<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-13732
COMTREX SYSTEMS CORPORATION
---------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-2353604
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
102 Executive Drive, Moorestown, NJ 08057-4224
-----------------------------------------------
(Address of principal executive offices)
(856) 778-0090
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at November 10, 2000
----- --------------------------------
Common Stock, par value $.001 3,866,572
Transitional Small Business Disclosure Form (check one):
Yes ___ No _X_
<PAGE>
COMTREX SYSTEMS CORPORATION
TABLE OF CONTENTS
FORM 10-QSB
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements, Unaudited
Unaudited Consolidated Balance Sheets
at September 30, 2000 and March 31, 2000
Unaudited Consolidated Statement of Operations
for the six months ended September 30, 2000 and 1999
Unaudited Consolidated Statement of Cash Flow
for the six months ended September 30, 2000 and 1999
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or
Plan of Operation
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(These statements are unaudited.)
<TABLE>
<CAPTION>
ASSETS
Current assets: September 30, 2000 March 31, 2000
------------------ --------------
<S> <C> <C>
Cash and cash equivalents $ 17,683 $ 246,270
Accounts receivable, net of reserve of
$98,551 and $99,318 as of September 30, 2000
and March 31, 2000, respectively 2,574,478 3,022,935
Inventories 1,928,349 1,808,984
Prepaid expenses and other 135,945 116,668
----------- -----------
Total current assets 4,656,455 5,194,857
----------- -----------
Property and equipment:
Land 156,244 156,244
Building 312,656 312,656
Machinery, equipment, furniture and leasehold 1,687,007 1,639,881
----------- -----------
2,155,907 2,108,781
Less - accumulated depreciation (1,421,843) (1,372,781)
----------- -----------
Net property and equipment 734,064 736,000
----------- -----------
Other assets:
Purchased and capitalized software and design,
net of amortization 424,557 409,188
Goodwill, net of amortization 535,784 551,125
----------- ------------
Total other assets 960,341 960,313
----------- -----------
TOTAL ASSETS $ 6,350,860 $ 6,891,170
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit loan $ 1,125,000 $ 775,000
Accounts payable 479,246 1,020,988
Current portion of long term debt 81,313 64,711
Income and V.A.T. payable 93,664 146,471
Accrued expenses 219,279 168,502
Deferred revenue 272,653 464,153
Customer deposits 48,624 37,640
----------- -----------
Total current liabilities 2,319,779 2,677,465
----------- -----------
eferred income taxes 10,051 10,051
----------- -----------
Long term liabilities:
Long term debt, net of current 240,568 245,213
Convertible debentures payable, net of current 216,667 256,667
----------- -----------
Total long term liabilities 457,235 501,880
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000
shares authorized, none outstanding - -
Common stock, $.001 par value, 10,000,000
shares authorized, 3,866,572 and 3,840,572
issued and outstanding as of
September 30, 2000 and March 31, 2000, respectively 3,867 3,841
Additional paid-in capital 5,782,538 5,757,704
Foreign currency translation adjustment (7,314) 29,651
Accumulated deficit (2,215,296) (2,089,422)
----------- -----------
Total shareholders' equity 3,563,795 3,701,774
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,350,860 $ 6,891,170
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(These statements are unaudited.)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,755,793 $ 2,265,194 $ 4,025,993 $ 4,410,609
Costs and expenses
Cost of sales 814,757 1,114,926 1,882,283 2,238,673
Administrative 340,674 325,353 654,590 619,444
Research and development 58,419 39,465 110,615 75,461
Sales and marketing 245,447 245,803 506,817 470,190
Customer support 402,668 390,754 805,705 680,493
Depreciation and amortization 51,548 51,850 106,838 99,503
----------- ----------- ----------- -----------
1,913,513 2,168,151 4,066,848 4,183,764
----------- ----------- ----------- -----------
Income (loss) from operations (157,720) 97,043 (40,855) 226,845
Interest income (expense), net (38,364) (32,164) (72,324) (44,532)
----------- ----------- ----------- -----------
Income (loss)
before income taxes (196,084) 64,879 (113,179) 182,313
Provision for income taxes 367 3,310 12,695 9,480
----------- ----------- ----------- -----------
Net income (loss) $ (196,451) $ 61,569 $ (125,874) $ 172,833
=========== =========== =========== ===========
Basic earnings per share:
Net income (loss) $ (.05) $ .02 $ (.03) $ .05
=========== =========== =========== ===========
Diluted earnings per share:
Net income (loss) $ (.05) $ .02 $ (.03) $ .05
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(These statements are unaudited.)
<TABLE>
<CAPTION>
Six months ended
September 30,
2000 1999
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (125,874) $ 172,833
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities -
Depreciation and amortization 106,838 99,441
Provisions for losses on accounts
receivable 2,426 3,258
Provisions for losses on inventories - 20,000
Foreign currency translation adjustment (36,965) 37,939
(Increase) decrease in -
Accounts receivable 355,588 (260,920)
Inventories (146,400) (613,071)
Prepaid expenses and other (22,214) (30,954)
Increase (decrease) in -
Accounts payable (465,802) 100,098
Current portion of long term debt 43,183 -
Accrued expenses 10,557 (10,129)
Customer deposits 10,984 42,945
Deferred revenue (160,317) (191,839)
Notes payable, current - -
------------ -----------
Net cash provided by (used in)
operating activities (427,996) (630,399)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchases) of property and equipment:
Purchases of property and equipment (47,126) (45,328)
Purchases of software and capitalized
software and design (57,500) (55,783)
Cost of acquiring district - (8,489)
------------ -----------
Net cash provided by (used in)
investing activities (104,626) (109,600)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit, net 350,000 510,502
Payments on Debt (70,825) (22,895)
Proceeds from issuing equity securities 24,860 4,941
------------ -----------
Net cash provided by (used in)
financing activities 304,035 492,548
------------ ------------
Net increase (decrease) in cash (228,587) (247,451)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 246,270 483,917
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,683 $ 236,466
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business:
Comtrex Systems Corporation ("Comtrex" or "the Company") is a Delaware
corporation, initially incorporated in New Jersey in April, 1981. Comtrex
designs, develops, assembles, markets, sells and provides services for computer
software, electronic terminals and turn-key systems for restaurants, both table
and quick service. The Company's hardware and software systems provide
transaction processing, operational controls and management information, both
in-store and on an enterprise level. The Company markets its products through a
network of authorized distributors in Canada, France, Belgium, Germany,
Portugal, Holland, Ireland and Australia, and through a wholly-owned subsidiary
in the United Kingdom. In the United States, the Company markets its products
through a network of dealers and through its own direct sales offices.
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 its distributor in the United Kingdom and
engaged in the direct sale and service of its products throughout the U.K. In
June, 1999, Comtrex acquired its dealer in Pontiac, Michigan and engaged in the
direct sale and service of its products in the Detroit metropolitan area and in
the mid-western United States. Hereinafter, Comtrex and its subsidiary are
referred to as the Company.
Basis of presentation:
The accompanying consolidated financial statements have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the SEC. In the opinion of the
Company's management, all adjustments necessary for a fair presentation of the
accompanying unaudited consolidated financial statements are reflected herein.
All such adjustments are normal and recurring in nature. All significant
intercompany transactions and balances have been eliminated. Interim results are
not necessarily indicative of the results for the full year or for any future
interim periods. For more complete financial information, these consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 2000, as filed with the SEC.
Foreign currency translation:
Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the foreign currency
translation adjustment in shareholders' equity.
2. INVENTORIES:
Inventories include the cost of materials, labor and overhead and are
valued at the lower of cost (first-in, first-out) or market as follows:
September 30, March 31,
2000 2000
----------- -----------
Raw materials $ 824,039 $ 838,633
Work-in-process 142,533 50,838
Finished goods 1,041,777 999,513
Reserve for excess and obsolete inventory (80,000) (80,000)
----------- -----------
$ 1,928,349 $ 1,808,984
=========== ===========
6
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES:
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,452,000, which begin to expire in 2004. Such loss
carryforwards result in deferred tax assets of approximately $985,000, which has
been offset by a valuation allowance of equal amount. During the quarter ended
September 30, 2000, the valuation account was not affected.
The components of the provision for income taxes for the six months
ended September 30, 2000 consist of current expense (foreign) of $12,495, and
current expense (U.S.) of $200, respectively. The current expense (U.S.) for
both periods has been offset by the benefits of net operating loss carryforwards
through the reduction of the valuation account.
4. EARNINGS PER SHARE DISCLOSURE:
In the quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). It replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is
based upon the weighted average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
A reconciliation of the basic and diluted EPS for the three months
ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, 2000
------------------
Income (Loss) Shares Per Share
------------- ------ ---------
<S> <C> <C> <C>
Net income (loss) $(196,451)
Basic EPS:
Income (loss) available to common shareholders (196,451) 3,853,239 $ (0.05)
Effect of dilutive securities, options and
warrants 38,025
Effect of dilutive convertible debenture 5,333 266,667
Diluted EPS:
Income available to common shareholders $(191,118) 4,157,931 $ (0.05)
</TABLE>
For purposes of computing diluted per share data, $5,333 of interest
related to the convertible debenture was added to net income.
<TABLE>
<CAPTION>
Six months ended
September 30, 2000
------------------
Income (Loss) Shares Per Share
------------- ------ ---------
<S> <C> <C> <C>
Net income (loss) $(125,874)
Basic EPS:
Income (loss) available to common shareholders (125,874) 3,846,905 $ (0.03)
Effect of dilutive securities, options 52,106
Effect of dilutive convertible debenture 10,933 273,333
Diluted EPS:
Income available to common shareholders $(114,941) 4,172,344 $ (0.03)
</TABLE>
For purposes of computing diluted per share data, $10,933 of interest
related to the convertible debenture was added to net income.
7
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER SHARE DISCLOSURE: (CONTINUED)
<TABLE>
<CAPTION>
Three months ended
September 30, 1999
------------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Net income $ 61,569
Basic EPS:
Income available to common shareholders 61,569 3,754,072 $ 0.02
Effect of dilutive securities, options and
warrants 75,122
Effect of dilutive convertible debenture 6,000 300,000
Diluted EPS:
Income available to common shareholders $ 67,569 4,129,194 $ 0.02
</TABLE>
For purposes of computing diluted per share data, $6,000 of interest
related to the convertible debenture was added to net income.
<TABLE>
<CAPTION>
Six months ended
September 30, 1999
------------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Net income $ 172,833
Basic EPS:
Income available to common shareholders 172,833 3,675,655 $ 0.05
Effect of dilutive securities, options 69,222
Effect of dilutive convertible debenture 12,000 300,000
Diluted EPS:
Income available to common shareholders $ 184,833 4,044,877 $ 0.05
</TABLE>
For purposes of computing diluted per share data, $12,000 of interest
related to the convertible debenture was added to net income.
5. SEGMENT INFORMATION
In the fiscal year ended March 31, 1999, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise", replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The Company has two reportable segments: the United States
and the United Kingdom.
<TABLE>
<CAPTION>
Three months ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales:
United States, domestic $ 621,364 $ 815,192 $ 1,488,694 $ 1,527,096
United States, export 545,923 698,387 1,300,806 1,621,520
United Kingdom 849,709 951,861 1,816,743 1,831,058
Transfers between segments (261,203) (200,246) (580,250) (569,065)
----------- ----------- ----------- -----------
Net sales $ 1,755,793 $ 2,265,194 $ 4,025,993 $ 4,410,609
=========== =========== =========== ===========
</TABLE>
8
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Three months ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
United States $ (183,784) $ 61,961 $ (135,840) $ 187,543
United Kingdom 3,051 12,619 63,790 37,168
Corporate (15,351) (9,701) (41,129) (42,398)
----------- -------- ---------- ---------
Income before
income taxes $ (196,084) $ 64,879 $ (113,179) $ 182,313
========== ======== ========== =========
Depreciation and amortization:
United States $ 34,910 $ 34,482 $ 73,504 $ 65,441
United Kingdom 9,538 10,268 19,134 19,862
Corporate 7,100 7,100 14,200 14,200
----------- -------- ---------- ---------
$ 51,548 $ 51,850 $ 106,838 $ 99,503
========== ======== ========== =========
</TABLE>
September 30, 2000 March 31, 2000
------------------ --------------
Identifiable assets:
United States $ 4,786,520 $ 4,841,358
United Kingdom 2,126,380 2,414,652
Corporate 373,998 384,998
Eliminations (936,038) (749,838)
----------- -----------
Total assets $ 6,350,860 $ 6,891,170
=========== ===========
Long lived assets:
United States $ 156,993 $ 150,716
United Kingdom 577,071 585,284
----------- ------------
$ 734,064 $ 736,000
=========== ===========
6. COMPREHENSIVE INCOME
In the fiscal year ended March 31, 1999, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in equity
(net assets) of a business enterprise during the period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The Company's comprehensive income is comprised of net
income and foreign currency translation adjustments. Comprehensive income (loss)
is $(213,039) and $154,617 for the quarters ended September 30, 2000 and 1999,
respectively, and $(162,839) and $207,579 for the six months ended September 30,
2000 and 1999, respectively. The difference from net income as reported is the
tax effected change in the foreign currency translation adjustment component of
shareholders' equity.
9
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK PURCHASE TRANSACTION:
On June 23, 1999, the Company 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. Results of operation of
Comtrex Michigan have been consolidated with those of the Company effective as
of July 1, 1999, the beginning of the second quarter of the Company's 2000
fiscal year.
The cost of the acquired enterprise is $171,915, which represents
150,000 shares of Comtrex common stock with an assigned value of $100,800,
$62,628 of net liabilities assumed in the transaction and associated legal fees
of $8,489. Acquired goodwill of $171,915 is being amortized over 20 years, using
the straight-line method.
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-QSB 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-QSB 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 the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 2000, as filed with the SEC.
Liquidity and Capital Resources
As of September 30, 2000, the Company had total current assets of
$4,656,455, including cash and cash equivalents of $17,683, as compared to
$5,194,857 of total current assets and $246,270 of cash and cash equivalents as
of March 31, 2000. The Company had current liabilities of $2,319,779, resulting
in a current ratio of 2.0 as of September 30, 2000, compared to $2,677,465 and
1.9, respectively, as of March 31, 2000.
Cash and cash equivalents decreased by $228,587 during the first six
months of fiscal year 2001. Operating activities consumed $427,996 of cash, as
compared with cash consumption of $630,399 for the corresponding prior year
period. Investing activities consumed $104,626 during the first six months of
fiscal year 2001 while financing activities provided $304,035, as compared with
a net consumption of $109,600 for investing activities and net provision of
$492,548 from financing activities in the corresponding prior year period. Cash
provided by financing activities in both periods was principally from the
Company's line of credit.
The Company reported a net loss of $125,874 for the six month period
ended September 30, 2000. The Company has net operating loss carryforwards of
approximately $2,430,000 for federal income tax purposes, which do not begin to
expire until 2004.
The financial statements of Comtrex U.K. are translated into U.S.
dollars for financial reporting purposes. Revenues and expenses are translated
at an average exchange rate during the fiscal year, and the assets and
liabilities of Comtrex U.K. are translated at that average rate of exchange at
the end of each fiscal quarter. As a consequence of a difference in the exchange
rate used during fiscal year 2001 and the exchange rate as of March 31, 2000,
differences between accounts on the consolidated balance sheets as of September
30, 2000 and March 31, 2000 do not involve cash outlay to the extent they are
merely the result of a differing rate of exchange. The following analysis
relates to the changes in the Company's balance sheet accounts on a cash flow
basis.
A decrease in accounts receivable of $355,588 along with depreciation
of $106,838 represented significant positive contributions to cash flow for the
six month period ending September 30, 2000. These positive cash flows were
offset by a net loss of $125,874, an increase in inventories of $146,400, a
decrease in accounts payable of $465,802, and a decrease in deferred revenues of
$160,317. Each of these amounts is largely a result of timing, and not
necessarily indicative of trends for the balance of the fiscal year. The
decrease of current receivables is a reflection of the Company's aggressive
collections efforts. During the six month period, work-in-process inventory
increased by $91,695, while finished goods increased by $42,264 and raw
materials decreased by $14,594.
Another negative contribution to cash flow from operating activities
was a decrease in deferred revenue. Deferred revenue is principally comprised of
prepayments on maintenance contracts in the Company's U.K. subsidiary and its
Atlanta District Office, which are billed on an annual basis. The decrease of
$160,317 is the result of two quarter's recognition of such deferred revenue and
is of a recurring nature, and not necessarily indicative of any trend
representing a decline in maintenance revenue or billings.
11
<PAGE>
Liquidity and Capital Resources (continued)
The primary positive contributors to cash flow were a reduction of
receivables of $355,588 and depreciation and amortization of $106,838. The
quarterly depreciation and amortization contribution is expected to continue
throughout the current fiscal year at approximately the same quarterly amount.
Investing activities consumed $104,626 of cash during the six month
period ended September 30, 2000, through a combination of purchased property and
equipment and capitalized software and design. Financing activities provided
$304,035, with the principal activity being borrowings under the Company's line
of credit and the reclassification of short term debt.
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 six months ended September 30, 2000, these
adjustments had the effect of a cash consumption of $36,965 on the consolidated
cash flows. On the consolidated balance sheets, these adjustments are recorded
in a currency translation adjustment in shareholders' equity. As a result of a
reduced exchange rate between the pound sterling and the U.S. dollar, this
adjustment to shareholders' equity changed from a positive impact of $29,651 as
of March 31, 2000, to a negative impact of $7,314 as of September 30, 2000.
In March of 2000, 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, 2001. Borrowings bear interest at the rate of 2.75
percent in excess of the bank's base rate and are collateralized by
substantially all assets of the subsidiary. The Company is not a guarantor on
this line of credit.
On July 5, 2000, the Company entered into a credit facility with Summit
Bank, replacing an existing facility, which had extended through September of
2000, with PNC Bank N.A. The new credit facility, which extends through
September of 2001, provides the Company with the availability of a total amount
of $2,000,000 for borrowings and the issuance of Irrevocable Letters of Credit.
Outstanding borrowings bear interest at either the bank's prime rate of interest
minus one half of one percent (0.50%), or two and one half percent (2.50%) above
the London Interbank Offered Rate (LIBOR), at the Company's option. For
borrowings under which interest will be computed on the LIBOR formula, the
Company must place minimum principal amount draws of $200,000, on no more than
three (3) loans outstanding at any one time, for a period of either one, two or
three months. The credit facility is collateralized by substantially all
domestic assets of the Company. The previous facility with PNC Bank N.A.
provided the Company with the availability of a total amount of $1,500,000 for
borrowings and the issuance of Irrevocable Letters of Credit. Loans under the
facility with PNC Bank bore interest at the bank's prime rate and were also
collateralized by substantially all domestic assets of the Company.
The Company believes that its cash balance, together with its lines of
credit, provides the Company with adequate liquidity to finance its projected
operations for the foreseeable future. As of September 30, 2000, the Company had
no material commitments for capital expenditures.
Results of Operation
Net sales during the first six months of fiscal year 2001 decreased by
9%, to $4,025,993, as compared with corresponding sales of $4,410,609 during the
first six months of fiscal year 2000. For the comparable quarters ended
September 30, sales decreased by 22%, to $1,755,793 from $2,265,194 for fiscal
year 2001 and fiscal year 2000, respectively. Results of operations of the
Company's U.K. distributor, acquired as of October 2, 1997, are consolidated in
both quarters. Results of operations of Comtrex Michigan, acquired on June 23,
1999, have been consolidated with those of the Company effective as of July 1,
1999, the beginning of the second quarter of fiscal year 2000.
The Company reported a net loss of $125,874 for the current six month period, or
$.03 per share, as compared with net income of $172,833, or $.05 per share, for
the comparable prior year period. During the quarter ended September 30, 2000
12
<PAGE>
Results of Operation (continued)
the Company reported a net loss of $196,451, or $.05 per share, as compared with
net income of $61,569, or $.02 per share, for the second quarter of the prior
fiscal year.
Sales during the quarterly and six month period ended September 30,
2000 were adversely affected by several factors, most of which the Company
believes are not of a recurring nature. Export sales declined, on a year to year
comparative basis, during the six month period ended September 30, 2000 by
$320,714, or approximately 20%. The decline in the exchange rate between the
Euro and the US dollar is the largest single factor in this decline in export
sales, as the Company's products become more expensive to purchase in Europe.
In the U.K., the stoppage of petroleum deliveries to local retail
outlets severely impacted delivery and installation of equipment for the last
two weeks of September. Despite this fuel unavailability in the last half of
September, sales in the U.K. increased by approximately 8% during the six month
period for the current fiscal year over the prior year. When stated in US
dollars, however, sales in the U.K. decreased by 1% for the six month period,
when compared with the same period in the prior year, due to an approximate 10%
decline in the value of the pound sterling against the dollar.
Domestic sales declined by $193,828, or approximately 23%, on a
quarterly comparative basis, and by $38,402, or approximately 3%, when comparing
the first six month periods of fiscal years 2001 and 2000. Substantially all of
the decline on a quarterly basis resulted from reduced sales through the
Company's Michigan District Office. The principal customer base of the Michigan
office during the prior fiscal year had been franchisee customers of a large
family dining chain, replacing existing equipment which had been in service for
a number of years. The Company believes that the timing of such replacement
purchases are essentially discretionary when viewed over a number of quarterly
periods. The capital investments during the prior fiscal year reflected the
concerns over the Y2K issue. The Company believes that its customer base, as
well as that of many of its competitors, are postponing additional capital
equipment expenditures into calendar year 2001 as a result of the increased
spending during the last quarter of calendar year 1999 and the first quarter of
calendar year 2000.
Administrative expenses increased from $619,444 to $654,590 during the
first six month period of fiscal year 2001 when compared with same period of
fiscal year 2000, representing an increase from 14% to 16% of net sales in
comparative periods. Sales, marketing and customer support expenses increased
from $1,150,683 during the six month period ended September 30, 1999, to
$1,312,522, during the current fiscal year period, representing 26% and 32% of
net sales, respectively. The increase can be attributed to the additional
expenses of the Michigan district office which was acquired on June 23, 1999.
Substantially all of the operating activities of Comtrex U.K., like the
Company's District Offices in Atlanta and Michigan, relate to the direct sale,
installation and service of products to end-users.
Cost of sales during the second quarter and first six month period of
fiscal year 2001 were 46% and 47% of net sales, respectively, as compared to 49%
and 51% of net sales, respectively for the comparable quarter and six month
period of the prior fiscal year. The reduction in cost of sales, and increase in
gross margin, is a result of increased emphasis on the direct sales activities
of the Company, through Comtrex U.K., the Atlanta and Michigan District Offices
and in the Philadelphia metropolitan area. While selling and support expenses
represent a higher percentage of direct sales than sales through a distribution
network, the gross margin on such product sales is significantly greater. In
addition to product sales, a significant percentage of the net sales realized
through such direct sales activities consists of maintenance and repairs,
installation, training and implementation services. Such service related revenue
is at a greater gross margin than product sales.
As of October 30, 2000, the Company's backlog was approximately
$908,435. Excluded from this backlog are any orders for delivery to subsidiaries
or District Offices from the parent. The Company's backlog as of November 5,
1999 was approximately $1,415,000. The Company expects that substantially all of
its current backlog will be shipped within the next 90 days.
13
<PAGE>
Year 2000
The Company has completed a review of its business systems and
products, and has queried its customers, vendors and resellers with respect to
Year 2000 compliancy issues.
At the time of this report, all internal information and accounting
systems of the Company appear to be functioning normally, and no Year 2000
problems have been encountered. In addition, at the time of this report, all
Year 2000 compliant products of the Company appear to be functioning normally,
provided that software upgrades, to the extent they are required, have been
performed. The Company is not aware of any Year 2000 issues with its Year 2000
compliant software products for which upgrades, to the extent they are required,
are not readily available.
The Company believes has diligently addressed the Year 2000 issue and
that it will satisfactorily resolve significant Year 2000 problems should any
additional, and currently unforeseen, problems arise.
The Company has expensed all incremental costs related to the Year 2000
analysis and remediation efforts. Any internal and external costs specifically
associated with modifying software for the Year 2000 will be charged to expenses
as incurred. All of these costs have been 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.
Based on the Company's experience to date, and reviews from presently
available information, it is believed that any 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.
More complete information with respect to the Company's activities
related to the Year 2000 issue is included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 2000, as filed with the SEC.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Information Required by Item 701 of Regulation S-B - Recent Sales of
Unregistered Securities
On August 1, 2000, the Company issued 20,000 shares of its common stock
to Norman and Shirley Roberts. These shares represent a second conversion of
$20,000 of convertible debentures to common stock, at the rate of $1.00 per
share, pursuant to the terms and conditions of the Subordinated Convertible
Debenture (the "Debenture") issued on October 1, 1997 in conjunction with the
Company's acquisition of its U.K. subsidiary.
The original amount of the Debenture was $300,000, and after this
second conversion, the remaining balance on the debenture was $260,000. The
Debenture accrues interest at the rate of eight (8) percent per annum, payable
monthly. The Debenture is convertible into shares of the common stock (in blocks
of 20,000 shares) at the rate of $1.00 per share.
In July of 2000, the Company and Norman and Shirley Roberts executed
Amendment No. 1 (the "Amendment) to the Subordinated Convertible Debenture. The
Amendment extends the expiration date for the Holders' conversion rights
specified in the Debenture by six (6) months, from October 1, 2000 to April 1,
2001, and extends the date on which the first principal payment is due from
January 1, 2001 to July 1, 2001. Any principal outstanding under the debenture
on April 2, 2001 is to be paid in twelve equal quarterly installments,
commencing on July 1, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Stockholders (the "Annual Meeting") was held
on August 15, 2000. A quorum was present and the following sets forth a brief
description of each matter voted upon at the Annual Meeting and the results of
the voting on each such matter.
1. Election of Directors
The management of the Company nominated a slate of five persons to
serve on the Board of Directors until the next Annual Meeting or until their
respective successors are duly elected and shall qualify. No other nominations
were made. The nominees received the following votes:
Nominee Votes For Votes Withheld (Abstain)
------- --------- ------------------------
Sidney Dworkin 3,711,258 17,712
Nathan I. Lipson 3,711,258 17,712
Jeffrey C. Rice 3,711,258 17,712
Steven D. Roberts 3,711,258 17,712
Alan G. Schwartz 3,711,258 17,712
The entire slate of directors nominated was elected by a majority of
the shares present in person or represented by proxy and entitled to vote.
Item 5. Other Information
None.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit No. Description of Instrument
----------- -------------------------
3.1*(h) Certificate of Incorporation, as amended through October 26, 1999,
of the Company
3.2*(b) By-Laws, as amended, of the Company
4.1*(b) Specimen Common Stock Share Certificate
4.2*(e) Subordinated Convertible Debenture, in the original principal
amount of $300,000 (the "Debenture"), issued by the Company to
Norman and Shirley Roberts
4.3*(f) 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
4.4*(i) Amendment No. 1, dated July 31, 2000, to the Debenture issued by
the Company to Norman and Shirley Roberts
10.1*(g) Stock Purchase Agreement, dated June 23, 1999, between the Company,
Michael R. Carter, Matthew R. Carter, Mark R. Carter and Donn
Scott Smith
10.2*(c) 1992 Non-Qualified Stock Option Plan of the Company
10.3*(d) 1995 Employee Incentive Stock Option Plan of the Company
10.4*(f) 1999 Stock Option Plan of the Company
10.5*(e) Loan Agreement (Business Overdraft Facility) between Comtrex
Systems Corporation LTD and Barclays Bank PLC dated March 30, 1998
10.6*(e) Security Agreement (Debenture), dated March 30, 1998, delivered by
Comtrex Systems Corporation LTD to Barclays Bank PLC
10.7*(f) Financial Advisory Agreement, dated February 8, 1999, between
Comtrex Systems Corporation and Alvin L. Katz
10.8*(i) Secured Credit Agreement between the Company and Summit Bank N.A.
dated July 5, 2000
27 *(a) Financial Data Schedule in accordance with Article 5 of Regulation
S-X
------------------
*(a) Filed herewith.
*(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 to the Company's definitive
proxy statement filed with the Securities and Exchange Commission on
July 16, 1992.
*(d) Incorporated by reference to the exhibits to the Company's definitive
proxy statement filed with the Securities and Exchange Commission on
July 13, 1995.
*(e) Incorporated by reference to the exhibits to the Company's Form 10-KSB
filed with the Securities and Exchange Commission on June 29, 1998.
*(f) Incorporated by reference to the exhibits to the Company's Form 10-KSB
filed with the Securities and Exchange Commission on June 28, 1999.
*(g) Incorporated by reference to the exhibits to the Company's Form 10-QSB
filed with the Securities and Exchange Commission on August 9, 1999.
*(h) Incorporated by reference to the exhibits to the Company's Form 10-QSB
filed with the Securities and Exchange Commission on November 12, 1999.
*(i) Incorporated by reference to the exhibits to the Company's Form 10-QSB
filed with the Securities and Exchange Commission on August 10, 2000.
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, no current reports on Form
8-K were filed by the registrant with the Securities and Exchange Commission.
16
<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: November 13, 2000 By: /s/
------------------- -----------------------------------------
Jeffrey C. Rice
Chief Executive Officer
Date: November 13, 2000 By: /s/
------------------- -----------------------------------------
Kenneth J. Gertie
Chief Financial &
Chief Accounting Officer
17
<PAGE>
Exhibit Index
Exhibit Page
------- ----
27 Financial Data Schedule in accordance with Article 5
Of Regulation S-X 19
