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, 2002
[ ] 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
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(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 9, 2002
- ----------------------------- -----------------------------
Common Stock, par value $.003 1,417,120
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, 2002 and March 31, 2002 3
Unaudited Consolidated Statements of Operations 4
for the three months ended June 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows 5
for the three months ended June 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or 12
Plan of Operation
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Exhibits 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 2002 March 31, 2002
------------- --------------
Current assets:
Cash and cash equivalents $ 106,112 $ 143,245
Accounts receivable, net of reserve of
$98,593 and $100,055 as of June 30, 2002
and March 31, 2002 respectively 2,320,126 2,529,557
Note receivable 3,193 3,146
Inventories 1,398,395 1,452,386
Prepaid expenses and other 155,545 98,293
----------- -----------
Total current assets 3,983,371 4,226,627
----------- -----------
Property and equipment:
Land 156,244 156,244
Building 312,656 312,656
Machinery, equipment, furniture and leasehold 2,125,095 1,970,002
----------- -----------
2,593,995 2,438,902
Less - accumulated depreciation (1,635,475) (1,596,268)
----------- -----------
Net property and equipment 958,520 842,634
----------- -----------
Other assets:
Purchased and capitalized software and design,
net of amortization of $395,045 as of
June 30, 2002 and March 31, 2002 802,367 715,397
Goodwill, net of amortization of $122,152 as of
June 30, 2002 and March 31, 2002 489,761 489,761
----------- -----------
Total other assets 1,292,128 1,205,158
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TOTAL ASSETS $ 6,234,019 $ 6,274,419
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit loan $ 575,000 $ 850,000
Accounts payable 472,283 313,814
Current portion of long term debt 126,923 76,972
Income and V.A.T. payable 131,691 114,791
Accrued expenses 159,161 150,974
Deferred revenue 655,415 778,067
Customer deposits 2,000 2,000
----------- -----------
Total current liabilities 2,122,473 2,286,618
----------- -----------
Long term debt, net of current portion 450,303 386,154
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000
shares authorized, none outstanding -- --
Common stock, $.003 par value, 10,000,000
shares authorized, 1,417,120 and 1,417,120
issued and outstanding as of
June 30, 2002 and March 31, 2002, respectively 4,252 4,252
Additional paid-in capital 5,999,654 5,999,654
Foreign currency translation adjustment 25,490 (14,333)
Accumulated deficit (2,368,153) (2,387,926)
----------- -----------
Total shareholders' equity 3,661,243 3,601,647
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,234,019 $ 6,274,419
=========== ===========
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,
2002 2001
----------- -----------
Net sales $ 1,717,651 $ 1,534,922
Costs and expenses:
Cost of sales 797,150 726,571
Administrative 219,552 272,566
Research and development 27,988 23,631
Sales and marketing 196,439 232,898
Customer support 379,118 365,509
Depreciation and amortization 31,976 57,452
----------- -----------
1,652,223 1,678,727
----------- -----------
Income from operations 65,428 (143,705)
Interest expense, net (16,035) (22,194)
----------- -----------
Income before income taxes 49,393 (165,899)
Provision for income taxes (29,620) (10,804)
----------- -----------
Net income $ 19,773 $ (176,703)
=========== ===========
Basic earnings per share:
Net income $ .01 $ (.12)
=========== ===========
Diluted earnings per share:
Net income $ .01 $ (.12)
=========== ===========
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,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,773 ($176,703)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities -
Depreciation and amortization 31,976 57,452
Provisions for losses on accounts
receivable (1,462) 2,121
Provisions for losses on inventories (507) --
Foreign currency translation adjustment 17,889 5,080
(Increase) decrease in -
Accounts receivable 294,221 362,071
Inventories 81,062 (2,442)
Prepaid expenses and other (55,122) (34,159)
Increase (decrease) in -
Accounts payable 134,228 (422,780)
Accrued V.A.T. and income taxes 9,729 12,334
Accrued expenses (2,392) 25,709
Customer deposits -- 12,551
Deferred revenue (163,631) (114,421)
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Net cash provided by (used in)
operating activities 365,764 (273,187)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchases) of property and equipment:
Purchases of property and equipment (155,093) (30,178)
Purchases of software and capitalized
software and design (86,969) (87,984)
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Net cash provided by (used in)
investing activities (242,062) (118,162)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net (275,000) 248,191
Increase in (payments on) debt, net 114,165 (7,459)
Proceeds from issuing equity securities -- 1,180
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Net cash provided by (used in)
financing activities (160,835) 241,912
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Net increase (decrease) in cash (37,133) (149,437)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 143,245 164,866
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 106,112 $ 15,429
========== =========
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, 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, 2002, as filed with the SEC.
Reverse Stock Split:
On February 12, 2001, the shareholders approved a one for three
reverse stock split, effective as of February 14, 2001 with the filing of a
Certificate of Amendment to the Company's Certificate of Incorporation with the
Secretary of State of the State of Delaware. All amounts herein reflect such
reverse stock split.
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.
Goodwill:
Implementation of Statement of Financial Accounting Standards No. 142,
effective with the beginning of the current fiscal year, resulted in the
elimination of amortization of goodwill for the current, and future, fiscal
years. See Note 8.
6
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
2002 2002
----------- -----------
Raw materials $ 610,000 $ 601,850
Work-in-process 972 1,033
Finished goods 918,113 980,700
Reserve for excess and obsolete inventory (130,690) (131,197)
----------- -----------
$ 1,398,395 $ 1,452,386
=========== ===========
3. INCOME TAXES:
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,450,000, which begin to expire in 2004. Such loss
carryforwards result in deferred tax assets of approximately $980,000, which has
been offset by a valuation allowance of equal amount. During the quarter ended
June 30, 2002, the valuation account was not affected.
The components of the provision for income taxes for the quarter ended
June 30, 2002 consist of current expense (foreign) of $27,248, and current
expense (U.S.) of $2,372, respectively. The current expense (U.S.) was not able
to be offset by the net operating loss carryforwards.
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, 2002 and 2001 is as follows:
Three months ended
June 30, 2002
Income Shares Per Share
-------- --------- ---------
Net income $ 19,773
Basic EPS:
Income available to common shareholders $ 19,773 1,417,120 $ 0.01
Effect of dilutive securities, options and
Warrants: 28
Diluted EPS:
Income available to common shareholders $ 19,773 1,417,148 $ 0.01
7
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER SHARE DISCLOSURE (continued):
Three months ended
June 30, 2001
------------------
Income Shares Per Share
-------- --------- ---------
Net income (loss) ($ 176,703)
Basic EPS:
Income (loss) available to common
shareholders ($ 176,703) 1,417,120 ($ 0.12)
Effect of dilutive securities, options and
warrants --
Diluted EPS:
Income (loss) available to common
shareholders ($ 176,703) 1,417,120 ($ 0.12)
There is no dilutive effect from stock options because there was a net loss for
the three months ended June 30, 2001.
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,
2002 2001
----------- -----------
Net sales:
United States, domestic $ 654,136 $ 674,410
United States, export 331,841 299,600
United Kingdom 989,265 746,073
Transfers between segments (257,591) (185,161)
----------- -----------
Net sales $ 1,717,651 $ 1,534,922
=========== ===========
Income (loss) before income taxes:
United States $ (64,055) $ (177,663)
United Kingdom 132,290 54,076
Corporate (18,842) (42,312)
----------- -----------
Income (loss) before
income taxes $ 49,393 $ (165,899)
=========== ===========
Depreciation and amortization:
United States $ 19,332 $ 37,141
United Kingdom 11,044 13,211
Corporate 1,600 7,100
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$ 31,976 $ 57,452
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8
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SEGMENT INFORMATION (continued):
June 30, 2002 March 31, 2002
------------- --------------
Identifiable assets:
United States $ 4,225,320 $ 4,516,551
United Kingdom 2,538,066 2,285,735
Corporate 340,998 340,998
Eliminations (870,365) (868,865)
----------- -----------
Total assets $ 6,234,019 $ 6,274,419
=========== ===========
Long lived assets:
United States $ 211,261 $ 228,803
United Kingdom 747,259 613,831
----------- ------------
$ 958,520 $ 842,634
=========== ===========
6. COMPREHENSIVE INCOME:
In the fiscal year ended March 31, 1999, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components in the Company's consolidated financial
statements. Comprehensive income is defined in SFAS 130 as the change in equity
(net assets) of a business enterprise during the period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The Company's comprehensive income is comprised of net
income and foreign currency translation adjustments. Comprehensive income(loss)
was $59,596 and ($171,623) for the quarters ended June 30, 2002 and 2001,
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:
At June 30, 2002, the Company was advanced $575,000 against a line of
credit facility of $1,500,000. The loan bears interest at the bank's prime rate
(4.75 percent at June 30, 2002) and is collateralized by substantially all
domestic assets of the Company. The terms of this credit facility require the
Company to meet a series of financial covenants, the failure of which would
result in a technical default of the loan. Compliance with these covenants is
reported to the Bank on a quarterly basis. As of June 30, 2002, the Company
believes it was in compliance with all financial covenants. As of both December
31, 2001 and March 31, 2002, the Company was in default under the debt service
covenant, which requires cash flows from operating activities to be equal to or
greater than 125 percent of the Company's debt service, including interest and
taxes. The Company was, therefore, in technical default on the loan and the
entire amount of the outstanding loan may still be immediately callable as a
consequence of such prior technical defaults. Based on its negotiations and
ongoing relationship with the Bank, management believes that the credit facility
will continue to be available to the Company throughout its scheduled term. The
terms of any renewal of the credit facility will be dependent on the Company's
ability to comply with all terms of the credit facility in future quarterly
reports to the Bank.
At June 30, 2002, the Company's UK subsidiary had no utilization
against a line of credit facility of approximately $216,000. The loan bears
interest at the bank's base rate (4.00 percent at June 30, 2002) plus two
percent and is collateralized by substantially all assets of the subsidiary.
9
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. GOODWILL AND OTHER INTANGIBLE ASSETS:
Effective as of April 1, 2002, the beginning of the current fiscal
year, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under SFAS 142, amortization of goodwill to earnings ceased for the
current, and future, fiscal years. Instead, the carrying value of goodwill must
be evaluated for impairment on at least an annual basis.
In addition, SFAS 142 requires that the Company identify reporting
units for the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets and
cease amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for impairment
in accordance with the guidance in SFAS 142. SFAS 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption and to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
Aside from goodwill, the Company has no intangible assets with an
indefinite useful life. During the quarter ended June 30, 2002, the first
interim quarter after adoption of SFAS 142, the Company has reassessed the
useful lives of its intangible assets, principally capitalized software and
development expenses. The Company believes the useful life of such assets is not
currently impaired. The Company's policy is to amortize capitalized software and
development expenses 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. The weighted-average amortization period is
expected to be five years. During the quarter ended June 30, 2002, the Company
developed $86,969 of capitalized software. No residual value is expected after
amortization. No amortization expense was incurred during the quarter ending
June 30, 2002. The aggregate amortization expense for the current fiscal year
and for fiscal years 2004, 2005, 2006 and 2007 is estimated to be $86,000,
$172,000, 172,000, 172,000 and $86,000, respectively.
The Company had $489,761 of goodwill on its balance sheet as of March
31, 2002 and as of June 30, 2002. Amortization of goodwill was $7,671 and
$30,684 for the quarter ended June 30, 2001 and the fiscal year ended March 31,
2002, respectively. The components of goodwill on the Company's balance sheet
are: a) $340,998 related to the acquisition of the Company's U.K. subsidiary;
and b) $148,763 related to the Company's domestic subsidiary, Comtrex Michigan.
Based on management's evaluation of a variety of factors and considerations,
including contribution to net sales and net income of $989,625 and $105,042,
respectively, during the quarter ended June 30, 2002, the Company does not
believe the goodwill related to the Company's U.K. subsidiary is currently
impaired. Since its acquisition in June, 1999, Comtrex Michigan has reported
significantly fluctuating operating results both on a monthly and quarterly
basis. Management believes that this fluctuation is due to a combination of the
small size of the operation and the difficulties associated with selling and
marketing the Company's current software product line. Comtrex Michigan employs
five individuals and is engaged in the direct sale and service of the Company's
products in the Detroit metropolitan area, the mid-western United States and in
a general supporting role both for dealers and national accounts of the Company.
In addition, Comtrex Michigan is involved in the initial beta testing of the
Company's next generation point-of-sale product line, the POS/2100. There is
significant strategic value to the Company in maintaining both a geographic
presence in multiple locations in the U.S. and a close contact with end users of
its products, particularly during a critical new product release. Based on
management's evaluation, the Company does not believe the goodwill related to
Comtrex Michigan is currently impaired. The Company intends to continue to
evaluate the carrying value of both components of goodwill on its balance sheet
during the course of each fiscal year, rather than as a single event on an
annual basis.
10
COMTREX SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. GOODWILL AND OTHER INTANGIBLE ASSETS (continued):
The following table provides a reconciliation of the reported net
income and net income that would have been reported, exclusive of the
amortization of goodwill recognized, during the reporting periods presented
herein:
Three months ended
June 30,
2002 2001
----------- ------------
Reported net income (loss) $ 19,773 $ (176,703)
Add back: Goodwill amortization 7,671
Adjusted net income (loss) $ 19,773 $ (169,032)
=========== ============
Basic (and diluted) earnings
per share:
Reported net income (loss) $ .01 $ (.12)
Goodwill amortization $ .00
Adjusted net income (loss) $ .01 $ (.12)
=========== ============
11
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, 2002, as filed with the SEC.
Liquidity and Capital Resources
As of June 30, 2002, the Company had total current assets of
$3,983,371, including cash and cash equivalents of $106,112, as compared to
$4,226,627 of total current assets and $143,245 of cash and cash equivalents as
of March 31, 2002. The Company had current liabilities of $2,122,473, resulting
in a current ratio of 1.9 as of June 30, 2002, compared to $2,286,618 and 1.8,
respectively, as of March 31, 2002.
Cash and cash equivalents decreased by $37,133 during the first three
months of fiscal year 2003. Operating activities generated $365,764 of cash, as
compared with cash consumption of $273,187 for the corresponding prior year
period. Investing activities consumed $242,062 during the first quarter of 2003
and $160,835 was consumed by financing activities. This compares with a
consumption of $118,162 by investing activities and $241,912 provided by
financing activities in the corresponding prior year period.
The Company reported net income of $19,773 for the three month period
ended June 30, 2002. The Company has net operating loss carryforwards of
approximately $2,450,000 for federal income tax purposes, which do not begin to
expire until 2004. The net loss of $176,703 for the period ended June 30, 2001
was a significant contributor to cash consumed through operating activities
during the comparable prior quarterly period.
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 2003 and the exchange rate as of March 31, 2002,
differences between accounts on the consolidated balance sheets as of June 30,
2002 and March 31, 2002 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.
In addition to the net income reported for the quarter, a decrease in
accounts receivable of $294,221, an increase in accounts payable of $134,228, a
decrease in inventories of $81,062 and depreciation and amortization of $31,976
represented significant positive contributions to cash flow for the period
ending June 30, 2002. The quarterly depreciation and amortization contribution
is expected to continue throughout the current fiscal year at the same
approximate quarterly amount. As covered in detail in Note 8 to the Consolidated
Financial Statements, implementation of Statement of Financial Accounting
Standards No. 142, effective with the beginning of the current fiscal year,
resulted in the elimination of amortization of goodwill for the current, and
future, fiscal years.
The positive cash flows were offset by a decrease in prepaid expenses
of $55,122 and a decrease in deferred revenues of $163,631. Both of these
amounts are largely a result of timing, and not necessarily indicative of trends
for the balance of the fiscal year.
12
Liquidity and Capital Resources (continued)
The decrease in accounts receivable is a result of continued aggressive
collection efforts, while the increase in accounts payable is a largely a result
of timing. A significant 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 $163,631 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 $242,062 of cash during the three month
period ended June 30, 2002, through a combination of $155,093 of purchased
property and equipment and $86,969 of capitalized software and design.
Substantially all of the increase in purchased property and equipment relate to
the Company's U.K. subsidiary. During the quarter, the Company's U.K. subsidiary
invested approximately $100,000 in hardware and $50,000 in software in an
upgrade of its information technology infrastructure. This investment will be
amortized on a straight-line basis over a three year period. The capitalized
software and design relate to continued development of the Company's next
generation point-of-sale product, the Odyssey POS/2100. This product is
scheduled for release during the second quarter of the current fiscal year. The
software will be amortized over the faster of a straight-line basis over a five
year period or the estimated yearly units of sale. Financing activities consumed
a net of $160,835, through a combination of payments of $275,000 under the
Company's line of credit with Fleet National Bank and net borrowings of the
Company's U.K. subsidiary of $114,165 in conjunction with its acquisition of the
aforementioned property and equipment.
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, 2002, these adjustments
had the effect of a cash provision of $17,889 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 changes in the
exchange rate between the pound sterling and the U.S. dollar, this adjustment to
shareholders' equity increased from a negative impact of $14,333 as of March 31,
2002, to a positive impact $25,491 as of June 30, 2002.
In February of 2001, the Company's wholly-owned subsidiary in the U.K.,
Comtrex Systems Corporation LTD, signed a line of credit agreement with National
Westminster Bank PLC. The agreement calls for borrowings of up to
(pound)150,000, and was renewed in December of 2001 through December 3, 2002.
Borrowings bear interest at the bank's base rate (4.00 percent as of June 30,
2002) plus 2 percent and are collateralized by substantially all assets of the
subsidiary. The Company is not a guarantor on this line of credit.
In November of 2001, the Company entered into a credit facility with
Fleet National Bank (the "Bank"), replacing an existing facility originally
scheduled to expire on September 30, 2001 and subsequently extended through
November of 2001. The new credit facility provides the Company with the
availability of a total amount of $1,500,000 for borrowings and the issuance of
Irrevocable Letters of Credit and expires on September 30, 2002. Outstanding
borrowings bear interest at either the bank's prime rate of interest (4.75
percent as of June 30, 2002), or three percent above the Euro-Rate interest, at
the Company's option. The credit facility is collateralized by substantially all
domestic assets of the Company. The previous facility with the Bank provided the
Company with the availability of a total amount of $2,000,000. Loans under the
previous facility bore interest at the bank's prime rate of interest less one
half percent. All other terms and conditions of the line of credit facility
remained essentially the same. Both the current and prior credit facility also
require that the Company maintain certain financial covenants as a condition of
the loan. Compliance with these covenants is reported to the Bank on a quarterly
basis. As of June 30, 2002, the Company believes it was in compliance with all
financial covenants.
13
Liquidity and Capital Resources (continued)
As of both December 31, 2001 and March 31, 2002, the Company was in
default under the debt service covenant, which requires cash flows from
operating activities to be equal to or greater than 125 percent of the Company's
debt service, including interest and taxes. The Company was, therefore, in
technical default on the loan and the entire amount of the outstanding loan may
still be immediately callable as a consequence of such prior technical defaults.
Based on its negotiations and ongoing relationship with the Bank, management
believes that the credit facility will continue to be available to the Company
throughout its scheduled term. The terms of any renewal of the credit facility
will be dependent on the Company's ability to comply with all terms of the
credit facility in future quarterly reports to the Bank.
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 2003. As of June 30, 2002, the
Company had no material commitments for capital expenditures.
Results of Operation
Net sales during the first quarter of fiscal year 2003 increased by
12%, to $1,717,651, as compared with corresponding sales of $1,534,922 during
the first quarter of fiscal year 2002. The Company reported net income of
$19,773 for the current three month period, or $.01 per share, as compared with
a net loss of $176,703, or $.12 per share, for the comparable prior year period.
The relative increase in sales over the prior year comparable quarter
is largely a reflection of the significant difficulties experienced during the
previous fiscal year's first quarter, coupled with exceptional results during
the most recent quarter from our U.K. subsidiary. The Company continues to
experience the effects of an overall economic slowdown and an erosion of sales
through the distribution channels of our U.S. operating segment for our mature
software product line, as well the anticipation of new product releases by the
Company's own, direct sales channels.
While export sales by the U.S. operating unit during the quarter were
up approximately 11%, from $299,600 during the first quarter of fiscal year 2002
to $331,841 during the most recent quarter, export sales to countries other than
the U.K. remain depressed. Total Company export sales include the sales of our
U.K. subsidiary but exclude transfers by the U.S. operating unit to our U.K.
subsidiary. Such overall export sales rose by 24%, from $860,512 in the first
quarter of fiscal year 2002 to $1,063,515 in the first quarter of the current
fiscal year. Prior to fiscal year 2002, the Company's distributor in France,
Restaurant Data Systems (RDS), accounted for 19%, 21% and 15% for the fiscal
years 2001, 2000 and 1999, respectively. During fiscal year 2002, RDS began
local sourcing, in France, of the hardware components associated with sales of
the Company's product lines. RDS accounted for 10% of Company net sales during
fiscal year 2002. In addition, the Company believes that sales to RDS have been
negatively impacted by delays in the introduction of the Company's next
generation Windows point-of-sale product line. During the first quarter of
fiscal year 2003, sales to RDS accounted for less than 2% of total Company net
sales. Management believes that the release for general delivery of the next
generation point-of-sale software, the Odyssey POS/2100, will positively impact
export sales by the U.S. operating unit.
Cost of sales during the first quarter of fiscal year 2003 was
$797,150, or 46% of net sales, as compared to $726,571, or 47% of net sales, for
the first quarter of the prior fiscal year. The cost of sales and gross margin
percentages are a reflection of the continued emphasis, and reliance, on the
direct sales activities of the Company through Comtrex U.K., the Atlanta and
Michigan District Offices and in the Philadelphia metropolitan area. Gross
margins on the Company's sales to its dealer and distributor channels are, in
general, approximately one half of the gross margins realized on its direct
sales activities.
Administrative expenses decreased from $272,566 during the first
quarter of fiscal year 2002, to $219,522 for the first quarter of fiscal year
2003, representing
14
Results of Operation (continued)
18% and 13% of net sales, respectively. The Company has been aggressively
reducing expenses in all areas of its operations, except product development and
customer support, over the last twelve months. Sales, marketing and customer
support expenses decreased from $598,407 during the period ended June 30, 2002,
to $575,557, during the current fiscal year period, representing 39% and 34% 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.
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 consist of maintenance and repairs, installation, training and
implementation services. Such service related revenue is at a greater gross
margin than product sales.
The Company continues to experience a gradual erosion in sales to
customers in the sit-down dining segment of its customer base, coupled with a
gradual decline in sales through its U.S. dealer network. The primary customer
base for the Company's U.S. dealer network is the sit-down dining segment.
Management believes that in order to effectively compete in this market segment,
the Company must release for general delivery its next generation point-of-sale
software, the Odyssey POS/2100. Currently, all development resources of the
Company are focused on this effort. Initial beta installation of the
point-of-sale software was accomplished in the most recent quarter.
The Company has been engaged in the software design, development and
documentation of an entirely new suite of in-store software, including both back
office software and point-of-sale software, for approximately the last three
fiscal years. Initial installations of the back office software were placed in
service at customer locations, through the Company's district office channel,
during the second quarter of fiscal year 2002. The initial implementation of the
back office software component of this product suite was released for general
sale during the third quarter of fiscal year 2002. This component of the new
product suite was been designed to interact with the Company's current
point-of-sale product line, as well as forming the basis for the next generation
point-of-sale software. The primary market for this product combination is in
the quick service market where the Company's current point-of-sale software
remains competitive from a feature and functionality perspective.
The point-of-sale component, the Odyssey POS/2100, of the new suite of
software has an initial target in the sit-down dining market segment. This
component of the Company's next generation software is scheduled for release for
general delivery during the second quarter of the current fiscal year. In
conjunction with the point-of-sale software, the back office software component,
designed to interact with the new point-of-sale software, has been finalized and
will also be released for general delivery in the second quarter of this fiscal
year.
The Company anticipates an increasing rate of decline in sales related
to its current software product line once the next generation software is
released. In conjunction with the release for general delivery, the Company will
be securing new dealers, who will require training, as well as training its
existing dealer and direct channel. The combination of declining sales of its
existing software products coupled with initial sales of a new product, often
through new distributors, and training requirements may reduce sales during the
second and third quarters of the current fiscal year over the sales levels of
the first quarter. While management believes that the release of the next
generation product suite positions the Company for a return to long term growth
and profitability, the ability of the Company to return to profitability during
the current fiscal year will depend heavily on the acceptance, and reliability
in the field, of its new product suite.
As of August 9, 2002, the Company's backlog was approximately $487,000.
Excluded from this backlog are any orders for delivery to subsidiaries or
District Offices from the parent. The Company's backlog as of August 10, 2001
was approximately $1,392,000. The Company expects that substantially all of its
current backlog will be shipped within the next 90 days.
15
PART II - OTHER INFORMATION
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
10.1 *(c) 1992 Non-Qualified Stock Option Plan of the Company
10.2 *(d) 1995 Employee Incentive Stock Option Plan of the Company
10.3 *(e) 1999 Stock Option Plan of the Company
10.4 *(f) Amended and Restated Master Advance Note between the Company
and Fleet National Bank, dated November 19, 2001
10.5 *(f) Advice of Borrowing Terms between Comtrex Systems
Corporation LTD and National Westminster Bank, PLC,
dated December 21, 2001
99.1 *(a) Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 19
99.2 *(a) Certification of the Chief Financial Officer
(or equivalent thereof) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. 20
- ---------------
*(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 28, 1999.
*(f) Incorporated by reference to the exhibits to the Company's Form 10-QSB
filed with the Securities and Exchange Commission on February 11, 2002.
(b) Reports on Form 8-K
On May 30, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission reporting receipt of a Nasdaq Staff Determination letter on
May 23, 2002 indicating that the Nasdaq Listing Qualifications Panel had decided
to delist Comtrex's common stock from the Nasdaq SmallCap Market effective at
the opening of business on May 31, 2002. The Panel determined that Comtrex was
no longer in compliance with the requirement that the minimum market value of
the Company's publicly held shares be at least $1,000,000. Comtrex's press
release, dated May 30, 2002, relating to the Nasdaq notification was attached as
an exhibit to the filing.
No other current reports on Form 8-K were filed by the registrant with
the Securities and Exchange Commission during the quarter ended June 30, 2002.
16
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 13, 2002 By: /s/
------------------- -----------------------------------------
Jeffrey C. Rice
Chief Executive Officer
Date: August 13, 2002 By: /s/
------------------- -----------------------------------------
Pamela M. Reci
Chief Accounting Officer
17
Exhibit Index
Exhibit Page
- ------- ----
99.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 19
99.2 Certification of the Chief Financial Officer
(or equivalent thereof) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. 20
18