 31 March 1999 and of its profit and cash flows
for the period then ended and have been properly prepared in accordance with
United States generally accepted accounting principles.
Date: 25, June 1999 ROTHMAN PANTALL & CO
Chartered Accountants &
Registered Auditors
Clareville House
26/27 Oxendon Street
London SW1Y 4EP
22
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 483,917 $ 313,617
Accounts receivable, net of reserve
of $108,010 in 1999 and $131,488 in 1998 2,043,095 1,711,154
Inventories 1,257,561 1,180,783
Prepaid expenses and other 92,969 106,334
---------- ----------
Total current assets 3,877,542 3,311,888
---------- ----------
Property and equipment:
Land 156,244 156,244
Building 312,656 312,656
Machinery, equipment and furniture 1,512,563 1,426,107
---------- ----------
1,981,463 1,895,007
Less accumulated depreciation (1,251,243) (1,141,929)
---------- ----------
Net property and equipment 730,220 753,078
---------- ----------
Other assets:
Software development costs, net of amortization 354,864 309,569
Goodwill, net of amortization 406,998 428,998
---------- ----------
761,862 738,567
---------- ----------
$5,369,624 $4,803,533
========== ==========
</TABLE>
See notes to financial statements.
23
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Current liabilities:
Bank loan, line of credit $ 301,000 $ -
Accounts payable 699,056 842,352
Current portion of long-term debt 64,086 56,136
Note payable - 32,500
Income and V.A.T payable 146,234 -
Accrued expenses:
Payroll 22,050 87,904
Other 59,982 112,767
Deferred income 389,753 277,970
Customer deposits 5,648 31,901
---------- ----------
Total current liabilities 1,687,809 1,441,530
---------- ----------
Deferred income taxes 9,321 10,418
---------- ----------
Long-term debt, net of current portion 575,700 596,563
---------- ----------
Total liabilities 2,272,830 2,048,511
---------- ----------
Commitments and contingency
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.001 par value, 5,000,000 shares
authorized, 3,593,572 and 3,583,572 shares issued and
outstanding March 31, 1999 and 1998, respectively 3,594 3,584
Additional paid-in capital 5,591,306 5,557,092
Foreign currency translation adjustments 9,030 34,912
Accumulated deficit (2,507,136) (2,840,566)
---------- ----------
Total shareholders' equity 3,096,794 2,755,022
---------- ----------
$5,369,624 $4,803,533
========== ==========
</TABLE>
See notes to financial statements.
24
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
---------- ---------- ----------
Net sales $8,299,591 $6,382,948 $5,430,221
---------- ---------- ----------
Costs, expenses, and other:
Cost of sales 4,330,906 3,562,600 3,366,509
Administrative 1,143,496 883,759 681,859
Research and development 154,845 193,684 131,258
Sales and marketing 804,486 634,137 744,075
Customer support 1,238,817 654,684 463,840
Depreciation and amortization 195,938 157,716 139,801
Interest expense (income), net 59,710 45,276 (8,104)
---------- ---------- ----------
7,928,198 6,131,856 5,519,238
---------- ---------- ----------
Income (loss) before income taxes 371,393 251,092 (89,017)
Provision for income taxes 37,963 9,693 -
---------- ---------- ----------
Net income (loss) $ 333,430 $ 241,399 ($ 89,017)
========== ========== ==========
Per share basis:
Basic:
Net income (loss) $ .09 $ .07 $ (.03)
========== ========== ==========
Diluted:
Net income (loss) $ .09 $ .07 $ (.03)
========== ========== ==========
</TABLE>
See notes to financial statements.
25
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Foreign
-------------------- Additional currency Total
Shares paid-in translation Accumulated shareholders'
issued Amount capital adjustments deficit equity
--------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996 3,164,022 $3,165 $5,315,970 ($2,992,948) $2,326,187
Net loss - - - (89,017) (89,017)
--------- ------ ---------- ---------- ----------
Balance, March 31,
1997 3,164,022 3,165 5,315,970 (3,081,965) 2,237,170
Issuance of
common stock,
exercise of options 19,550 19 7,922 7,941
Issuance of
common stock,
purchase of
subsidiary 400,000 400 233,200 233,600
Currency translation $34,912 34,912
adjustment
Net income 241,399 241,399
--------- ------ ---------- ------- ---------- ----------
Balance, March 31,
1998 3,583,572 3,584 5,557,092 34,912 (2,840,566) 2,755,022
Issuance of
common stock,
exercise of options 10,000 10 7,790 7,800
Issuance of warrants
for service 26,424 26,424
Currency translation (25,882) (25,882)
adjustment
Net income 333,430 333,430
--------- ------ ---------- ------- ---------- ----------
Balance, March 31,
1999 3,593,572 $3,594 $5,591,306 $ 9,030 ($2,507,136) $3,096,794
========= ====== ========== ======= ========== ==========
</TABLE>
See notes to financial statements.
26
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $333,430 $241,399 ($89,017)
Adjustments to reconcile to
net cash provided by operating activities:
Depreciation and amortization 195,938 157,716 139,801
Provisions for (recovery of)
losses on accounts receivable (9,472) (57,217) 51,664
Provisions for (recovery of) losses on inventories 50,848 (37,920) 120,232
Foreign currency translation adjustments (25,882) (2,278) -
Loss on sale of fixed assets 3,554 - -
Warrants issued for services 26,424 - -
Changes in assets and liabilities:
Certificate of deposit - 100,000 -
Accounts receivable (322,469) (188,602) 27,512
Inventories (127,626) 246,532 (274,585)
Prepaid expenses and other 9,569 20,386 17,277
Accounts payable (143,296) (32,771) 150,106
Accrued expenses and other 245 (4,807) 13,328
Deferred income 111,783 - -
-------- -------- --------
Net cash provided by operating activities 103,046 442,438 156,318
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (94,687) (36,304) (94,549)
Software development costs (102,453) (37,538) (137,049)
Proceeds from disposals of fixed assets 1,007 7,472 -
Cost of acquiring subsidiary - (82,604) -
Cash overdraft of subsidiary at date acquired - (81,582) -
-------- -------- --------
Net cash used in investing activities (196,133) (230,556) (231,598)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings under line of credit, net 301,000 - -
Repayments on notes payable (32,500) (32,500) -
Repayments on debt (12,913) (16,592) -
Proceeds from issuing equity securities 7,800 7,941 -
-------- -------- --------
Net cash provided (used) by financing activities 263,387 (41,151) -
-------- -------- --------
Net increase (decrease) in cash 170,300 170,731 (75,280)
Cash and cash equivalents, beginning of year 313,617 142,886 218,166
-------- -------- --------
Cash and cash equivalents, end of year $483,917 $313,617 $142,886
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 59,710 $ 38,321 $ 3,954
======== ======== ========
Cash paid during the year for income taxes $ 12,500 $ 26,600 $ -
======== ======== ========
</TABLE>
Non-cash financing activity: In fiscal year 1998, the Company purchased all of
the capital stock of its subsidiary; see Note 2 for debt issued. In connection
with the acquisition, debt of the subsidiary approximating $369,000 was assumed.
See notes to financial statements.
27
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business:
Comtrex Systems Corporation ("Company") is a Delaware corporation. Comtrex
designs, develops, assembles and markets electronic terminals and computer
software which provides retailers with transaction processing, in-store controls
and management information. Comtrex sells in the United States through various
distribution organizations. In April, 1996, Comtrex acquired the operations of a
distributor in Atlanta, Georgia and engaged in the direct sale and service of
its products in both the Atlanta metropolitan area and in the southeast United
States. In October, 1997, Comtrex acquired, via a subsidiary, a distribution
organization in the United Kingdom. Comtrex and its subsidiary are referred to
as "Company".
Principles of consolidation:
The consolidated financial statements include the accounts of Comtrex and its
wholly owned subsidiary. Intercompany transactions and accounts are eliminated
in consolidation.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents:
The Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and temporary cash investments and
accounts receivable.
The Company places its cash and temporary cash investments with high quality
financial institutions. The Company has not incurred losses related to these
financial instruments. Accounts receivable are primarily from distributors of
the Company's equipment and consist of domestic and foreign entities. The
Company minimizes credit risk by obtaining bank and trade references, and
primarily for foreign customers, by obtaining advance deposits or letters of
credit. The Company reviews its accounts receivable monthly and provides
allowances for potential uncollectible accounts.
28
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
Inventories:
Inventories include the cost of materials, labor and overhead and are valued
at the lower of cost (first-in, first-out) or market.
Property and equipment:
Property and equipment are stated at cost. Maintenance and repairs are
expensed, while betterments are capitalized. When an asset is disposed of, the
related costs and accumulated depreciation are removed from the accounts, and
any gain or loss is charged to operations.
Software development costs and amortization:
Software development costs consist primarily of salaries incurred to develop
and enhance software applications used in the Company's products. Amortization
is provided on a product-by-product basis using the faster of the straight-line
method over the estimated useful life of the software or based upon units of
sale. Amortization begins when the software is available for general release to
customers. Amortization expense was $57,158, $65,740, and $33,103, for the years
ended March 31, 1999, 1998, and 1997, respectively. Accumulated amortization was
$621,129 and $563,971 at March 31, 1999 and 1998, respectively.
Goodwill:
Goodwill represents the cost in excess of net assets acquired related to
Comtrex's acquisition of its subsidiary. Goodwill is being amortized over 20
years using the straight-line method. Accumulated amortization was $33,000 and
$11,000 at March 31, 1999 and 1998, respectively. Goodwill is periodically
reviewed by the Company for impairment to determine if the fair value is less
than the carrying value.
Product maintenance contract revenue:
Revenue is recognized from sales of maintenance contracts and extended
warrantees on a straight-line basis over the contract period. Unearned revenue
is deferred and reflected as deferred income on the consolidated balance sheets.
Software revenue recognition:
Revenue is recognized from sales of software when the program is shipped.
Depreciation:
Depreciation on personalty is computed by both straight-line and accelerated
methods over the estimated useful lives of the assets which are three to seven
years. Depreciation on realty is computed using the straight-line method over
the estimated useful life of thirty years.
29
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
Foreign currency translation:
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are included in the currency translation adjustment
in shareholders' equity.
Income (loss) per share:
Basic income (loss) per share is computed by dividing income (loss) available
to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted income (loss) per share is computed as
above while giving effect to all dilutive potential common shares (but not
giving effect to securities that would have an antidilutive effect, as would
occur in loss years) that were outstanding during the period.
Reclassifications:
Reclassifications have been made to the consolidated financial statements as
of March 31, 1998 to conform to the presentation as of March 31, 1999. The
reclassifications have no effect on financial position or results of operations.
2. ACQUISITION OF SUBSIDIARY
On October 2, 1997, Comtrex acquired all the issued and outstanding capital
stock ("Stock") of Data Systems Terminals Limited, a corporation formed and
existing under the laws of England ("DSTL"). DSTL was a distributor of Comtrex's
products in the United Kingdom, which business Comtrex intends to continue.
Subsequent to the acquisition, DSTL's name was changed to Comtrex Systems
Corporation Limited ("Comtrex UK").
The following consideration was paid for the acquisition:
a) 400,000 restricted shares of Common Stock. These are not transferrable on
or before October 2,1999.
b) A Subordinated Convertible Debenture, in the amount of $300,000
("Debenture"). The Debenture accrues interest at the rate of eight percent
per annum, payable monthly. No principal is payable until January 1, 2001.
The Debenture is convertible into shares of the Common Stock (in blocks of
20,000 shares), on or before October 1, 2000, at the rate of $1.00 per
share. Comtrex may prepay all amounts outstanding under the Debenture at
any time on or before October 2, 2000 if the shares of Comtrex Common
Stock have closed at $1.50, or higher, for each trading day for a 30 day
period. Any principal outstanding on October 2, 2000 shall be paid in
twelve equal quarterly installments, commencing January 1, 2001. The
Debenture is subordinate to all debt of the Company.
c) A Promissory note, in the amount of $65,000 ("Note"). The Note was paid in
full by March 31, 1999.
30
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
2. ACQUISITION OF SUBSIDIARY: (continued)
The business combination has been accounted for using the purchase method.
The results of operations of Comtrex UK are included in the statement of
operations for the year ended March 31, 1998 since the date of acquisition.
The cost of the acquired enterprise is $681,204, which represents 400,000
shares of Comtrex Common Stock with an assigned value of $233,600, the $300,000
Debenture, the $65,000 Note and legal and accounting fees associated with the
transaction of $82,604. Acquired goodwill of $439,998 will be amortized over 20
years, using the straight-line method.
3. INVENTORIES:
1999 1998
---------- ----------
Raw materials $ 837,922 $ 706,342
Work-in-process 65,431 91,398
Finished goods 431,430 443,467
Reserve for excess and obsolete inventory (77,222) (60,424)
---------- ----------
$1,257,561 $1,180,783
========== ==========
4. SIGNIFICANT CUSTOMERS:
The customers listed below accounted for a significant portion of sales and
receivables:
% of Sales % of Receivables
Fiscal Year Ended March 31, as of March 31,
------------------------------ -----------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Customer "A" 15% 10% 3% 32% 23%
Customer "B" 17% 10% - 15% 20%
Customers "A" and "B" are foreign corporations.
31
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Convertible debenture, issued in connection
with acquisition of subsidiary. See Note 2(b). $300,000 $300,000
Note payable, bank, due 2016, paid in monthly
installments of $3,125 which includes interest.
Interest is the bank's base prime rate plus
2 percent. The bank's base rate was 5.5 percent
at March 31, 1999. Substantially all assets of
the subsidiary serve as collateral. 305,001 311,743
Notes payable, financial companies, due from 2000
to 2002, payable in monthly installments of $2,403 which
includes interest ranging from 5 to 11.5 percent.
Secured by certain assets financed. 34,785 40,956
-------- --------
639,786 652,699
Less current portion 64,086 56,136
-------- --------
$575,700 $596,563
======== ========
</TABLE>
Payable as follows, assuming no conversion
of convertible debenture:
2000 $ 64,086
2001 67,524
2002 140,675
2003 137,500
thereafter 230,001
6. STOCK OPTION PLANS / WARRANTS:
1985 Employee incentive stock option plan:
During 1985, the Company adopted an employee incentive stock option plan.
During 1989, the plan was amended to increase the total number of shares to
400,000. The plan provided for the granting of options to officers and other key
employees. Outstanding options have a weighted average remaining contract life
of .9 years at March 31, 1999. Through March 31, 1996, 252,000 options were
exercised and 98,000 expired. Following is a summary of activity:
32
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
6. STOCK OPTION PLANS/WARRANTS: (continued)
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------
Number Price Range Total
<S> <C> <C> <C>
-------- ------------ -------
Balance, March 31, 1996 50,000 $.81 - $1.06 45,800
Forfeited (35,000) .81 - 1.06 (33,500)
------ ------------ -------
Balance, March 31, 1997 and 1998 15,000 .81 - .84 12,300
Forfeited (5,000) .84 (4,200)
------ ------------ -------
Balance March 31,1999 10,000 $.81 $ 8,100
====== ============ =======
</TABLE>
1992 Nonqualified stock option plan:
This plan was instituted in fiscal year 1993, and provides for options for
150,000 shares. Options are exercisable at any time for a period of five years
from date of grant. Outstanding options have a weighted average remaining
contract life of 2.3 years at March 31, 1999. Following is a summary of
activity:
<TABLE>
<CAPTION>
Outstanding Options
Available ------------------------------------
for Grant Number Price Range Total
<S> <C> <C> <C> <C>
--------- ------ ------------ -------
Balance, March 31, 1996 87,000 63,000 $.81 - $1.75 $74,340
Granted (32,000) 32,000 .59 - .63 19,680
------ ------ ------------ -------
Balance, March 31, 1997 55,000 95,000 .59 - 1.75 94,020
Granted (14,000) 14,000 .44 6,160
Forfeited 27,000 (27,000) .88 - 1.50 (33,060)
------ ------ ------------ -------
Balance, March 31, 1998 68,000 82,000 .44 - 1.75 67,120
Granted (14,000) 14,000 1.00 14,000
Forfeited 4,000 (4,000) .88 (3,520)
Exercised - (8,000) .88 (7,040)
------ ------ ------------ -------
Balance, March 31, 1999 58,000 84,000 $.44 - $1.75 $70,560
====== ====== ============ =======
</TABLE>
33
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
6. STOCK OPTION PLANS / WARRANTS: (continued)
1995 Employee incentive stock option plan:
During fiscal year 1996, the Company adopted an employee incentive stock
option plan. The plan provides for the granting of up to 250,000 options to
officers and other key employees. The option price must equal at least 100% of
the market price on the date of grant. Outstanding options have a weighted
average remaining contract life of 3.0 years at March 31, 1999. Following is a
summary of activity:
<TABLE>
<CAPTION>
Outstanding Options
Available -------------------------------------
for Grant Number Price Range Total
<S> <C> <C> <C> <C>
--------- ------- ------------ -------
Balance, March 31, 1996 197,000 53,000 $.63 $33,390
Granted (15,000) 15,000 .63 9,450
Forfeited 35,000 (35,000) .63 (22,050)
------- ------- ----------- -------
Balance, March 31, 1997 217,000 33,000 .63 20,790
Granted (105,000) 105,000 .38 - .88 59,600
Forfeited 4,000 (4,000) .63 (2,520)
Exercised - (19,550) .38 - .63 (7,942)
------- ------- ----------- -------
Balance, March 31, 1998 116,000 114,450 .38 - .88 69,928
Forfeited 28,000 (28,000) .38 - .88 (23,340)
Exercised - (2,000) .38 (760)
------- ------- ----------- -------
Balance, March 31, 1999 144,000 84,450 $.38 - $.69 $45,828
======= ======= =========== =======
</TABLE>
Accounting for stock based compensation:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS 123")." Accordingly, no compensation cost has been recognized for the
stock option plans.
Had compensation cost for the Company's stock option plans been recognized
based on the fair value at the grant date for awards consistent with the
provisions of SFAS 123, the Company's net income (loss) and income (loss) per
share would have changed as indicated:
1999 1998 1997
-------- -------- --------
Net income (loss) as reported $333,430 $241,399 $(89,017)
======== ======== ========
Pro forma $330,866 $168,124 $(93,026)
======== ======== ========
Income (loss) per share:
Basic, as reported $ .09 $ .07 $ (.03)
======== ======== ========
Basic, Pro forma $ .09 $ .05 $ (.03)
======== ======== ========
Diluted, as reported $ .09 $ .07 $ (.03)
======== ======== ========
Diluted, Pro forma $ .09 $ .05 $ (.03)
======== ======== ========
34
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
6. STOCK OPTION PLANS / WARRANTS: (continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants; expected volatility of 90% and a risk-free interest
rate of 6.0%.
Warrants:
In February, 1999, warrants to purchase 120,000 shares of common stock were
issued in exchange for consulting services valued at $20,000. The warrants were
exercisable upon issuance as follows:
40,000 warrants, $1.00 per share, expires February 9, 2001
40,000 warrants, $1.50 per share, expires February 9, 2002
40,000 warrants, $3.00 per share, expires February 9, 2002
7. INCOME TAXES:
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,850,000 (which begin to expire in 2004). Such loss
carryforwards result in deferred tax assets of approximately $1,140,000, which
has been offset by a valuation allowance of equal amount. During the year ended
March 31, 1999, the valuation account was reduced by $100,000.
The components of the provision for income taxes consist of:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Current provision, foreign $ 37,963 $ 9,693 $ -
Current provision, U.S. 100,000 84,416 -
Utilization of loss carryforwards (100,000) (84,416) -
-------- ------- -------
$ 37,963 $ 9,693 $ -
======== ======= =======
</TABLE>
A reconciliation of the reported amount of provision for income taxes to the
amount that would result from applying domestic federal statutory tax rates
(34%) to pretax income follows:
1999 1998
--------- --------
Income tax provision at U.S. statutory rate $126,274 $85,371
International rate differences (17,756) (4,247)
Utilization of loss carryforwards at 34% (85,000) (72,000)
Other 14,445 569
-------- -------
$ 37,963 $ 9,693
======== =======
35
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
8. COMMITMENTS AND CONTINGENCY:
The Company leases certain property under operating leases which expire
through the fiscal year ending 2004. Rent expense was approximately $327,000,
$285,000 and $160,000 for the years ended March 31, 1999, 1998 and 1997,
respectively. Rental commitments under noncancelable operating leases for the
years ending March 31, are as follows: 2000, $296,000; 2001, $294,000; 2002,
$243,000; 2003, $96,000; 2004, $19,000.
The Company maintains a 401(k) plan ("Plan") in which substantially all
employees may participate. The Company matches 25% of each participating
employee's contribution, with a maximum Company contribution of 1 1/2% of the
employee's earnings. The Company's subsidiary in England maintains a defined
contribution plan ("U.K. Plan") in which substantially all employees may
participate, subject to invitation by that entity's Directors. Under the U.K.
Plan, Comtrex UK is committed to fund $15,000 annually for certain executive
employees plus three percent of salaries for other participants. The Company's
contributions to both plans aggregated $33,000, $31,000 and $14,000 in the
fiscal years ending March 31, 1999, 1998 and 1997, respectively.
9. SEGMENT INFORMATION:
The Company adopted Financial Accounting Standard No. 131 "Disclosures about
Segments of an Enterprise and Related Information" in the fiscal year ended
March 31, 1999. The Company has two reportable segments: the United States and
the United Kingdom.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
United States, domestic $3,450,966 $2,361,225 $3,583,946
United States, export 1,979,661 2,717,651 1,846,275
United Kingdom* 3,750,115 1,780,170 -
Transfers between segments (881,151) (476,098) -
---------- ---------- ----------
Net sales $8,299,591 $6,382,948 $5,430,221
========== ========== ==========
Income (loss) before income taxes:
United States $224,065 $211,040 ($89,017)
United Kingdom* 163,878 41,491 -
Corporate (16,550) (1,439) -
---------- ---------- ----------
Income (loss) before income taxes $371,393 ($251,092) ($89,017)
========== ========== ==========
</TABLE>
*Subsidiary acquired October 2, 1997
36
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
9. SEGMENT INFORMATION: (continued)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization:
United States $ 114,581 $ 123,538 $ 139,801
United Kingdom* 52,957 19,978 -
Corporate 28,400 14,200 -
---------- ---------- ----------
$ 195,938 $ 157,716 $ 139,801
========== ========== ==========
Identifiable assets:
United States $3,437,205 $3,017,826 $2,943,211
United Kingdom* 2,062,349 1,856,899 -
Corporate 406,998 428,998 -
Eliminations (536,928) (500,190) -
---------- ---------- ----------
Total assets $5,369,624 $4,803,533 $2,943,211
========== ========== ==========
Long lived assets:
United States $ 122,568 $ 122,687 $ 147,549
United Kingdom* 607,652 630,391 -
---------- ---------- ----------
$ 730,220 $ 753,078 $ 147,549
========== ========== ==========
</TABLE>
* Subsidiary acquired October 2, 1997
10. PER SHARE INFORMATION:
A reconciliation of the average number of common shares outstanding used in
the basic and diluted computations follows:
<TABLE>
<CAPTION>
Average Common Shares Outstanding
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic 3,590,405 3,375,130 3,164,022
Diluted effect of stock options 75,501 42,751 -
Diluted effect of convertible debenture 300,000 150,000 -
--------- --------- ---------
Diluted 3,965,906 3,567,881 3,164,022
========= ========= =========
</TABLE>
For purposes of computing diluted per share data in 1999 and 1998, $24,000
and $12,000, respectively, of interest related to the convertible debenture was
added to net income.
37
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
11. BANK LOAN, LINE OF CREDIT:
At March 31, 1999, the Company was advanced $301,000 against a line of
credit facility of $650,000. The loan bears interest at the bank's prime rate
(7.75 percent at March 31, 1999) and is collateralized by substantially all
domestic assets of the Company. See Note 13 regarding renewal of line of credit.
12. COMPREHENSIVE INCOME:
The Company adopted Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", in the fiscal year ended March 31, 1999. The Company's
comprehensive income is comprised of net income and foreign currency translation
adjustments. Comprehensive income was $307,548, $276,311 and ($89,017) for
fiscal years 1999, 1998 and 1997, respectively.
13. SUBSEQUENT EVENTS:
Renewal of line of credit:
In June, 1999, the Company and a bank entered into a line of credit
agreement. This agreement renewed a line of credit agreement that existed as of
March 31, 1999 with the same bank. The new agreement provides for borrowings of
up to $650,000, and a letter of credit facility of $400,000. The agreement
expires on September 30, 1999. Loans bear interest at the bank's prime rate. The
line of credit is collateralized by substantially all domestic assets of the
Company.
Acquisition of subsidiary:
On June 23, 1999, the Company acquired all of the outstanding capital stock
of Cash Register Systems, Inc. in exchange for 150,000 restricted shares of the
Company's common stock. The transaction is not expected to have an immediate
material impact on the Company's financial results.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMTREX SYSTEMS CORPORATION
Date: June 25, 1999 By: /s/
---------------------------
Jeffrey C. Rice, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ President, Director and June 25, 1999
- ------------------------------------ Principal Executive Officer
Jeffrey C. Rice
/s/ Principal Financial and June 25, 1999
- ------------------------------------ Accounting Officer
Lisa J. Mudrick
* Director June 25, 1999
- ------------------------------------
Sidney Dworkin
* Director June 25, 1999
- ------------------------------------
Steven D. Roberts
* Director June 25, 1999
- ------------------------------------
Larry Irwin
* Director June 25, 1999
- ------------------------------------
Nathan Lipson
* Director June 25, 1999
- ------------------------------------
Alan G. Schwartz
* Director June 25, 1999
- ------------------------------------
Anthony Maladra
* By /s/
- ------------------------------------
Jeffrey C. Rice
Attorney-in-Fact
</TABLE>
39
<PAGE>
Exhibit 4.4 WARRANT TO PURCHASE SHARES OF COMMON STOCK FROM COMTREX
SYSTEMS CORPORATION AND EXHIBIT A (REGISTRATION RIGHTS
DECLARATION), DATED FEBRUARY 8, 1999, ISSUED TO ALVIN L. KATZ
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS WARRANT
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (i) AN OPINION OF
COUNSEL SATISFACTORY TO COMTREX SYSTEMS CORPORATION THAT SUCH SALE, TRANSFER OR
OTHER DISPOSITION MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES
ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS OR (ii) SUCH REGISTRATION.
COMTREX SYSTEMS CORPORATION
WARRANT
TO PURCHASE
SHARES OF COMMON STOCK
For value received, ALVIN L. KATZ, and his successors or assigns
(collectively, the "Holder"), are entitled to purchase from Comtrex Systems
Corporation, a Delaware corporation (the "Company"), up to One Hundred Twenty
Thousand (120,000) fully paid and nonassessable shares of the Company's common
stock, $0.001 par value per share, or such greater or lesser number of such
shares as may be determined by application of the anti-dilution provisions of
this warrant, (a) 40,000 of which may be purchased at a price of $1.00 per share
on or before the second (2nd) anniversary of the date hereof, (b) 40,000 of
which may be purchased at a price of $1.50 per share on or before the third
(3rd) anniversary of the date hereof, and (c) 40,000 of which may be purchased
at a price of $3.00 per share on or before the third (3rd) anniversary of the
date hereof, all subject to adjustments as noted below (individually or in the
aggregate, the "warrant exercise price").
This warrant may be exercised by Holder at any time or from time to
time beginning on the date hereof and prior to the close of business of the
Company on the applicable expiration date set forth above.
This warrant is subject to the following terms and conditions:
1. Exercise. The rights represented by this warrant may be exercised by
the Holder, in whole or in part, by written election, in the form set forth
below, by the surrender of this warrant (properly endorsed if required) at the
principal office of the Company, by payment to it by cash, certified check or
bank draft of the applicable warrant exercise price for the shares to be
purchased and by delivery of a subscription agreement, an investment letter
and/or similar documents acceptable to the Company demonstrating that the sale
of the shares to be purchased is exempt from registration under the Securities
Act of 1933, as amended, and any state securities law. The shares so purchased
shall be deemed to be issued as of the close of business on the date on which
this warrant has been exercised by payment to the Company of the warrant
exercise price. Certificates for the shares of stock so purchased, bearing an
appropriate restrictive legend, shall be delivered to the Holder within thirty
(30) days after the rights represented by this warrant shall have been so
exercised, and, unless this warrant has expired, a new warrant representing the
number of shares, if any, with respect to which this warrant has not been
exercised shall also be delivered to the Holder hereof within such time. No
fractional shares shall be issued upon the exercise of this warrant.
40
<PAGE>
2. Shares. All shares that may be issued upon the exercise of the
rights represented by this warrant shall, upon issuance, be duly authorized and
issued, fully paid and nonassessable shares. During the period within which the
rights represented by this warrant may be exercised, the Company shall at all
times have authorized and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this warrant a sufficient
number of shares of its common stock to provide for the exercise of the rights
represented by this warrant.
3. Adjustment. The warrant exercise price shall be subject to
adjustment from time to time as hereinafter provided in this paragraph 3:
(a) If the Company at any time divides the outstanding shares
of its common stock into a greater number of shares pursuant to a stock split or
stock dividend, and conversely, if the outstanding shares of its common stock
are combined into a smaller number of shares, the warrant exercise price(s) in
effect immediately prior to such division or combination shall be
proportionately adjusted to reflect the reduction or increase in the value of
each such common share.
(b) If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of the
Company's common stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for such common stock, then, as a condition of
such reorganization, reclassification, consolidation, merger or sale, the Holder
shall have the right to purchase and receive upon the terms and conditions
specified in this warrant and in lieu of the shares of the common stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock, other securities or assets
as would have been issued or delivered to the Holder if Holder had exercised
this warrant and had received such shares of common stock immediately prior to
such reorganization, reclassification, consolidation, merger or sale. The
Company shall not effect any such consolidation, merger or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument the obligation to deliver to the
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to purchase.
(c) Upon each adjustment of the warrant exercise price(s), the
Holder shall thereafter be entitled to purchase, at the warrant exercise
price(s) resulting from such adjustment, the sum of the number of shares
obtained by multiplying each warrant exercise price in effect immediately prior
to such adjustment by the number of shares purchasable pursuant hereto at such
exercise price immediately prior to such adjustment and dividing the product
thereof by the corresponding new warrant exercise price resulting from such
adjustment.
41
<PAGE>
4. No Rights as Shareholder. This warrant shall not entitle the Holder
to any voting rights or other rights as a shareholder of the Company.
5. Transfer. This warrant may not be sold, transferred or otherwise
disposed of without (i) an opinion of counsel satisfactory to the Company that
such sale, transfer or other disposition may lawfully be made without
registration under the Securities Act of 1933, as amended, and applicable state
securities laws, or (ii) registration under the Securities Act of 1933, as
amended, and all applicable state securities laws. Subject to the foregoing,
this warrant and all rights hereunder are transferable, in whole or in part, at
the principal office of the Company by the holder hereof in person or by duly
authorized attorney, upon surrender of this warrant properly endorsed. The
bearer of this warrant, when endorsed, may be treated by the Company and all
other persons dealing with this warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented by this
warrant, or to the transfer hereof on the books of the Company, any notice to
the contrary notwithstanding; but until such transfer on such books, the Company
may treat the registered owner hereof as the owner for all purposes.
6. Registration Rights. Holder shall be entitled to the registration
rights set forth on Exhibit A to this warrant.
7. Writing. This warrant may not be changed, waived, discharged or
terminated orally but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
8. Governing Law. This warrant shall be governed by and construed in
accordance with the laws of the State of New Jersey without regards to its
conflict of laws rules.
IN WITNESS WHEREOF, the Company has caused this warrant to be executed
and delivered by a duly authorized officer.
Dated: February 8, 1999
COMTREX SYSTEMS CORPORATION
By:_____/s/_________________________
Jeffrey C. Rice
President
Name and Address of Holder:
Alvin L. Katz
301 North Birch Road
Ft. Lauderdale, FL 33304-4211
42
<PAGE>
WARRANT EXERCISE
(To be signed only upon exercise of this warrant)
The undersigned, the Holder of the foregoing warrant, hereby
irrevocably elects to exercise the purchase right represented by such warrant
for, and to purchase thereunder, a total of ___________ shares of common stock
of Comtrex Systems Corporation, to which such warrant relates and herewith makes
payment of $___________ therefor in cash, certified check or bank draft and
requests that the certificates for such shares be issued in the name of, and be
delivered to ______________________, whose address is set forth below the
signature of the undersigned. The number of shares to be purchased at each
exercise price is as follows:
Number of Shares Purchase Price
---------------- --------------
_______________________ $
_______________________ $
_______________________ $
Dated: _______________________ _________________________
Signature
Social Security or other Tax Identification No.
If shares are to be issued other than to Holder:
Please print present name and complete address
_______________________
_______________________
_______________________
43
<PAGE>
WARRANT ASSIGNMENT
(To be signed only upon transfer of this warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto the right represented by the foregoing warrant to purchase the shares of
common stock of Comtrex Systems Corporation and appoints ______________________
attorney to transfer such right on the books of Comtrex Systems Corporation,
with full power of substitution in the premises.
Dated:__________________ _______________________
Signature
Social Security or other Tax Identification No.
__________________________________
Please print present name and complete address
_______________________
_______________________
_______________________
44
<PAGE>
Registration Rights Declaration
1. Piggyback Registration Rights.
(a) At any time that the Company proposes to file a
Registration Statement (as such term is defined hereinafter) and there are
Registrable Shares (as such term is defined hereinafter) then outstanding, the
Company will, prior to such filing, give written notice (the "Registration
Notice") to the Holder of its intention to do so and, upon the written request
of the Holder received by the Company within twenty (20) days of the date of the
Registration Notice (which request shall state the intended method of
disposition of the Registrable Shares), the Company will use reasonable
commercial efforts to include in the Registration Statement all Registrable
Shares theretofore issued to the Holder which the Company has been requested by
the Holder to register and to cause all such Registrable Shares to be registered
under the Securities Act of 1933, as amended (the "33 Act"), to the extent
necessary to permit their sale or other disposition by the Holder in accordance
with the intended methods of distribution specified in the request of the Holder
delivered to the Company; provided that the Company shall have the right to
postpone or withdraw any registration effected pursuant to this paragraph 1(a)
without obligation to the Holder if the Registration Statement is also postponed
or withdrawn.
(b) If a Registration Statement is filed by the Company in
connection with any underwritten public offering of shares of the Company's
Common Stock, the Company shall not be required to include any Registrable
Shares in such Registration Statement or otherwise register any Registrable
Shares under the 33 Act unless the Holder accepts the terms of the underwriting
as agreed upon by the Company and the underwriters selected by the Company, and
then only in a quantity as will not, in the judgment of such underwriters,
jeopardize the success of the offering by the Company. If in the opinion of the
underwriter the registration of all, or any part of the Registrable Shares,
would adversely affect the offering, then the Company shall only be required to
include in the underwriting the number of Registrable Shares which the managing
underwriter believes may be sold without causing any such adverse effect.
(c) For purposes of this Registration Rights Declaration and
the warrant to which it is attached, the term "Registrable Shares" shall mean
any shares of the Company's Common Stock issued and outstanding as a result of
an exercise of the warrant so long as such shares are not then freely tradeable
pursuant to Rule 144 promulgated under the Act, or any successor statute
thereto.
(d) For purposes of this Registration Rights Declaration and
the warrant to which it is attached, the term "Registration Statement" shall
mean a registration statement filed by the Company with the Securities and
Exchange Commission for a public offering and sale of the Common Stock of the
Company (other than a registration statement on Form S-8 or Form S-4 or any
other form not available for registering the Registrable Shares for sale to the
public).
2. Expenses. With respect to any registration of shares pursuant to
paragraph 1 hereof, the Company shall bear the following fees, costs and
expenses: all SEC registration, SEC filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if the Company and/or selling security holders are required to bear such fees
and disbursements), all internal Company expenses, and the premiums and other
costs of policies of insurance against liability arising out of the public
offering. Fees and disbursements of counsel and accountants for Holder,
underwriting discounts and commissions and transfer taxes for Holder and any
other expenses incurred by Holder not expressly included above shall be borne by
Holder.
45
<PAGE>
3. Indemnification. In the event that any shares owned by Holder are
included in a Registration Statement under paragraph 1:
(a) The Company will indemnify and hold harmless Holder and
any underwriter (as defined in the 33 Act) for Holder from and against
any and all loss, damage, liability, cost and expense to which Holder
or any such underwriter may become subject under the 33 Act or
otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue statement or alleged untrue statement
of any material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by Holder or
such underwriter.
(b) Holder will, jointly and severally, indemnify and hold
harmless the Company and any underwriter from and against any and all
loss, damage, liability, cost or expense to which the Company or any
underwriter may become subject under the 33 Act or otherwise, insofar
as such losses, damages, liabilities, costs or expenses are caused by
any untrue or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was so made in reliance upon and in strict conformity
with information furnished by Holder.
46
<PAGE>
(c) Promptly after receipt by an indemnified party pursuant to
the provisions of subparagraphs (a) or (b) of this paragraph 3 of
notice of the commencement of any action involving the subject matter
of the foregoing indemnity provisions, such indemnified party will, if
a claim thereof is to be made against the indemnifying party pursuant
to the provisions of said paragraph (a) or (b), promptly notify the
indemnifying party of the commencement thereof; but the omission to so
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than hereunder. In
case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the
right to select separate counsel to participate in the defense of such
action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party pursuant to the provisions of
paragraph (a) or (b) for any legal or other expense subsequently
incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the
indemnified party shall have employed counsel in accordance with the
proviso of the preceding sentence, (ii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the
notice of the commencement of the action or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party.
4. Rule 144. The Company covenants and agrees to use reasonable efforts
to file such reports and/or make available such information as is required in
order for Rule 144 to be available to Holder at any time that Holder would
otherwise be eligible to sell pursuant to Rule 144.
47
<PAGE>
Exhibit 10.10 COMTREX SYSTEMS CORPORATION 1999 STOCK OPTION PLAN
COMTREX SYSTEMS CORPORATION
1999 STOCK OPTION PLAN
1. Purpose
The purpose of the 1999 Stock Option Plan (referred to herein as the
"Plan") of Comtrex Systems Corporation (the "Company") is to provide a means by
which certain employees and directors of, and others providing services to or
having a relationship with, the Company and its Affiliates (as such term is
defined hereinafter) may be given an opportunity to purchase common stock of the
Company ("Common Stock"). The Plan is intended to promote the interests of the
Company by encouraging stock ownership on the part of such individuals, by
enabling the Company and its Affiliates to secure and retain the services of
highly qualified persons, and by providing such individuals with an additional
incentive to advance the success of the Company and its Affiliates. For purposes
of this Plan, "Affiliate" shall mean any parent or subsidiary corporation of the
Company as defined in Sections 424(e), (f) and (g) of the Internal Revenue Code
of 1986, as amended (hereinafter the "Code").
2. Administration
(a) The Plan shall be administered by a Committee consisting of not
less than two directors (the "Committee") to be appointed from time to time by
the Board of Directors. Membership on the Committee shall in any event be
limited to those members of the Board who are "Non-Employee Directors" as
defined in the regulations promulgated by the Securities Exchange Commission
pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Board of Directors may, from time to time, remove
members from or add members to the Committee. Vacancies in the Committee,
however caused, shall be filled by the Board of Directors. The Committee shall
select one of its members chairman and shall hold meetings at such times and
places as it may determine. The Committee may appoint a secretary and, subject
to the provisions of the Plan and to policies determined by the Board of
Directors, may make such rules or regulations for the conduct of its business as
it shall deem advisable. The majority of the Committee shall constitute a
quorum. All action of the Committee shall be taken by a majority of its members.
Any action may be taken by written instrument signed by a majority of the
members of the Committee, and an action so taken shall be fully effective as if
it had been taken by a vote of the majority of the members of the Committee at a
meeting duly called and held.
(b) The Committee shall have the power to select optionees, to
establish the number of shares and other terms applicable to each option granted
pursuant to the Plan, to construe the provisions of the Plan, and to adopt rules
and regulations governing the administration of the Plan. All power and
authority granted hereunder to the Committee may, at the discretion of the Board
of Directors, be exercised by the Board.
(c) The members of the Board of Directors or the Committee shall not be
liable for any action or determination made in good faith with respect to the
Plan or to any option granted pursuant thereto.
3. Eligibility; Grant of Options
(a) Participants. The persons who shall be eligible to participate in
this Plan and receive options hereunder shall be the Company's and each
Affiliate's directors and such employees and other individuals who provide
services to or otherwise have a relationship with the Company or any Affiliate
as the Committee shall from time to time determine to be key individuals to the
success of the Company or its Affiliates.
48
<PAGE>
(b) Discretionary Grants. The Committee shall from time to time
authorize the grant of options pursuant to this Plan to one or more persons
eligible to participate in the Plan, and each such option grant shall be on such
terms and conditions, consistent with this Plan, as may be specified by the
Committee; provided that directors of the Company or any Affiliate (other than
directors who are full-time employees of the Company or any of Affiliate) shall
not be granted any options pursuant to this Plan except as otherwise provided in
subparagraph 3(c) below.
(c) Fixed Grants to Directors. Each individual who is a member of the
Company's Board of Directors on July 1 of each calendar year, commencing on July
1, 2000, shall automatically be granted a Non-Qualifying Option (as such term is
defined hereinafter) to acquire 2,000 shares of the Common Stock of the Company
at an exercise price equal to the lowest reported bid price for the Common Stock
during the four (4) week period immediately preceding the date of the grant.
Such options shall expire five (5) years from the date of grant unless
terminated as provided herein, and otherwise shall be on such terms and
provisions as are specified in paragraph 6 below.
4. Allotment of Shares
A maximum of Two Hundred Thousand (200,000) authorized but unissued
shares of the Common Stock, $0.001 par value, of the Company will be allotted to
the Plan, provided that the number of options that may be granted to any
employee under the Plan shall be reasonable in relation to the purpose of the
Plan. Shares that by reason of the expiration of an option or otherwise are no
longer subject to purchase pursuant to an option granted under the Plan may be
re-optioned under the Plan. The Company shall not be required upon the exercise
of any option to issue or deliver any shares of stock prior to the completion of
such registration or other qualification of such shares under any state or
federal law, rule or regulation as the Company shall determine to be necessary
or desirable.
5. Effective Date and Term of Plan
The effective date of the Plan is July 1, 1999. The Plan shall
terminate on June 30, 2009, but the Board of Directors may terminate the Plan at
any time prior thereto. Termination of the Plan shall not alter or impair,
without the consent of the optionee, any of the rights or obligations of any
option theretofore granted under the Plan.
6. Terms and Conditions
A. All Options
Stock options granted pursuant to this Plan shall be evidenced
by agreements in such form as the Committee shall from time to time approve.
Nothing in this Plan or any option granted hereunder shall govern the employment
rights and duties between the optionee and the Company or any Affiliate. Neither
this Plan, nor any grant or exercise pursuant thereto, shall constitute an
employment agreement among such parties. The following shall also apply to all
options granted under the Plan:
(i) Time of Exercise of Option
Except as otherwise set forth herein, the Committee shall
establish the option period and time or times within the option period
when the stock option may be exercised in whole or in such parts as may
be specified from time to time by the Committee. Each non-qualified
stock option granted to directors pursuant to subparagraph 3(c) hereof
shall be exercisable in full one (1) year after the date of grant. No
other option granted pursuant to this Plan shall be exercisable until
after the expiration of six (6) months from the date of grant. With
respect to an optionee whose employment with the Company is about to
terminate (for whatever reason), the Committee may in its discretion
accelerate the time or times when any particular stock option held by
said optionee may be so exercised so that such time or times are
earlier than those originally provided in said option. In all cases
exercise of a stock option granted to an employee or a Director shall
be subject to the provisions of subparagraphs 6(A)(iv) and 6(A)(v),
respectively.
49
<PAGE>
(ii) Payment and Manner of Exercise
The entire option price shall be paid at the time the option
is exercised. To the extent that the right to purchase shares has
accrued hereunder, options may be exercised from time to time by
written notice to the Company stating the full number of shares with
respect to which the option is being exercised and the time of delivery
thereof, in accordance with such administrative procedures as may from
time to time be specified by the Committee. Such notice of exercise
shall be accompanied by full payment for the shares by: (1) certified
or official bank check or the equivalent thereof acceptable to Company;
(2) by tendering to the Company shares of Common Stock, or requesting
the Company to accept shares to be acquired by exercising the option,
having an aggregate fair market value, determined by the Company at the
date of payment, equal to the option price; or (3) any combination of
the foregoing. Upon exercise, the Company shall deliver to the optionee
(or other person entitled to exercise the option), at the principal
office of the Company, or such other place as shall be mutually agreed
upon, a certificate or certificates for such shares; provided, however,
that the time of delivery may be postponed by the Company for such
periods as may be required for it with reasonable diligence to comply
with any requirements of law; and provided further that in the event
the Common Stock issuable upon exercise is not registered under the
Securities Act of 1933 (the "Act"), then the Company may require that
the registered owner deliver an investment representation in form
acceptable to the Company and its counsel and the Company will place a
legend on the certificate for such Common Stock restricting the
transfer of same. There shall be no obligation or duty for the Company
to register under the Act at any time the Common Stock issuable upon
exercise of the options. If the optionee (or other person entitled to
exercise the option) fails to accept delivery, the optionee's payment
shall be returned and the right to exercise the option with respect to
such undelivered shares shall be terminated.
(iii) Non-Transferability of Option
An option, by its terms, shall not be transferable by the
optionee otherwise than by will or by the laws of descent and
distribution.
(iv) Rights after Termination of Employment
In the event of termination of an optionee's employment due to
any cause other than death or disability, the right to exercise any
stock option granted pursuant to the Plan shall terminate three (3)
months following cessation of employment. In the event of termination
of an optionee's employment due to disability (within the meaning of
Section 22(e)(3) of the Code) or death, such optionee (or the executor,
administrator or devisee of the optionee) shall have the right to
exercise such option (to the extent otherwise exercisable) at any time
within one (1) year after cessation of employment by reason of such
disability or death.
(v) Effect of Termination of Directorship
In the event of the termination of an optionee's service as a
Director of the Company due to any cause other than death or
disability, then the right to exercise any stock option grant pursuant
to the Plan shall terminate three (3) months following the date on
which such optionee's service as a Director of the Company terminates.
In the event of the termination of a Director's service due to
disability (within the meaning of Section 22(e)(3) of the Code) or
death, such optionee (or the executor, administrator or devisee of the
optionee) shall have the right to exercise such option (to the extent
otherwise exercisable) at any time within one (1) year after cessation
of service as a Director of the Company by reason of such disability or
death.
50
<PAGE>
(vi) Adjustment in Event of Recapitalization of the
Company
The aggregate number of shares of Common Stock for which
options may be granted to persons participating under the Plan, the
number of shares covered by each outstanding option and the exercise
price per share for each such option, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common
Stock of the Company resulting from the subdivision or consolidation of
shares, or the payment of a stock dividend after the effective date of
this Plan, or other increase or decrease in such shares affected
without the receipt of consideration by the Company; provided, however,
that any options to purchase fractional shares resulting from any such
adjustment shall be eliminated; and provided further, that any such
adjustment shall be made in a manner so as not to constitute a
modification as defined in Section 425(h)(3) of the Code.
(vii) Adjustment of Options upon Reorganization
(a) If the Company shall at any time merge or
consolidate with or into another corporation or entity and (1)
the Company is not the surviving entity or (2) the Company is
the surviving entity and the shareholders of Company Common
Stock are required to exchange their shares for property
and/or securities, the holder of each option will thereafter
receive, upon the exercise thereof, the securities and/or
property to which a holder of the number of shares of Common
Stock then deliverable upon the exercise of such option would
have been entitled upon such merger or consolidation, and the
Company shall take such steps in connection with such merger
or consolidation as may be necessary to assure that the
provisions of this Plan shall thereafter be applicable, as
nearly as reasonably may be, in relation to any securities or
property thereafter deliverable upon the exercise of such
option, provided, however, that under no circumstances shall
any option exercise date be accelerated in contemplation of
such action. The sale of all or substantially all of the
assets of the Company for consideration (apart from the
assumption of obligations) consisting primarily of securities
shall be deemed a merger or consolidation for the foregoing
purposes. Notwithstanding any of the foregoing, the provisions
of this Section 6(A)(vii) shall be subject to all of the other
applicable terms and provisions of this Plan.
(b) The surviving entity in any reorganization may,
at any time, in its sole discretion, tender substitute options
as it may deem appropriate. However, in no event may the
substituted options entitle the optionee to any fewer shares
(or at any greater aggregate price) or any less other property
than the optionee would be entitled to under the immediately
preceding paragraph upon an exercise of the options held prior
to the substitution of the new option. Any substitution made
under this paragraph shall be made in a manner so as not to
constitute a modification as defined in Section 425(h)(3) of
the Code.
(c) With respect to options to acquire stock of any
Affiliate of optionee's then present employer, if optionee's
then present employer ceases to be affiliated with the
Company, then the Company shall give the optionee written
notice of such fact within thirty (30) days after the date on
which optionee's employer ceases to be an Affiliate and the
option shall expire and terminate within thirty (30) days
after the receipt of such notice by optionee.
B. Non-Qualified Stock Options
The Committee may, in its discretion, grant options under the
Plan which, in whole or in part, do not qualify as incentive stock options under
Section 422 of the Code ("Non-Qualifying Options"). The terms and conditions of
the Non-Qualifying Options shall be governed by Section 6A above.
51
<PAGE>
C. Incentive Stock Options
The Committee may, in its discretion, grant options under the
Plan which qualify, in whole or in part, as incentive stock options under
Section 422 of the Code. In addition to the terms and conditions set forth in
Section 6A above, the following terms and conditions shall govern any incentive
stock option issued under the Plan:
(i) Maximum Fair Market Value of Incentive Stock Options
No optionee may have incentive stock options which become
exercisable for the first time in any calendar year (under all
incentive stock option plans of the Company and its subsidiary
corporations) with an aggregate fair market value (determined as of the
time such option is granted) in excess of One Hundred Thousand Dollars
($100,000).
(ii) Option Price
The option price per share for each incentive stock option
shall be 100% of the fair market value of the Common Stock on the date
the option is granted; except, in the case of the grant to an optionee
who owns Common Stock of the Company possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Company or its subsidiaries, the option price of such option shall be
at least 110% of the fair market value of the Common Stock on the date
the option is granted. The fair market value shall be determined as
prescribed by the Code and regulations promulgated thereunder.
(iii) Period of Option
Each incentive option shall expire ten (10) years from the
date it is granted or at the end of such shorter period as may be
designated by the Committee on the date of grant; except, in the case
of the grant of an incentive stock option to an optionee who owns
Common Stock of the Company possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company
or its subsidiaries, such option shall not be exercisable after the
expiration of five (5) years from the date it is granted.
(iv) Eligible Participants
Incentive stock options may be issued only to employees of the
Company or its parent or subsidiary corporation or corporations.
7. Amendment of Plan
The Board, within its discretion, shall have authority to amend the
Plan and the terms of any option issued hereunder; provided, that no such action
of the Board of Directors, without the approval of the Shareholders of the
Company, shall:
(a) materially increase the benefits accruing to optionees
under the Plan;
(b) increase the number of securities which may be issued
under the Plan; or
(c) materially modify the requirements as to eligibility for
participation under the Plan.
52
<PAGE>
Exhibit 10.11 FINANCIAL ADVISORY AGREEMENT, DATED FEBRUARY 8, 1999, BETWEEN
COMTREX SYSTEMS CORPORATION AND ALVIN L. KATZ
FINANCIAL ADVISORY AGREEMENT
AGREEMENT made as of this 8th of February, 1999, by and between Comtrex
Systems Corporation (the "Company") and Alvin L. Katz (the"Consultant").
WHEREAS, the Consultant is engaged in the business of providing
financial consulting and business advisory services; and
WHEREAS, the Company desires to engage the Consultant as a financial
advisor and to provide investment banking services for the period set forth
herein and the Consultant desire to perform such services for the Company upon
the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing and of the covenants
and conditions contained herein, the parties hereby agree as follows:
1. Engagement. The Company hereby engages the Consultant to provide
financial consulting and business advisory services hereinafter described, and
the Consultant hereby accept such engagement, both upon the terms and conditions
hereinafter set forth.
2. Term. The term of this Agreement shall commence on the execution of
this Agreement and shall continue for a two year period. Nothing contained
herein shall relieve the Company from liability for approved expenses incurred
by the Consultant hereunder.
3. Duties. During the term of its engagement hereunder, the Consultant
shall, as described below, serve and advise the Company in connection with the
Company's general financial and operational needs, the market for its
securities, potential mergers and acquisitions and other areas in which the
Consultant's expertise will be beneficial to the Company. The Consultant shall
review the Company's present operations and plans, its status in the financial
community and the nature and extent of the market for its currently traded
securities.
4. Compensation. For their services hereunder and in consideration of
the payment of $100, and for other good and valuable consideration, the receipt
of which is hereby acknowledged, the Company shall grant to the Consultant (i)
two year warrants to purchase an aggregate 40,000 shares of the Company's Common
Stock exercisable at $1.00 per share, (ii) three year warrants to purchase an
aggregate 40,000 shares of the Company's Common Stock exercisable at $1.50 per
share, and (iii) three year warrants to purchase an aggregate 40,000 shares of
the Company's Common Stock exercisable at $3.00 per share. All of the foregoing
warrants shall be immediately exercisable.
5. Expenses. The Company shall pay or reimburse the Consultant for all
reasonable expenses paid or incurred by the Consultant in connection with the
performance of its duties hereunder upon proper presentation of expense
statements, receipts or vouchers. Not in limitation of the above, the Consultant
shall be reimbursed for all extraordinary expenses incurred on behalf of the
Company, and at the Company's request, including airfare and other travel
expenses, printing, accounting and/or legal expenses. Any expenses in excess of
$500, in the aggregate during a one month period, shall be pre-approved in
writing by the Company.
53
<PAGE>
6. Confidentiality. The Consultant shall not, during or after the term
of this Agreement, utilize for itself or disclose to any other person or entity
any confidential information of the Company for any reason or purpose
whatsoever, except as required in the performance of its duties hereunder, and
as approved in writing by the Company.
7. Independent Contractor. The Consultant is engaged by the Company
only for the purpose and to the extent required in this Agreement, and the
Consultant's relationship to the Company shall, during the period of this
Agreement, be that of an independent contractor.
8. Indemnification. In consideration of Consultant' services provided
hereunder, the Company agrees to indemnify and hold harmless Consultant against
all claims, liabilities or expenses arising out of its performance hereunder,
unless Consultant's conduct has been found to constitute gross negligence or
willful misconduct in a final judgment by a court of competent jurisdiction.
This indemnification, however, shall not relate to any acts of the Consultant
which have not been authorized by the Company.
9. Notices. All notices, demands, payments and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been given if hand delivered or mailed by registered or certified
mail, return receipt requested:
To Consultant: Alvin L. Katz
301 North Birch Road
Ft. Lauderdale, FL 33304-4211
To the Company: Comtrex Systems Corporation
102 Executive Drive
Suite 1
Moorestown, NJ 08057-4224
Attn. Jeffrey C. Rice, President and CEO
10. Miscellaneous.
a. This Agreement constitutes the entire Agreement between the parties
concerning the subject matter hereof and supersedes all prior and
contemporaneous agreements, representations and understandings of the parties.
No supplement, modification, or amendment of this Agreement shall be binding
unless executed in writing by both parties.
b. This Agreement shall be governed under and construed in accordance
with the laws of the State of New Jersey. Section headings are inserted for
convenience only and shall not affect the interpretation of this Agreement.
c. Neither party may assign this Agreement without the prior written
consent of the other party.
54
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMTREX SYSTEMS CORPORATION
By: /s/_______________________
Jeffrey C. Rice
President and CEO
CONSULTANT
/s/_______________________
Alvin L. Katz
55
<PAGE>
Exhibit 21.1 SUBSIDIARIES OF THE COMPANY
Comtrex Systems Corporation Limited, a company incorporated in England (Formerly
Data Terminal Systems Terminals Limited)
As of June 23, 1999, Cash Register Systems, Inc., a Michigan corporation
56
<PAGE>
Exhibit 23.1 CONSENT OF DRUCKER, MATH & WHITMAN, P.C.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8, bearing Registration No. 33-32994, and the Registration Statement on
Form S-3, bearing Registration No. 33-38529, and the Registration Statement on
Form S-8, bearing Registration No. 33-93560, of our report, dated June 24, 1998,
appearing on page 21 of this Annual Report on Form 10-KSB, on the consolidated
financial statements of Comtrex Systems Corporation and subsidiary appearing on
pages 23 to 38 of this Annual Report on Form 10-KSB for the year ended March 31,
1999.
DRUCKER, MATH & WHITMAN, P.C.
North Brunswick, New Jersey
June 24, 1999
57
<PAGE>
Exhibit 24.1 POWERS OF ATTORNEY
COMTREX SYSTEMS CORPORATION
POWER OF ATTORNEY
REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Jeffrey C. Rice his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities to sign Comtrex Systems
Corporation's Report on Form 10-KSB for the fiscal year ended March 31, 1999,
and to file the same with all exhibits thereto, and any amendments thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
/s/ June 25, 1999
- ---------------------------- --------------------
Sidney Dworkin Date
58
<PAGE>
COMTREX SYSTEMS CORPORATION
POWER OF ATTORNEY
REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Jeffrey C. Rice his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities to sign Comtrex Systems
Corporation's Report on Form 10-KSB for the fiscal year ended March 31, 1999,
and to file the same with all exhibits thereto, and any amendments thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
/s/ June 25, 1999
- ----------------------------- -------------------------
Steven D. Roberts Date
59
<PAGE>
COMTREX SYSTEMS CORPORATION
POWER OF ATTORNEY
REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Jeffrey C. Rice his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities to sign Comtrex Systems
Corporation's Report on Form 10-KSB for the fiscal year ended March 31, 1999,
and to file the same with all exhibits thereto, and any amendments thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
/s/ June 25, 1999
- ------------------------- ---------------------
Larry Irwin Date
60
<PAGE>
COMTREX SYSTEMS CORPORATION
POWER OF ATTORNEY
REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Jeffrey C. Rice his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities to sign Comtrex Systems
Corporation's Report on Form 10-KSB for the fiscal year ended March 31, 1999,
and to file the same with all exhibits thereto, and any amendments thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
/s/ June 25, 1999
- ----------------------- -----------------------
Nathan Lipson Date
61
<PAGE>
COMTREX SYSTEMS CORPORATION
POWER OF ATTORNEY
REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Jeffrey C. Rice his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities to sign Comtrex Systems
Corporation's Report on Form 10-KSB for the fiscal year ended March 31, 1999,
and to file the same with all exhibits thereto, and any amendments thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
/s/ June 25, 1999
- ---------------------- ----------------------
Alan G. Schwartz Date
62
<PAGE>
COMTREX SYSTEMS CORPORATION
POWER OF ATTORNEY
REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 1999
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints Jeffrey C. Rice his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities to sign Comtrex Systems
Corporation's Report on Form 10-KSB for the fiscal year ended March 31, 1999,
and to file the same with all exhibits thereto, and any amendments thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue hereof.
/s/ June 25, 1999
- -------------------------- -------------------
Anthony S. Maladra Date
63
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column C Column D Column E
- -------------- ------------ ------------ ------------ ------------- ------------
Charged Charged Balance
Balance at to costs to at
beginning and other end of
Description of period expenses accounts Deductions period
- ----------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997:
Reserve for bad debts $ 166,742 $ 51,664 $ - ($ 31,696)(1) $186,710
============ ============= ============= ============ ========
Reserve for excess and
obsolete inventory $ 88,055 $ 120,232 $ - ($ 19,090)(1) $189,197
============ ============= ============= ============ ========
Year ended March 31, 1998:
($ 30,450)(1)
Reserve for bad debts $ 186,710 $ 1,670 $ 32,445(3) ($ 58,887)(2) $131,488
============ ============= ============= =========== ========
Reserve for excess and ($ 90,853)(1)
obsolete inventory $ 189,197 $ - $ - ($ 37,920)(2) $ 60,424
============ ============= ============= =========== ========
Year ended March 31, 1999:
($ 14,006)(1)
Reserve for bad debts $ 131,488 $ 15,278 $ ($ 24,750)(2) $108,010
============ ============= ============= =========== ========
Reserve for excess and
obsolete inventory $ 60,424 $ 50,848 $ - ($ 34,050)(2) $ 77,222
============ ============ ============= =========== ========
</TABLE>
(1) Write-offs against reserve.
(2) Adjustment of reserve to year end balance.
(3) Opening balance of subsidiary's valuation account at date of acquisition.
64
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 483,917
<SECURITIES> 0
<RECEIVABLES> 2,151,105
<ALLOWANCES> 108,010
<INVENTORY> 1,257,561
<CURRENT-ASSETS> 3,877,542
<PP&E> 1,981,463
<DEPRECIATION> 1,251,243
<TOTAL-ASSETS> 5,369,624
<CURRENT-LIABILITIES> 1,687,809
<BONDS> 0
0
0
<COMMON> 3,594
<OTHER-SE> 5,591,306
<TOTAL-LIABILITY-AND-EQUITY> 5,369,624
<SALES> 8,299,591
<TOTAL-REVENUES> 8,299,591
<CGS> 4,330,906
<TOTAL-COSTS> 7,868,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (9,472)
<INTEREST-EXPENSE> 59,710
<INCOME-PRETAX> 371,393
<INCOME-TAX> 37,963
<INCOME-CONTINUING> 333,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,430
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
