<PAGE>
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
[ ] 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)
<TABLE>
<CAPTION>
<S> <C>
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 (856) 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)
</TABLE>
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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B, 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, 2000 were $9,886,287.
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 16, 2000 is $2,957,935. 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 16, 2000, there were outstanding 3,840,572 shares of the registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2000 Annual
Meeting of Shareholders, to be filed on or before July 25, 2000 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: 48
------------------
Index to exhibits located at page: 17
------------------
1
<PAGE>
PART I
Item 1. Description of 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, those matters discussed and 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, Portugal, Holland, Ireland, Spain, 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, Detroit 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 16, 2000,
the Company employed nine 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
16, 2000, Comtrex U.K. employed twenty-six 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.
On June 23, 1999, the Company acquired all the issued and outstanding
capital stock of Cash Register Systems (CRS), Inc. a Michigan corporation. CRS
was a privately-held corporation which sold and serviced point-of-sale
equipment, principally the product lines of the Company. As of June 16, 2000,
the Company employed seven individuals in its Michigan District Office. The
personnel are engaged in the direct sale and service of the Company's products
in both the Detroit metropolitan area and in the mid-western United States.
2
<PAGE>
PRODUCTS
The Company's principal products are various software programs,
point-of-sale (POS) terminals, printers, computers and peripheral devices which
the Company integrates 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 current product line of POS offered 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 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 upgraded, 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.
In February of 1999, the Company introduced the iTP series of POS
terminals as a hardware component of the PCS-5000 system. These 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 10.4"
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 PCS-5000 software and series of
terminals, including the iTP hardware, accounted for approximately 96%, 81%, and
66% of net sales in fiscal years 2000, 1999, and 1998, respectively.
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. The Sprint family of terminals accounted for approximately
4%, 10%, and 20% of net sales in fiscal years 2000, 1999, and 1998,
respectively.
The Company has been engaged in a software design and development
project for over twelve months aimed at improving the position of its PCS-5000
product line. The initial phase of this project is an entirely new suite of
in-store back office software modules, being developed in conjunction with Quick
Restaurants N.V. An adjunct to this development is an integration with SAP
Retail, which will provide centralized, enterprise control over the in-store
database, as well as a mechanism for collecting store information for
centralized reporting and analysis. A separate development project is also
underway with City Centre Restaurants to enhance the Company's Internet-based
decision support and data warehouse system, designed to operate under Windows NT
and SQL Server. The Company expects both these development efforts to be
completed in its fiscal year 2001. The second phase of the design and
development project is an entirely new, 32-bit Windows application software
module for the point-of-sale function. It is currently anticipated that this
aspect of the development project will not be complete until early in the
Company's fiscal year 2002.
3
<PAGE>
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 Firich Enterprises (the parent
company of 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 Firich at a lower cost than the Company could produce.
Firich 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 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 current 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 2000, 1999, and 1998 fiscal
years, it expended approximately $301,406, $277,326, and $242,601, respectively,
(which amounts include capital expenditures of $113,283, $122,481, and $48,917,
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 holds all right, title and interest in one patent, on a
product which is not in current production. The Company also has registered five
(5) trademarks, none of which expires prior to 2001.
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.
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
4
<PAGE>
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.
SALES, MARKETING AND DISTRIBUTION
During fiscal year 2000, the Company recorded foreign sales of
$6,431,518, representing 65% of net sales. Foreign sales were $4,848,625,
representing 58% of net sales, during fiscal year 1999, and $4,021,723,
representing 63% of net sales during fiscal year 1998. 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 2000, sales to the Company's distributor in
France, Restaurant Data Systems (RDS) were approximately $2,100,000, and sales
to the City Centre Group, a customer of Comtrex U.K., were approximately
$700,000, representing 21% and 7% of sales, respectively. These two customers of
the Company and its subsidiary each accounted for approximately 15% and 17%,
respectively, of consolidated net sales during fiscal year 1999. These two
customers of the Company and its subsidiary each accounted for approximately 10%
of consolidated net sales during fiscal year 1998. No other single customer
represented more than 10% of sales during fiscal years 2000, 1999, or 1998.
Sales through the Atlanta District Office during fiscal years 2000,
1999 and 1998 were approximately $1,010,000, $940,000 and $460,000, or 10%, 11%
and 7%, respectively, of net sales. Sales through the Michigan District Office
during fiscal year 2000, for the three quarters for which such sales were
consolidated, were approximately $630,000, or 6% of net sales. During fiscal
year 2000, 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 15, 2000, the Company's consolidated backlog was
approximately $1,010,000, as compared with a backlog of approximately $960,000
as of June 18, 1999. The Company recognizes
5
<PAGE>
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 business segments within which the Company operates are highly
competitive. The Company and its dealers and distributors compete with a number
of service providers, software companies and manufacturers of terminals and
peripherals. 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 establishing and maintaining relationships and distribution channels
which provide close contact with its target customers, coupled with the ability
of the Company to supply an extremely reliable product, thoroughly tailored to
the specific needs of the 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.
EMPLOYEES
As of June 16, 2000, Comtrex had forty-six 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-six 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.
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
6
<PAGE>
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 2000 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.
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 impact of economic conditions generally and in the intelligent
point-of-sale terminal industry in particular;
- The risk of unavailability of adequate capital or financing;
- 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 Firich
Enterprises and its subsidiary 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;
7
<PAGE>
- 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 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.
Item 2. Description of Property
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 August of 1998, the Company entered into a new lease with its
existing landlord in Atlanta, Georgia, 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 this space is suitable and adequate for the operations of the
Atlanta District Office, and further, that additional or alternative 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.
In May of 2000, the Company entered into a new lease with a new
landlord in Waterford, Michigan, for approximately 1,800 square feet of
primarily office space to replace an existing leased facility of approximately
the same size, the term for which was essentially complete. The lease extends
through June of 2003. The Company believes that this space is suitable and
adequate for the operations of the Michigan District Office, and further, that
additional or alternative 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 expansion be required.
The Company's subsidiary in the U.K., Comtrex Systems Corporation LTD,
currently owns and occupies approximately 4,700 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.
8
<PAGE>
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 2000.
Special Item. Executive Officers of the Registrant
Name Age Position
---- --- --------
Jeffrey C. Rice 50 President and Chief Executive Officer
Steven D. Roberts 38 Managing Director, Comtrex U.K.
Kenneth J. Gertie 37 Vice President, Treasurer, Chief Financial Officer
Matthew R. Carter 29 Vice President of Sales
Brian C. Moseley 53 Vice President of Engineering
Jeffrey C. Rice has been President, Chief Executive Officer and a
Director of the Company since February of 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 of 1985 through May of
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 of 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.
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.
Kenneth J. Gertie is a certified public accountant in the state of New
Jersey and was appointed Vice President of Finance and Administration and Chief
Financial Officer upon joining the Company in September of 1999. From 1995
through 1999, Mr. Gertie worked as Controllor for Charles T. Gamble Industries,
a privately held electronics manufacturer. From 1989 to 1995, he served as
Assistant Controllor for a division of Weyerhaueser Co., and from 1985 to 1989
he worked in various positions at a regional CPA firm. Mr. Gertie is a graduate
both of Rutgers University, with a Bachelor of Arts degree in Accounting, and of
Drexel University, with an MBA in Finance.
Matthew R. Carter has been promoted to Vice President of Sales of the
Company effective as of July 1, 2000. Mr. Carter joined the Company in June of
1999 as National Sales Manager. Mr. Carter was one of the four shareholders of
Cash Register Systems (CRS), Inc., and served as its Vice President of Sales
from 1995 until its acquisition by the Company in June, 1999. Mr. Carter
functioned as Sales Manager for CRS from 1992 through 1995, and worked in
various sales, service and installation capacities for CRS, beginning as a
summer employee in 1986.
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.
9
<PAGE>
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, 2000 High Low
------------------------- ---- ---
4/1/1999 - 6/30/1999 1.594 .844
7/1/1999 - 9/30/1999 1.750 .938
10/1/1999 - 12/31/1999 1.875 .938
1/1/2000 - 3/31/2000 3.375 1.000
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
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the acquisition by the Company of all the
outstanding capital stock of Cash Register Systems (CRS), Inc., the Company
issued 150,000 restricted shares of the Common Stock of the Company, par value
$.001 per share, on June 23, 1999 to the former shareholders CRS. These shares
were issued by the Company in reliance upon the exemption from registration
provided by section 4(2) of the Securities Act of 1933, as amended.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Approximate Number
of Record Holders
Title of Class (as of June 16, 2000)
-------------- ----------------------
Common Stock, $ .001 par value 400 (1)
(1) Included in the number of stockholders of record are shares held in
"nominee" or "street" name.
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.
10
<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, those matters discussed and 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, 2000, the Company had total current assets of
$5,194,857, including cash and cash equivalents of $246,270, as compared to
$3,877,542 of total current assets and $483,917 of cash and cash equivalents as
of March 31, 1999. The Company had current liabilities of $2,677,465, resulting
in a current ratio of 1.9 as of March 31, 2000, compared to $1,687,809 and 2.3,
respectively, as of March 31, 1999.
Cash and cash equivalents decreased by $237,647 during fiscal year
2000. Operating activities consumed $469,902 of cash, as compared with cash
generation of $103,046 during the prior year. Investing activities consumed
$234,395 of cash, while financing activities, principally borrowings under the
Company's lines of credit, generated $466,650 during the period.
The Company reported net income of $417,714 during fiscal year 2000.
The Company has net operating loss carryforwards of approximately $2,500,000 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 the actual rate of exchange at the
end of each fiscal quarter. As a consequence of a difference in the exchange
rate used during fiscal year 2000 and the exchange rate as of March 31, 2000,
differences between accounts on the consolidated balance sheets as of March 31,
2000 and March 31, 1999 do not involve cash outlay to the extent they are merely
the result of a differing rate of exchange. In addition, as outlined in Note 2
to the Consolidated Financial Statements, the acquisition of Cash Register
Systems, Inc. (CRS) involved no cash outlay other than professional fees. As a
consequence, differences as of March 31, 2000 and March 31, 1999, between
accounts on the Consolidated Balance Sheets do not involve cash outlay to the
extent they are the result of merely consolidating the Balance Sheet accounts of
the Company and CRS as of March 31, 2000. The following analysis relates to the
changes in the Company's balance sheet accounts on a cash flow basis.
Hereinafter, CRS is referred to as Comtrex Michigan or the Michigan District
Office.
Accounts receivable on a cash flow basis increased during the 2000
fiscal year by $968,079, net of reserves. The increase in receivables is a
combination of two factors; overall increased sales levels, and a greater
percentage increase in sales to customers with historically slow payment cycles.
While net sales for the full fiscal year represented a 19% increase, net sales
during the fourth quarter of fiscal year 2000 represented a 35% increase over
the fourth quarter of last fiscal year. For the full fiscal year, sales to the
Company's distributor in France rose by approximately $900,000, or 75%, over
fiscal year 1999. The Company's aged receivables from this distributor, over the
twelve year relationship between the two companies, has consistently extended
beyond one hundred and twenty days. The Company also 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 and Michigan District Offices and terms of thirty
to ninety days through Comtrex U.K..
On a cash flow basis, inventories net of reserves rose by $462,963
during fiscal year 2000. Substantially all of the increase in total inventories
was represented by the finished goods component of inventories as of March 31,
2000.
11
<PAGE>
LIQUIDITY (continued)
As the Company's proprietary product lines, the Sprint and SuperSprint,
have been phased out, these products have been replaced by the open architecture
PCS-5000 product series. The hardware utilized with the PCS-5000 is configured
principally with assemblies which are generally available, often with
off-the-shelf delivery, to the Company. In addition, the iTP series of terminals
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. The Company is able to maintain a lower level
of raw material, component inventory than is required with a proprietary product
series, at comparable sales levels. The increase in finished goods is a
combination of increased sales expectations and increased sales through the
Company's directs channels, its District Offices and Comtrex U.K.. The Company
is constantly seeking to balance the carrying costs of its inventories against
the desire to fill orders both from its distribution network and its direct
customers on a timely basis.
In addition to net income of $417,714, depreciation and amortization of
$211,109 represented a significant positive contribution to cash provided by
operating activities. Financing activities provided $466,650, principally
through increased borrowings under the Company's line of credit of $474,000
during the 2000 fiscal year. Offsetting $53,195 of repayments on notes were
proceeds of $45,845 from issuing equity securities pursuant to the exercise of
options during the year.
Investing activities consumed $234,395 of cash during the fiscal year,
including capitalized software development expenses of $113,283 and purchases of
property and equipment of $117,238. Included in property and equipment purchases
is a complete hardware and software upgrade of the primary internal information
and accounting system of the Company. The prior system was deemed to not be Year
2000 compliant, and the system upgrade of this system was performed in August of
1999.
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, 2000, these
adjustments resulted in positive impact of $20,621 on the consolidated cash
flow. On the Balance Sheet, these adjustments are recorded in a foreign currency
translation adjustment in the calculation of shareholders' equity, resulting in
contributions to shareholders' equity of $29,651 and $9,030 as of March 31, 2000
and March 31, 1999, respectively.
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 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 1999, the Company and PNC Bank N.A. extended an existing
credit facility through September 30, 1999 and increased the credit facility
from $700,000 to $1,050,000. In September of 1999, the Company and PNC Bank N.A.
renewed the existing credit facility through September 30, 2000, and increased
the credit facility from $1,050,000 to $1,500,000. The increased borrowing
facility no longer distinguishes between borrowings and the issuance by the bank
of Irrevocable Letters of Credit and provides the Company with the availability
of the total amount of $1,500,000 for either purpose or both purposes combined.
In conjunction with the renewal of the facility, certain restrictive provisions
pertaining to tangible net worth, as affected by the currency translation
adjustment in shareholders' equity, were removed. The balance of the terms and
provisions of the facility remained the same. The Company anticipates that its
line of credit will be renewed, or replaced, on terms at least as favorable and
in the same or larger amount, with a credit facility extending through September
30, 2001.
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 coming fiscal year. As of March 31, 2000, the Company had no
material commitments for capital expenditures.
12
<PAGE>
RESULTS OF OPERATIONS
Year Ended March 31, 2000 Compared to the Year Ended March 31, 1999
Net sales during fiscal year 2000 increased by 19%, to $9,886,287, as
compared with corresponding sales of $8,299,591 during fiscal year 1999. The
Company reported net income of $417,714, or $.11 per share, for the fiscal year
ended March 31, 2000, as compared with net income of $333,430, or $.09 per
share, for the prior fiscal year. Results of operations for the last three
quarters of fiscal year 2000 include a consolidation of the operations of the
Company's domestic subsidiary, Comtrex Michigan. Acquired by the Company as of
June 23, 1999, net sales through Comtrex Michigan were approximately $630,000
for the nine month period.
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 10% over the prior fiscal year, from
$1,143,496 in fiscal year 1999 to $1,258,924 for the current fiscal year,
resulting in a decline from 14% to 13%, when expressed as a percentage of sales.
Sales, marketing and customer support expenses increased from $2,043,303, or 25%
of sales, during fiscal year 1999, to $2,535,900, or 26% of sales, during fiscal
year 2000. 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. 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 slight increase in such expenses, when
expressed as a percentage of sales, is a result of the addition of Comtrex
Michigan to consolidated results of operation beginning with the second quarter
of the fiscal year.
Cost of sales, expressed as a percentage of net sales, remained
constant during the most recent fiscal year at 52%. 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 37%
of the net sales of Comtrex U.K. represent maintenance, installation, spare
parts 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, there can be no assurance
that this continued competitive pressure will not cause future declines in the
Company's overall gross margin.
International sales rose significantly both in absolute terms and when
expressed as a percentage of overall net sales. During fiscal year 2000, the
Company recorded foreign sales of $6,431,518, or 65% of sales, compared to
$4,848,625, or 58% of sales, for fiscal year 1999. A primary factor in this
increase was an increase in sales to the Company's French distributor,
Restaurant Data Systems (RDS) of approximately $900,000 during fiscal year 2000.
In addition, new dealers in the Carribean and Canada and increased sales through
Comtrex U.K. contributed to the rise in foreign sales. 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, during fiscal year 1999, as the sole
approved POS system for new openings and store retrofits of this Belgian
operator of quick service hamburger restaurants. During fiscal year 2000, RDS
installed approximately one hundred additional Quick locations with the PCS-5000
system, as compared with approximately fifty additional locations during fiscal
year 1999.
13
<PAGE>
RESULTS OF OPERATIONS (continued)
Year Ended March 31, 2000 Compared to the Year Ended March 31, 1999 (continued)
Management believes that the primary factor in its ability to maintain
growth, both in sales and in profitability, will be establishing and maintaining
relationships and distribution channels which provide close contact with its
target customers. The Company is continuously engaged in selective acquisition
negotiations with entities involved in the sale, service and distribution of
integrated systems designed for the foodservice segment of the retailing
industry. The key element in the Company's consideration of acquisitions is the
ability to retain experienced and knowledgeable management, sales and
installation personnel, coupled with an existing customer base both for
recurring service revenue and follow-on sales.
As of June 15, 2000, the Company's consolidated backlog was
approximately $1,010,000, as compared with a backlog of $960,000 as of June 18,
1999. 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, 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
consolidated 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.
Administrative expenses increased from $883,759 in fiscal year 1998 to
$1,143,496 for fiscal year 1999, 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 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, was 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 1999 fiscal year, from 56% of net
sales, for fiscal year 1998, to 52% of net sales, for the fiscal year 1999. 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 continued to account for greater than 50% of the
Company's net sales, rising from $4,021,723, or 63% of sales, to $4,848,625, or
58% of sales, for fiscal years 1998 and 1999, 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 $1,200,000.
As of June 18, 1999, the Company's consolidated backlog was
approximately $960,000, as compared with an approximate backlog of $1,050,000 as
of June 19, 1998.
14
<PAGE>
RESULTS OF OPERATIONS (continued)
Year 2000
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.
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.
During the first week of January, 2000, the Company received numerous
inquiries, both from its authorized dealers and from end users, concerning
issues related to the Year 2000 and the products of the Company. To the best of
the Company's knowledge and belief, all problems related to the software
supplied by the Company which were encountered have been resolved through an
upgrade to the latest software versions available from the Company. Problems
related to hardware, particularly to BIOS incompatibilities, have been, or are
being, resolved through the use of third party vendor upgrades to the BIOS or to
the hardware itself.
The Company believes it has diligently addressed Year 2000 issues 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 presently available
information, 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.
15
<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 2000 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 2000 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 2000 Annual Meeting of Shareholders.
Item 12. Certain Relationships and Related Transactions
Incorporated herein by reference from the Company's definitive Proxy
Statement for its 2000 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, 2000 and 1999
Consolidated Statements of Operations for the years ended March 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flow for the years ended March 31,
2000, 1999 and 1998
Notes to Financial Statements
(a)2. Financial Statement Schedules (included in this report):
VIII. Valuation and Qualifying Accounts for the years ended March 31,
2000, 1999 and 1998
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.
16
<PAGE>
(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 *(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
10.1 *(g) Stock Purchase Agreement, dated June 23, 1999, between the
Company, Michael R. Carter, Matthew R. Carter, Marc 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) Working Cash Line of Credit Agreement between the Company and
PNC Bank N.A. dated June 12, 1998.
10.6 *(e) Security Agreement dated June 12, 1998, delivered by the
Company to PNC Bank N.A.
10.7 *(e) Loan Agreement (Business Overdraft Facility) between Comtrex
Systems Corporation LTD and Barclays Bank PLC dated March 30,
1998
10.8*(e) Security Agreement (Debenture), dated March 30, 1998,
delivered by Comtrex Systems Corporation LTD to Barclays Bank
PLC
10.9 *(f) Financial Advisory Agreement, dated February 8, 1999, between
Comtrex Systems Corporation and Alvin L. Katz
21.1 *(a) Subsidiaries of the Company.................................39
23.1 *(a) Consent of Drucker, Math & Whitman, P.C.....................40
24.1 *(a) Powers of Attorney .........................................41
27 *(a) Financial Data Schedules....................................47
----------
*(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.
17
<PAGE>
*(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.
b. Reports on Form 8-K
During the fourth quarter of the year ended March 31, 2000, no current
reports on Form 8-K were filed by the registrant with the Securities and
Exchange Commission.
18
<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 subsidiaries ("Company") as of March
31, 2000 and 1999, 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, 2000. 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 35 percent and 39 percent,
respectively, of the related consolidated totals for 2000. 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
subsidiaries as of March 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the years in the three year period ended March
31, 2000 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, 2000,
1999 and 1998 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 12, 2000
19
<PAGE>
AUDITORS' REPORT TO THE MEMBERS OF
COMTREX SYSTEMS CORPORATION LIMITED
YEAR TO MARCH 31, 2000
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 2000 and of its profit and cash flows
for the year then ended and have been properly prepared in accordance with
United States generally accepted accounting principles.
Date: 6, June 2000 ROTHMAN PANTALL & CO
Chartered Accountants &
Registered Auditors
Clareville House
26/27 Oxendon Street
London SW1Y 4EP
20
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 246,270 $ 483,917
Accounts receivable, net of reserve
of $99,318 in 2000 and $108,010 in 1999 3,022,935 2,043,095
Inventories 1,808,984 1,257,561
Prepaid expenses and other 116,668 92,969
----------- -----------
Total current assets 5,194,857 3,877,542
----------- -----------
Property and equipment:
Land 156,244 156,244
Building 312,656 312,656
Machinery, equipment and furniture 1,639,881 1,512,563
----------- -----------
2,108,781 1,981,463
Less accumulated depreciation (1,372,781) (1,251,243)
----------- -----------
Net property and equipment 736,000 730,220
----------- -----------
Other assets:
Software development costs, net of amortization 409,188 354,864
Goodwill, net of amortization 551,125 406,998
----------- -----------
960,313 761,862
----------- -----------
$ 6,891,170 $ 5,369,624
=========== ===========
</TABLE>
21
See notes to financial statements.
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Current liabilities:
Revolving line of credit loan $ 775,000 $ 301,000
Accounts payable 1,020,988 699,056
Current portion of long-term debt 64,711 64,086
Income and V.A.T payable 146,471 146,234
Accrued expenses:
Payroll 110,596 22,050
Other 57,906 59,982
Deferred income 464,153 389,753
Customer deposits 37,640 5,648
----------- -----------
Total current liabilities 2,677,465 1,687,809
----------- -----------
Deferred income taxes 10,051 9,321
----------- -----------
Long-term debt, net of current portion 501,880 575,700
----------- -----------
Total liabilities 3,189,396 2,272,830
----------- -----------
Commitments and contingency
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.001 par value, 10,000,000 and
5,000,000 shares authorized, 3,840,572 and
3,593,572 issued and outstanding, as of
March 31, 2000 and 1999, respectively 3,841 3,594
Additional paid-in capital 5,757,704 5,591,306
Foreign currency translation adjustments 29,651 9,030
Accumulated deficit (2,089,422) (2,507,136)
----------- -----------
Total shareholders' equity 3,701,774 3,096,794
----------- -----------
$ 6,891,170 $ 5,369,624
=========== ===========
</TABLE>
See notes to financial statements.
22
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
---------- ----------- ----------
Net sales $9,886,287 $8,299,591 $6,382,948
---------- ----------- ----------
<S> <C> <C> <C>
Costs, expenses, and other:
Cost of sales 5,128,900 4,330,906 3,562,600
Administrative 1,258,924 1,143,496 883,759
Research and development 188,123 154,845 193,684
Sales and marketing 1,002,739 804,486 634,137
Customer support 1,533,161 1,238,817 654,684
Depreciation and amortization 211,109 195,938 157,716
Interest expense, net 102,454 59,710 45,276
---------- ---------- -----------
9,425,410 7,928,198 6,131,856
---------- ---------- -----------
Income before income taxes 460,877 371,393 251,092
Provision for income taxes 43,163 37,963 9,693
---------- ---------- -----------
Net income $ 417,714 $ 333,430 $ 241,399
========== ========== ===========
Per share basis:
Basic:
Net income $ .11 $ .09 $ .07
========== ========== ===========
Diluted:
Net income $ .11 $ .09 $ .07
========== ========== ===========
</TABLE>
See notes to financial statements.
23
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<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>
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
Net income 241,399 241,399
Foreign currency $ 34,912 34,912
translation adjustments
Comprehensive income 276,311
----------- ------ ---------- ----------- ------------ -----------
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
Net income 333,430 333,430
Foreign currency (25,882) (25,882)
translation adjustment
Comprehensive income 307,548
----------- ------ ---------- ----------- ------------ -----------
Balance, March 31,
1999 3,593,572 3,594 5,591,306 9,030 ( 2,507,136) 3,096,794
Issuance of
common stock,
exercise of options 77,000 77 45,768 45,845
Issuance of
common stock,
exercise of convertible
debentures 20,000 20 19,980 20,000
Issuance of
common stock,
purchase of
subsidiary 150,000 150 100,650 100,800
Net income 417,714 417,714
Foreign currency 20,621 20,621
translation adjustments
Comprehensive income 438,335
----------- ------ ---------- ----------- ------------ -----------
Balance, March 31,
2000 3,840,572 $3,841 $5,757,704 $ 29,651 ($ 2,089,422) $ 3,701,774
=========== ====== ========== =========== =========== ===========
</TABLE>
See notes to financial statements.
24
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
2000 1999 1998
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 417,714 $ 333,430 $ 241,399
Adjustments to reconcile to
net cash provided (used) by operating activities:
Depreciation and amortization 211,109 195,938 157,716
Provisions for (recovery of)
losses on accounts receivable 31,702 ( 9,472) ( 57,217)
Provisions for (recovery of) losses on inventories 20,000 50,848 ( 37,920)
Foreign currency translation adjustments 20,621 ( 25,882) ( 2,278)
Loss on sale of fixed assets 4,382 3,554 -
Warrants issued for services - 26,424 -
Changes in assets and liabilities:
Certificate of deposit - - 100,000
Accounts receivable ( 999,781) ( 322,469) ( 188,602)
Inventories ( 482,963) ( 127,626) 246,532
Prepaid expenses and other ( 23,699) 9,569 20,386
Accounts payable 169,563 ( 143,296) ( 32,771)
Accrued expenses and other 79,336 245 ( 4,807)
Deferred income 82,114 111,783 -
------------- ------------- ------------
Net cash provided (used) by operating activities ( 469,902) 103,046 442,438
------------- ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment ( 117,238) ( 94,687) ( 36,304)
Software development costs ( 113,283) ( 102,453) ( 37,538)
Proceeds from disposals of fixed assets 4,125 1,007 7,472
Cost of acquiring subsidiary ( 8,487) - ( 82,604)
Cash (overdraft) of subsidiary at date acquired 488 - ( 81,582)
----------- ------------- ------------
Net cash used in investing activities ( 234,395) ( 196,133) ( 230,556)
----------- ------------- ------------
Cash flows from financing activities:
Proceeds from borrowings under line of credit, net 474,000 301,000 -
Repayments on notes payable ( 30,486) ( 32,500) ( 32,500)
Repayments on debt ( 22,709) ( 12,913) ( 16,592)
Proceeds from issuing equity securities 45,845 7,800 7,941
-------------- ------------- ------------
Net cash provided (used) by financing activities 466,650 263,387 ( 41,151)
------------- ------------- ------------
Net increase (decrease) in cash ( 237,647) 170,300 170,731
Cash and cash equivalents, beginning of year 483,917 313,617 142,886
------------- ------------- -------------
Cash and cash equivalents, end of year $ 246,270 $ 483,917 $ 313,617
============= ============= ============
</TABLE>
See notes to financial statements.
25
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 102,455 $ 59,710 $ 38,321
============= ============= ===============
Income taxes $ 2,088 $ 12,500 $ 26,600
============= ============= ===============
</TABLE>
Non-cash financing activity:
In fiscal year 1998, the Company purchased all of the outstanding capital
stock of Data Systems Terminals Limited, its U.K. subsidiary. See Note 2 for
the non-cash consideration paid. In connection with the U.K. acquisition,
debt of the subsidiary approximating $369,000 was assumed.
In fiscal year 2000, the Company purchased all of the outstanding capital
stock of Cash Register Systems, Inc., its domestic subsidiary (Comtrex
Michigan). See Note 2 for the non-cash consideration paid.
In fiscal year 2000, $20,000 of convertible debentures were converted into
20,000 shares of the Company's common stock.
See notes to financial tatements.
26
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
1. NATURE OF BUSINESS AND 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 subsidiaries are
referred to as the Company.
Principles of consolidation:
The consolidated financial statements include the accounts of Comtrex
and its wholly owned subsidiaries. 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.
27
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
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.
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 $58,960, $57,158, and
$65,740, for the years ended March 31, 2000, 1999, and 1998, respectively.
Accumulated amortization was $680,089 and $621,129 at March 31, 2000 and 1999,
respectively.
Goodwill:
Goodwill represents the cost in excess of net assets acquired related to
Comtrex's acquisition of its subsidiaries. Goodwill is being amortized over 20
years using the straight-line method. Accumulated amortization was $60,789 and
$33,000 at March 31, 2000 and 1999, respectively. Goodwill is periodically
reviewed by the Company for impairment to determine if the fair value is less
than the carrying value.
28
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
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.
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 per share:
Basic income per share is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted income 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 SUBSIDIARIES:
U.K. 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").
29
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2. ACQUISITION OF SUBSIDIARIES: (continued)
U.K. subsidiary: (continued)
The following consideration was paid for the acquisition:
a) 400,000 restricted shares of Common Stock. These were 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.
The business combination has been accounted for using the purchase
method. The results of operations of Comtrex UK have been included in the
statement of operations 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.
Domestic subsidiary:
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 operates 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. See Note 8.
The business combination has been accounted for using the purchase
method. The results of operations of Comtrex Michigan are included in the
statements of operations for the year ended March 31, 2000 since the date of
acquisition.
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 $8,487. Acquired goodwill of $171,915 will be amortized over 20 years, using
the straight-line method.
30
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
3. INVENTORIES:
2000 1999
---------- -----------
Raw materials $ 838,633 $ 837,922
Work-in-process 50,838 65,431
Finished goods 999,513 431,430
Reserve for excess and obsolete inventory ( 80,000) ( 77,222)
---------- -----------
$1,808,984 $1,257,561
========== ===========
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,
---------------------------------- ------------------
2000 1999 1998 2000 1999
---------- ---------- -------- --------- --------
Customer "A" 21% 15% 10% 40% 32%
Customer "B" 7% 17% 10% 16% 15%
Customers "A" and "B" are foreign corporations.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
2000 1999
---------- ------------
<S> <C> <C>
Convertible debenture, issued in connection
with acquisition of the U.K. subsidiary. See Note 2(b). $ 280,000 $ 300,000
Note payable, bank, due 2016, paid in monthly
installments of $3,019 which includes interest.
Interest is the bank's base prime rate plus 2
percent. The bank's base rate was 6.0 percent
at March 31, 2000. Substantially all assets of
the U.K. subsidiary serve as collateral. 278,104 305,001
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. 8,487 34,785
---------- ----------
566,591 639,786
Less current portion 64,711 64,086
---------- ----------
$ 501,880 $ 575,700
========== ==========
</TABLE>
31
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
5. LONG TERM DEBT: (continued)
Payable as follows: (assuming no conversion of convertible debenture)
2001 $ 64,711
2002 131,799
2003 129,011
2004 105,678
thereafter 135,392
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. There are no outstanding options at March 31, 2000. Through March
31, 1997, 252,000 options were exercised and 133,000 expired. No options are
available for grant.
The following is a summary of activity under the 1985 Employee incentive
stock option plan:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------------------
Number Price Range Total
------ ----------- -----
<S> <C> <C> <C> <C>
Balance, March 31, 1997 15,000 $ .81 - $ .84 $ 12,300
Balance, March 31, 1998 15,000 .81 - .84 12,300
Forfeited ( 5,000) .84 ( 4,200)
------------ ---------------------- ----------
Balance, March 31, 1999 10,000 .81 8,100
Exercised ( 10,000) .81 ( 8,100)
------------ ---------------------- ----------
Balance March 31, 2000 - - -
============ ====================== ===========
</TABLE>
1992 Non-qualified 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 2.4 years at March 31, 2000. The plan was terminated, as to
future grants available thereunder, with the approval by shareholders of the
1999 stock option plan in August of 1999.
32
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
6. STOCK OPTION PLANS / WARRANTS: (continued)
1992 Non-qualified stock option plan: (continued)
The following is a summary of activity under the 1992 Non-qualified stock option
plan:
<TABLE>
<CAPTION>
Outstanding Options
Available -------------------------------------------------
for Grant Number Price Range Total
--------- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
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
Granted ( 14,000) 14,000 .94 13,160
Forfeited 12,000 ( 12,000) 1.75 ( 21,000)
Exercised - ( 22,000) .63 - .81 ( 14,220)
Termination of plan ( 56,000) ( -) - -
----------- ------------ ------------------- ------------
Balance, March 31, 2000 - 64,000 $ .44 - $ 1.00 $ 48,500
============ =========== =================== ============
</TABLE>
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 3.4 years at March 31, 2000.
The following is a summary of activity under the 1995 Employee incentive
stock option plan:
<TABLE>
<CAPTION>
Outstanding Options
Available -------------------------------------------------
for Grant Number Price Range Total
--------- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
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
Granted ( 40,000) 40,000 1.00 - 1.25 41,250
Forfeited 1,000 ( 1,000) .63 ( 630)
Exercised - ( 45,000) .38 - .69 ( 23,525)
------------ ------------- ------------------ -----------
Balance, March 31, 2000 105,000 78,450 $.38 - $ 1.25 $ 62,923
============ ============== ================== ===========
</TABLE>
33
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
6. STOCK OPTION PLANS / WARRANTS: (continued)
1999 Stock option plan:
During fiscal year 2000, the Company adopted a stock option plan. The
plan provides for the granting of up to 200,000 options to employees, directors
and other individuals responsible for making significant contributions to the
Company's business. The option price must equal at least 100% of the market
price on the date of grant. By adoption of the plan, future grants under the
1992 non-qualified stock option plan were terminated. There are no outstanding
options under the 1999 stock option plan at March 31, 2000.
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:
2000 1999 1998
--------------- -------------- ------------
Net income as reported $ 417,714 $ 333,430 $ 241,399
================ ============== ===========
Pro forma $ 387,729 $ 330,866 $ 168,124
================ ============== ===========
Income per share:
Basic, as reported $ .11 $ .09 $ .07
================ ============== ===========
Basic, Pro forma $ .10 $ .09 $ .05
================ ============== ===========
Diluted, as reported $ .11 $ .09 $ .07
================ ============== ===========
Diluted, Pro forma $ .10 $ .09 $ .05
================ ============== ===========
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 63% 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
34
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
7. INCOME TAXES:
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,500,000 (which begin to expire in 2004). Such loss
carryforwards result in deferred tax assets of approximately $1,000,000, which
has been offset by a valuation allowance of equal amount. During the year ended
March 31, 2000, the valuation account was reduced by $140,000.
The components of the provision for income taxes consist of:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current provision, foreign $ 43,163 $ 37,963 $ 9,693
Current provision, U.S. 140,000 100,000 84,416
Utilization of loss carryforwards ( 140,000) ( 100,000) ( 84,416)
-------------- -------------- -------------
$ 43,163 $ 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:
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
Income tax provision at U.S. statutory rate $ 156,698 $ 126,274
International rate differences ( 15,684) ( 17,756)
Utilization of loss carryforwards at 34% ( 119,000) ( 85,000)
Other 21,149 14,445
--------------- ---------------
$ 43,163 $ 37,963
=============== ===============
</TABLE>
8. COMMITMENTS AND CONTINGENCY:
The Company leases certain property under operating leases which expire
through the fiscal year ending 2004. Rent expense was approximately $337,000,
$327,000 and $285,000 for the years ended March 31, 2000, 1999 and 1998,
respectively. Rental commitments under non-cancelable operating leases for the
years ending March 31, are as follows: 2001, $267,000; 2002, $237,000; 2003,
$113,000; 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, $33,000 and $31,000 in the
fiscal years ending March 31, 2000, 1999 and 1998, respectively.
The Company has employment agreements with four employees, executed in
conjunction with the acquisition of its domestic subsidiary, which provide for
an aggregate of $224,000 in minimum annual salaries. Two of the agreements
contain provisions which provide for bonuses and commission payments based on
the achievement of certain sales levels, under which the Company made payments
in fiscal year 2000. All four agreements expire in June, 2002.
35
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
9. 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. 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>
2000 1999 1998
------------- ------------ ------------
Net sales:
<S> <C> <C> <C>
United States, domestic $ 3,454,769 $ 3,450,966 $ 2,361,225
United States, export 3,625,517 1,979,661 2,717,651
United Kingdom* 3,852,108 3,750,115 1,780,170
Transfers between segments ( 1,046,107) ( 881,151) ( 476,098)
------------- ------------ ------------
Net sales $ 9,886,287 $ 8,299,591 $ 6,382,948
=========== =========== ============
Income (loss) before income taxes:
United States $ 311,750 $ 224,065 $ 211,040
United Kingdom* 173,077 163,878 41,491
Corporate ( 23,950) ( 16,550) ( 1,439)
-------------- ------------ ------------
Income before income taxes $ 460,877 $ 371,393 $ 251,092
============ ============ ============
Depreciation and amortization:
United States $ 137,776 $ 114,581 $ 123,538
United Kingdom* 44,933 52,957 19,978
Corporate 28,400 28,400 14,200
-------------- ------------ ------------
$ 211,109 $ 195,938 $ 157,716
============ ============ ============
Identifiable assets:
United States $ 4,841,358 $ 3,437,205 $ 3,017,826
United Kingdom* 2,414,652 2,062,349 1,856,899
Corporate 384,998 406,998 428,998
Eliminations ( 749,838) ( 536,928) ( 500,190)
------------ ------------ ------------
Total assets $ 6,891,170 $ 5,369,624 $ 4,803,533
=========== =========== ============
Long lived assets:
United States $ 150,716 $ 122,568 $ 122,687
United Kingdom* 585,284 607,652 630,391
------------- ------------ ------------
$ 736,000 $ 730,220 $ 753,078
=========== ============ ============
</TABLE>
* Subsidiary acquired October 2, 1997
36
<PAGE>
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
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
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Basic 3,730,947 3,590,405 3,375,130
Diluted effect of stock options 75,610 75,501 42,751
Diluted effect of convertible debenture 298,333 300,000 150,000
----------- ---------- ----------
Diluted 4,104,890 3,965,906 3,567,881
=========== ========== ==========
</TABLE>
For purposes of computing diluted per share data in 2000, 1999 and 1998,
$24,000, $24,000 and $12,000, respectively, of interest related to the
convertible debenture was added to net income.
11. BANK LOAN, LINE OF CREDIT:
At March 31, 2000, the Company was advanced $775,000 against a line of
credit facility of $1,500,000. The loan bears interest at the bank's prime rate
(8.75 percent at March 31, 2000) and is collateralized by substantially all
domestic assets of the Company.
12. 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 was
$438,335, $307,548 and $276,311 for fiscal years 2000, 1999 and 1998,
respectively. The difference from net income as reported is the tax effected
change in the foreign currency translation adjustment component of shareholders'
equity.
37
<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 27, 2000 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 27, 2000
------------------------------------ Principal Executive Officer
Jeffrey C. Rice
/s/ Principal Financial and June 27, 2000
------------------------------------ Accounting Officer
Kenneth J. Gertie
* Director June 27, 2000
------------------------------------
Sidney Dworkin
* Director June 27, 2000
------------------------------------
Steven D. Roberts
* Director June 27, 2000
------------------------------------
Larry Irwin
* Director June 27, 2000
------------------------------------
Nathan Lipson
* Director June 27, 2000
------------------------------------
Alan G. Schwartz
* Director June 27, 2000
------------------------------------
Anthony Maladra
* By /s/
------------------------------------
Jeffrey C. Rice
Attorney-in-Fact
</TABLE>
38
