<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13732
COMTREX SYSTEMS CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2353604
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Executive Drive, Moorestown, NJ 08057-4224
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(609) 778-0090
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 5, 1999
----- -------------------------------
Common Stock, par value $.001 3,591,572
<PAGE>
COMTREX SYSTEMS CORPORATION
TABLE OF CONTENTS
FORM 10-QSB
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements, Unaudited
Unaudited Consolidated Balance Sheets
at December 31, 1998 and March 31, 1998
Unaudited Consolidated Statements of Operations for
the three and nine months ended December 31, 1998
and 1997
Unaudited Consolidated Statements of Cash Flow for
the nine months ended December 31, 1998 and 1997
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II
OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
- 2 -
<PAGE>
Item 1.
Financial Statements
COMTREX SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(These statements are unaudited.)
<TABLE>
<CAPTION>
ASSETS
Current assets: December 31, 1998 March 31, 1998
----------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 242,211 $ 313,617
Accounts receivable, net of reserve of
$136,240 and $131,488 as of 12/31/1998
and 3/31/1998, respectively 1,959,173 1,679,136
Note receivable and accrued interest 9,140 14,495
Inventories 1,250,139 1,180,783
Due from officers 6,029 17,523
Prepaid expenses and other 106,557 106,334
----------- -----------
Total current assets 3,573,249 3,311,888
----------- -----------
Property and equipment:
Machinery, equipment, furniture and leasehold 1,501,166 1,426,107
Less - accum depreciation (1,195,985) (1,133,616)
----------- -----------
Net property and equipment 305,181 292,491
----------- -----------
Land and building:
Land and building 468,900 468,900
Less - accum depreciation (18,227) (8,313)
----------- -----------
Net land and building 450,673 460,587
----------- -----------
Other assets:
Purchased and capitalized software and design 1,141,615 1,068,980
Less - accum amortization and depreciation (801,829) (759,411)
----------- -----------
Total other assets 339,786 309,569
----------- -----------
Goodwill 412,498 428,998
----------- -----------
TOTAL ASSETS $ 5,081,387 $ 4,803,533
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 771,440 $ 842,352
Accrued expenses 267,413 200,671
Note payable 217,407 32,500
Customer deposits 29,083 31,901
Current portion, debt and notes payable 63,665 56,136
Deferred revenue 105,125 277,970
----------- -----------
Total current liabilities 1,454,133 1,441,530
----------- -----------
Long term liabilities:
Long term debt, net of current 284,481 296,563
Convertible debentures payable 300,000 300,000
----------- -----------
Total long term liabilities 584,481 596,563
----------- -----------
Deferred income taxes 10,418 10,418
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000
shares authorized, none outstanding - -
Common stock, $.001 par value, 5,000,000
shares authorized, 3,591,572 and 3,583,572
issued and outstanding as of
12/31/1998 and 3/31/1998, respectively 3,592 3,584
Additional paid-in capital 5,564,125 5,557,092
Foreign currency translation adjustment 35,753 34,912
Accumulated deficit (2,571,115) (2,840,566)
----------- -----------
Total shareholders' equity 3,032,355 2,755,022
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,081,387 $ 4,803,533
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
COMTREX SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(These statements are unaudited.)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,126,455 $ 1,771,974 $ 6,260,655 $ 4,391,778
Costs and expenses
Cost of sales 1,091,266 860,856 3,317,920 2,507,969
Administrative 260,243 262,528 806,764 571,113
Research and
development 35,684 59,562 112,717 169,273
Sales and marketing 228,783 190,633 603,393 449,239
Customer support 315,404 224,676 921,284 360,409
Depreciation and
amortization 47,369 46,611 131,201 107,667
----------- ----------- ----------- -----------
1,978,749 1,644,866 5,893,279 4,165,670
----------- ----------- ----------- -----------
Income from operations 147,706 127,108 367,376 226,108
Interest expense, net (12,540) (25,024) (44,590) (27,636)
----------- ----------- ----------- -----------
Income before income taxes 135,166 102,084 322,786 198,472
Provision for income taxes 15,490 2,400 53,335 2,400
----------- ----------- ----------- ------------
Net income $ 119,676 $ 99,684 $ 269,451 $ 196,072
=========== =========== =========== ===========
Basic earnings per share:
Net income $ .03 $ .03 $ .08 $ .06
=========== =========== =========== ===========
Diluted earnings per share:
Net income $ .03 $ .03 $ .08 $ .06
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
COMTREX SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(These statements are unaudited.)
<TABLE>
<CAPTION>
Nine months ended
December 31,
1998 1997
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 269,451 $ 196,072
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities -
Depreciation and amortization 131,201 107,667
Deferred income tax - 2,400
Provisions for losses on accounts
receivable 20,322 17,413
Provisions for losses on inventories 49,000 8,500
Foreign currency translation adjustment 841 -
(Increase) decrease in -
Accounts receivable (300,359) (189,844)
Note receivable 5,355 650
Inventories (118,356) 146,711
Due from officers 11,494 -
Prepaid expenses and other (223) 345
Increase (decrease) in -
Accounts payable (70,912) (51,085)
Accrued expenses 66,742 (4,492)
Customer deposits (2,818) (13,778)
Deferred revenue (172,845) 37,499
Notes payable, current 7,529 6,184
----------- -----------
Net cash provided by (used in)
operating activities (103,578) 264,242
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchases) of property and equipment:
Purchases of property and equipment (75,059) (15,449)
Purchases of software and capitalized
software and design (72,635) -
Proceeds from disposals of property,
plant and equipment - 7,202
Capitalized acquisition costs - (82,605)
----------- -----------
Net cash provided by (used in)
investing activities (147,694) (90,852)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under credit facilities 795,993 300,000
Repayments under credit facilities (578,586) (300,000)
Payments on notes and other loans (32,500) (16,250)
Payments on long-term debt (12,082) (15,640)
Proceeds from issuing equity securities 7,041 7,627
----------- -----------
Net cash provided by (used in)
financing activities 179,866 (24,263)
----------- -----------
Net increase (decrease) in cash (71,406) 149,127
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 313,617 142,886
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 242,211 $ 292,013
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
COMTREX SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Interim financial reporting:
The accompanying financial statements should be read in conjunction
with the financial statements and notes included in the Company's latest Annual
Report on Form 10-KSB.
These interim financial statements reflect all adjustments, of a normal
and recurring nature, which are, in the opinion of management, necessary for a
fair statement of the results for the interim period(s) presented. The results
for the period(s) herein presented are not necessarily indicative of the results
for the entire fiscal year.
2. Inventories:
December 31, March 31,
1998 1998
----------- -----------
Raw materials $ 667,277 $ 706,342
Work-in-process 102,159 91,398
Finished goods 590,127 443,467
Reserve for excess and obsolete inventory (109,424) (60,424)
----------- -----------
$ 1,250,139 $ 1,180,783
=========== ===========
3. Income taxes:
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $3,000,000 (which begin to expire in 2004) and tax
credit carryforwards for state income tax purposes of approximately $148,000.
Such loss carryforwards and tax credits result in deferred tax assets of
approximately $1,350,000, which has been offset by a valuation allowance of
equal amount. During the quarter ended December 31, 1998, the valuation account
was reduced by $31,000.
The components of the provision for income taxes consist of current
expense (foreign) of $15,490, current expense (U.S.) of $31,000, offset by the
benefits of net operating loss carryforwards of $31,000.
4. Earnings per share disclosure:
<TABLE>
<CAPTION>
Three months ended
December 31, 1998
-----------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Net income $ 119,676
Basic EPS:
Income available to common shareholders $ 119,676 3,591,572 $ 0.03
Effect of dilutive securities, options 68,212
Effect of dilutive convertible debenture 9,698
Diluted EPS:
Income available to common shareholders $ 123,676 3,669,482 $ 0.03
</TABLE>
For purposes of computing diluted per share data, $4,000 of interest
related to the convertible debenture was added to net income.
- 6 -
<PAGE>
COMTREX SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Earnings per share disclosure: (continued)
<TABLE>
<CAPTION>
Nine months ended
December 31, 1998
-----------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Net income $ 269,451
Basic EPS:
Income available to common shareholders $ 269,451 3,588,905 $ 0.08
Effect of dilutive securities, options 75,091
Effect of dilutive convertible debenture 25,176
Diluted EPS:
Income available to common shareholders $ 285,451 3,689,172 $ 0.08
</TABLE>
For purposes of computing diluted per share data, $16,000 of interest
related to the convertible debenture was added to net income.
<TABLE>
<CAPTION>
Three months ended
December 31, 1997
-----------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Net income $ 99,684
Basic EPS:
Income available to common shareholders $ 99,684 3,583,072 $ 0.03
Effect of dilutive securities, options 63,907
Diluted EPS:
Income available to common shareholders $ 99,684 3,646,979 $ 0.03
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
December 31, 1997
-----------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Net income $ 196,072
Basic EPS:
Income available to common shareholders $ 196,072 3,305,650 $ 0.06
Effect of dilutive securities, options 37,614
Diluted EPS:
Income available to common shareholders $ 196,072 3,343,264 $ 0.06
</TABLE>
5. Stock purchase transaction
On October 2, 1997, the Company acquired from Norman Roberts
("Norman"), Shirley Roberts ("Shirley"), and Steven Roberts ("Steven" together,
with Norman and Shirley, the "Sellers") all the issued and outstanding capital
stock (the "Stock") of Data Systems Terminals Limited, a corporation formed and
existing under the laws of England ("DSTL"). DSTL is a distributor of the
Company's products in the United Kingdom, which business the Company intends to
continue.
The following consideration was paid by the Company for such
acquisition of the Stock:
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<PAGE>
COMTREX SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
5. Stock purchase transaction: (continued)
(a) 400,000 restricted shares of the Common Stock of the Company, par
value $.001 per share, were delivered by the Company to Steven. These shares of
the Company's Common Stock are not transferable by Steven on or before October
2, 1999.
(b) A Subordinated Convertible Debenture, in the original principal
amount of $300,000 (the "Debenture"), was delivered by the Company to Norman and
Shirley. The Debenture accrues interest at the rate of eight percent (8%) per
annum, which is payable monthly. No principal is payable pursuant to the terms
of the Debenture for the first three (3) years following its delivery. The
Debenture is convertible into shares of the Company's Common Stock (in blocks of
20,000 shares), at any time on or before October 2, 2000, at the rate of $1.00
per share. The Company may prepay all amounts outstanding under the Debenture at
any time on or before October 2, 2000 if (i) the shares of the Company's Common
Stock have closed at $1.50, or higher, for each trading day for a thirty (30)
day period, and (ii) the Company has provided the holders of the Debenture with
at least sixty (60) days prior written notice of the prepayment. Any principal
outstanding of the Debenture on October 2, 2000 shall be paid by the Company in
twelve (12) equal quarterly installments. The Company anticipates that internal
funds will be utilized to make all interest and principal payments due under the
Debenture.
(c) A promissory note, in the original principal amount of $65,000 (the
"Note"), was delivered to Norman and Shirley. The Note bears interest at the
rate of six percent (6%) per annum. The outstanding principal balance of the
Note, and all interest accrued thereon, is repayable in twelve (12) equal
monthly installments, commencing on November 1, 1997. The note has subsequently
been paid in full, pursuant to its terms, utilizing internal funds.
The business combination will be accounted for using the purchase
method.
The cost of the acquired enterprise was $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 will be amortized over twenty (20) years, using the
straight line method.
6. Pro forma financial data (unaudited):
As outlined in Footnote 5, the Company acquired all the issued and
outstanding capital stock of DSTL, effective October 2, 1997. The following pro
forma financial data, unaudited, reflects revenue, income from continuing
operations, net income and income per share for the nine month period ended
December 31, 1997, as though the transaction occurred as of April 1, 1997.
Nine months ended
December 31, 1997
-----------------
Revenue $ 5,606,014
Income from continuing operations 274,101
Net income 191,942
Income per share 0.06
- 8 -
<PAGE>
COMTREX SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
7. Capital structure disclosure:
In connection with the acquisition of DSTL, outlined in Footnote 5, a
Subordinated Convertible Debenture, in the original principal amount of $300,000
(the "Debenture"), was delivered by the Company to Norman and Shirley. The
Debenture accrues interest at the rate of eight percent (8%) per annum, which is
payable monthly. No principal is payable pursuant to the terms of the Debenture
for the first three (3) years following its delivery. The Debenture is
convertible into shares of the Company's Common Stock (in blocks of 20,000
shares), at any time on or before October 2, 2000, at the rate of $1.00 per
share. The Company may prepay all amounts outstanding under the Debenture at any
time on or before October 2, 2000 if (i) the shares of the Company's Common
Stock have closed at $1.50, or higher, for each trading day for a thirty (30)
day period, and (ii) the Company has provided the holders of the Debenture with
at least sixty (60) days prior written notice of the prepayment. Any principal
outstanding of the Debenture on October 2, 2000 shall be paid by the Company in
twelve (12) equal quarterly installments. The Company anticipates that internal
funds will be utilized to make all interest and principal payments due under the
Debenture.
8. Year 2000 compliance:
The Company is working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900, rather than the year 2000,
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has not yet completed
its assessment, but currently believes that costs of addressing this issue will
not have a material adverse impact on the Company's financial position. However,
if the Company and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company plans to
devote all resources required to resolve any significant year 2000 issues in a
timely manner.
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<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of December 31, 1998, the Company had total current assets of
$3,573,249, including cash and cash equivalents of $242,211, as compared to
$3,311,888 of total current assets and $313,617 of cash and cash equivalents as
of March 31, 1998. The Company had current liabilities of $1,454,133, resulting
in a current ratio of 2.5 as of December 31, 1998, compared to $1,441,530 and
2.3, respectively, as of March 31, 1998.
Cash and cash equivalents decreased by $71,406 during the first nine
months of fiscal year 1999. Operating activities consumed $103,578, as compared
with cash generation of $264,242 for the corresponding prior year period.
Investing activities consumed $147,694 of cash during the current period.
Financing activities provided $179,886 during the current period, principally
through short term borrowings.
The Company reported net income of $119,676 and $269,451 for the three
month and nine month periods ended December 31, 1998, respectively. The Company
has net operating loss carryforwards of approximately $3,000,000 for federal
income tax purposes, which do not begin to expire until 2004, and tax credit
carryforwards of approximately $148,000.
In addition to net income, the primary positive contributor to cash
flow from operating activities was depreciation and amortization expense of
$131,201. The primary negative contributions to cash flow from operating
activities came from increases in accounts receivable and inventories and a
decrease in deferred revenue. Accounts receivable increased during the nine
month period by $280,037, net of reserves. Inventories increased during the nine
month period by $69,356, while declining during the quarter ended December 31,
1998 by $81,491, both figures net of reserves. All of the increase in
inventories occurred during the first three months of the fiscal year. Deferred
revenue is principally comprised of prepayments on maintenance contracts in the
Company's U.K. subsidiary and its Atlanta District Office, many of which are
pro-rated over the calendar year.
The increase in receivables is a result both of increased sales and the
timing of payments received, principally from a single customer of Comtrex U.K.
Using sales during the immediately preceding quarter, accounts receivables
represented approximately 76 days of sales as of March 31, 1998 and 83 days of
sales as of December 31, 1998. In excess of 35% of the net sales of Comtrex U.K.
are derived from a single customer whose fiscal year ends December 31. Payments
received from this customer during the first two weeks of January, 1999 were in
excess of $250,000. The Company believes that the timing of these payments
relates to the financial presentation of the customer's fiscal year, and are not
indicative of a normal payment pattern. Had these payments been received as of
December 31, 1998, accounts receivable would have represented 72 days of sales
as of that date.
The overall net increase in inventories is a combination factors. The
planned, gradual phase-out of the Company's proprietary Sprint and SuperSprint
products lines is acting to reduce inventories. An increasing level of sales and
initial stocking activity for the Company's new iTP Series of terminals are both
contributing to an increased requirement for inventory. The hardware components
of the PCS/5000 product line, including the new iTP Series of terminals, are
configured principally with completed assemblies, including circuit boards and
cabinetry, 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.
Investing activities consumed $147,694 of cash during the nine month
period ended December 31, 1998, through a combination of purchased property and
equipment and capitalized software and design. The Company is in the process of
upgrading its internal accounting systems in readiness for installation of new
software which is Year 2000 compliant. Additional P&E expenses include
demonstration products and other sales and marketing related equipment.
- 10 -
<PAGE>
Liquidity and Capital Resources (continued)
Financing activities provided $179,866 of cash, as net borrowings under
the Company's credit facilities of $217,407 offset payments on long term debt,
notes and other loans during the nine month period. The Company expects to
continue to utilize its credit facilities from time to time for short term cash
requirements.
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 period ended September 30, 1998, these
adjustments had a negligible impact of $841 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 $35,753 and $34,912 as of December 31
and March 31, 1998, respectively.
In March of 1998, the Company's wholly owned subsidiary in the U.K.,
Comtrex Systems Corporation LTD, entered into a line of credit agreement with
Barclays Bank PLC. The agreement calls for borrowings of up to (pound)150,000,
and expires on March 30, 1999. 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 June of 1998, the Company and PNC Bank N.A. entered into a $700,000
credit facility which expires on July 31, 1999. The initial agreement with PNC
Bank provided for borrowings of up to $650,000, and for the issuance by the bank
of up to $50,000 of Irrevocable Letters of Credit. During November of 1998, the
total facility was increased to $850,000, to allow for the issuance by the bank
of up to $200,000 of Irrevocable Letters of Credit. The credit facility with PNC
Bank replaced a line of credit agreement with Fleet Bank N.A., entered into in
October of 1997 and which extended through July of 1998. The agreement with
Fleet Bank provided for borrowings of up to $750,000, with a limitation
depending on the eligible receivables, as defined in the agreement. Both the new
and previous facility provide for interest at the banks' prime rate, and for
collateral assignment of substantially all assets of the Company. The facility
with PNC Bank N.A., however, contains no provisions limiting the borrowings
amount depending on eligible receivables, such as were contained in the
agreement with Fleet Bank N.A.
The Company believes that its cash balance, together with its lines of
credit, provides the Company with adequate liquidity to finance its projected
operations. As of December 31, 1998, the Company had no material commitments for
capital expenditures.
Results of Operation
Net sales during the third quarter of fiscal year 1999 increased by
20%, to $2,126,455, as compared with corresponding sales of $1,771,974 during
the third quarter of fiscal year 1998. Company results for each of the
comparable third quarter periods consolidate the operations of the Company's
U.K. subsidiary, which was acquired as of October 2, 1997, as outlined in Note 5
to the Notes to Consolidated Financial Statements. For the nine month period,
net sales increased by 43%, from $4,391,778 to $6,260,655, for fiscal years 1998
and 1999, respectively. A primary contributing factor to the increase in
corresponding sales during the current nine month period was the U.K.
acquisition, and the resulting consolidation of sales during the entire nine
month period of fiscal year 1999. Note 6 to the Notes to Consolidated Financial
Statements provides pro forma information relating to results of operation
during the nine month period ended December 31, 1997, as if the acquisition had
occurred at the beginning of fiscal year 1998.
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.
- 11 -
<PAGE>
Results of Operation (continued)
The Company reported net income of $119,676 for the current three month
period, or $.03 per share, as compared with net income of $99,684, also $.03 per
share, for the comparable prior year period. Net income for the nine month
period was $269,451, or $.08 per share, as compared with net income of $196,072,
or $.06 per share, for the first nine months of the prior fiscal year.
Sales, marketing and customer support expenses increased from $415,309,
or 23% of sales, during the third quarter of fiscal year 1998, to $544,187, or
26% of sales during the most recent quarter. During the third quarter, the
Company commenced direct sales in the greater Philadelphia area out of its New
Jersey headquarters, incurring additional such expenses. For the nine month
period, such expenses increased from $809,648, or 18% of sales, to $1,524,677,
or 24% of sales for fiscal years 1998 and 1999, respectively. 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 expenses required for such sales
activities directly to end users will represent a higher percentage of sales
than is associated with sales through a dealer or distribution channel.
For the comparable quarterly periods, administrative expenses were
essentially identical, while decreasing when expressed as a percentage of sales,
as a result of the 20% increase in net sales for the current quarter over the
prior third quarter. Administrative expenses for the third quarters of fiscal
years 1999 and 1998 were $260,243 and $262,528, respectively, representing 12%
and 15% of net sales, respectively. For the comparable nine month periods of
fiscal years 1999 and 1998, administrative expenses were $806,764, or 13% of net
sales, and $571,113, also 13% of net sales, respectively.
Cost of sales during the third quarter and first nine month period of
fiscal year 1999 were 51% and 53% of net sales, respectively, as compared to 49%
and 57% of net sales, respectively, for the comparable quarter and nine month
period of the prior fiscal year. The reduction in cost of sales over the nine
month period, and increase in gross margin, is a result of the consolidation of
sales of Comtrex U.K., and increased sales through the Company's Atlanta
District Office. While selling and support expenses represent a higher
percentage of sales which are made directly to end users than sales through a
distribution network, the gross margin on sales to end users is significantly
greater. In addition to product sales, maintenance services and contracts,
installation and implementation services represent a significant percentage of
the total sales of both the Atlanta office and Comtrex U.K. Such service related
revenue is at a greater gross margin than initial product sales.
As of February 5, 1999, the Company's backlog was approximately
$622,911, as compared to the Company's corresponding backlog as of February 3,
1998 of approximately $683,000. The Company expects that substantially all of
its current backlog will be shipped within the next 90 days.
Forward Looking Statements
This Form 10-QSB discusses primarily historical information. Statements
included in this Form 10-QSB, to the extent they are forward looking, are based
on current management expectations that involve a number of uncertainties and
risks. Potential risks and uncertainties include, without limitation, the impact
of economic conditions generally; the competitive nature of the intelligent
point-of-sale terminal industry; the Company's ability to enhance its existing
products and develop and introduce new products which keep pace with
technological developments in the marketplace; and market demand.
- 12 -
<PAGE>
Item 5.
OTHER INFORMATION
Stockholder Proposals
Stockholder proposals intended to be considered at the 1999 Annual
Meeting of Stockholders and which the proponent would like to have included in
the proxy materials distributed by the Company in connection with such meeting,
pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), must be received at the principal executive offices of
the Company no later than March 19, 1999. Such proposals may be included in next
year's proxy materials if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission.
Stockholder proposals intended to be considered at the 1999 Annual
Meeting of Stockholders and for which the proponent does not intend to seek
inclusion of the proposal in the proxy materials to be distributed by the
Company in connection with such meeting must be received at the principal
executive offices of the Company no later than June 2, 1999. Any stockholder
proposal received after such date will not be considered to be timely submitted
for purposes of the discretionary voting provisions of Rule 14a-4 promulgated
under the 1934 Act. In accordance with Rule 14a-4(c), the holders of proxies
solicited by the Board of Directors of the Company in connection with the
Company's 1999 Annual Meeting of Stockholders may vote such proxies in their
certain matters as more fully described in such Rule, including without
limitation on any matter coming before the meeting as to which the Company does
not have notice on or before June 2, 1999.
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
27 *(1) Financial Data Schedule
*(1) Filed herewith.
Reports on Form 8-K
No Form 8-K's were filed in the quarter ended December 31, 1998.
- 13 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMTREX SYSTEMS CORPORATION
(Registrant)
Date: February 12, 1999 By: /s/ Jeffrey C. Rice
-------------------- ----------------------------------------
Jeffrey C. Rice
Chief Executive Officer
Date: February 12, 1999 By: /s/ Lisa J. Mudrick
-------------------- ----------------------------------------
Lisa J. Mudrick
Chief Financial &
Chief Accounting Officer
- 14 -
<PAGE>
EXHIBIT INDEX
Exhibit
-------
27 Financial Data Schedule
- 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 242,211
<SECURITIES> 0
<RECEIVABLES> 2,095,413
<ALLOWANCES> 136,240
<INVENTORY> 1,250,139
<CURRENT-ASSETS> 3,573,249
<PP&E> 1,501,166
<DEPRECIATION> 1,195,985
<TOTAL-ASSETS> 5,081,387
<CURRENT-LIABILITIES> 1,454,133
<BONDS> 0
0
0
<COMMON> 3,592
<OTHER-SE> 5,564,125
<TOTAL-LIABILITY-AND-EQUITY> 5,081,387
<SALES> 6,260,655
<TOTAL-REVENUES> 6,260,655
<CGS> 3,317,920
<TOTAL-COSTS> 5,893,279
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20,322
<INTEREST-EXPENSE> 44,590
<INCOME-PRETAX> 322,786
<INCOME-TAX> 53,335
<INCOME-CONTINUING> 269,451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 269,451
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
