- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________
COMMISSION FILE NO. 0-21324
TRINITECH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 06-1344888
(State of incorporation) (I.R.S. Employer identification number)
333 LUDLOW STREET, STAMFORD, CONNECTICUT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 425-8000
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
8,788,530 shares of Common Stock were issued and outstanding as of October 30,
1998.
<PAGE>
Trinitech Systems, Inc.
FORM 10-Q
For the quarterly period ended September 30, 1998
CONTENTS PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30, 1998
(unaudited) and December 31, 1997 3
Condensed consolidated statements of operations (unaudited)
for the three months and nine months ended September 30, 1998
and 1997 4
Condensed consolidated statements of cash flows (unaudited)
for the months ended September 30, 1998 and 1997 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 16
2
<PAGE>
TRINITECH SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------- ------------
(Unaudited) (a)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,402,720 $ 2,141,307
Accounts receivable - less allowance of $94,000 and $144,000 2,454,637 1,859,301
Inventories - less allowance of $82,000 1,354,409 1,208,373
Prepaid expenses and other current assets 266,375 102,500
Receivable from officers 102,597 91,597
----------- -----------
Total Current Assets 5,580,738 5,403,078
EQUIPMENT - net of accumulated depreciation of $1,210,299 and $714,759 2,202,633 1,361,707
OTHER ASSETS - net of accumulated amortization of $1,384,974 and
$1,040,952 1,014,561 782,478
----------- -----------
TOTAL $ 8,797,932 $ 7,547,263
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 917,107 $ 927,672
Accrued expenses 419,426 389,174
Current portion of term loans payable - 47,709
Advance billings 1,150,946 171,414
Payroll and other taxes payable 141,189 63,706
----------- -----------
Total Current Liabilities 2,628,668 1,599,675
CREDIT LINE PAYABLE 1,500,000 -
TERM LOANS PAYABLE - 45,855
----------- -----------
Total Liabilities 4,128,668 1,645,530
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock - par value $1.00; 1,000,000 shares authorized;
-0- issued and outstanding - -
Common stock - par value $.001; 15,000,000 authorized 8,788,530 and
8,524,530 shares issued and outstanding 8,789 8,525
Additional paid-in capital 11,309,812 10,419,763
Accumulated deficit (6,202,159) (4,096,555)
Due from officers (447,178) (430,000)
----------- -----------
Total Stockholders' Equity 4,669,264 5,901,733
TOTAL $ 8,797,932 $ 7,547,263
=========== ===========
</TABLE>
(a) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
3
<PAGE>
TRINITECH SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
TRINITECH SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------
<TABLE>
<CAPTION>
-- Three Months Ended -- -- Nine Months Ended --
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------ ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Recurring contracts $914,296 $336,724 $2,378,661 $914,621
Sales 528,998 472,578 1,666,456 2,844,803
------------- ------------- ------------ --------------
Total Revenues 1,443,294 809,302 4,045,117 3,759,424
COST OF RECURRING CONTRACTS AND SALES 653,361 485,105 1,721,011 1,726,300
------------- ------------- ------------ --------------
GROSS PROFIT 789,933 324,197 2,324,106 2,033,124
------------- ------------- ------------ --------------
EXPENSES:
Selling, general and administrative 1,241,607 1,238,619 4,201,853 3,466,288
Depreciation 130,199 49,795 298,831 129,960
Amortization 4,596 10,213 13,786 28,634
------------- ------------- ------------ --------------
Total Expenses 1,376,402 1,301,671 4,514,470 3,624,882
------------- ------------- ------------ --------------
LOSS FROM OPERATIONS (586,469) (977,474) (2,190,364) (1,591,758)
OTHER (EXPENSE) INCOME:
Interest expense (11,777) (3,044) (27,373) (10,410)
Other income 18,642 41,240 112,133 117,756
------------- ------------- ------------ --------------
NET LOSS ($579,604) ($936,234) ($2,105,604) ($1,484,412)
============= ============= ============ ==============
NET LOSS PER COMMON SHARE $(.07) $( 0.11) $(0.24) $( 0.19)
============= ============= ============ ==============
AVERAGE COMMON SHARES
OUTSTANDING 8,771,530 8,218,530 8,682,780 7,998,030
============= ============= ============ ==============
</TABLE>
See accompanying notes.
4
<PAGE>
TRINITECH SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
------------ -----------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $(1,081,812) $ (768,582)
INVESTING ACTIVITIES:
Payments for equipment, net of retirements (1,377,419) (537,918)
Payments for other assets (576,105) (256,085)
----------- ----------
Net cash used in investing activities (1,953,524) (794,582)
----------- ----------
FINANCING ACTIVITIES:
Proceeds from line of credit 2,000,000 -
Issuance of common stock 890,313 3,725,938
Repayment of borrowings (593,564) (695,665)
----------- ----------
Net cash provided by financing activities 2,296,749 3,030,273
----------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (738,587) 1,467,330
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,141,307 1,198,730
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,402,720 $2,666,060
=========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
TRINITECH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and ITEM 310 (b) of Regulation S-B.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. All such adjustments are of a normal recurring nature.
Operating results for the nine-month period ended September 30, 1998
are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1997.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Parts $ 892,153 $ 875,822
Finished goods 544,256 414,551
Less allowance for obsolescence 82,000 82,000
----------- ----------
Total $ 1,354,409 $1,208,373
=========== ==========
</TABLE>
6
<PAGE>
3. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- -----------
<S> <C> <C>
Computer software $ 378,929 $ 331,668
Leasehold improvements 101,508 81,957
Furniture and equipment 1,035,863 878,518
Subscription and service bureau equipment 1,896,632 784,323
--------- -----------
Subtotal 3,412,932 2,076,466
Less accumulated depreciation 1,210,299 714,759
--------- -----------
Total $2,202,633 $1,361,707
========= ===========
</TABLE>
4. DEBT
On July 13, 1998, the Company entered into a three year $3 million line
of credit agreement (the "Agreement") with a financial institution with advances
on such agreement available to the Company during the first 18 months. The
Agreement is primarily intended to finance existing and future equipment
expenditures. The Agreement bears interest at either LIBOR plus 1.25% or the
Bank's Prime Rate and is personally secured by a Company shareholder and the
Company's president. The rate used is at management's discretion. The Company
drew down an aggregate of $1,500,000 under the Agreement in the third quarter of
1998 ($1 million at the nine month LIBOR rate plus 1.25% (7%) and $500,000 at
the 30 day LIBOR rate plus 1.25% (6.78%)). The Agreement requires monthly
payments of interest only until January 30, 2000, at which time monthly ratable
principal and interest payments are made until the Agreement matures. Principal
drawdowns under the Agreement can not be prepaid in the first eighteen months.
In consideration for securing the Agreement, the said shareholder and president
will receive 150,000 and 25,000 warrants respectively, to purchase the Company's
common stock at $6.375 per share, which was the market value of the Company's
common stock on the date such warrants were issued.
In association with obtaining the $3 million line of credit facility, the
Company terminated its previous $500,000 line of credit agreement (revised from
$1 million line of credit agreement in June 1998) and repaid all outstanding
term loans.
5. PER SHARE INFORMATION
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earning Per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Diluted earning per share is not presented in either period
because the effect of the Company's
7
<PAGE>
common stock equivalents (employee stock options and warrants) is antidilutive.
All earnings per share amounts for all periods have been restated, and are
presented to conform to the Statement 128 requirements.
6. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," which
supercedes SOP-91-1 and clarifies the existing guidance regarding revenue
recognition of certain computer software products. The Company adopted SOP 97-2
in the first quarter of 1998 and the effect is not material to the Company's
operations or financial position taken as a whole.
In September 1997, the Financial Accounting Standards board issued FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 requires that segment data be disclosed based on how
management makes decisions about allocating resources to segments and measuring
their performance. While the Company is studying the application of the
disclosure provisions, it does not expect this statement to materially affect
its financial position or results of operations. This Statement is effective for
the year ended December 31, 1998.
7. OTHER INCOME
Included in other income for the nine months ended September 30, 1998 is
approximately $50,000 pertaining to the payment of a liability for which the
Company had established a full reserve.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The management discussion and analysis in this Form 10-QSB contains
certain forward-looking statements regarding the Company's future plans,
objectives and expected performance. Those statements are based on assumptions
that the Company believes are reasonable, but are subject to a wide range of
risks and uncertainties, and a number of factors could cause the Company's
actual results to differ materially from those expressed in the forward looking
statements referred to above. These factors include, among others, the Company's
ability to further penetrate the financial services market with a full range of
the Company's products and the highly competitive market in which the Company
operates.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto. Historical results and
percentage relationships are not necessarily indicative of the operating results
for any future period.
Trinitech Systems, Inc. develops and markets advanced electronic trading
systems to brokerage firms, international banks and global exchanges trading in
equities, futures & options, and currencies. The Company's NYFIX Network, a
combined FIX and Exchange Access Network, enables users to electronically
communicate trade data among the buy-side, sell-side, and exchange floor
environments. The Company's goal is to become the leading provider of real-time
electronic trade entry and routing systems to the global financial services
industry. Being firm believers in the global market going electronic, the
company has maintained a consistent and focused commitment to the development of
electronic trading technologies during the pioneering phase of the market. The
Company is headquartered in Stamford, Connecticut and maintains operations in
New York, Chicago, and London.
The Company commenced its present business operations in January 1991
through the acquisition of a software license for its Guided-Input(R) Touchpad
system. Since that time, the Company has transitioned from a hardware vendor to
a software development company focusing exclusively on applications for the
financial marketplace. The Company is in process of transforming its business
from that of traditional capital equipment sales to that of licensing-based and
subscription-based revenue for its software and systems. The Company provides a
complete line of workstation products for the financial trading desk environment
and its systems provide order management and routing software for firms engaged
in financial trading. The Company currently offers its trading products
(integrated systems including hardware and software) together with linkage
through its NYFIX data-center. The data-center is a communication infrastructure
enabling the Company to provide its customers with global electronic
connectivity for order routing and allows Trinitech to deploy and monitor its
systems and services from a single location. Customers subscribe to various
products, paying a monthly fee per terminal for the Company's integrated
software systems. Most contracts provide the customer with a basic system or
infrastructure, via the Company's NYFIX data-center and are entered into by the
customer with the intention to expand the level of services subscribed to, once
the basic system and infrastructure are operational. Subscription revenue
contracts are generally for an initial period of one year with one to three year
9
<PAGE>
renewal periods. Initial annual revenues range from $15,000 to over $400,000 per
annum per contract. The Company begins recording subscription revenue once
installation is complete. Although subscription-based revenue has the short-term
negative impact of reduced revenues in the early stage, management believes that
the change will have a long-term positive impact on the future revenue growth of
the Company. Management is of the opinion that this change has already resulted
in new orders and increased market share that it otherwise would not have had,
in addition to leading to longer-term and more predictable revenues per
customer. In addition to significant logistical improvements in delivery and
support of its products, the Company expanded its business to offer the industry
a central electronic meeting place between the buy-side and sell-side, while
simultaneously providing a single point of universal access to different
exchange floor environments.
Management has made a considerable effort with respect to an expansion of
its operations, development of various trading systems and changes to its
business model to that of a subscription-based product offering. The Company
believes that this expansion of personnel, facilities, product portfolio and
subscription-based model will better position the Company and facilitate its
future growth. Management is of the opinion that the Company's transition from a
capital sales model to a subscription sales model will not only lead to
additional orders on top of the original contract, but will create a longer term
and more stable revenue stream for the Company going forward. It is important to
note that this transition is causing revenue to be recognized over a longer
period of time than the previous capital sales model. The Company is excited
about the subscription-based model because as the Company continues to add more
customers, the Company will collect revenue from each customer as long as they
are utilizing the Company's products or services. In the previous model, the
Company would only receive revenue one time for products or services sold.
Management believes the new business model will strengthen the Company's
marketshare and its financial position going forward.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES
The increase in revenues for the three months ended September 30, 1998
over the comparable 1997 period was principally due to the Company's changing
its strategy to electronic order routing which it began executing in late 1997.
In addition to the conversion from capital sales to subscription sales, a number
of new products and order routing services under the NYFIX umbrella are
contributing to the Company's continued ramp up in new orders and corresponding
recurring revenues.
Consistent with the Company's objectives, recurring revenue has generally
been increasing on a quarter-to-quarter basis. Recurring revenue is accounting
for a greater share of the Company's total revenue. Recurring contracts are
comprised of subscription revenue and service revenue. Recurring contractual
revenue for the Company increased by approximately 172% in the three months
ended September 30, 1998 (from $336,724 to $914,296) over the comparable 1997
period. During the three month period ended September 30, 1998, subscription
contracts and service contracts were approximately 64% and 36% of recurring
contractual revenue, respectively, as compared to 23%
10
<PAGE>
and 77%, respectively, during the three-month period ended September 30, 1997.
The increase in recurring contractual revenue is due principally to the
Company's strategy of offering its products and services on a subscription basis
rather than capital sales coupled with increased service agreements.
Sales revenue is comprised of capital equipment sales and software sales.
Sales revenue for the Company increased by approximately 12% in the three months
ended September 30, 1998 over the comparable 1997 period (from $472,578 to
$528,998). During the three month period ended September 30, 1998, capital
equipment sales and software revenue were approximately 56% and 44% of sales
revenues, respectively as compared to 67% and 33%, respectively during the three
month period ended September 30, 1997.) The increase in sales (capital equipment
and software) is primarily attributable to increased orders in the United
States. Foreign operation revenues amounted to approximately $401,000 and
$324,000 for the three-month periods ended September 30, 1998 and 1997,
respectively.
Revenue from export sales approximated $8,000 (less than 1% of revenue)
during the three-month period ended September 30, 1998 as compared to
approximately $87,000 (approximately 18% of revenue) during the comparable
period in 1997.
COST OF RECURRING CONTRACTS AND SALES AND GROSS PROFIT
The Company's cost of recurring contracts and sales are principally
comprised of labor, materials, overhead, amortization of capitalized product
enhancement costs, depreciation of subscription based equipment and
communication lines. Gross profit as a percentage of total revenue was
approximately 55% and 40% during the three-month periods ended September 30,
1998 and 1997, respectively. The increase in gross profit percentage experienced
by the Company during the three-month period ended September 30, 1998
principally resulted from an increase in the amount of higher margin
subscription and service contracts and software sales. The Company obtains its
materials and supplies from a variety of vendors in the U.S. and the Far East.
Included in cost of sales is amortization expense for product enhancement costs
of approximately $124,000 and $167,000 for the three-month periods ended
September 30, 1998 and 1997, respectively. Also included in cost of sales is
depreciation expense for subscription based equipment of approximately $88,000
and $40,000 for the three-month period ended September 30, 1998 and 1997,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE
During the three months ended September 30, 1998, selling general and
administrative expenses remained relatively flat (from $1,238,619 to $1,241,607)
when compared to the three months ended September 30, 1997. Both periods reflect
the continued expansion of the development, technical and finance teams in the
U.S. and the continued expansion of the development team in London. The
expansion in development efforts relates to the Company's plans of providing an
increased number of new additional services. These services relate to offering
subscription and transaction based order-routing, via the Company's NYFIX
data-center, to multiple exchange-floors and between "Buy-side" and "Sell-side"
institutions. The Company's recruitment effort continues to strengthen the
Company's infrastructure and position the Company to respond to increasing
market and revenue opportunities. Included in selling, general & administrative
expenses is rent expense
11
<PAGE>
for the Company's offsite data center and equipment in such data center of
approximately $75,514 for the three-month period ended September 30, 1998. The
Company, during the past several years, has committed considerable resources to
developing a variety of "trader desk-top" and "exchange-floor" trading systems.
Management believes that the investment in development of the new data-center,
and its services, is designed to better leverage the existing products while
providing additional sources of revenue. The Company has continued its marketing
programs in 1998 primarily focusing on public relations activities, production
of various product brochures, and representation at technological exhibitions.
Research and development (new explorative research) expenses for the three
months ended September 30, 1998 and 1997 were approximately $147,000 and
$72,000, respectively (an increase of approximately 105%), and are included in
selling, general and administrative expenses.
DEPRECIATION
Depreciation expense increased by approximately 161% in the three months
ended September 30, 1998 over the comparable 1997 period (from $49,795 to
$130,199). Such increases principally reflect the continued investment in the
Company's infrastructure in its state of the art data center on Wall Street.
OTHER (EXPENSE) INCOME
Interest expense increased in the three-month period ended September 30,
1998 principally because of higher balances outstanding on the company's new
line of credit.
Interest income in the three months ended September 30, 1998 and 1997
approximated $19,000 and $41,000, respectively. Interest income decreased
principally because of lower average cash balances maintained by the Company
during the three months ended September 30, 1998 versus the three months ended
September 30, 1997.
NET LOSS
Net loss for the three months ended September 30, 1998 was $579,604
($0.07 per share) as compared to a net loss of $936,234 ($0.11 per share) for
the three months ended September 30, 1997. The decrease in net loss, principally
resulted from an increase in recurring revenue from the subscription-based
revenue model which in the three months ended September 30, 1997 was in the
beginning stage of implementation, and an increase in gross profit margin. See
"Revenues"and "Cost of Recurring Contracts and Sales and Gross Profit" above.
-12-
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES
The increase in revenues for the nine months ended September 30, 1998
over the comparable 1997 period was principally due to the Company's changing
its strategy to electronic order routing which it began executing in late 1997.
In addition to the conversion from capital sales to subscription sales, a number
of new products and order routing services under the NYFIX umbrella are
contributing to the Company's continued ramp up in new orders and corresponding
recurring revenues.
Consistent with the Company's objectives, recurring revenue has generally
been increasing on a quarter-to-quarter basis. Recurring revenue is accounting
for a greater share of the Company's total revenue. Recurring contracts are
comprised of subscription revenue and service revenue. Recurring contractual
revenue for the Company increased by approximately 160% in the nine months ended
September 30, 1998 (from $914,621 to $2,378,661) over the comparable 1997
period. During the nine month period ended September 30, 1998, subscription
contracts and service contracts were approximately 60% and 40% of recurring
contractual revenue, respectively, as compared to 16% and 84%, respectively,
during the nine-month period ended September 30, 1997. The increase in recurring
contractual revenue is due principally to the Company's strategy of offering its
products and services on a subscription basis rather than capital sales coupled
with increased service agreements.
Sales revenue is comprised of capital equipment sales and software sales.
Sales revenue for the Company decreased by approximately 41% in the nine months
ended September 30, 1998 over the comparable 1997 period (from $2,844,803 to
$1,666,456). During the nine month period ended September 30, 1998, capital
equipment sales and software revenue were approximately 45% and 55% of sales
revenues, respectively as compared to 61% and 39%, respectively during the nine
month period ended September 30, 1997.) The decrease in sales (capital equipment
and software) corresponds to the increase in recurring revenue as previously
mentioned.
Revenue from export sales approximated $226,000 (less than 6% of revenue)
during the nine-month period ended September 30, 1998 as compared to
approximately $2,209,000 (78% of revenue) during the comparable period in 1997.
Foreign operation revenues amounted to approximately $1,523,000 and $1,238,000
for the nine-month periods ended September 30, 1998 and 1997, respectively.
COST OF RECURRING CONTRACTS AND SALES AND GROSS PROFIT
The Company's cost of recurring contracts and sales are principally
comprised of labor, materials, overhead, amortization of capitalized product
enhancement costs and depreciation of subscription based equipment. Gross profit
as a percentage of total revenue was approximately 57% and 54% during the
nine-month period ended September 30, 1998 and 1997, respectively. The Company
obtains its materials and supplies from a variety of vendors in the U.S. and the
Far East. Included
13
<PAGE>
in cost of sales is amortization expense for product enhancement costs of
approximately $330,000 and $241,000 for the nine month periods ended September
30, 1998 and 1997, respectively. Also included in cost of sales is depreciation
expense for subscription based equipment of approximately $205,000 and $40,000
for the nine-month period ended September 30, 1998 and 1997, respectively.
SELLING, GENERAL AND ADMINISTRATIVE
During the nine months ended September 30, 1998, selling general and
administrative expenses increased approximately 21% (from $3,466,288 to
$4,201,853) when compared to the nine months ended September 30, 1997. Such
increases reflect the continued expansion of the development, technical and
finance teams in the U.S. and the continued expansion of the development team in
London. The expansion in development efforts relates to the Company's plans of
providing an increased number of new services. These services relate to offering
subscription and transaction based order-routing, via the Company's NYFIX
data-center, to multiple exchange-floors and between "Buy-side" and "Sell-side"
institutions. As a result, the Company experienced increases in salaries and
related personnel costs, travel expenses and various office expenses. The
Company's recruitment effort continues to strengthen the Company's
infrastructure and position the Company to respond to increasing market and
revenue opportunities. Included in selling, general & administrative expenses is
rent expense for the Company's offsite data center and equipment in such data
center of approximately $227,000 for the nine-month period ended September 30,
1998. The Company, during the past several years, has committed considerable
resources to developing a variety of "trader desk-top" and "exchange-floor"
trading systems. Management believes that the investment in development of the
new data-center, and its services, are designed to better leverage the existing
products while providing additional sources of revenue. The Company has
continued its marketing programs in 1998 primarily focusing on public relations
activities, production of various product brochures, and representation at
technological exhibitions. Research and development (new explorative research)
expenses for the nine months ended September 30, 1998 and 1997 were
approximately $490,000 and $213,000, respectively, (an increase of approximately
130%) and are included in selling, general and administrative expenses.
DEPRECIATION
Depreciation expense increased by approximately 130% in the three months
ended September 30, 1998 over the comparable 1997 period (from $129,960 to
$298,831). Such increases principally reflect the continued investment in the
Company's infrastructure in its state of the art data center on Wall Street.
OTHER (EXPENSE) INCOME
Interest expense increased in the nine-month period ended September 30,
1998 principally because of higher balances outstanding on the company's new
line of credit.
Other income consists principally of a settlement of a fully reserved
liability, interest earned on cash balances and sublease income earned. Included
in other income for the nine months ended September 30, 1998 is approximately
$50,000 pertaining to the payment of a liability for which
14
<PAGE>
the Company had established a full reserve. Interest income in the nine months
ended September 30, 1998 and 1997 approximated $62,000 and $104,800,
respectively. Interest income decreased principally because of lower average
cash balances maintained by the Company during the nine months ended September
30, 1998 versus the nine months ended September 30, 1997. The Company previously
leased a portion of its corporate office facility under a nine-year sublease,
which expired on April 30, 1997. Due to the continuing expansion of operations,
(See "Selling, General and Administrative" above) the Company decided not to
renew the sublease and incorporated such space into its existing corporate
facility. Sublease rental income earned during the nine months ended September
30, 1997 approximated $13,000.
NET LOSS
Net loss for the nine months ended September 30, 1998 was $2,105,604 ($0.26 per
share) as compared to a net loss of $1,484,412 ($0.19 per share) for the nine
months ended September 30, 1997. The increase in net loss, principally resulted
from 1) decrease in "capital sales" type revenue resulting from the Company
moving to a subscription-based revenue model which presently is in its early
stage of growth, and 2) increase in selling, general and administrative
expenses. See "Revenues", "Cost of Recurring Contracts and Sales and Gross
Profit" and "Selling, General and Administrative" above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been equity capital and
proceeds from lines of credit. Since the commencement of operations, the Company
has raised approximately $9.8 million of working capital through various private
placements of its securities. During March 1997, the Company completed a private
placement of 800,000 shares of Common Stock at a price of $4.50 per share, for
an aggregate value of $3,600,000. Costs related to this offering amounted to
approximately $85,000 resulting in net proceeds to the Company of approximately
$3,515,000. At September 30, 1998, cash balances decreased to $1,402,720 from
$2,141,307 at December 31, 1997.
The Company's current assets at September 30, 1998 exceeded its current
liabilities by approximately $3.0 million. The Company at September 30, 1998 had
long-term debt totaling $1.5 million, which represents draw downs on a line of
credit that was obtained in July 1998. See discussion below. In addition, at
September 30, 1998, the Company had no material commitments for capital
expenditures or inventory purchases.
On July 13, 1998, the Company entered into a three year $3 million line
of credit agreement (the "Agreement") with a financial institution with advances
on such agreement available to the Company during the first 18 months. The
Agreement is primarily intended to finance existing and future equipment
expenditures. The Agreement bears interest at either LIBOR plus 1.25% or the
Bank's Prime Rate and is personally secured by a Company shareholder and the
Company's president. The rate used is at management's discretion. The Company
drew down an aggregate of $1,500,000 under the agreement in the third quarter of
1998 ($1 million at the nine month
15
<PAGE>
LIBOR rate plus 1.25% (7%) and $500,000 at the 30 day LIBOR rate plus 1.25%
(6.78%)). The Agreement requires monthly payments of interest only until January
30, 2000, at which time monthly ratable principal and interest payments are made
until the Agreement matures. Principal drawdowns under the Agreement can not be
prepaid in the first eighteen months. In consideration for securing the
Agreement, the said shareholder and president will receive 150,000 and 25,000
warrants respectively, to purchase the Company's common stock at $6.375 per
share, which was the market value of the Company's common stock on the date such
warrants were issued.
In association with obtaining the $3 million line of credit facility, the
Company terminated its previous $500,000 line of credit agreement (revised from
$1 million line of credit agreement in June 1998) and repaid all outstanding
term loans.
The Company believes that with its available capital, including the
proceeds from the line of credit facility, it will be able to fund its cash
needs through the end of 1998. The Company intends to internally finance its
continuing research and development activities. The Company's line of credit
facility is primarily utilized to finance equipment purchases. The Company is
considering numerous alternatives to finance its anticipated sales growth and
growing infrastructure. The Company's financial requirements and its ability to
meet them thereafter will depend largely on its future financial performance.
However, in the event the Company's operations do not generate cash to the
extent currently anticipated by management of the Company and grows more rapidly
than anticipated, it is possible that the Company could require additional funds
beyond 1998. At this time, the Company does not know what sources, if any, would
be available to it for such funds, if required.
In addition, at September 30, 1998, the Company has warrants outstanding
for the purchase of 220,837 shares of its Common Stock. Assuming the exercise of
all such outstanding warrants, the Company would receive approximately $800,000
in gross proceeds.
WORKING CAPITAL
At September 30, 1998 and December 31, 1997, the Company had working
capital of approximately $2,952,000 and $3,803,000, respectively. The Company's
present capital resources include its available borrowing capacity under its
bank credit facility. Through September 30, 1998, 264,000 stock options and
warrants to purchase common stock were exercised with the Company receiving
proceeds of approximately $890,000.
CASH USED IN OPERATING ACTIVITIES
During the nine-months ended September 30, 1998, net cash used in
operations was approximately $1,082,000 as compared to cash used in operations
for the nine-month ended September 30, 1997 of approximately $769,000. The
decline is primarily attributable to the continued investment in the Company's
infrastructure as previously discussed.
16
<PAGE>
CASH USED IN INVESTING ACTIVITIES
During the nine months ended September 30, 1998 and 1997, net cash used
in investing activities was approximately $1,954,000 and $795,000, respectively,
and principally represents payments for the purchases of equipment and payments
related to product enhancement costs for the Company's product portfolio.
PROCEEDS FROM FINANCING ACTIVITIES
During the nine months ended September 30, 1998 and 1997, proceeds from
financing activities were approximately $2,297,000 and $3,030,000, respectively.
The decrease is primarily attributable to there being no equity offering during
the nine months ended September 30, 1998 as there was in the nine months ended
September 30, 1997.
YEAR 2000 COMPLIANCE
The Company expects to implement the systems and programming changes
necessary to address Year 2000 issues and does not believe the cost of such
actions will have a material effect on the Company's results of operations or
financial condition. However, there is no guarantee that the Company, its
suppliers or other third parties will be able to make all of the modifications
necessary to address Year 2000 issues on a timely basis. This could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company views all of its applications as mission
critical. The Company recently converted its previous capital sales model to a
subscription sales model. The newly implemented data center is substantially
compliant, with all date fields expanded to four digits. The Company is in
process of setting up a redundant environment and will test substantially all of
its business transactions. The testing of these applications is expected to be
completed during 1999.
The Company anticipates the possibility that not all of its vendors and
other third parties will have taken the necessary steps to adequately address
their respective Year 2000 issues on a timely basis. In order to minimize the
impact on the Company, a project team will be formed to monitor the activities
of third parties. The Company intends to continue monitoring the progress of
others in order to determine whether adequate services will be provided to run
the Company's operations in the Year 2000.
SEASONALITY
The Company believes that its operations are not significantly effected
by seasonality.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," which
supercedes SOP-91-1 and clarifies the existing guidance regarding revenue
recognition of certain computer software products. The
17
<PAGE>
Company adopted SOP 97-2 in the first quarter of 1998 and the effect is not
material to the Company's operations or financial position taken as a whole.
In September 1997, the Financial Accounting Standards board issued FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 requires that segment data be disclosed based on how
management makes decisions about allocating resources to segments and measuring
their performance. While the Company is studying the application of the
disclosure provisions, it does not expect this statement to materially affect
its financial position or results of operations. This Statement is effective for
the year ended December 31, 1998.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 Financial Data Schedule
18
<PAGE>
(b) REPORTS ON FORM 8-K
On August 7, 1998 the Company filed a current report on Form 8-K relative
to obtaining a $3 million line of credit facility, terminating its $500,000
previous line of credit agreement and repaying its three term loans.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Trinitech Systems, Inc.
(Registrant)
By: /s/ Peter Kilbinger Hansen
-----------------------------
Peter Kilbinger Hansen
Chairman of the Board
and President
(Chief Executive Officer)
By: /s/ Kevin C. Cassidy
-----------------------------
Kevin C. Cassidy
Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE THREE MONTHS ENDED September 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> Jul-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,402,720
<SECURITIES> 0
<RECEIVABLES> 2,548,637
<ALLOWANCES> 94,000
<INVENTORY> 1,354,409
<CURRENT-ASSETS> 5,580,738
<PP&E> 2,202,633
<DEPRECIATION> 130,199
<TOTAL-ASSETS> 8,797,932
<CURRENT-LIABILITIES> 2,628,668
<BONDS> 0
0
0
<COMMON> 8,789
<OTHER-SE> 4,660,475
<TOTAL-LIABILITY-AND-EQUITY> 8,797,932
<SALES> 1,666,456
<TOTAL-REVENUES> 4,045,117
<CGS> 653,361
<TOTAL-COSTS> 4,514,470
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,777
<INCOME-PRETAX> (579,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (579,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (579,604)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
