U.S. 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 June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13732
COMTREX SYSTEMS CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 22-2353604
- -------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
102 Executive Drive, Moorestown, NJ 08057-4224
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(Address of principal executive offices)
(856) 778-0090
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at August 7, 2000
- ----------------------------- -----------------------------
Common Stock, par value $.001 3,846,572
Transitional Small Business Disclosure Form (check one):
Yes No X
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COMTREX SYSTEMS CORPORATION
TABLE OF CONTENTS
FORM 10-QSB
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements, Unaudited
Unaudited Consolidated Balance Sheets
at June 30, 2000 and March 31, 2000
Unaudited Consolidated Statement of Operations
for the three months ended June 30, 2000 and 1999
Unaudited Consolidated Statement of Cash Flow for the
three months ended June 30, 2000 and 1999
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or
Plan of Operation
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 2000 March 31, 2000
--------------- --------------
Current assets:
Cash and cash equivalents $ 193,452 $ 246,270
Accounts receivable, net of reserve of
$90,626 and $99,318 as of June 30, 2000
and March 31, 2000, respectively 2,806,084 3,022,935
Inventories 2,046,356 1,808,984
Prepaid expenses and other 159,520 116,668
----------- -----------
Total current assets 5,205,412 5,194,857
----------- -----------
Property and equipment:
Land 156,244 156,244
Building 312,656 312,656
Machinery, equipment, furniture and leasehold 1,663,312 1,639,881
----------- -----------
2,132,212 2,108,781
Less - accumulated depreciation (1,400,150) (1,372,781)
----------- -----------
Net property and equipment 732,062 736,000
----------- -----------
Other assets:
Purchased and capitalized software and design,
net of amortization 419,898 409,188
Goodwill, net of amortization 543,455 551,125
----------- ------------
Total other assets 963,353 960,313
----------- -----------
TOTAL ASSETS $ 6,900,827 $ 6,891,170
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit loan $ 1,025,000 $ 775,000
Accounts payable 824,452 1,020,988
Current portion of long term debt 39,476 64,711
Income and V.A.T. payable 107,907 146,471
Accrued expenses 201,270 168,502
Deferred revenue 377,933 464,153
Customer deposits 34,835 37,640
----------- -----------
Total current liabilities 2,610,873 2,677,465
----------- -----------
Deferred income taxes 10,051 10,051
----------- -----------
Long term liabilities:
Long term debt, net of current 243,070 245,213
Convertible debentures payable, net of current 280,000 256,667
----------- -----------
Total long term liabilities 523,070 501,880
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000
shares authorized, none outstanding - -
Common stock, $.001 par value, 10,000,000
shares authorized, 3,846,072 and 3,840,572
issued and outstanding as of
June 30, 2000 and March 31, 2000, respectively 3,847 3,841
Additional paid-in capital 5,762,557 5,757,704
Foreign currency translation adjustment 9,274 29,651
Accumulated deficit (2,018,845) (2,089,422)
----------- -----------
Total shareholders' equity 3,756,833 3,701,774
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,900,827 $ 6,891,170
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(These statements are unaudited.)
Three months ended
June 30,
2000 1999
----------- -----------
Net sales $ 2,270,201 $ 2,145,415
Costs and expenses:
Cost of sales 1,067,526 1,123,747
Administrative 313,916 294,092
Research and development 52,196 35,995
Sales and marketing 261,370 224,387
Customer support 403,037 289,739
Depreciation and amortization 55,290 47,653
----------- -----------
2,153,335 2,015,613
----------- -----------
Income from operations 116,866 129,802
Interest expense, net (33,960) (12,368)
----------- -----------
Income before income taxes 82,906 117,434
Provision for income taxes (12,329) (6,170)
----------- -----------
Net income $ 70,577 $ 111,264
=========== ===========
Basic earnings per share:
Net income $ .02 $ .03
=========== ===========
Diluted earnings per share:
Net income $ .02 $ .03
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(These statements are unaudited.)
Three months ended
June 30,
2000 1999
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 70,577 $ 111,264
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities -
Depreciation and amortization 55,290 47,653
Provisions for losses on accounts
receivable (8,692) 3,000
Provisions for losses on inventories - 20,000
Foreign currency translation adjustment (20,377) (11,538)
(Increase) decrease in -
Accounts receivable 169,830 (306,705)
Inventories (254,025) (440,624)
Prepaid expenses and other (44,662) (36,799)
Increase (decrease) in -
Accounts payable (151,323) 569,439
Current portion of long term debt (23,233) -
Accrued expenses 1,958 7,539
Customer deposits (2,806) 32,412
Deferred revenue (67,011) (108,460)
Notes payable, current - -
----------- -----------
Net cash provided by (used in)
operating activities (274,474) (112,819)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchases) of property and equipment:
Purchases of property and equipment (23,431) (11,718)
Purchases of software and capitalized
software and design (30,962) (25,557)
----------- ----------
Net cash provided by (used in)
investing activities (54,393) (37,275)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net 250,000 (30,000)
Increase in (payments on) debt, net 21,189 (8,929)
Proceeds from issuing equity securities 4,860 2,091
----------- -----------
Net cash provided by (used in)
financing activities 276,049 (36,838)
----------- -----------
Net increase (decrease) in cash (52,818) (186,932)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 246,270 483,917
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 193,452 $ 296,985
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business:
Comtrex Systems Corporation ("Comtrex" or "the Company") is a Delaware
corporation, initially incorporated in New Jersey in April, 1981. Comtrex
designs, develops, assembles, markets, sells and provides services for computer
software, electronic terminals and turn-key systems for restaurants, both table
and quick service. The Company's hardware and software systems provide
transaction processing, operational controls and management information, both
in-store and on an enterprise level. The Company markets its products through a
network of authorized distributors in Canada, France, Belgium, Germany,
Portugal, Holland, Ireland and Australia, and through a wholly-owned subsidiary
in the United Kingdom. In the United States, the Company markets its products
through a network of dealers and through its own direct sales offices.
In April, 1996, Comtrex acquired the operations of a distributor in
Atlanta, Georgia and engaged in the direct sale and service of its products in
both the Atlanta metropolitan area and in the southeast United States. In
October, 1997, Comtrex acquired its distributor in the United Kingdom and
engaged in the direct sale and service of its products throughout the U.K. In
June, 1999, Comtrex acquired its dealer in Pontiac, Michigan and engaged in the
direct sale and service of its products in the Detroit metropolitan area and in
the mid-western United States. Hereinafter, Comtrex and its subsidiary are
referred to as the Company.
Basis of presentation:
The accompanying consolidated financial statements have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the SEC. In the opinion of the
Company's management, all adjustments necessary for a fair presentation of the
accompanying unaudited consolidated financial statements are reflected herein.
All such adjustments are normal and recurring in nature. All significant
intercompany transactions and balances have been eliminated. Interim results are
not necessarily indicative of the results for the full year or for any future
interim periods. For more complete financial information, these consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 2000, as filed with the SEC.
Foreign currency translation:
Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the foreign currency
translation adjustment in shareholders' equity.
2. INVENTORIES:
Inventories include the cost of materials, labor and overhead and are
valued at the lower of cost (first-in, first-out) or market as follows:
June 30, March 31,
2000 2000
----------- -----------
Raw materials $ 996,302 $ 838,633
Work-in-process 42,877 50,838
Finished goods 1,087,177 999,513
Reserve for excess and obsolete inventory (80,000) (80,000)
----------- -----------
$ 2,046,356 $ 1,808,984
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6
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES:
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,452,000, which begin to expire in 2004. Such loss
carryforwards result in deferred tax assets of approximately $985,000, which has
been offset by a valuation allowance of equal amount. During the quarter ended
June 30, 2000, the valuation account was reduced by $15,000.
The components of the provision for income taxes for the quarter ended
June 30, 2000 consist of current expense (foreign) of $12,128, and current
expense (U.S.) of $15,200, respectively. The current expense (U.S.) for both
periods has been offset by the benefits of net operating loss carryforwards
through the reduction of the valuation account.
4. EARNINGS PER SHARE DISCLOSURE:
In the quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). It replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is
based upon the weighted average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
A reconciliation of the basic and diluted EPS for the three months
ended June 30, 2000 and 1999 is as follows:
Three months ended
June 30, 2000
----------------------------------------------------
Income Shares Per Share
--------- ---------- ---------
Net income $ 70,577
Basic EPS:
Income available to common shareholders $ 70,577 3,840,572 $ 0.02
Effect of dilutive securities, options and
warrants 66,187
Effect of dilutive convertible debenture 280,000
Diluted EPS:
Income available to common shareholders $ 76,177 4,186,759 $ 0.02
For purposes of computing diluted per share data, $5,600 of interest
related to the convertible debenture was added to net income.
Three months ended
June 30, 1999
----------------------------------------------------
Income Shares Per Share
--------- ----------- ---------
Net income $ 111,264
Basic EPS:
Income available to common shareholders $ 111,264 3,597,239 $ 0.03
Effect of dilutive securities, options 63,322
Effect of dilutive convertible debenture 300,000
Diluted EPS:
Income available to common shareholders $ 117,264 3,960,561 $ 0.03
For purposes of computing diluted per share data, $6,000 of interest
related to the convertible debenture was added to net income.
7
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SEGMENT INFORMATION:
In the fiscal year ended March 31, 1999, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise", replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The Company has two reportable segments: the United States
and the United Kingdom.
Three months ended
June 30,
2000 1999
-------------------------
Net sales:
United States, domestic $ 867,330 $ 711,904
United States, export 754,883 923,133
United Kingdom 967,035 879,197
Transfers between segments ( 319,047)( 368,819)
----------- -----------
Net sales $ 2,270,201 $ 2,145,415
=========== ===========
Income (loss) before income taxes:
United States $ 47,945 $ 125,581
United Kingdom 60,739 24,550
Corporate (25,778) (32,697)
----------- -----------
Income before
income taxes $ 82,906 $ 117,434
=========== ===========
Depreciation and amortization:
United States $ 38,594 $ 30,959
United Kingdom 9,596 9,594
Corporate 7,100 7,100
----------- -----------
$ 55,290 $ 47,653
=========== ===========
June 30, 2000 March 31, 2000
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Identifiable assets:
United States $ 5,131,468 $ 4,841,358
United Kingdom 2,197,483 2,414,652
Corporate 379,498 384,998
Eliminations ( 807,622) ( 749,838)
----------- -----------
Total assets $ 6,900,827 $ 6,891,170
=========== ===========
Long lived assets:
United States $ 150,379 $ 150,716
United Kingdom 581,683 585,284
----------- -----------
$ 732,062 $ 736,000
=========== ===========
8
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPREHENSIVE INCOME:
In the fiscal year ended March 31, 1999, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in equity
(net assets) of a business enterprise during the period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The Company's comprehensive income is comprised of net
income and foreign currency translation adjustments. Comprehensive income was
$50,200 and $52,962 for the quarters ended June 30, 2000 and 1999, respectively.
The difference from net income as reported is the tax effected change in the
foreign currency translation adjustment component of shareholders' equity.
7. BANK LOAN, LINE OF CREDIT:
On July 5, 2000, the Company entered into a credit facility with Summit
Bank, replacing an existing facility, which had extended through September of
2000, with PNC Bank N.A. The new credit facility, which extends through
September of 2001, provides the Company with the availability of a total amount
of $2,000,000 for borrowings and the issuance of Irrevocable Letters of Credit.
Outstanding borrowings bear interest at either the bank's prime rate of interest
minus one half of one percent (0.50%), or two and one half percent (2.50%) above
the London Interbank Offered Rate (LIBOR), at the Company's option. For
borrowings under which interest will be computed on the LIBOR formula, the
Company must place minimum principal amount draws of $200,000, on no more than
three (3) loans outstanding at any one time, for a period of either one, two or
three months. The credit facility is collateralized by substantially all
domestic assets of the Company. The previous facility with PNC Bank N.A.
provided the Company with the availability of a total amount of $1,500,000 for
borrowings and the issuance of Irrevocable Letters of Credit. Loans under the
facility with PNC Bank bore interest at the bank's prime rate and were also
collateralized by substantially all domestic assets of the Company.
8. STOCK PURCHASE TRANSACTION:
On June 23, 1999, the Company acquired all of the outstanding capital
stock of Cash Register Systems (CRS), Inc., a Michigan corporation, in exchange
for 150,000 restricted shares of the Company's common stock. CRS will operate as
a District Office, Comtrex Michigan. Prior to the acquisition, CRS was a
privately-held corporation which sold and serviced point-of-sale equipment,
principally the product lines of the Company. The four selling shareholders of
CRS were all employees within the organization, and will remain as Comtrex
employees pursuant to three year employment agreements. Results of operation of
Comtrex Michigan have been consolidated with those of the Company effective as
of July 1, 1999, the beginning of the second quarter of the Company's 2000
fiscal year.
The cost of the acquired enterprise is $171,915, which represents
150,000 shares of Comtrex common stock with an assigned value of $100,800,
$62,628 of net liabilities assumed in the transaction and associated legal fees
of $8,489. Acquired goodwill of $171,915 is being amortized over 20 years, using
the straight-line method.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The matters discussed in this Form 10-QSB that are
forward-looking statements are based on current management expectations that
involve a number of risks and uncertainties. Potential risks and uncertainties
include, without limitation, the impact of economic conditions generally and in
the intelligent point-of-sale terminal industry; and the risk of unavailability
of adequate capital or financing. Further information on potential risks is
contained in the Item 1 section of the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2000, as filed with the SEC.
Liquidity and Capital Resources
As of June 30, 2000, the Company had total current assets of
$5,205,412, including cash and cash equivalents of $193,452, as compared to
$5,194,857 of total current assets and $246,270 of cash and cash equivalents as
of March 31, 2000. The Company had current liabilities of $2,610,873, resulting
in a current ratio of 2.0 as of June 30, 2000, compared to $2,677,465 and 1.9,
respectively, as of March 31, 2000.
Cash and cash equivalents decreased by $52,818 during the first three
months of fiscal year 2001. Operating activities consumed $274,474 of cash, as
compared with cash consumption of $112,819 for the corresponding prior year
period. Investing activities consumed $54,393 during the first quarter of 2001
while financing activities provided $276,049 as compared with a net consumption
of $74,113 for investing and financing activities in the corresponding prior
year period.
The Company reported net income of $70,577 for the three month period
ended June 30, 2000. The Company has net operating loss carryforwards of
approximately $2,452,000 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 as of
the end of each fiscal quarter. As a consequence of a difference in the exchange
rate used during fiscal year 2001 and the exchange rate as of March 31, 2000,
differences between accounts on the consolidated balance sheets as of June 30,
2000 and March 31, 2000 do not involve cash outlay to the extent they are merely
the result of a differing rate of exchange. The following analysis relates to
the changes in the Company's balance sheet accounts on a cash flow basis.
A decrease in accounts receivable of $169,830, net income of $70,577
and depreciation of $55,290 represented significant positive contributions to
cash flow for the period ending June 30, 2000. The quarterly depreciation and
amortization contribution is expected to continue throughout the current fiscal
year at the same approximate quarterly amount. These positive cash flows were
offset by an increase in inventories of $254,025, a decrease in accounts payable
of $151,323 and a decrease in deferred revenues of $67,011. Each of these
amounts is largely a result of timing, and not necessarily indicative of trends
for the balance of the fiscal year. The decrease in accounts receivable is a
result of aggressive collection efforts, and was achieved despite June sales
accounting for approximately one-half of sales for the quarterly period.
During the quarter, work-in-process inventory declined by $7,961,
while finished goods and raw materials inventories increased by $87,664 and
$157,669, respectively. The iTP product of the Company is manufactured to the
Company's specifications by Firich Enterprises, formerly Commercial Data
Systems, in Taiwan, and sold in conjunction with the software for the PCS-5000
series. Orders for the iTP are placed by the Company with an approximate lead
time of two months. Based on current customer order and stocking levels, the
Company anticipates declines in inventories during the second quarter of the
current fiscal year.
10
Liquidity and Capital Resources (continued)
Another negative contribution to cash flow from operating activities
was a decrease in deferred revenue. Deferred revenue is principally comprised of
prepayments on maintenance contracts in the Company's U.K. subsidiary and its
District Offices in Atlanta and Michigan, which are billed on an annual basis.
The decrease of $67,011 is the result of a quarter's recognition of such
deferred revenue and is of a recurring nature, and not necessarily indicative of
any trend representing a decline in maintenance revenue or billings.
Investing activities consumed $54,393 of cash during the three month
period ended June 30, 2000, through a combination of purchased property and
equipment and capitalized software and design. Financing activities provided
$276,049, with the principal activity being borrowings from the Company's line
of credit and the reclassification of short term debt. In July of 2000, the
Company and Norman and Shirley Roberts executed Amendment No. 1 (the
"Amendment") to the Subordinated Convertible Debenture originally issued to
Norman and Shirley Roberts in October of 1997. The Amendment extends the
expiration date for the Holders' conversion rights specified in the Debenture by
six (6) months, from October 1, 2000 to April 1, 2001, and extends the date on
which the first principal payment is due from January 1, 2001 to July 1, 2001.
As a result of the Amendment, $21,180 which was reflected under the current
portion of long term debt as of March 31, 2000 has been reclassified as of June
30, 2000 under long term debt. More information on the Amendment is included
under Item 2 of Part II of this Form 10-QSB, and the Amendment is also filed
herewith as Exhibit 4.4.
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 quarter ended June 30, 2000, these adjustments
had the effect of a cash consumption of $20,377 on the consolidated cash flows.
On the consolidated balance sheets, these adjustments are recorded in a currency
translation adjustment in shareholders' equity. As a result of a reduced
exchange rate between the pound sterling and the U.S. dollar, this positive
adjustment to shareholders' equity decreased from an impact of $29,651 as of
March 31, 2000, to $9,274 as of June 30, 2000.
In March of 2000, the Company's wholly-owned subsidiary in the U.K.,
Comtrex Systems Corporation LTD, renewed its line of credit agreement with
Barclays Bank PLC. The agreement calls for borrowings of up to (pound)150,000,
and expires on March 30, 2001. Borrowings bear interest at the rate of 2.75
percent in excess of the bank's base rate and are collateralized by
substantially all assets of the subsidiary. The parent Company is not a
guarantor on this line of credit.
On July 5, 2000, the Company entered into a credit facility with Summit
Bank, replacing an existing facility, which had extended through September of
2000, with PNC Bank N.A. The new credit facility, which extends through
September of 2001, provides the Company with the availability of a total amount
of $2,000,000 for borrowings and the issuance of Irrevocable Letters of Credit.
Outstanding borrowings bear interest at either the bank's prime rate of interest
minus one half of one percent (0.50%), or two and one half percent (2.50%) above
the London Interbank Offered Rate (LIBOR), at the Company's option. For
borrowings under which interest will be computed on the LIBOR formula, the
Company must place minimum principal amount draws of $200,000, on no more than
three (3) loans outstanding at any one time, for a period of either one, two or
three months. The credit facility is collateralized by substantially all
domestic assets of the Company. The previous facility with PNC Bank N.A.
provided the Company with the availability of a total amount of $1,500,000 for
borrowings and the issuance of Irrevocable Letters of Credit. Loans under the
facility with PNC Bank bore interest at the bank's prime rate and were also
collateralized by substantially all domestic assets of the Company.
The Company believes that its cash balance, together with its lines of
credit, provides the Company with adequate liquidity to finance its projected
operations for the remainder of fiscal year 2001. As of June 30, 2000, the
Company had no material commitments for capital expenditures.
11
Results of Operation
Net sales during the first quarter of fiscal year 2001 increased by 6%,
to $2,270,201, as compared with corresponding sales of $2,145,415 during the
first quarter of fiscal year 2000. Results of operation of the Company's U.K.
distributor, acquired as of October 2, 1997, are consolidated in both quarters.
Results of operation of Comtrex Michigan, acquired on June 23, 1999, have been
consolidated with those of the Company effective as of July 1, 1999, the
beginning of the second quarter of fiscal year 2000.
The Company reported net income of $70,577 for the current three month
period, or $.02 per share, as compared with net income of $111,264, or $.03 per
share, for the comparable prior year period.
Administrative expenses increased from $294,092 during the first
quarter of fiscal year 2000, to $313,916 for the first quarter of fiscal year
2001, representing 14% of net sales in both periods. Sales, marketing and
customer support expenses increased from $514,126 during the period ended June
30, 1999, to $664,407, during the current fiscal year period, representing 24%
and 29% of net sales, respectively. Substantially all of the operating
activities of Comtrex U.K., like the Company's District Offices in Atlanta and
Michigan, relate to the direct sale, installation and service of products to
end-users.
Cost of sales during the first quarter of fiscal year 2001 were
$1,067,526, or 47% of net sales, as compared to $1,123,747, or 52% of net sales,
for the first quarter of the prior fiscal year. The reduction in cost of sales,
and increase in gross margin, is a combination of an increased emphasis on the
direct sales activities of the Company through Comtrex U.K., the Atlanta and
Michigan District Offices and in the Philadelphia metropolitan area, and
increased software license fees and funded software development.
While selling and support expenses represent a higher percentage of
direct sales than sales through a distribution network, the gross margin on such
product sales is significantly greater. In addition to product sales, a
significant percentage of the net sales realized through such direct sales
activities consists of maintenance and repairs, installation, training and
implementation services. Such service related revenue is at a greater gross
margin than product sales.
During the quarter ended June 30, 2000, the Company began a beta
installation of its Internet-based Decision Support and DataWarehouse software
in conjunction with City Centre Restaurants, through its U.K. subsidiary. The
system includes an in-store component, FTP Messenger, which forwards information
on a daily basis to an FTP Server, and a central component based on Windows NT
and SQL Server. The central component integrates information from restaurants
across several concepts into the SQL database, and provides for reporting access
by management using only an Internet browser. The arrangement under which
software and services are being provided to City Centre Restaurants includes a
one-time license fee, and ongoing fees for support, both in-store and at the
central site, and software maintenance.
The Company has also been engaged in a software design and development
project for approximately nine months in conjunction with Quick Restaurants N.V.
The development includes an entirely new suite of in-store back office software
modules, as well as an integration with SAP Retail, which will provide
centralized, enterprise control over the in-store database and a mechanism for
collecting store information for centralized reporting and analysis. The funded
portion of this development is expected to continue through September of 2000.
The in-store component is currently installed in a pilot location which is being
used to evaluate the software as it is released from development. Any chain-wide
rollout is not anticipated until the first half of calendar year 2001.
During the month of June, 2000, the Company began to see a slowdown in
the rate at which proposals and quotations to its direct customers were
resulting in the placement of firm orders, as well as a general slowdown in the
rate of incoming orders from its dealers and distributors. In evaluating the
overal marketplace in which the Company competes, management believes that this
trend is also affecting a broad number of companies involved in supplying
software, services and equipment to the restaurant industry. The result of this
trend on the Company's results of operations was the minimal increase in
revenues for the first quarter of fiscal year 2001 as compared to the the first
quarter of the prior fiscal year.
12
Results of Operation (continued)
Based on information currently available, management believes that the
second and third quarters of the current fiscal year will also show minimal, if
any, growth with respect to the prior periods. Essentially all of the Company's
comparative sales increase during fiscal year 2000, over fiscal year 1999,
occurred during the second half of the fiscal year. Based on the anticipated
release of new back office product offerings, and an expected increase in
overall purchasing trends relative to current depressed levels, management
believes that comparative sales growth should commence in the fourth quarter of
the current fiscal year, the beginning of calendar year 2001.
As of August 7, 2000, the Company's backlog was approximately $750,000.
Excluded from this backlog are any orders for delivery to subsidiaries or
District Offices from the parent. The Company's backlog as of August 6, 1999 was
approximately $1,100,000. The Company expects that substantially all of its
current backlog will be shipped within the next 90 days.
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.
13
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Information Required by Item 701 of Regulation S-B - Recent Sales of
Unregistered Securities
On March 22, 2000, the Company issued 20,000 shares of its common
stock, par value $.001 per share, to Norman and Shirley Roberts. These shares
represent the conversion of $20,000 of convertible debentures to common stock,
at the rate of $1.00 per share, pursuant to the terms and conditions of the
Subordinated Convertible Debenture (the "Debenture") issued to Norman and
Shirley Roberts on October 1, 1997 in conjunction with the Company's acquisition
of its U.K. subsidiary. In issuing the shares to Norman and Shirley Roberts, the
Company relied on the exemption from registration provided by section 4(2) of
the Securities Act of 1933, as amended, since the issuance did not involve any
public offering of the Company's securities.
The original amount of the Debenture was $300,000, and after the
conversion the remaining balance on the debenture was $280,000. The Debenture
accrues interest at the rate of eight (8) percent per annum, payable monthly.
The Debenture provides that no principal is payable until January 1, 2001, and
that any principal outstanding on October 2, 2000 is to be paid in twelve equal
quarterly installments, commencing 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.
In July of 2000, the Company and Norman and Shirley Roberts executed
Amendment No. 1 (the "Amendment") to the Subordinated Convertible Debenture,
filed herewith as Exhibit 4.4. The Amendment extends the expiration date for the
Holders' conversion rights specified in the Debenture by six (6) months, from
October 1, 2000 to April 1, 2001, and extends the date on which the first
principal payment is due from January 1, 2001 to July 1, 2001. Any principal
outstanding on April 2, 2001 is to be paid in twelve equal quarterly
installments, commencing on July 1, 2001.
Item 5. Other Information
Stockholder Proposals:
Stockholder proposals intended to be considered at the 2001 Annual
Meeting of Stockholders and which the proponent would like to have included in
the proxy materials distributed by the Company in connection with such meeting,
pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), must be received at the principal executive offices of
the Company no later than March 23, 2001. Such proposals may be included in next
year's proxy materials if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission.
Stockholder proposals intended to be considered at the 2001 Annual
Meeting of Stockholders and for which the proponent does not intend to seek
inclusion of the proposal in the proxy materials to be distributed by the
Company in connection with such meeting must be received at the principal
executive offices of the Company no later than June 6, 2001. Any stockholder
proposal received after such date will not be considered to be timely submitted
for purposes of the discretionary voting provisions of Rule 14a-4 promulgated
under the 1934 Act. In accordance with Rule 14a-4(c), the holders of proxies
solicited by the Board of Directors of the Company in connection with the
Company's 2001 Annual Meeting of Stockholders may vote such proxies in their
certain matters as more fully described in such Rule, including without
limitation on any matter coming before the meeting as to which the Company does
not have notice on or before June 6, 2001.
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit No. Description of Instrument
- ----------- -------------------------
4.1 *(b) Specimen Common Stock Share Certificate
4.2 *(e) Subordinated Convertible Debenture, in the original principal amount
of $300,000 (the "Debenture"), issued by the Company to Norman and
Shirley Roberts
4.3 *(f) Warrant to Purchase Shares of Common Stock from Comtrex Systems
Corporation and Exhibit A (Registration Rights Declaration), dated
February 8, 1999, issued to Alvin L. Katz
4.4 *(a) Amendment No. 1, dated July 31, 2000, to the Debenture issued by the Company to Norman and Shirley Roberts
10.1 *(g) Stock Purchase Agreement, dated June 23, 1999, between the Company,
Michael R. Carter, Matthew R. Carter, Mark R. Carter and Donn Scott
Smith
10.2 *(c) 1992 Non-Qualified Stock Option Plan of the Company
10.3 *(d) 1995 Employee Incentive Stock Option Plan of the Company
10.4 *(f) 1999 Stock Option Plan of the Company
10.5 *(e) Loan Agreement (Business Overdraft Facility) between Comtrex Systems
Corporation LTD and Barclays Bank PLC dated March 30, 1998
10.6 *(e) Security Agreement (Debenture), dated March 30, 1998, delivered by Comtrex Systems Corporation LTD to
Barclays Bank PLC
10.7 *(f) Financial Advisory Agreement, dated February 8, 1999, between Comtrex
Systems Corporation and Alvin L. Katz
10.8 *(a) Secured Credit Agreement between the Company and Summit Bank dated July 5, 2000
27 *(a) Financial Data Schedule in accordance with Article 5 of Regulation S-X
- ------------
*(a) Filed herewith.
*(b) Incorporated by reference to the exhibits to the Company's Form 8-K
filed with the Securities and Exchange Commission on May 16, 1989.
*(c) Incorporated by reference to the exhibits to the Company's definitive
proxy statement filed with the Securities and Exchange Commission on
July 16, 1992.
*(d) Incorporated by reference to the exhibits to the Company's definitive
proxy statement filed with the Securities and Exchange Commission on
July 13, 1995.
*(e) Incorporated by reference to the exhibits to the Company's Form 10-KSB
filed with the Securities and Exchange Commission on June 29, 1998.
*(f) Incorporated by reference to the exhibits to the Company's Form 10-KSB
filed with the Securities and Exchange Commission on June 28, 1999.
*(g) Incorporated by reference to the exhibits to the Company's Form 10-QSB
filed with the Securities and Exchange Commission on August 9, 1999.
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, no current reports on Form 8-K
were filed by the registrant with the Securities and Exchange Commission.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMTREX SYSTEMS CORPORATION
(Registrant)
Date: August 10, 2000 By: /s/ Jeffrey C. Rice
------------------- -----------------------------------
Jeffrey C. Rice
Chief Executive Officer
Date: August 10, 2000 By: /s/ Kenneth J. Gertie
------------------- -----------------------------------
Kenneth J. Gertie
Chief Financial &
Chief Accounting Officer
16
Exhibit Index
Exhibit Page
- ------- ----
4.4 Amendment No. 1, dated July 31, 2000, to the Subordinated
Convertible Debenture issued by the Company to Norman and
Shirley Roberts 18
10.8 Secured Credit Agreement between the Company and Summit
Bank dated July 5, 2000 20
27 Financial Data Schedule in accordance with Article 5
Of Regulation S-X 30
17