SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from_________ to___________
Commission file number 0-21633
BRISTOL RETAIL SOLUTIONS, INC.
(Name of Issuer in Its Charter)
DELAWARE 58-2235556
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1437 South Jackson, Seattle, Washington 98144
(Address of Principal Executive Offices) (Zip Code)
(206) 325-8922
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting common equity held by non-affiliates
was approximately $4,613,768 (computed using the closing price of $.81 per share
of Common Stock on March 31, 2001as reported by The OTC Bulletin Board, based on
the assumption that directors and officers and more than 5% stockholders are
affiliates). Bristol has no non-voting common equity.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
There were 8,376,968 shares of the registrant's Common Stock, par value $.001
per share, and 1,733,791 of the registrant's Class A Redeemable Common Stock
Purchase Warrants outstanding on March 29, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 30
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Bristol Retail Solutions, Inc.("Bristol") is a dealer of retail
point-of-sale ("POS") systems in the United States with sales, service and
support offices in eleven cities located in five states. Bristol sells, installs
and supports POS systems, which retail establishments use to collect and process
data at the "point-of-sale" during sales transactions with customers. Bristol
has installed systems in more than 16,000 retail locations, primarily in two
major markets: grocery stores and table-service and fast-food restaurants.
Bristol installs POS systems manufactured by NCR Corporation ("NCR"), Matsushita
Electronic Corporations of America ("Panasonic"), ICL Retail Systems
("ICL-Fujitsu"), Micros Systems, Incorporated ("Micros"), and several other
software and hardware manufacturers.
The POS computer systems installed by Bristol serve a range of
mission-critical functions required by retailers to be competitive today. These
systems may integrate several hardware devices such as a cash register, display
terminals, scanners, debit and credit card verification devices and may include
software from more than one manufacturer. A POS computer system is designed to
assist a retailer with speedier customer checkout service, tracking customer
purchases and preferences, monitoring inventory on a real-time basis,
promotional and electronic funds transfer ("EFT") systems and security
monitoring. Retailers who outgrow the limitations of electronic cash registers
(ECRs) represent a major source of new revenue for Bristol. Bristol also expects
additional demand for its products to come from retailers seeking to upgrade
existing, under-performing POS systems as well as from new retailers.
Bristol was founded to become a national distribution organization for
POS systems through selective acquisitions of independent dealers and systems
integrators that sell, install, and support POS systems for use in retail
establishments. Bristol has acquired seven dealers since its establishment in
April 1996. The following table sets forth certain information with respect to
Bristol's acquisitions to date. Currently, Bristol is operating as a dealer in
the states listed hereafter. Bristol suspended its acquisition strategy and
there are no current plans to reinstate this strategy.
ACQUISITIONS DATE BUSINESS LOCATIONS
- -------------------------------------------------------------------------------------------
Cash Registers, Incorporated ("CRI") June 1996 POS Dealer Kentucky/Ohio
Automated Retail Systems, Inc. ("ARS") December 1996 POS Dealer Washington
MicroData, Inc. ("MICRODATA") April 1997 POS Dealer Illinois
Smyth Systems, Inc. ("SMYTH") May 1997 POS Dealer California
Electronic Business Machines ("EBM") June 1997 POS Dealer Indiana
Pacific Cash Registers and
Computer, Inc. ("PCR") August 1997 POS Dealer California
Quality Business Machines ("QBM") May 1998 POS Dealer California
On November 19, 1999, Bristol sold a Division of Smyth Systems, Inc.
that was a value-added reseller ("VAR") to the golf course and resort industry.
The sales price was $2.8 million and Bristol's net gain on the sale was $1.2
million.
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POTENTIAL MERGER
As previously disclosed on Form 8-K, filed November 21, 2000, the
boards of directors of Registry Magic Incorporated ("Registry") and Bristol have
unanimously approved a merger in which Bristol will become a wholly-owned
subsidiary of Registry. The parent company will be named Voiceflash Networks,
Inc., and is expected to benefit from the complementary strengths of Registry
and Bristol. In accordance with the merger agreement dated November 6, 2000, as
amended, Bristol would become a wholly-owned subsidiary of Registry.
In the merger, each share of Bristol common stock will be converted
into .65 of a share of Registry common stock. The common stock into which
Bristol's Series C preferred stock is convertible into will be similarly
adjusted. The merger will not change the aggregate number of shares held by
Registry shareholders before the merger. Registry shareholders' ownership
percentage of the total shares of Registry outstanding after the merger will
decrease. Former shareholders of Bristol will own 5,445,029 shares of common
stock equivalent to approximately 48.4% of Registry. Registry shareholders will
own 5,880,068 shares of common stock equivalent to approximately 51.6% of
Registry. These common shares owned by Bristol and Registry do not include the
common shares issuable upon conversion of any preferred stock, warrants, or
options to be received by Bristol shareholders.
A preliminary proxy statement and registration statement on Form S-4
was filed with the SEC on February 14, 2001. Meeting of the respective Bristol
and Registry common shareholders seeking approval of this merger transaction is
anticipated to take place within the year 2001. The holders of a majority of
Bristol's common stock must approve this transaction and Bristol's Series C
Preferred shareholders must consent to the transaction or the merger will not be
completed.
INDUSTRY OVERVIEW
The driving forces in retailing in the United States are the need to
attract and retain new customers with a variety of goods and services that meet
the ever-changing tastes of consumers, to increase the average sale per visit,
and to maximize internal productivity and efficiency in order to generate higher
operating profits. Retailers need the ability to quickly identify the buying
history and preferences of the consumer. Access to such information allows
retailers to match or to adjust their current products and services to the
ever-changing demands of consumers. These trends have accelerated the
requirement for enterprise-wide access to information and have heightened the
demand for automated information systems. Bristol believes this is due, in part,
to the shift in consumer preferences toward variety, value and convenience.
Furthermore, consumers are demanding speedier checkout times, the ability to
accept credit and debit cards at the point-of-sale, and the convenience of
performing a POS transaction without human intervention.
Retailers have long sought new uses of technology to help them improve
efficiency. The first specialized apparatus was the cash register. Electronic
cash registers ("ECR") used by many retailers are incapable of handling the
increasing need to capture and process detailed information or the demand to
process a sale expediently for faster customer service. For many types of
retailers, automation did not make economic or business sense until the price of
computing power and the cost of implementation declined. Computing power has
become increasingly flexible and easy to use. Today, the computer has made the
modern POS system practical, providing the means to capture and process enormous
amounts of information while at the same time performing the basic cash control
duties of a cash register. The initial investment in a POS system is offset by
reduced labor and transportation costs.
Retail automation has become an important tool for creating strategic
advantage. There is a growing trend among retailers to implement local area
networks ("LANs") and wide area networks ("WANs") in retail establishments. The
LANs serve a range of valuable functions, including speeding customer checkout
service, tracking customer purchases and preferences, and monitoring inventory
on a real-time basis, integrating scanning, promotional and electronic funds
transfer systems, monitoring security and in-store accounting. WANs integrate
several LANs into a corporate headquarters' information system to create the
ability for management to remotely monitor individual store operations by
analyzing the data that a sophisticated POS system produces.
The channels of distribution for retail automation systems in the
United States are fragmented and overlapping. The two principal distribution
channels for POS systems and ECR products to reach the end user currently are:
(i) the "Direct" channel and (ii) the "Indirect" channel. The Direct channel
consists of manufacturers that sell directly to large, national "major retail"
chains. Bristol estimates that the Direct channel represents less than half of
all units sold. The Indirect channel consists of a variety of independent
businesses which sell to all types of retail-end users. The two principal
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components of the Indirect channel are dealers and Value Added Resellers (VARs).
Dealers in the Indirect channel generally take title to equipment that they
resell and do not, as a rule, engage in software development. In contrast, VARs
are typically compensated with a commission from the manufacturer and need not
take title to equipment or provide hardware service. VARs sometimes act as
software developers. All manufacturers use dealers or VARs to distribute at
least a portion of their products to the retail market, and some manufacturers
use dealers or VARs as their exclusive means of distributing their products.
Bristol believes that there is movement by original equipment manufacturers to
increasingly rely on the Indirect channel for distribution since dealers and
VARs can operate at a lower cost than the major manufacturers.
The typical POS or ECR dealer is privately held, is licensed to
represent and to resell only one or two manufacturer's key products and sells,
and services those products on a restricted, regional basis. Typical dealership
functions are sales, in-house and on-site service, and administration. Based on
Bristol's experience in evaluating dealers as acquisition candidates, Bristol
believes that the typical dealer derives its revenue from the sale of hardware,
software and service. Bristol believes there are more than 3,000 independent POS
and ECR dealers in the United States that sell to customers in one or several
segments of the retail industry. Because restaurants and grocery stores, the
primary markets that Bristol serves, have been among the first markets in the
retail industry to adopt retail automation tools, the majority of POS and ECR
dealers have some sales to one or both of these markets.
Systems integrators, who integrate different manufacturers' hardware
and software products into one system, also play a role in distributing POS
systems. Systems integrators generally market turnkey solutions directly to
retailers, primarily through their own sales force with in-depth knowledge of
their targeted markets. They seek to deliver solutions for many of the demanding
operating challenges facing retailers in today's competitive environment.
However, Bristol believes there is an increasing trend for dealers to offer more
than one manufacturer's product or services. Coupled with the increasing demand
for LANs and WANs, a dealer is becoming a solutions-provider integrating a
variety of third-party hardware and software products.
Bristol believes that there is a direct relationship between the size
of the retailer and the strategy it employs in purchasing a POS system. Large
chains tend to purchase system components directly from manufacturers and
utilize an in-house staff to perform system integration. Smaller retailers tend
to buy integrated systems from a single source. Bristol expects manufacturers to
increasingly concentrate their direct sales efforts on the largest retail chains
and to rely increasingly on the Indirect channel to reach the balance of the
retail marketplace. Bristol also expects a fundamental shift in marketing
strategies to develop as retail automation systems become more complex as
software, installation, maintenance support and systems integration as opposed
to hardware become a larger share of the total cost of purchase.
Bristol believes the average life span of a POS system is five to seven
years. Technology enhancements to POS systems are more software related than
hardware and are more related to enhancing a current system. For example, though
display terminals are commonplace, retailers are utilizing these devices to
display grocery products scanned with a running total of products purchased or
displaying menu items ordered when you purchase through a drive-through. In
addition, for the future, certain manufacturers are implementing products that
will permit self-checkout at a grocery store. Other manufacturers are testing
products that utilize radio-frequency for shelf labeling. Because many of these
products and services are enhancements to current systems, Bristol believes that
dealers with systems integration expertise will be able to improve their revenue
without waiting for a retailer to replace existing systems.
Bristol's primary markets are the grocery stores and the hospitality
market defined as fast-food and table-service restaurants. These markets were
selected because Bristol believes they represent large vertical business
segments that offer the best opportunity for future sales growth and improved
margins.
In the grocery store or supermarket market, Bristol believes that
consolidation is taking place as evidenced by the combinations of national and
regional chains such as Safeway Stores/Vons Cos., Smith's Food & Drug/Smitty's
Food Stores, and Albertson/Lucky Stores, among others. However, Bristol believes
that supermarkets and grocery stores are moving towards becoming specialized in
either ethnic or gourmet or health food groceries. Some of Bristol's customers
have integrated a grocery store with a restaurant. It is these retailers that
Bristol is targeting.
In the hospitality market, Bristol targets the franchisee that may have
one or multiple stores and table-service restaurants. Bristol believes that this
market will grow as the trend is to dine out more often.
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COMPANY STRATEGY
Offering Additional Product Lines and Services. Bristol believes the
essential ingredient to increase revenue in its territories is to offer
competitive products and services. Bristol installs systems from leading POS
manufacturers such as NCR, Panasonic, ICL-Fujitsu and Micros, though not
necessarily in all regions listed. When permitted by manufacturer agreements,
Bristol plans to offer throughout its existing dealerships, product lines that
previously have been offered only at certain of its locations. In addition,
where required, Bristol will negotiate with other manufacturers to represent
their products in a region where there is no other solution. Bristol's current
objective is to represent products to sell in the grocery and hospitality
markets. Bristol's long-term intention is to create a uniform group of products
and support services that can be provided from each of its locations.
Increasingly, manufacturers are easing the territorial restrictions and
permitting some products to be sold in open territories. Bristol believes that
it is well-positioned to take advantage of this latest trend. Bristol believes
that in time, manufacturers will reduce its direct sales force and will depend
more on the Indirect channel for their revenue. If these trends continue,
Bristol will need only to open a sales or service office to service a region.
These trends further substantiate Bristol's ability to grow organically.
In addition to offering state-of-the-art POS systems to its customers,
Bristol plans to implement other services. Bristol has an agreement with a
leasing company to implement a customized lease program for Bristol's customers.
Bristol continues to pursue long-term service arrangements with its customers.
Finally, Bristol is executing a strategy to sell POS supplies to the grocery and
hospitality industries.
OPERATING STRATEGIES
Achieving Operating Efficiencies and Synergies. Bristol plans to
increase the operating efficiencies of its dealerships to enhance internal
growth and profitability. In 2000 Bristol consolidated payroll, insurance
services, employee benefits and finances. In 1999, Bristol implemented a
wide-area network and began converting all operations to uniform accounting and
operations software. The system conversion was completed in March 2000. Bristol
has been evaluating which administrative service functions should be
centralized. Centralization of functions should serve to reduce duplicative
expenses and permit the dealerships to benefit from a level of scale and
expertise that would otherwise be unavailable to them individually. For example,
Bristol has received from a major manufacturer volume discounts that apply to
all Bristol's dealerships that represent their products. Bristol has centralized
payment for essential suppliers to ensure a steady flow of product. However,
there can be no assurances that other benefits can be realized from this
strategy.
Utilizing Technology Throughout Operations. Bristol believes that the
internet can be utilized to assist operations with closing sales or offering
other services utilizing the internet. For example, Bristol's leasing program
with a third party vendor utilizes the internet for speedier credit approval.
Secondly, Bristol offers a variety of professional services including
customization and programming.
Emphasizing Customer Satisfaction and Loyalty. Bristol seeks to achieve
a high level of customer satisfaction and to enhance long-term loyalty of its
customers by offering the systems that best serve their needs while supporting
each sale with the highest quality of service and training. Bristol maintains
ongoing training programs for its service and support personnel to enable this
staff the ability to effectively assess solutions to provide the customer an
integrated POS system that meets their requirements.
4
PRODUCTS
A POS system is used at the "point-of-sale" in a retail establishment
to collect and to process data with communications capability. A POS system
leads or prompts the retail clerk through a sales transaction with a customer
and collects detailed information, including credit verification, consumer
preferences and quantities of inventory sold. Standard components of a POS
system include a display terminal to view the transaction, a keyboard for data
processing, a scanner (supermarket applications), a credit or debit verification
reader and coordinating communications, a server, and software to guide the
clerk through the entire transaction. In a typical hospitality or grocery store,
there is usually more than one system that requires integration. For example, in
a grocery store there may be multiple checkout lanes each lane housing a POS
system. These systems must be linked via a LAN to permit a retail store the
capability of multiple departments or locations to process transactions
simultaneously. Bristol believes these are mission-critical systems and any
disruption with these systems may cause the retailer to lose sales.
SERVICES AND SUPPLIES
Bristol offers its customers a variety of value-added services, such as
consulting, training, integration, and support services. Consulting and
integration services include system design, performance and security analysis,
migration planning, data compilation and management reporting, inventory
procurement, configuration testing, and systems installation and implementation.
Bristol also offers its customers continued support, customer service,
and supplies from installation through the life span of the products it sells.
Support services include network management, twenty-four hour a day and seven
days a week ("24 X 7") "help-desk" support and enhancement, and maintenance and
repair of POS systems. Bristol maintains backup inventory to swap components
that require repair to reduce system downtime. Bristol also may have "depot"
parts inventory for its largest customers for faster service especially for
stores in remote locations.
SALES, MARKETING AND DISTRIBUTION
Bristol identifies its customers in a number of ways, including
referrals from existing customers, advertising in local Yellow Pages and
industry publications, through Bristol's direct sales personnel, by means of
customer upgrades and replacements, and referrals from suppliers. Bristol also,
in conjunction with Bristol's suppliers, periodically makes marketing
presentations at industry-related trade shows. Once Bristol identifies a
potential customer, the lead is assigned to a Company sales representative who
will contact the customer, inquire about the customer requirements, offer a POS
solution and attempt to complete the sale. The typical sales cycle, from
introduction to installation to collection of a receivable, will range from
three to nine months for POS sales depending on the complexity of the solution
provided.
Bristol also pursues add-on products such as additional display
terminals or security systems when providing service and support. Bristol sells
POS supplies such as cash register tape, printer ribbons, etc. either through a
small telemarketing sales staff or through the various sales or service offices
that Bristol operates. Bristol also pursues and sells long-term maintenance
contracts utilizing Bristol's sales and service personnel. Bristol intends to
explore other avenues to sell and market its products.
CUSTOMERS
Bristol concentrates its sales efforts on two principal markets of the
retail industry, which are supermarkets or grocery stores and fast food and
table service restaurants. Bristol does sell to customers who are in related
markets such as convenience stores or drug stores where Bristol's products meet
the requirements of the customer. Typically, Bristol's customers tend to be a
regional franchisee or a group of several stores with the same owner. Generally,
when Bristol receives an order for POS systems, it will be for a group of stores
to be installed over a relatively short period of time known as a "roll-out."
After completion of the installation of these stores, future revenues from the
customer will be for maintenance service contracts or time and materials
service, add-on products or enhancements, or supplies.
5
The majority of Bristol's customers in the supermarket or grocery store
market are regional chains or ethnic supermarkets, generally, referred to
Bristol from Bristol's relationship with wholesalers. A typical system for a
supermarket is three to eight or more lanes, with each lane typically consisting
of a cash register or drawer, display screen, scanner, printer and electronic
funds transfer terminal. Other possible devices to be installed could include
coin dispensers, hand held scanners, and pole displays. All of these devices are
connected to a LAN and supported by POS software, which captures the data,
computes totals, prints out the transaction receipt for the customer, approves a
customer's credit or debit card if requested, and interfaces with the retailer's
financial and management information systems.
Bristol also sells, installs and supports POS systems for both table
service and fast food restaurants. Typical among Bristol's customers are
franchisee restaurants for many major, fast food chains. The typical system for
these restaurants consists of the countertop POS cash register(s) with drawers,
kitchen printers or display terminals, drive through systems including speaker
box or touch-screen display terminal, and local management servers. In addition,
Bristol also installs the operating software for these POS systems. These
systems may require some customization whereby the cash registers are programmed
based on the customer's requirements.
The typical system for a table service restaurant where a customer
orders his or her meal from a waiter or waitress as opposed to a counter from a
clerk, consists of touch screen terminals at one or more floor stations and
generally, one or two at the bar area if it exists. In addition, there will be a
printer or display terminal installed in the kitchen and a local management
server.
No customer accounted for more than 10% of Bristol's total revenue for
the years ended December 31, 2000, 1999, and 1998.
COMPETITION
The POS industry is highly fragmented and competitive. Competitive
factors within the industry include product offerings and prices, quality of
products, customer service levels, reputation, and geographic location of
dealers. Bristol primarily competes with independent POS dealers, many which may
have greater financial resources available to them than does Bristol. In
addition, some manufacturers of POS equipment and software compete in certain
product areas by distributing their products directly to the end-users that
Bristol serves. If the manufacturers continue the trend of opening territorial
restriction, Bristol will face stiffer competition from those dealers or VARs
with greater financial resources.
Bristol believes that other independent POS dealers may seek growth
through consolidation with entities other than Bristol during the next few
years. In addition, no assurance can be given that the major manufacturers will
not choose to effect or expand the distribution of their products through their
own wholesale organizations or to increase distribution directly to many of the
retail accounts of Bristol in the markets served by Bristol.
SUPPLIERS
A substantial portion of Bristol's total consolidated net revenue is
and will be derived from the sale of POS systems, ECRs, and related equipment,
none of which are manufactured by Bristol. Bristol's business is dependent upon
close relationships with manufacturers of POS equipment and Bristol's ability to
purchase equipment in sufficient quantities necessary and upon competitive terms
in order to enable Bristol to meet the needs of its end-user customers. During
the year ended December 31, 1999 and year ended December 2000, Bristol purchased
a significant portion of the hardware products that it resold from Panasonic,
ERC Parts, Inc. ("ERC"), a distributor of Panasonic products, and NCR. Sales of
products purchased from Panasonic and its distributor, ERC and NCR accounted for
approximately 32% of total revenue for the year ended December 31, 2000 and 33%
for the year ended December 31,1999.
Bristol has supply agreements with these and other manufacturers and
suppliers such as ICL-Fujitsu and Micros. The agreements are non-exclusive, may
have geographical limitations and may have renewable one-year terms, depending
if Bristol and its related subsidiaries achieve a
previously-agreed-to-procurement quota. Geographical limitations are the
assignment of sales territories that define the municipalities and states where
Bristol and its related subsidiaries can sell a manufacturer's hardware and/or
software. The actual sales territories for each manufacturer are subsidiary
specific and some subsidiaries may not have permission to sell hardware or
6
software of certain manufacturers in certain regions or territories of the
country. Effective January 1, 2001 NCR has eliminated Bristol's geographical
limitations thereby allowing Bristol to sell NCR products throughout the
country.
Bristol's strategy is to develop long-term relationships with quality
and brand-recognizable manufacturers such as NCR and Panasonic with the goal of
establishing standard product offerings for our customers. There can be no
assurance that the relationships with these and other manufacturers and
suppliers will continue or that Bristol's supply requirements can be met in the
future. Bristol believes that its relationship with its suppliers is good,
however, Bristol has occasionally experienced delays in obtaining equipment
because of insufficient cash flows. If Bristol should, in the future, have the
inability to obtain equipment, software, parts or supplies on competitive terms
from its current or other major manufacturers, this could have a material
adverse effect on Bristol's business, results of operations, financial
condition, and cash flows.
SEASONALITY
Bristol's business can be subject to seasonal influences. The POS
dealers that Bristol acquired typically have had lower revenue in the quarters
ending March 31 and December 31 primarily due to the lower level of new store
openings or remodeling of existing stores. A secondary factor to lower revenues
in these quarters is related to replacement of existing POS systems by customers
who will tend to delay a purchase of a POS system until the third quarter in
preparation for the holiday shopping season. Bristol believes that this pattern
of seasonality will continue in the foreseeable future.
RESEARCH AND DEVELOPMENT
In the past, research and development related to software development
for a division that sold POS systems to golf courses and resorts. This division
was sold on November 19, 1999.
EMPLOYEES
As of December 31, 2000, Bristol had 182 full-time and 3 part-time
employees, 122 of whom were employed in customer service, 27 in finance and
administrative services, and 36 in sales and marketing. Of the total full-time
employees, 11 were employed at Bristol's corporate office, 50 were employed at
CRI (including MicroData and EBM), 36 were employed at ARS, 33 were employed at
QBM, 28 were employed at Smyth and 27 were employed at PCR. No employee of
Bristol is covered by a collective bargaining agreement or is represented by a
labor union. However, though Bristol considers its employee relations to be
good, Bristol has discovered that it is increasingly difficult to retain service
and support staff who are technically competent with Windows based applications.
If Bristol is unable to retain a core group of service and support staff, it
will incur additional costs to hire, train, and pay these new employees. These
additional costs may have a material adverse effect on Bristol's business,
results of operations, financial condition, and cash flows.
ITEM 2. PROPERTIES
Bristol's general policy is to lease, rather than own, its business
locations. Bristol leases numerous properties for administration, sales and
service, and distribution functions. The terms vary under the respective leases,
although, in general, Bristol's lease agreements require it to pay its
proportionate share of taxes, common area expenses, insurance, and related costs
of such rental properties.
Bristol leases its 3,001 square foot former headquarters facility in
Long Beach, California. Bristol also leases approximately 19,200 square feet of
office and warehouse facilities in Kentucky, Indiana and Ohio for its CRI
operations (including facilities utilized by MicroData and EBM). Bristol's ARS
operations utilize approximately 11,800 square feet of leased property, which
includes an approximately 11,200 square foot office facility where the
accounting department is located in Seattle, Washington that is leased from
certain officers of ARS. The lease expires in December 2003. In addition, its
QBM operation utilizes approximately 9,000 square feet of office and warehouse
facilities in Sacramento, California and is leased from the former owner, who
retired in May 2000. The lease expires in May 2001 and will be extended.
Bristol's Smyth subsidiary leases approximately 13,000 square feet of office and
warehouse facilities in Irvine, California. Bristol's PCR subsidiary in Concord,
California leases approximately a 7,100 square foot office and warehouse
facility and in San Francisco, California a sales office is leased with
approximately 1,350 square feet. The Concord lease expires in October 2005.
7
Bristol believes that its leased facilities are adequate for its
present needs and that suitable additional or replacement space will be
available on commercially reasonable terms, as required.
ITEM 3. LEGAL PROCEEDINGS
Bristol's subsidiaries have been from time to time a party to various
lawsuits and other matters involving ordinary and routine claims arising in the
normal course of business. In the opinion of management of Bristol and its
counsel, although the outcomes of these claims and suits are not presently
determinable, in the aggregate they should not have a material adverse affect on
Bristol's business, financial position or results of operations.
On or about August 7, 1997, a class action complaint was filed against
Bristol and certain of Bristol's officers and directors in the United States
District Court of the Southern District of New York. (Lincoln Adair, et al. v.
Bristol Technology Systems, Inc. , et al.) The plaintiffs' complaint alleged
claims under the federal securities laws for alleged misrepresentations and
omissions in connection with sales of Bristol's securities. On December 23,
1997, Bristol filed a motion to dismiss the complaint, and on May 14, 1998, the
court denied Bristol's request. On May 3, 1999, Bristol and the plaintiffs
agreed to settle the class action complaint against Bristol and a stipulation
was filed with the United States District Court, Southern District of New York.
Bristol has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, Bristol has spent approximately $150,000
on legal fees. Currently, the settlement money from the insurance company is in
a trust fund. Final disposition of funds to the plaintiffs will occur when
Bristol pays the money owed as agreed to per the settlement. Bristol is required
to pay an additional $20,000 to complete its obligation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Bristol's Common Stock and Warrants trade on the Over the Counter
Bulletin Board under the symbols "BRTL" and "BRTLW," respectively. Bristol's
securities previously traded on the Nasdaq Small Cap Market until August 6,
1999. The following table sets forth the range of high and low bid information
for Bristol's Common Stock and Warrants for the periods indicated as reported by
Interactive Data. The quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
2000: High Low
----- ---- ---
1ST QUARTER
Common Stock $ .875 $ .469
Warrants $ .25 $ .08
2ND QUARTER
Common Stock $ .969 $ .469
Warrants $ .10 $ .03
3RD QUARTER
Common Stock $ 1.125 $ .531
Warrants $ .15 $ .07
4TH QUARTER
Common Stock $ 1.01 $ .40
Warrants $ .12 $ .04
1999: High Low
----- ---- ---
1ST QUARTER
Common Stock $ 1.156 $ .343
Warrants $ .375 $ .156
2ND QUARTER
Common Stock $ 1.25 $ .406
Warrants $ .313 $ .109
3RD QUARTER
Common Stock $ .719 $ .250
Warrants $ .10 $ .03
4TH QUARTER
Common Stock $ .719 $ .188
Warrants $ .15 $ .01
HOLDERS
As of March 15, 2001, the approximate number of record holders of
Bristol's Common Stock and Warrants was approximately 700 and 190, respectively.
Bristol believes that a significant number of beneficial owners hold substantial
shares of Common Stock and Warrants in depository or nominee form.
9
DIVIDENDS
Bristol was obligated to pay, semi-annually, commencing January 15,
2000, cumulative dividends at a rate of twelve percent (12%) per annum of the
original issue price of the Series B Preferred Stock as of December 31, 1999. No
dividends were paid on its common stock as of December 31, 2000. Additionally,
the current line of credit prohibits Bristol from paying cash dividends and the
line of credit contains certain covenants which restrict the reduction or
depletion of Bristol's capital. Bristol has obtained a waiver on the Series B
Preferred Stock dividends. Bristol anticipates that future financing, including
any lines of credit, may further restrict or prohibit Bristol's ability to pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1996, 1997, 1998, 1999 and 2000 and the selected balance sheet data
at those dates, are derived from our consolidated financial statements and notes
thereto. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere in
this report.
Period from Inception
(April 6, 1996)
through Year Ended Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1997 December 31, 1998 December 31, 1999 December 31, 2000
----------------- ----------------- ----------------- ----------------- -----------------
Total revenue $ 4,196,230 $ 21,088,487 $ 32,196,708 $ 36,701,052 $22,865,843
Gross margin 1,350,235 6,395,043 10,153,550 11,176,955 3,939,478
Operating expenses (1) 1,452,215 11,381,340 11,996,519 12,143,603 9,324,827
Operating loss (101,980) (4,986,297) (1,812,969) (966,648) (5,385,349)
Net loss (2) (106,625) (4,968,607) (1,731,778) (362,284) (5,812,780)
Basic and diluted net
loss per share (0.03) (0.96) (.38) (0.06) (.88)
Basic and diluted weighted
average common shares
outstanding 319,738 5,198,156 5,826,839 6,951,505 7,432,030
(1) For the year ended December 31, 1997, includes goodwill write down of
$1,871,471.
(2) For the year ended December 31, 1999, includes the gain of $1,171,373
on the sale of net assets of a division of Smyth Systems.
As of As of As of As of As of
December 31, 1996 December 31, 1997 December 31, 1998 December 31, 1999 December 31, 2000
----------------- ----------------- ----------------- ----------------- -----------------
Cash and cash equivalents $ 5,475,674 $ 715,929 $ 146,235 $ 332,959 $ 477,509
Working capital (deficit) 6,164,490 263,566 (175,793) 903,972 (3,769,608)
Intangible assets, net 1,693,400 4,160,964 4,538,778 4,272,210 3,995,569
Total assets 11,169,699 13,811,630 17,284,637 15,220,800 11,910,813
Long-term liabilities 61,379 81,825 268,659 191,810 72,407
Total liabilities 2,994,706 7,618,244 11,427,311 9,330,138 11,186,872
Redeemable Preferred Stock - - - - 1,000,000
Shareholders' equity (deficit) 8,174,993 6,193,386 5,857,326 5,890,662 (276,059)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY INTENDS THAT
SUCH STATEMENTS SHALL BE PROTECTED BY THE SAFE HARBORS PROVIDED FOR IN SUCH
SECTIONS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. THE COMPANY MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS
IN FUTURE OPERATING RESULTS DUE TO A NUMBER OF ECONOMIC, COMPETITIVE,
GOVERNMENTAL AND TECHNOLOGICAL FACTORS, INCLUDING, AMONG OTHER THINGS, CHANGES
IN LAWS, CHANGES TO OR CLARIFICATIONS OF ACCOUNTING RULES OR APPROACHES AND/OR
10
THEIR APPLICATIONS, THE SIZE AND TIMING OF CUSTOMER ORDERS, NEW OR INCREASED
COMPETITION, DELAYS IN NEW PRODUCT ENHANCEMENTS AND NEW PRODUCT AND/OR SERVICE
INTRODUCTIONS, QUALITY CONTROL DIFFICULTIES, CHANGES IN MARKET DEMAND, MARKET
ACCEPTANCE OF NEW PRODUCTS AND/OR SERVICES, PRODUCT RETURNS AND SEASONALITY IN
PRODUCT AND SERVICES PURCHASES. SEE "BUSINESS--RISK FACTORS" FOR A MORE DETAILED
DISCUSSION OF IMPORTANT FACTORS WHICH COULD CAUSE OPERATING RESULTS TO VARY
SIGNIFICANTLY FROM THOSE IN PRIOR PERIODS, AND THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS REPRESENT
MANAGEMENT'S CURRENT EXPECTATIONS AND ARE INHERENTLY UNCERTAIN. INVESTORS ARE
WARNED THAT ACTUAL RESULTS MAY DIFFER FROM MANAGEMENT'S EXPECTATIONS. THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE THE FORWARD-LOOKING INFORMATION TO
REFLECT ACTUAL RESULTS OR CHANGES IN THE FACTORS AFFECTING SUCH FORWARD-LOOKING
INFORMATION.
GENERAL
The following discussion of the financial condition and results of
operations of Bristol should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this report.
Bristol's financial condition and results of operations have changed
considerably since Bristol's inception in April 1996, as a result of Bristol's
previous acquisition strategy. Bristol completed seven acquisitions since its
inception through the end of December 31, 1998, all of which were accounted for
under the purchase method of accounting. Bristol completed no acquisitions
during the year ended December 31, 1999 and year ended December 31, 2000.
Bristol's consolidated total revenue is comprised of two components:
(i) revenue derived from the sale and installation of hardware and software
(Systems Revenue) and (ii) revenue derived from the sale of services and
supplies (Service Revenue).
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenue
Total revenue for the year ended December 31, 2000 was $22,865,843 and
represents a decrease of 38% from Bristol's total revenue of $36,701,052 for the
year ended December 31, 1999. The decrease in revenue from the year ended
December 31, 1999 to the year ended December 31, 2000 was attributable to the
sale of the Smyth Imager division in November 1999 ($5,088,564 of the decrease).
The remaining decrease in revenue is attributable to a slowdown in sales to the
grocery and franchise hospitality markets when compared to the prior year ended
December 31, 1999. Bristol expects this to continue for the foreseeable future.
Bristol has also experienced a reduction this year in the number of sales when
compared to 1999, now that the urgency for buying new systems to achieve Y2K
compliance has passed.
Total revenue for the year ended December 31, 2000 was comprised of 64%
Systems Revenue and 36% Service Revenue, as compared to a revenue composition of
66% Systems Revenue and 34% Service Revenue for the year ended December 31,
1999. The mix of revenue change from 1999 to 2000 was primarily due to product
mix due to the sale of the Smyth Imager division.
No customer accounted for more than 10% of total revenue for the year
ended December 31, 2000 or 1999. Aggregate sales of products from Bristol's
three principal hardware vendors, Panasonic, ERC Parts, Inc., a distributor of
Panasonic products, and NCR Corporation, accounted for approximately 39% of
total revenue for year ended December 31, 2000, and approximately 33% of total
revenue for year ended December 31, 1999. Bristol's supply agreements with these
manufacturers are non-exclusive, have geographic limitations and may have
renewable one-year terms depending upon Bristol's achievement of a
previously-agreed-to procurement quota. Geographical limitations exist as a
result of the assignment of sales territories that define the municipalities and
states where Bristol's subsidiaries can sell a manufacturer's hardware or
software. The actual sales territories for each manufacturer are
subsidiary-specific and some subsidiaries may not have permission to sell
hardware or software of certain manufacturers in certain regions or territories
of the country. NCR, however, has informed Bristol that effective January 1,
2001; it will eliminate Bristol's geographical limitations, thereby allowing
Bristol to sell NCR products throughout the country. A change in Bristol's or
its subsidiaries' relationship with its principal vendors could have a material
adverse effect on Bristol's business, financial condition, results of operations
and cash flows. Bristol has experienced some delays in obtaining equipment
because of cash flows and a continuance can significantly alter Bristol's or its
subsidiaries' relationship with these principal vendors and may have a material
adverse effect on Bristol's business, financial condition, results of operations
and cash flows
11
Gross Margin
Gross margin decreased to $3,939,478 for the year ended December 31,
2000, from $11,176,955 for the year ended December 31, 1999. As a percentage of
sales, gross margin for the year ended December 31, 2000 was 17% and was
comprised of gross margin for Systems Revenue of 8% and gross margin for Service
Revenue of 33%. The decrease in gross margin is primarily attributable to
decreased revenue available to cover fixed labor and overhead that are
components of cost of sales. Total gross margin excluding the fixed labor and
overhead components of costs of sales for the year ended December 31, 2000
improved from 53% to 54% or approximately $228,000. Gross margin for the year
ended December 31, 1999 was 30% and was comprised of gross margin for Systems
Revenue of 33% and gross margin for Service Revenue of 26%. The decrease in
gross margin is primarily attributable to decreased revenue available to cover
fixed labor and overhead that are components of cost of sales. Gross margins
excluding fixed overhead costs for the year ended December 31, 2000 were 35%
versus 39% for year ended December 31, 1999.
As a percentage of total revenue, the decrease in Systems Revenue gross
margin is attributable to decreased revenue available to cover fixed labor and
overhead directly related to revenue generating activities. Based on significant
losses experienced in 2000, management has implemented cost reduction
initiatives including a reduction in workforce and has sold two of its branch
local offices.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses were $8,786,566 for
the year ended December 31,2000, a decrease of $2,737,830 from the year ended
December 31, 1999 and represented 38% of total revenue, versus 31% of total
revenue in the year ended December 31, 1999. The decrease in expenses in
absolute dollars between years was primarily attributable to the sale of the
Imager division and the two Cash Registers, Inc. offices, and other workforce
reductions. The increase in selling, general and administrative expenses as a
percentage of total revenue during the year ended December 31, 2000, compared to
the comparable prior year period, is primarily due to lower revenues in year
2000 and delayed reaction by management in cutting fixed labor and
administrative expenses. As sales declined in early 2000; management did not
identify the extent or the potential negative effects due to a disaggregation of
data coming from its acquired businesses and the inability of the Company to
reduce expenses as quickly as revenues declined.
Research and Development Costs
Research and development costs were zero during year ended December 31,
2000 compared to $619,000 incurred during the year ended December 31, 1999. The
decrease is due to the sale of the Imager division whose costs in 1999 were
attributable to software development costs to develop and design point-of-sale
licensed software to run on the latest operating systems specifically targeted
for the golf course and resort markets. Bristol's policy was to expense such
costs until technological feasibility was established.
Other Expense (Income)
Bristol earned interest income of $2,303 for the year ended December
31, 2000, compared to $37,000 for the year ended December 31, 1999. Interest
income is primarily related to finance charges earned on delinquent accounts.
Bristol recognized interest expense of $615,560 for the year ended December 31,
2000 compared to $589,650 for the year ended December 31, 1999. Interest expense
in both years consisted primarily of interest on outstanding balances on
Bristol's lines of credit and amortization of debt issuance costs.
12
Provision for Income Taxes
Bristol recorded a slight income tax provision for the years ended
December 31, 2000 and 1999, respectively. Income tax expense in both years
consisted solely of state taxes as Bristol had a taxable loss for federal income
tax purposes. These federal tax losses are available to offset future taxable
revenue, if any. Bristol has recorded a 100% valuation allowance against the
deferred tax asset created by the net operating loss carry-forward as management
believes that the more likely than not standards imposed by Statement of
Financial Accounting Standards (SFAS) No. 109 have not been met.
Net Loss Applicable to Common Stockholders
Bristol's net loss applicable to common stockholders for the year ended
December 31, 2000 was $6,510,556 consisting of Bristol's net loss of $5,812,780
, cumulative dividends on preferred stock of $126,970, accretion of $550,806 to
increase the Series C Convertible Preferred Stock issued on January 12, 2000 to
its redemption value of $100 per share and accretion of $20,000 related to
Series B Preferred Stock.
Bristol's net loss applicable to common stockholders for the year ended
December 31, 1999 was $ 440,724, consisting of Bristol's net loss of $362,284
and cumulative dividends on the Series B Preferred Stock of $25,940, accretion
of $52,500 to increase the Series B Preferred Stock to its liquidation value and
cumulative dividends on the Series B Preferred Stock.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue
Total revenue for the year ended December 31, 1999 was $36,701,000 and
was comprised of revenue from Bristol's seven acquisitions for the entire year.
This represents an increase of 14% from Bristol's total revenue of $32,196,708
for the year ended December 31, 1998. The increase in total revenue is primarily
attributable to a full year of revenue contributed by Quality Business Machines
("QBM") (a 1998 acquisition). The remaining operations had no growth in revenue
from 1998 to 1999. Future growth in revenue will be dependent upon Bristol's
ability to expand its hardware and software product offerings in the regions it
operates as well as increase its maintenance business.
Total revenue for the year ended December 31, 1999 was comprised of 66%
Systems Revenue and 34% Service Revenue, as compared to a revenue composition of
65% Systems Revenue and 35% Service Revenue for the year ended December 31,
1998. The mix of revenue change from 1998 to 1999 was due primarily to increased
Systems Revenue at QBM, mainly related to Y2K demand in that region.
No customer accounted for more than 10% of total revenue for years
ended December 31, 1999 and 1998. Aggregate sales of products from Bristol's
three principal hardware vendors, Panasonic, ERC Parts, Inc., a distributor of
Panasonic products, and NCR Corporation, accounted for approximately 33% of
total revenue for the year ended December 31, 1999, and approximately 26% of
total revenue for year ended December 31, 1998. Bristol's supply agreements with
these manufacturers are non-exclusive, have geographic limitations and may have
renewable one-year terms depending upon Bristol's achievement of a
previously-agreed-to procurement quota. Geographical limitations exist as a
result of the assignment of sales territories that define the municipalities and
states where Bristol's subsidiaries can sell a manufacturer's hardware or
software. The actual sales territories for each manufacturer are
subsidiary-specific and some subsidiaries may not have permission to sell
hardware or software of certain manufacturer's in certain regions or territories
of the country. Bristol has experienced some delays in obtaining equipment
because of cash flows and the continuing inability will significantly alter
Bristol's or its subsidiaries' relationship with these principal vendors and may
have a material adverse effect on Bristol's business, financial condition,
results of operations and cash flows.
13
Gross Margin
Gross margin for the year ended December 31, 1999 was 30% and was
comprised of gross margin for Systems Revenue of 32% and gross margin for
Service Revenue of 26%. Gross margin for the year ended December 31, 1998 was
32% and was comprised of gross margin for Systems Revenue of 34% and gross
margin for Service Revenue of 28%. As a percentage of revenue, the decrease in
Systems Revenue gross margin is attributable to previously agreed to gross
margins with a major grocery wholesaler and lower software revenue related to a
division that was sold in November 1999. As a percentage of total revenue, the
decrease in Service Revenue gross margin is attributable to lower service and
support revenue and higher costs related to a division that was sold in November
1999.
Selling, General, and Administrative Expenses
Total selling, general and administrative expenses for 1999 of
$11,524,000 increased by $296,000 from the comparable prior-year and represented
31% of total revenue, versus 35% of total revenue in the comparable prior year
period. The increase in expenses in absolute dollars for year ended 1999 as
compared to the comparable year in 1998 was primarily due to a full year of
selling and administrative costs related to the QBM acquisition. This increase
in 1999 was offset by a decrease in corporate overhead attributable to the
departure of the former Chairman, President and Chief Operating Officer salaries
and related taxes at the beginning of the year who were replaced by existing
employees of approximately $410,000, expenses of an unsuccessful private
placement memorandum that occurred in 1998 of approximately $128,000 and a sales
promotion program for Bristol's sales staff that was accrued in 1998 and paid in
1999 of approximately $85,000.
Research and Development Costs
Research and development costs were $619,000 during the year ended
December 31, 1999 compared to $739,000, incurred during year ended December 31,
1998. The decrease in absolute dollars is attributable to ten and one-half
months of software development costs at a division sold in November 1999.
Bristol's policy is to expense such costs until technological feasibility is
established.
Other Expense (Income)
Bristol earned interest income of $37,000 for the year ended December
31, 1999 compared to $78,000 for the year ended December 31, 1998. For the year
ended December 31, 1999, interest income primarily related to the recognition of
finance charges on delinquent accounts. For the year ended December 31, 1998,
Bristol earned interest income from the recognition of finance charges on
delinquent accounts and dividend income of $34,000 received from a purchasing
cooperative of cash register dealers that was disbanded upon the passing of the
former President of Smyth. In addition, Bristol had other income in 1998 of
approximately $504,000 relating to proceeds received from a Company paid life
insurance policy.
Bristol had interest expense of $590,000 for the year ended December
31, 1999 compared to $479,000 for the year ended December 31, 1998. Interest
expense in both years consisted primarily of interest on outstanding balances on
Bristol's lines of credit. The increase was a direct result of increased
borrowings under the existing credit facilities over the prior year,
amortization in the current year of the debt issue costs and finance charges
paid to a major supplier for delinquent payments.
Provision for Income Taxes
The income tax provision for 1999 and 1998 consisted of minimum state
taxes as Bristol had a taxable loss for federal income tax purposes.
Net Loss Applicable to Common Stockholders
Bristol's net loss applicable to common stockholders for the year ended
December 31, 1999, was $440,724, consisting of Bristol's net loss for the year
of $362,284, accretion of $52,500 to increase the Series B Preferred Stock
issued on April 15,1999 to its liquidation value of $1.00 per share, and
cumulative dividends on the Preferred Stock of $25,940. Bristol's net loss
applicable to common stockholders for the year ended December 31, 1998, was
$2,225,000, consisting of Bristol's net loss for the year of $1,731,778,
accretion of $241,916 to increase the Series B Preferred Stock issued on March
18, 1998 to its liquidation value of $100 per share, imputed dividends related
to the beneficial conversion feature of the Series B Preferred Stock of $227,589
and cumulative dividends on the Preferred Stock of $23,580.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $477,509 and negative
working capital of $3,769,608 at December 31, 2000 compared to cash and cash
equivalents of $332,959 and working capital of $903,972 at December 31, 1999. In
the year ended December 31, 2000, the Company used $663,850 of cash in
operations; used $47,370 for the purchase of property and equipment; and
generated $851,168 from financing activities, which consists of the net impact
of borrowings and repayments under the Company's line of credit agreements,
repurchase of Series B Preferred Stock and common stock, issuance of Series C
Redeemable Preferred Stock, and repayments under various debt agreements. The
Company's auditors have modified their opinions as to the Company's ability to
continue as a going concern.
On January 12, 2000, the Company and Berthel SBIC, LLC entered into an
Investment Agreement whereby the Company issued 500,000 shares of its Series C
Redeemable Preferred Stock (Series C) for $1,000,000 and a warrant to purchase
425,000 shares of is common stock. The warrant has an exercise price per share
of $.01 and is exercisable until January 12, 2005. In connection with the
purchase by Berthel, the Company and the Chairman of the Board, Larry Cohen
agreed to surrender, without exercise, options held by him for the acquisition
of 1,330,000 shares of common stock of the Company, which the Company cancelled.
Upon certain circumstances, Berthel may tender to the Company the warrant or
shares underlying the warrant.
The Company redeemed $200,000 of Series B Preferred Stock in January
2000; $50,000 in February, March, and September 2000; and $25,000 in October
2000 for a total of $375,000 redeemed in the twelve months ended December 31,
2000.
Subsequent to December 31, 2000, the Company negotiated extended
payment terms with three large creditors and was able to convert a total of $
1,537,000 of accounts payable balances to interest bearing notes. In addition,
the Company was able to extend its line of credit from a March 31, 2001 due date
to May 31, 2001. Because of these situations the Company has experienced
equipment delivery delays from certain manufacturers. This has also contributed
to a decline in sales due to Bristol's inability to meet customer needs in a
timely and efficient manner.
The Company believes that an additional capital infusion along with its
availability on the Company's current asset base line of credit is required to
meet its working capital requirements until December 31, 2001. At December 31,
2000, approximately $120,000 of eligible collateral was available for the
Company to borrow under the credit facilities. The Company will require
financing in order to fund the business operations and may incur additional
costs and expenditures to expand operational and financial systems and corporate
management and administration. The Company will be limited in its ability to
grow internally without working capital. There can be no assurance that the
Company will be able to successfully obtain additional financing or that such
financing will be available on terms the Company deems acceptable. In
anticipation of the proposed merger with Registry Magic the Company has borrowed
from Registry Magic $1,910,000 through April 12, 2001 on an interest bearing
note at 11.5% for working capital. The Company's success is dependent upon its
ability to obtain necessary financing, the continued cooperation of suppliers
and equipment manufacturers, the successful execution of management's cost
reduction initiatives and the achievement of sustained profitable operations.
The Company in late 3rd quarter of 2000 implemented a significant reduction in
workforce and sold two sales offices resulting in a reduction of fixed operating
expenses of approximately $800,000 per quarter. Additional reductions in
operating costs are being implemented in 2001 with expected cost reductions of
$475,000 per quarter. Management believes by effectively consolidating technical
operations, converting remote field office to support of sales only,
incorporating a new incentive based salesman compensation package and the
completion of the consolidation of financial services support will result in an
further reduction in fixed annual operating expenses while maintaining required
customer support and service levels.
The Company had cash and cash equivalents of $332,959 and working
capital of $903,972 at December 31, 1999, compared to cash and cash equivalents
of $146,000 and negative working capital of $176,000 at December 31, 1998. In
the year ended December 31, 1999, the Company used $2,767,000 of cash in
operations; used $10,000 for the final installment for the acquisition of QBM;
used $137,000 for the purchase of property and equipment and generated
$2,608,000 from the sale of Smyth Imager Division and $85,000 from other
investing activities; and generated $409,000 from financing activities, which
consists of the net impact of borrowings and repayments under the Company's line
of credit agreements, issuance and repurchase of Series B Preferred Stock and
common stock and repayments under various debt agreements.
15
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock (the Series B) for $500,000 to an accredited investor. The
holder of shares of Series B is entitled to receive semi-annually, commencing
January 15, 2000 and each July 15 and January 15, thereafter, cumulative
dividends, at the rate of twelve (12%) per annum of the original issue price of
the Series B. The Series B is not convertible, has no voting rights, has a
liquidation preference of $1.00 per share plus unpaid dividends and is
redeemable at the option of the Company at any time. The purchaser of the Series
B received warrants to purchase 150,000 shares of the Company's common stock
concurrently with the $500,000 investment. These warrants were valued by the
Company at $53,000 using a Black-Scholes option pricing model and are
exercisable at $1.00 per share and were charged against the carrying value of
the Series B. The Company recorded accretion of $53,000 to increase the carrying
value of Series B Preferred Stock to the liquidation value of $1.00 per share.
On September 10, 1999, the Company redeemed $100,000 of the Series B shares. The
Company recorded cumulative preferred dividends of $25,940 as of December 31,
1999.
In the year ended December 31, 1998, the Company used $1,791,000 of
cash in operations; used $138,000 for the purchase of property and equipment and
used $562,000 for the acquisition of QBM; and generated $2,190,000 from
financing activities, which consists of the net impact of borrowings and
repayments under the Company's various debt agreements and the issuance of
common stock.
The Company's current line of credit provides for aggregate borrowings
up to $5,000,000 computed based on eligible accounts receivable and inventories;
bears interest at the bank's prime rate plus 1.75%; matured on December 31, 2000
and was extended to May 31, 2001; and is collateralized by the Company's
eligible accounts receivable and inventories. Ineligible accounts receivable
includes any customer invoice that is ninety-days past due or any customer
account where 25% or more of the amount due is ninety-days delinquent. Pursuant
to the terms of the line of credit, the Company is subject to covenants, which,
among other things, impose certain financial reporting obligations on the
Company and prohibit the Company from engaging in certain transactions prior to
obtaining the written consent of the lender. Some of the significant
transactions include: (i) acquiring or selling any assets over $50,000 excluding
purchases of dealers; (ii) selling or transferring any collateral except for
finished inventory in the ordinary course of business; (iii) selling inventory
on a sale-or-return, guaranteed sale, consignment, or other contingent basis;
(iv) incurring any debts, outside the ordinary course of business, which would
have a material adverse effect; (v) guaranteeing or otherwise become liable with
respect to obligations of another party or entity; (vi) paying or declaring any
dividend (except for dividends payable solely in stock); and (vii) making any
change in the Company's capital structure that would have a material adverse
effect. The Company repaid all amounts outstanding under its previous CRI, ARS
and Smyth credit lines using proceeds from the new line of credit. The Company
had outstanding borrowings of $2,215,655 and $3,256,000 bearing interest at
10.68% and 10.25% at December 31, 2000 and 1999, respectively. The Company has
received an extension of its line of credit until May 31, 2001. The Company will
be required to obtain a new line of credit or an extension thereafter.
DISCLOSURE OF IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1999, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FAS No. 133", which
delayed the effective date of FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", by one year. FAS No. 133 is now effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000
(January 1, 2001 for the Company). In June 2000, the FASB issued FAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133". FAS No. 138 amends FAS No. 133 and will
be adopted concurrently with FAS No. 133. FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or accumulated other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability, or firm commitment, changes in the fair value of the
derivative instrument will be included in the income statement along with the
offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
accumulated other comprehensive income. The gains and losses on the derivative
instruments that are reported in accumulated other comprehensive income will be
reclassified to earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
of the hedges will be recognized in current period earnings. The impact of FAS
No. 133 as amended by FAS No. 138 on the Company's financial statements will
depend on a variety of factors, including the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. The Company believes that the cumulative effect of adoption will
not be material to the Consolidated Financial Statements.
16
Effective January 1, 2000, the Company's accounting policies were reviewed for
compliance with the guidance provided by Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides the
Securities and Exchange Commission's views in applying generally accepted
accounting principles to revenue recognition in the financial statements. The
Company recognizes revenue for systems sales upon shipment and completed
installation at which time there are no other significant vendor obligations.
Hardware sales are recognized as revenue upon shipment and passage of title as
there are no other significant vendor obligations. Training and other services
are recognized as revenue when such items are delivered. Revenue from
maintenance contracts is recognized ratably over the term of the agreement.
In September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs". Under the provisions of
EITF 00-10, amounts billed to a customer in a sales transaction related to
shipping and handling should be classified as revenue. EITF 00-10 also requires
the disclosure of the income statement classification of any shipping and
handling costs. The Company was in compliance with EITF 00-10 for the year ended
December 31, 2000. The adoption resulted in no impact on the classification of
revenue for the Company and had no impact on the determination of net income.
In March 2000, the EITF reached a consensus on the application of EITF Issue No.
96-13, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", with Issue No. 00-7, "Equity
Derivative Transactions that Require Net Cash Settlement if Certain Events
Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity derivative
contracts that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value through earnings under EITF 00-7. In September 2000, the EITF reached a
consensus on Issue No.00-19, "Determination of Whether Share Settlement Is
Within the Control of the Issuer for Purposes of Applying Issue No. 96-13,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 00-19 addresses
questions regarding the application of EITF 00-7 and sets forth a model to be
used to determine whether equity derivative contracts should be recorded as
equity. Under the transition provisions of EITF 00-19, all contracts existing
prior to the date of the consensus are grandfathered until June 30, 2001, with a
cumulative catch-up adjustment to be recorded at that time. Additionally, any
contracts entered into prior to September 20, 2000, which are not revised to
comply with the requirements of EITF 00-19 by December 31, 2000, will require
reclassification out of permanent equity and into temporary equity pursuant to
Accounting Series Release No. 268. This reclassification will remain until the
contracts are revised to comply with EITF 00-19 before June 30, 2001. The
Company believes that the equity derivative contracts that may remain
outstanding at June 30, 2001, if any, will be in accordance with the
requirements of EITF 00-19 and does not anticipate that such adoption will have
a material impact on the consolidated financial statements.
In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for Certain
Sales Incentives", which provides guidance on accounting for discounts, coupons,
rebates and free products, as well as the income statement classification of
these discounts, coupons, rebates and free products. EITF 00-14 is effective
April 1, 2001, for the Company. The Company is currently evaluating the impact
of this new guidance.
17
RISK FACTORS
RISKS RELATED TO BRISTOL
CONTINUED OPERATING LOSSES. Bristol has only a limited history upon
which you can evaluate its prospects and future performance. Bristol's prospects
must be considered in light of the risks, expenses and difficulties frequently
involved in the operation and expansion of a business in an evolving industry
and one which experiences rapid technological change and intense competition.
For the year ended December 31, 2000, Bristol incurred a net loss applicable to
common stockholders of $ 6,510,556. The ability of Bristol to become profitable
will be dependent upon its ability to grow faster than historical performance
and to improve on the historical excesses of its acquired dealer network. There
can be no assurance that Bristol will be able to implement successfully its
strategic plan, to generate sufficient revenue to meet its expenses or achieve
or sustain profitability.
SUBSTANTIAL FLUCTUATION IN FUTURE OPERATING RESULTS. Bristol may
experience substantial fluctuation in its annual and quarterly operating results
in the future. Bristol's operating results are affected by a number of factors,
many of which are beyond Bristol's control. A substantial portion of Bristol's
backlog is typically scheduled for delivery within ninety days. Delivery dates
for products sold by the company are subject to change due to customer's
changing the required installation date. Quarterly sales and operating results
depend in part on customer driven delivery dates, which are subject to change. A
significant portion of Bristol's operating expenses is relatively fixed in
nature and planned expenditures are based in part on anticipated orders. Any
inability to adjust spending quickly enough to compensate for any revenue
shortfall may magnify the adverse impact of such revenue shortfall on the
company's results of operations.
RESTRICTION OF BRISTOL'S ABILITY TO ENTER INTO CERTAIN TRANSACTIONS.
With Bristol's existing line of credit, Bristol is prohibited from engaging in
certain transactions without first obtaining the written consent of its lender.
Such transactions include, but are not limited to:
o Acquiring or selling any assets over $50,000;
o Selling or transferring collateral under the credit line,
except for sale of items in the company's finished inventory
in the ordinary course of business;
o Selling of inventory in a sale or return, guaranteed sale,
consignment or other contingent basis;
o In the other transaction outside the ordinary course.
Bristol's line of credit expired on December 31, 2000, but Bristol has
received an extension of the line of credit until May 31, 2001. Failure to
obtain a new line of credit or an extension of the existing line of credit could
adversely effect the company's financial condition.
BRISTOL'S FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT IT WILL
CONTINUE AS A GOING CONCERN. The auditor's report on Bristol's 2000 financial
statements states that certain "matters raise substantial doubt about the
company's ability to continue as a going concern." Bristol continues to explore
the possibility of raising funds through available sources that include equity
and debt markets. Whether or not the merger with Registry is completed, Bristol
is not certain that it will be successful at raising funds through any sources
in the event Bristol is unable to generate sufficient revenues to maintain
operations.
RISKS RELATING TO THE MERGER
THE MERGER INVOLVES A HIGH DEGREE OF RISK. In addition, by voting in
favor of the merger, Bristol shareholders will be choosing to invest in Registry
common stock. An investment in Registry common stock involves a high degree of
risk. The occurrence of any of the risks described below could materially
adversely affect the business, financial condition and results of operations of
Bristol, as applicable.
ALTHOUGH REGISTRY AND BRISTOL EXPECT THAT THE MERGER WILL RESULT IN
BENEFITS, THOSE BENEFITS MAY NOT OCCUR. The acquisition of Bristol by Registry
involves risks related to, among other things, the integration and management of
acquired technology, sales and marketing efforts, operations and personnel. The
integration of Registry and Bristol will be a complex, time consuming and
expensive process and may result in disruption of the business of the combined
18
company. Following the merger, the combined company must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices. There may be
substantial difficulties, costs and delays involved in integrating Registry and
Bristol, including:
o Potential incompatibility of business cultures;
o Product development delays caused by disruptions from the
merger;
o Perceived adverse changes in business focus;
o Potential lapses in internal and financial controls;
o The loss of key employees and diversion of the attention of
management from ongoing business concerns; and
o Bristol may not be successfully integrated, managed and
operated by Registry.
FAILURE TO ACHIEVE BENEFICIAL SYNERGIES COULD RESULT IN DECREASED
INCOME AND INCREASED OPERATING COSTS. Registry and Bristol have entered into the
merger agreement with the expectation that the merger will result in beneficial
synergies. Achieving these anticipated synergies and the potential benefits
underlying the two companies' reasons for the merger will depend on a number of
factors, some of which include:
o Integration of research and development efforts;
o Retention of technology staff;
o Reduction of operating expenses due to consolidation of
operations;
o The ability of the combined company to increase sales of each
company's products;
o Competitive factors, including technological advances attained
by competitors and patents granted to or contested by
competitors, which would result in competitors' ability to
compete against the combined companies more effectively; and
o The ability of the combined company to continue development of
Registry and Bristol products.
Even if the two companies are able to integrate operations, there can
be no assurance that the anticipated synergies will be achieved. The failure to
achieve such synergies could have a material adverse effect on the business,
results of operations and financial condition of the combined company.
THE VALUE AND NUMBER OF THE SHARES OF REGISTRY COMMON STOCK TO BE
RECEIVED MAY DECLINE FROM ITS CURRENT VALUE. Because Registry common stock is
publicly traded, the value of a share of Registry common stock may change on a
daily basis. Therefore, the market price of the shares of Registry common stock
each Bristol shareholder is to receive in the merger may decline from the
current market price.
SUBSTANTIAL SALES OF REGISTRY COMMON STOCK COULD ADVERSELY AFFECT ITS
MARKET PRICE. Registry cannot predict the effect, if any, that future sales of
shares of Registry common stock or the availability of such shares for future
sale will have on its market price from time to time. Sales of substantial
amounts of Registry common stock, or the perception that such sales could occur,
could adversely affect prevailing market prices for the stock.
19
RISKS RELATED TO THE COMBINED COMPANY
THE COMPANIES DEPEND ON THE CONTINUED DEVELOPMENT OF CLIENT/SERVER AND
INTERNET SOLUTIONS SOFTWARE MARKET FOR GROWTH. The market for pos systems, CCRs
and related equipment and, in particular, for products and services are:
o Constantly evolving and is subject to rapid technological
changes;
o Dependent on the introduction, growth, adoption and pricing of
software solutions;
o Subject to the technical knowledge and ability of users to
understand and use such software; and
o Characterized by transforming technology and frequent new
product and service introductions.
DEVELOPING NEW PRODUCTS AND PRODUCT ENHANCEMENTS IS A COMPLEX AND
UNCERTAIN PROCESS REQUIRING HIGH LEVELS OF INNOVATION, AS WELL AS THE ACCURATE
ANTICIPATION OF TECHNOLOGICAL AND MARKET TRENDS. Broad market acceptance of
products and future success will depend in part on the following:
o Ability to educate users about the benefits of the combined
company's products and services generally and the specific
benefits of our products and services - ability to adapt to
emerging industry standards and respond to competitors'
product and service announcements;
o Ability to develop and introduce competitive new products and
services and enhancements that meet changing customer
requirements and emerging industry standards; and
o Ability to increase brand-name recognition.
If the companies are not successful in meeting the goals listed above,
the companies may not be able to maintain or gain broad market acceptance for
products and services. Further, a decline in demand for software products and
services generally, could occur as a result of competitive technological change
or other factors.
REVENUE HAS BEEN DEPENDENT ON DEMAND FOR A FEW PRODUCTS. The companies
have historically had a substantial portion of revenue generated from a few
products. Registry's Virtual Operator product family represented approximately
100% of revenue for the year ended July 30, 2000. Bristol's pos product family
represented approximately 63% of its revenue for the year ended December 31,
2000. The likelihood that these products will continue to contribute significant
revenue to the combined company is subject to certain risks, including:
o Our ability to develop and introduce competitive new products
and services that meet changing customer requirements; and
o Our ability to develop and introduce products and services
that meet emerging industry standards.
RISKS ASSOCIATED WITH COMMON MANAGEMENT. Senior management of both
companies includes Lawrence Cohen , who has the capacity to significantly
influence management decision-making. Consequently, determinations by management
concerning the merger or other matters may be influenced by reason of these
relationships that may affect the interests of Registry's or Bristol's
shareholders in an adverse manner.
SIGNIFICANT CAPITAL REQUIREMENTS; POSSIBLE NEED FOR ADDITIONAL
FINANCING. The companies will continue to have significant capital requirements
due to the substantial costs associated with product development and refinement,
recruitment of skilled personnel and the marketing of innovative speech
recognition and business application products and related services. Cash
requirements for the purpose of developing products and services have been
substantial and, as a result, the companies have been dependent upon capital
resources provided by investors in order to finance our operations.
In the event the companies do not develop and refine products and
services on a timely basis, the companies do not complete contracts for the
provision of products and technology in sufficient numbers or in the event
available capital is insufficient to fund the implementation of business plan
and working capital requirements, the companies may require additional
financing. The companies have no current arrangements with respect to, or
potential sources of, additional financing and do not anticipate that existing
shareholders will satisfy any portion of our future financing requirements. The
companies cannot provide assurances that any additional financing will be
available when needed, on commercially reasonable terms, or at all. If the
companies are unable to obtain additional financing when needed, this would have
a material adverse effect on the companies, including the curtailment of product
and service development, marketing and expansion activities.
20
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ. Registry's common stock
is listed on the Nasdaq SmallCap Market. In order to continue to be listed on
Nasdaq, however, Registry must maintain at least $2,000,000 in net tangible
assets (total assets less total liabilities and goodwill) or $500,000 in net
income in the latest fiscal year or in two of the last three years or
$35,000,000 in market capitalization, a public float of at least 500,000 shares,
a $1,000,000 market value of public float, a minimum bid price of $1.00 per
share, at least two market makers, at least 300 shareholders and at least two
outside directors. The failure to meet these maintenance criteria in the future
may result in the delisting of Registry's securities from Nasdaq, and Registry's
common stock would thereafter be traded in the non-Nasdaq over-the-counter
market. As a result of such delisting, an investor could find it more difficult
to dispose of or to obtain accurate quotations as to the market value of
Registry's common stock.
DIFFICULTIES IN MAINTAINING PROPRIETARY RIGHTS. Success depends upon
proprietary applications software technology which may be difficult to protect.
Registry currently relies on a combination of contractual rights, trade secrets,
know-how, trademarks, non-disclosure agreements and technical knowledge to
establish and protect our proprietary rights. The measures taken to protect
proprietary rights may not be adequate to prevent misappropriation of the
technology or independent development by others of products with features based
upon, or otherwise similar to, those of Registry's products. There are no
assurances that Registry's technology does not and will not infringe on the
proprietary rights or trade secrets of others or that third parties will not
assert infringement claims, trade secret violations, competitive torts or other
proprietary rights violations against the companies in the future. In the case
of infringement, the companies could, under certain circumstances, be required
to modify our products or obtain licenses, which could require cash or other
consideration. The companies may not be able to do either in a timely manner or
upon acceptable terms and conditions, and this failure could have a material
negative effect on the companies. There are no assurances that the companies
will have the resources to defend or prosecute a patent infringement or other
proprietary rights infringement action.
THE COMPANIES WILL NEED TO CONTINUE TO MAINTAIN AND BUILD RELATIONSHIPS
WITH MANUFACTURERS. A substantial portion of Bristol's total revenue is, and
will continue to be derived from the sale of POS systems, ECRs and related
equipment, none of which Bristol manufactures. Business is dependent upon close
relationships with manufacturers of POS equipment and the ability to purchase
equipment in the quantities necessary and upon competitive terms so that the
companies will be able to meet the needs of in user customers. During the year
ended December 31, 2000, Bristol has experienced delivery delays from these
manufacturers due to Bristol's cash flow and credit line limitations. Bristol's
inability to obtain equipment or supplies on a timely basis from major
manufacturers could have a material adverse effect on its business results of
operations, financial condition and cash flows.
DEPENDENCE ON KEY PERSONNEL AND RISKS ASSOCIATED WITH HIRING AND
RETAINING EMPLOYEES. The companies rely to a significant extent upon senior
management team and other key employees. Competition for such employees is
intense. There is no guarantee that the companies will be able to retain key
employees following the merger. From time to time, the companies will need to
hire additional or replacement employees. The companies may not be successful in
hiring, integrating or retaining new employees.
AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS. The
board of directors of Registry is authorized to issue 5,000,000 shares of
preferred stock exclusive of the preferred stock to be issued to Bristol's
preferred stockholders and to determine the dividend, liquidation, conversion,
redemption, and other rights, preferences, and limitations of such shares
without any further vote or action of the shareholders. Accordingly, the board
of directors has the power, without shareholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting, or other rights that could
negatively affect the voting power or other rights of the holders of the common
stock. In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging and delaying or preventing a
change in control of Registry.
21
RISKS RELATED TO REGISTRY
CONTINUED OPERATING LOSSES. Registry has received only limited revenues
from its inception in October 1995 through January 31, 2001. Total revenues for
the year ended July 31, 2000 and the six months ended January 31, 2001 were
$952,944 and $117,553 respectively. Registry has only a limited history upon
which an evaluation of prospects and future performance can be made. Registry's
prospects must be considered in light of the risks, expenses and difficulties
frequently involved in the operations and expansion of a new business in an
evolving industry that has not obtained widespread commercial acceptance and
which experiences rapid technological obsolescence and intense competition.
From inception through January 31, 2001, Registry has incurred
cumulative losses of $12,464,470 and anticipates losses will continue during the
fiscal year ending July 31, 2001. Registry expects to incur expenditures in
connection with the development and marketing of speech recognition and wireless
applications which will likely result in losses until such time, if ever, as
Registry is able to obtain sufficient contracts for its speech recognition
products and wireless applications, and services which will generate adequate
sources of revenue to support Registry's operations. Registry cannot provide
assurances that Registry's current business strategy will enable it to ever
achieve profitable operations.
REGISTRY'S FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT IT
WILL CONTINUE AS A GOING CONCERN. The auditor's report on Registry's 2000
financial statements states that "the Company has suffered recurring losses from
operations, has a cash deficiency from operations and is experiencing operating
losses that raise substantial doubt about its ability to continue as a going
concern." Registry continues to explore the possibility of raising funds through
available sources that include equity and debt markets. Whether or not the
merger with Bristol is completed, Registry is not certain that it will be
successful at raising funds through any sources in the event it is unable to
generate sufficient revenues to maintain operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Bristol's financial instruments include cash and cash equivalents,
accounts receivable and accounts payable. At December 31, 2000, the carrying
values of Bristol's financial instruments approximated fair values based on
current market prices and rates. Because of their short duration, changes in
market interest rates would not have a material effect on fair value. The
Company estimates it would incur an additional $50,000 of annual costs based on
a 1% increase in the prime interest rate.
It is Bristol's policy not to enter into derivative financial
instruments. Bristol does not currently have any significant foreign currency
exposure, as Bristol does not transact business in foreign currencies. As such,
there is no significant currency exposure at December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements required to be filed hereunder are included
under Item 14 of this report and are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Bristol dismissed its former principal accountants, Deloitte & Touche
LLP, and appointed the accounting firm of BDO Seidman, LLP as its principal
accountants. The change was made effective September 1, 2000. Bristol's Board of
Directors approved the dismissal of Deloitte & Touche LLP and the selection of
BDO Seidman, LLP as the new principal accountants.
During the period from September 30, 1997 to December 31, 1999 and each
subsequent interim period preceding September 1, 2000, there were no
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Deloitte & Touche
LLP, would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
The Deloitte & Touche LLP reports on the financial statements of
Bristol for the years ended December 31, 1999 and 1998 contained no adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope, or accounting principles. Their reports on the 1999
and 1998 financial statements, reissued and included in this Annual Report on
Form 10-K, have been modified to include an explanatory paragraph regarding
substantial doubt as to the ability of the Company to continue as a going
concern.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the current
directors and executive officers of Bristol, the principal offices and positions
held by each person. Each year the shareholders elect all directors. The
executive officers of Bristol are elected annually by the Board of Directors and
serve terms of one year or until their death, resignation or removal by the
Board of Directors. There are no family relationships between any of the
directors and executive officers and any other person pursuant to which any
person was selected as an executive officer.
The directors and executive officers of Bristol are as follows:
NAME AGE POSITION
---- --- --------
Lawrence Cohen................. 55 Chairman of the Board and Director
William Kerechek .............. 50 Chief Financial Officer
David Kaye..................... 64 President, Chief Executive Officer and Director*
Peter Stranger................. 50 Director
Bryan Steffen.................. 28 Director
* David Kaye resigned as an officer and director, effective
April 16, 2001. o
LAWRENCE COHEN is a founder of Bristol and has served as Vice Chairman
of the Board since its inception in April 1996 until he became Chairman in
January 1999. On January 18, 1999, the Board of Directors named Mr. Cohen as
acting Chief Executive Officer until a replacement was made. From November 1990
to September 1996, Mr. Cohen served as Chairman of the Board of BioTime, Inc.
("BioTime"), a biotechnology company engaged in the artificial plasma business.
Mr. Cohen has also served as a director of ASHA Corporation, a publicly traded
supplier of traction control systems, from April 1995 to present; a director of
Apollo Genetics Inc., a company founded by Mr. Cohen which is engaged in the
genetic pharmaceutical business, from January 1993 to the present; a director of
Registry Magic Inc., a company founded by Mr. Cohen which develops voice
recognition equipment, from November 1995 to present.
WILLIAM KERECHEK has served as Chief Financial Officer for Bristol
since June 2000. From October 1992 until July 1999 he served as Controller for
Tyson Seafood Group, a wholly owned subsidiary of Tyson Foods, Inc. Prior to
Tyson, Mr. Kerechek had been Controller of Louis Kemp Seafoods, a division of
Oscar Mayer since 1987. Prior to working at Louis Kemp Seafood, Mr. Kerechek
held various positions within Philip Morris companies since 1975. Mr. Kerechek
received a B.S. in Accounting from the University of Illinois and is a CPA.
DAVID KAYE served as President and Chief Executive Officer of Bristol
from June 2000 until April 2001 and a director of Registry from February 2000
until April 2001 From January 1999 until December 1999, he was the Vice
President of Corporate Finance for Kann Capital Ltd., an investment banking
firm. From March 1998 until December 1998, he served as Chief Financial Officer
of Tech Electro Industries, Inc., a publicly traded holding company operating
principally in the information technology sector. From July 1997 to February
1998, Mr. Kaye served as President of 433, Inc., a corporation offering
mediation services to delinquent federal and state taxpayers. From January 1990
until July 1997 he served as President and Chief Executive Officer of Kaye Kotts
Associates, Inc., a corporation offering mediation services to delinquent
federal and state taxpayers. In February 1998, Kaye Kotts Associates, Inc. filed
bankruptcy under Chapter 7 of the bankruptcy code.
23
PETER STRANGER has served as a board member since June 1998. Mr.
Stranger has been President of the Los Angeles office of J. Walter Thompson &
Company, a worldwide advertising agency and a subsidiary of the WWP Group,
London since December 1997. He was a managing partner of Bozell Worldwide, a
communications firm, from August 1995 to December 1997. Mr. Stranger was
president of the Los Angeles office of Euro RSCG, an international
communications holding company, from September 1989 until November 1994, and he
was an officer of Della Famina, Travisano & Partners, an advertising agency, for
the prior 15 years.
BRYAN STEFFEN has been a Director of Bristol since April 1, 2000. He
has served as Director of Berthel Fisher & Company Planning, Inc., an investment
advisory company, since August 1999. From July 1997 to March 1999, he was with
Merit Capital Management, a private equity investment and management firm
located in Kansas City. He was an associate and financing analyst, working
directly with the principals in funding arrangements and operations of portfolio
companies. Mr. Steffen received his MBA in finance from the University of Iowa
and a degree in Business Administration and a degree in Professional Accounting
from Regis College.
All directors hold office until the next meeting of stockholders and
the election and qualification of their successors. Officers are elected by the
Board of Directors and serve at the discretion of the Board. The Board held
three regular and one written unanimous consent meetings during the year ended
December 31, 2000.
24
ITEM 11. EXECUTIVE COMPENSATION
The following tables present information concerning the cash
compensation paid and stock options granted to Bristol's Chief Executive Officer
and each additional executive officer of Bristol whose total compensation
exceeded $100,000 for the year ended December 31, 2000. The notes to these
tables provide more specific information regarding compensation.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
FISCAL OTHER ANNUAL STOCK OPTIONS/ LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS(S)($) SARs(#) PAYOUTS($) ($)
David Kaye (1)
President and Chief Executive
officer 2000 180,000 - - - 550,000 - -
Michael P. Pollastro (2) 2000 150,000 - - - 150,000 - -
Executive Vice President, Interim 1999 130,589 - - - 40,500 - -
Chief Executive and Chief
Operating Officer
Michael S. Shimada (3) 2000 140,000 - - - - - -
Vice President and Chief 1999 129,809 - - - 80,000 - -
Financial Officer 1998 103,365 - - - 200,000 - -
William Kerechek (4) 2000 100,000 - - - 50,000 - -
(1) Mr. Kaye was appointed President and Chief Executive Officer
in June 2000. He resigned effective April 2001.
(2) Mr. Pollastro was appointed Interim Chief Executive Officer
and Chief Operating Officer on June 16, 1999 until his
resignation effective December 31, 2000.
(3) Mr. Shimada joined Bristol in February 1998. He resigned
effective May 2000.
(4) Mr. Kerechek was appointed Chief Financial Officer in _June
2000.
25
The following table sets forth certain information concerning grants of
stock options to each of Bristol's executive officers named in the Summary
Compensation Table during the year ended December 31, 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------
INDIVIDUAL GRANTS
-----------------
% of Total
Number of Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price
Expiration Date Name Granted (#)(1) Fiscal Year ($/SH)
- --------------- ---- -------------------- ------------- -----------
1/01/2010 David Kaye 500,000 32.0% .468
5/23/2010 David Kaye 50,000 3.1% .531
1/01/2010 Michael P. Pollastro 50,000 3.1% .590
6/01/2010 Michael P. Pollastro 100,000 6.2% .610
6/01/2010 William Kerechek 50,000 3.3% .610
Option Exercises.
No options were exercised by any of Bristol's executive officers named in the
Summary Compensation Table during the year ended December 31, 2000.
The following table includes the number of shares covered by both
exercisable and un-exercisable stock options as of December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised in-the-
Unexercised Options/SARs at FY-end (#) Money Options/SARs at FY-end($)
-------------------------------------- -------------------------------
Share Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Un-exercisable Un-exercisable
- ---- --------------- ------------------ -------------- --------------
David Kaye __ __ 350,000/200,000 --/--
Michael P. Pollastro __ __ 181,000/9,500 --/--
William Kerechek __ __ 10,000/40,000 --/--
Michael S. Shimada __ __ 50,000/0 --/--
As of December 31, 2000, the closing price of Bristol's common stock was $.44.
As of March 15, 2001, the closing price of Bristol's common stock was $1.03.
Options issued to Mr. Shimada have been cancelled subsequent to year-end.
COMPENSATION OF DIRECTORS
Bristol's directors do not receive any cash compensation for service on
the Board of Directors or any committee thereof, but Bristol has and will
continue to pay the expenses of its directors incurred in attending Board and
committee meetings. In addition, pursuant to the terms of Bristol's Equity
Participation Plan (the "Stock Option Plan"), each non-employee director of
Bristol will be granted options to purchase shares of Bristol's Common Stock, at
an exercise price equal to the fair market value of a share of Common Stock as
26
of the date of the option grant. Persons who are elected as non-employee
directors receive an option to purchase thirty thousand (30,000) shares of
Common Stock on the following dates: (i) the date of such election to the Board,
(ii) the date of the second annual meeting following such meeting at which the
director was reelected to the Board and (iii) the date that the director is
reelected to the Board at each subsequent annual meeting of stockholders.
Options granted to non-employee directors under the Stock Option Plan become
exercisable in annual installments of twenty-five percent (25%) on each of the
first, second, third and fourth anniversaries of the option grant. Options
granted to non-employee directors subsequent to the second annual meeting of
stockholders become exercisable at one hundred percent (100%) on the date of
grant.
On July 21, 1999 each of the directors were awarded 50,000 options that
vest immediately from date of grant at the market price of $0.6875 per share. On
May 23, 2000 each of the directors were awarded 50,000 options that vest
immediately from date of grant at the market price of $0.531 per share.
Lawrence Cohen was also awarded 1,000,000 options at $0.625 per share
on February 23, 1999, and another 1,280,000 options at $0.1875 per share on
November 3, 1999. In an agreement with Berthel SBIC, LLC, 1,330,000 options
previously awarded to Mr. Cohen have been canceled. Mr. Cohen's options as of
December 31, 2000 are 1,280,000 at $.1875 per share and 50,000 at $.531 per
share.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On January 1, 2000, Bristol entered into an employment agreement with
Michael Pollastro, President of Automated Retail Systems, Inc., a wholly-owned
subsidiary of Bristol, whereby Bristol agreed to pay Mr. Pollastro one hundred
fifty thousand dollars ($150,000) per year ending December 31, 2000, unless
terminated in writing by Bristol, sixty (60) days prior to its expiration, the
agreement will automatically renew for two (2) additional years. In addition,
Mr. Pollastro will earn a quarterly bonus in an amount equal to three percent
(3%) of Bristol's pretax profit before any bonus calculation for each quarter.
The agreement contains confidentiality provisions and covenants not to compete.
In addition, the employment agreement has a clause providing for payment of the
amount of unpaid salary that would have been due through the expiration of the
term of the agreement in the event that the agreement is terminated due to death
or disability. In the event of voluntary resignation or termination for cause,
salary shall be paid through the date of termination. The employment agreement
does not have severance or change-in-control provisions. Mr. Pollastro has
resigned, effective December 31, 2000.
Bristol has employment agreements with certain executive officers and
employees, the terms of which expire at various times through 2002 and provide
for minimum salary levels. In addition, certain officers of the acquired
companies receive a portion of the acquired company's pre-tax profits greater
than the amount defined in the officer's employment agreement. At December 31,
2000, no provision for bonus payments were made for these certain employment
agreements due to the fact that the acquired companies incurred pre-tax losses.
The aggregate commitment for future salaries and the guaranteed bonus amounts
was $875,000 at December 31, 2000 excluding bonus contingent on achieving
certain pre-tax profits. Bristol believes payment of these contingent bonuses
will not have a material adverse effect on results of operations, financial
condition or cash flows. In addition, Bristol has entered into an employment
contract with a former owner of a subsidiary, expiring in 2009, that provides
for a minimum salary that is payable even in the event of termination for cause
or upon death. The aggregate commitment for future salaries and guaranteed bonus
amounts under this contract at December 31, 2000, as amended in March 2000, was
$205,545.
On June 7, 2000, David Kaye and Bristol entered into an employment
agreement. Under the terms of this agreement, Bristol is to pay Mr. Kaye an
annual salary of $180,000 and he is to receive 4% Bristol's consolidated net
income before income taxes, extraordinary items of income or expense and
amortization of goodwill created through acquisitions. Such payment and
incentive compensation payments are payable quarterly based upon the amounts
reported in Bristol's SEC filings. The agreement is for consecutive one-year
terms unless canceled by either party in writing 60 days prior to each
anniversary date. Bristol may terminate the contract provided the balance of
such year's contract is paid in full at termination plus the pro rata portion of
any incentive compensation for that year.
Bristol has an independent contractor agreement, with a former owner of
a subsidiary, expiring in 2002. The commitment for future payments under this
contract at December 31, 2000, as amended in March 1999, was $104,519.
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding Bristol's
Common Stock beneficially owned at December 31, 2000 based on 8,376,968 shares
outstanding (i) by each person who is known by Bristol to beneficially own, or
exercise voting or dispositive control, 5% or more Bristol's Common Stock on the
record date based upon certain reports regarding ownership filed with the
Securities and Exchange Commission in accordance with the Securities Exchange
Act of 1934, as amended, (ii) by each of Bristol's directors or nominees for
directors and certain executive officers, and (iii) by all officers and
directors as a group. A person is deemed to be a beneficial owner of any
securities of which the person has the right to acquire beneficial ownership
within 60 days. Unless otherwise indicated below, the persons in the table below
have sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where applicable.
Unless otherwise indicated below, the address of each person is c/o Bristol at
1437 S Jackson, Seattle, Washington, 98144.
Name and Address Beneficial Percent of
of Beneficial Owner Ownership Class
- ------------------- --------- -----
Larry Cohen (1) 2,672,375 27.3%
Peter Stranger (2) 180,000 2.7%
David Kaye (3) 583,000 6.5%
George Karfunkel 1,250,000 14.9%
William Kerechek (options only) 50,000 .6%
Berthel SBIC,LLC (4) 1,265,354 13.3%
All directors and executive officers as 3,574,433 33.8%
a group (5 persons)(5)
* Less than one percent of the outstanding shares of Common Stock.
(1) Mr. Cohen is Director and Chairman of the Board. Amount includes (i)
1,100,955 shares held of record by East Ocean Limited Partners, which
are beneficially owned by Mr. Cohen, the Chairman of the Board; (ii)
162,145 held of record by Mr. Cohen (iii) 31,775 shares and 5,000
shares underlying warrants which are held by Donna Cohen, wife of Mr.
Cohen; and (iii) 22,500 shares held in an IRA account, which are
beneficially owned by Mr. Cohen (iv) 1,330,000 shares subject to
options and 20,000 underlying warrants.
(2) Mr. Stranger is a Director of Bristol. Includes 180,000 shares subject
to options.
(3) Mr. Kaye served as President, CEO and Director from June 2000 until
April 2001. Amount includes (i) 550,000 shares subject to option and
(ii) 33,000 shares that are held by Mr. Kaye's wife.
(4) Address is 701 Tama Street, Marion, Iowa 52302. Includes 750,375 shares
at $1.33 upon conversion of the Series C Preferred Stock and 464,979
shares exercisable under warrants and 50,000 options..
(5) Includes 2,160,000 shares subject to options.
28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bristol has entered into a merger agreement with Registry Magic
Incorporated, subject to several conditions precedent as explained within this
report and on the Form S-4 registration statement filed by Registry Magic on
February 14, 2001. Both Registry Magic and Bristol have certain common
shareholders and members of management. Larry Cohen is Chairman and CEO of
Registry and also Chairman of Bristol Retail Solutions.
In anticipation of the proposed merger with Registry Magic the Company
borrowed from Registry Magic $1,910,000 through April 12, 2001 on an interest
bearing note for working capital.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
The financial statements listed on the index to financial statements are filed
as part of this Form 10-K.
(a) 3. EXHIBITS
Exhibits marked with an asterisk (*) are filed herewith. The remainder of the
exhibits has heretofore been filed with the Commission and is incorporated
herein by reference.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger by and among Bristol, Bristol
Merger Corporation, Automated Register Systems, Inc. and the
Shareholders thereof (Incorporated by reference to Exhibit 2.1
of Bristol's Form 8-K dated December 31, 1996, filed on
January 15, 1997, File No. 000-21633).
2.2 Agreement and Plan of Reorganization by and among Bristol,
Smyth Systems Inc., the Managing Stockholders of Smyth
Systems, Inc. and Smyth Merger Corp. (Incorporated by
reference to Exhibit 10.29 of Bristol's Form 8-K dated May 29,
1997 filed on June 12, 1997, File No. 0-21633).
2.3 Second Amendment to Agreement and Plan of Reorganization by
and among Bristol, Smyth Systems Inc., the Managing
Stockholders of Smyth Systems, Inc. and Smyth Merger Corp.
(Incorporated by reference to Exhibit 10.30 of Bristol's Form
8-K dated May 29,1997, filed on June 12, 1997, No. 0-21633).
2.4 Agreement and Plan of Merger, as amended, by and among
Bristol, Cash Register, Inc., Floyd Shirrell and Electronic
Business Machines, Inc. (Incorporated by reference to Exhibit
10.35 of Bristol's Form 8-K dated June 6, 1997, filed on June
20, 1997, File No. 0-21633).
2.5 Agreement and Plan of Merger by and among Bristol Retail
Solutions, Inc., Pacific Merger Corp., Pacific Cash Register
and Company, Inc., Robert Freaney and Abbass Barzgar dated
June 27, 1997, (Incorporated by reference to Exhibit 10.41 of
Bristol's Form 10-Q dated June 30, 1997, filed on August 13,
1997, File No. 0-21633).
2.6 Closing Agreement by and among Bristol, Pacific Merger Corp.,
Pacific Cash Register and Company, Inc., Robert Freaney and
Abbass Barzgar dated August 4, 1997, (Incorporated by
reference to Exhibit 10.43 of Bristol's Form 10-Q dated June
30, 1997, filed on August 13, 1997, File No. 0-21633).
2.7 Rescission Agreement by and between Bristol, International
Systems & Electronics Corporation and Pedro Penton dated July
23, 1997, (Incorporated by reference to Exhibit 10.42 of
Bristol's Form 10-Q dated June 30, 1997, filed on August 13,
1997, File No. 0-21633).
2.8 Agreement and Plan of Merger by and between Bristol, RMAG
Acquisition Corp. and Registry Magic Incorporated dated
November 6, 2000 (Incorporated by reference to Form 8-K dated
November 21, 2000, File No. 0-21633).
30
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation, as amended, of Bristol
(Incorporated by reference to Exhibit 3.1 of Amendment No. 1
to Bristol's Registration Statement on Form SB-2, File No.
333-5570-LA).
3.2 Bylaws of Bristol (Incorporated by reference to Exhibit 3.2 of
Amendment No. 1 to Bristol's Registration Statement on Form
SB-2, File No. 333-5570-LA).
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of Amendment No. 1 to Bristol's Registration
Statement on Form SB-2, File No. 333-5570-LA).
4.2 Form of Class A Redeemable Common Stock Purchase Warrants
(Incorporated by reference to Exhibit 4.3 of Amendment No. 1
to Bristol's Registration Statement on Form SB-2, File No.
333-5570-LA).
4.3 Form of Registration Rights Agreement by and between Bristol
and Investors listed on Schedule 1 thereto (Incorporated by
reference to Exhibit 4.4 of Bristol's Registration Statement
on Form SB-2, File No. 333-5570-LA).
4.4 Form of Underwriter's Warrant Agreement for Shares entered
into between Bristol and First Cambridge Securities
Corporation (Incorporated by reference to Exhibit 4.5 of
Amendment No. 1 of Bristol's Registration Statement on Form
SB-2, File No. 333-5570-LA).
4.5 Form of Underwriter's Warrant Agreement for Warrants entered
into between Bristol and First Cambridge Securities
Corporation (Incorporated by reference to Exhibit 4.6 of
Amendment No. 1 of Bristol's Registration Statement on Form
SB-2, File No. 333-5570-LA).
4.6 Form of Warrant Agreement entered into between Bristol and
American Stock Transfer and Trust Company (Incorporated by
reference to Exhibit 4.7 of Amendment No. 1 to Bristol's
Registration Statement on Form SB-2, File No. 333-5570-LA).
10.1 Form of the 1996 Equity Participation Plan of Bristol, dated
July 31, 1996, (Incorporated by reference to Exhibit 10.1 of
Bristol's Registration Statement on Form SB-2, File No.
333-5570-LA).
10.2 Amendment to the 1996 Equity Participation Plan of Bristol
(Incorporated by reference to Exhibit A of Bristol's
Definitive Proxy Statement filed on April 14,1997, File No.
0-21633).
10.3 1997 Employee Stock Purchase Plan of the Company (Incorporated
by reference to Exhibit B of Bristol's Definitive Proxy
Statement filed on April 14, 1997, File No. 0-21633).
10.4 Employment Agreement between Bristol and Richard H. Walker
dated April 3, 1996, (Incorporated by reference to Exhibit
10.5 of Bristol's Registration Statement on Form SB-2, File
No. 333-5570-LA).
10.5 Employment Agreement between Bristol and Paul Spindler dated
April 3, 1996, (Incorporated by reference to Exhibit 10.6 of
Bristol's Registration Statement on Form SB-2, File No.
333-5570-LA).
10.6 Employment Agreement between Bristol and Maurice R. Johnson
dated June 28, 1996, (Incorporated by reference to Exhibit
10.7 of Bristol's Registration Statement on Form SB-2, File
No. 333-5570-LA).
31
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.7 Employment Agreement between Michael Pollastro and Automated
Register Systems, Inc., dated January 1, 1997, (Incorporated
by reference to Exhibit 10.27 of Bristol's 8-K/A dated
December 31, 1996, filed on March 14, 1997, File No. 0-21633).
10.8 Employment Agreement between Gary Pollastro and Automated
Register Systems, Inc., dated January 1, 1997, (Incorporated
by reference to Exhibit 10.28 of Bristol's 8-K/A dated
December 31, 1996, filed on March 14, 1997, File No. 0-21633).
10.9 Employment Agreement between John Pollastro and Automated
Register Systems, Inc., dated January 1, 1997, (Incorporated
by reference to Exhibit 10.29 of Bristol's Form 8-K/A dated
December 31, 1996, filed on March 14, 1997, File No. 0-21633).
10.10 Employment Agreement by and between Robert T. Smyth and Smyth
Systems, Inc., and first Amendment to Employment Agreement
dated June 1, 1997, (Incorporated by reference to Exhibit
10.31 of Bristol's Form 8-K dated May 29, 1997, filed on June
12,1997, File No. 0-21633).
10.11 Employment Agreement by and between Larry D. Smyth and Smyth
Systems, Inc., and first Amendment to Employment Agreement
dated June 1, 1997, (Incorporated by reference to Exhibit
10.32 of Bristol's Form 8-K dated May 29, 1997, filed on June
12,1997, File No. 0-21633).
10.12 Employment Agreement by and between William A. Smyth and Smyth
Systems, Inc., and first Amendment to Employment Agreement
dated June 1, 1997, (Incorporated by reference to Exhibit
10.33 of Bristol's Form 8-K dated May 29, 1997, filed on June
12,1997, File No. 0-21633).
10.13 Independent Contractor Agreement by and between Bristol, Cash
Registers, Inc. and Floyd Shirrell, (Incorporated by reference
to Exhibit 10.36 of Bristol's 8-K dated June 6, 1997, filed on
June 20, 1997, File No. 0-21633).
10.14 Lease Agreement between Paul Thompson, Cash Registers,
Incorporated, and Coye D. King dated October 30, 1987,
(Incorporated by reference to Exhibit 10.10 of Bristol's
Registration Statement on Form SB-2, File No. 333-5570-LA).
10.15 Stock Purchase Agreement by and among Bristol, Cash Registers,
Inc., and Maurice R. Johnson, Andrew D. King and C. Stephen
King, dated as of June 26, 1996, (Incorporated by reference to
Exhibit 10.14 of Bristol's Registration Statement on Form
SB-2, File No. 333-5570-LA).
10.16 Building Lease dated May 29, 1990, by and between Automated
Register Systems, Inc., Michael J. Pollastro, Gary T.
Pollastro, and John and Carmen Pollastro, as amended by First
Amendment to Building Lease dated January 1, 1997, by and
between Automated Retail Systems, Inc., Michael Pollastro,
Gary T. Pollastro, and John and Carmen Pollastro,
(Incorporated by reference to Exhibit 10.25 of Bristol's Form
8-K dated December 31, 1996, filed on January 15, 1997, File
No. 000-21633).
10.17 Loan and Security Agreement by and between Bristol, Cash
Registers, Inc., Smyth Systems, Inc., Automated Retail
Systems, Inc., and Coast Business Credit dated December 11,
1997.
32
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.18 First Amendment to the Loan and Security Agreement by and
between Bristol, Cash Registers, Inc., Smyth Systems, Inc.,
Automated Retail Systems, Inc., and Coast Business Credit
dated January 6, 1998.
10.19 Second Amendment to the Loan and Security Agreement by and
between Bristol, Cash Registers, Inc., Smyth Systems, Inc.,
Automated Retail Systems, Inc., and Coast Business Credit
dated February 2, 1998.
10.20 Promissory Notes and Security Agreements between Registry and
Bristol (Incorporated by reference to Exhibit 10.3 of the
Registration Statement on Form S-4 filed by Registry on
February 14, 2001).
10.21 Employment Agreement with David Kaye (Incorporated by
reference to Exhibit 10.4 of the Registration Statement on
Form S-4 filed by Registry on February 14, 2001).
21* List of Subsidiaries of Bristol.
(b) REPORTS ON FORM 8-K.
During the fourth quarter of the year covered by this report, Bristol filed a
Current Report on Form 8-K, announcing the merger agreement with Registry Magic
Incorporated. This report was filed on November 21, 2000.
Subsequent to the period covered by this report, Bristol filed a current report
on Form 8-K, announcing the resignation of Mr. David Kaye as an officer and
director of the Company, effective April 16, 2001. This report was filed on
April 25, 2001.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Bristol Retail Solutions, Inc. (Registrant)
By: /S/ Lawrence Cohen
--- ------------------
Lawrence Cohen
Chairman of Board and Director
Date: May 4, 2001
----- -----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons on behalf of the registrant and in the capacities and on
the dates indicated have signed this report below.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Lawrence Cohen Chairman of Board and Director May 4, 2001
- ------------------------- (Principal Executive Officer)
Lawrence Cohen
/S/ William Kerechek Chief Financial Officer May 4, 2001
- ------------------------- (Principal Accounting and Financial Officer)
William Kerechek
/S/ Bryan Steffen Director May 4, 2001
- -------------------------
Bryan Steffen
/S/ Peter Stranger Director May 4, 2001
- -------------------------
Peter Stranger
34
Index to Consolidated Financial Statements
Bristol Retail Solutions, Inc.
Page
----
Report of Independent Certified Public Accountants - BDO Seidman,
LLP ................................................................ 36
Independent Auditors' Report - Deloitte & Touche
LLP ................................................................ 37
Consolidated Balance Sheets
as of December 31, 2000 and 1999 ................................... 38
Consolidated Statements of Operations
for the years ended December 31, 2000, 1999, and 1998 ............. 39
Consolidated Statement of Stockholders' Equity (Deficit)
for the years ended December 31, 2000,1999, and 1998 ............... 40
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999, and 1998 ............. 42
Notes to Consolidated Financial Statements ............................. 43
Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves ..................... 66
Consent of Independent Certified Public Accountants - BDO Seidman, LLP.. 69
Independent Auditors' Consent - Deloitte & Touche LLP................... 70
35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Bristol Retail Solutions, Inc.
We have audited the accompanying consolidated balance sheet of Bristol Retail
Solutions, Inc. and subsidiaries (the Company) as of December 31, 2000 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bristol Retail
Solutions, Inc. and subsidiaries at December 31, 2000 and the results of their
operations and their cash flows for the year ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has experienced recurring net operating losses and has a
tangible net worth and capital deficiency. Further the Company has been unable
to raise adequate capital to fulfill its bank loan agreements and its
obligations to its trade creditors. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Seattle, Washington
March 30, 2001
36
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Bristol Retail Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Bristol Retail
Solutions, Inc. and subsidiaries (the Company) as of December 31, 1999 and the
related consolidated statements of operations , stockholders' equity and cash
flows for the years ended December 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bristol Retail Solutions, Inc. and
subsidiaries at December 31, 1999 and the results of their operations and their
cash flows for the years ended December 31, 1999 and 1998 in conformity with
accounting principles generally accepted in the United States of America.
We have not audited any financial statements of the Company for any period
subsequent to December 31, 1999, nor have we performed a review of interim
financial statements for any periods ended subsequent to March 31, 2000 in
conformity with the standards set forth by the American Institute of Certified
Public Accountants. However, as discussed in Note 2 to the financial statements,
during the unaudited nine month period ended September 30, 2000, the Company
incurred substantial net losses and negative cash flows from
operations and, as of September 30, 2000, had a working capital deficit of
approximately $2.1 million. The Company has also entered into an Agreement and
Plan of Merger with Registry Magic Incorporated (Registry), a Company also
experiencing financial difficulties. Registry's independent auditors issued a
report on Registry's financial statements for the year ended July 31, 2000, that
included an explanatory paragraph referring to substantial doubt about that
company's ability to continue as a going concern. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 8, 2000 (except for Note 2 as to which the date is February 13, 2001)
37
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2000 1999
------------- -------------
Current assets:
Cash and cash equivalents $ 477,509 $ 332,959
Accounts receivable, net of allowance for doubtful accounts of $600,061
and $286,497 2,964,796 5,378,202
Inventories, net 3,480,693 3,853,041
Prepaid expenses and other current assets 277,687 395,767
Current portion of note receivable 144,172 82,331
------------- -------------
Total current assets 7,344,857 10,042,300
Property and equipment, net 425,707 596,781
Intangible assets, net of accumulated amortization of $1,085,431
and $808,790 3,995,569 4,272,210
Note receivable;less current portion 16,029 116,898
Other assets 128,651 192,611
------------- -------------
Total assets $ 11,910,813 $ 15,220,800
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Short-term borrowings $ 2,350,655 $ 3,351,434
Accounts payable 4,263,890 2,506,322
Accrued salaries, wages and related benefits 694,383 643,761
Accrued expenses 256,673 587,322
Deferred service revenue 1,618,055 1,327,066
Customer advances 599,191 652,348
Current portion of note payable to related party 850,000 15,577
Current portion of long-term debt 210,975 10,293
Redeemable Warrants associated with Series C Redeemable Preferred Stock 216,750 0
Current portion of capital lease obligations 53,893 44,205
------------- -------------
Total current liabilities 11,114,465 9,138,328
Long term debt, less current portion 0 66,667
Capital lease obligation, less current portion 72,407 57,586
Other long-term liabilities 0 67,557
------------- -------------
Total liabilities 11,186,872 9,330,138
Commitments and contingencies (Note 9)
Series C Redeemable Preferred Stock; $.001 par value, 4,000,000 shares authorized; 1,000,000
500,000 shares issued and outstanding
Stockholders' equity (deficit):
Series B Preferred Stock; $1.00 par value; 1,000,000 shares authorized;
500,000 shares issued; 25,000 and 400,000 shares outstanding 25,000 400,000
Common stock, $.001 par value: 20,000,000 shares authorized; 8,376,968 and
6,968,282 shares issued ; 8,371,968 and 6,968,282 shares outstanding 8,377 6,968
Additional paid-in-capital 13,759,898 13,259,222
Accumulated deficit (14,044,709) (7,750,903)
------------- -------------
(251,434) 5,915,287
Treasury stock, 5,000 shares, at cost (24,625) (24,625)
------------- -------------
Total stockholders' equity (deficit) (276,059) 5,890,662
------------- -------------
Total liabilities, redeemable preferred stock and stockholders' equity (defict) $ 11,910,813 $ 15,220,800
============= =============
See accompanying notes to consolidated financial statements.
38
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31,
-------------------------------
2000 1999 1998
---------------------------------------------------
Revenue:
System sales and installation $ 14,572,931 $ 24,379,761 $ 20,784,514
Service and supplies sales 8,292,912 12,321,291 11,412,194
------------- ------------- -------------
Total revenue 22,865,843 36,701,052 32,196,708
------------- ------------- -------------
Cost of revenue:
System sales and installation 13,386,880 16,451,892 13,792,274
Service and supplies sales 5,539,485 9,072,205 8,250,884
------------- ------------- -------------
Total cost of revenue 18,926,365 25,524,097 22,043,158
------------- ------------- -------------
Gross margin 3,939,478 11,176,955 10,153,550
------------- ------------- -------------
Operating expenses:
Selling, general and administrative expenses 8,786,566 11,524,396 11,228,011
Research and development costs - 619,207 738,508
Loss on sale of certain Cash Registers, Inc. assets 538,261 - -
------------- ------------- -------------
Total operating expenses 9,324,827 12,143,603 11,966,519
------------- ------------- -------------
Operating loss (5,385,349) (966,648) (1,812,969)
Gain on sale of Smyth Imager assets 162,662 1,171,373 -
Other income (expense), net (587,693) (557,750) 100,540
------------- ------------- -------------
Loss before income taxes (5,810,380) (353,025) (1,712,429)
Provision for income tax (2,400) (9,259) (19,349)
------------- ------------- -------------
Net loss $ (5,812,780) $ (362,284) $ (1,731,778)
============= ============= =============
Net loss $ (5,812,780) $ (362,284) $ (1,731,778)
Preferred stock accretion and dividends (697,776) (78,440) (493,085)
------------- ------------- -------------
Net loss applicable to common stockholders $ (6,510,556) $ (440,724) $ (2,224,863)
============= ============= =============
Basic and diluted net loss to common stockholders per share $ (0.88) $ (0.06) $ (0.38)
============= ============= =============
Basic and diluted weighted average common shares outstanding 7,432,030 6,951,505 5,826,839
============= ============= =============
See accompanying notes to consolidated financial statements.
39
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------------- ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1997 - $ - 5,548,510 $ 5,548 $ 11,287,695
Issuance of shares under Employee Stock plan - - 20,392 21 52,438
Issuance of Preferred Stock 10,000 10 - - 758,074
Preferred stock accretion - - - - 241,916
Imputed dividend on Preferred Stock - - - - 227,589
Issuance of warrants to brokers - - - - 69,500
Issuance of warrants to lender - - - - 38,595
Conversion of Preferred Stock (10,000) (10) 1,162,348 1,162 (492)
Issuance of shares in connection with acquisition - - 183,276 183 499,817
Stock dividend-Preferred Stock - - 5,993 6 10,078
Cash dividends-Preferred Stock - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1998 - - 6,920,519 6,920 13,185,210
Issuance of shares under Employee Stock plan - - 47,763 48 21,512
Issuance of Series B Preferred Stock 500,000 447,500 - - -
Issuance of warrant - - - - 52,500
Preferred stock accretion - 52,500 - - -
Redemption of Preferred Stock (100,000) (100,000) - - -
Dividend-Preferred Stock - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- --------------
Balance at December 31, 1999 400,000 400,000 6,968,282 6,968 13,259,222
Issuance of shares under Employee Stock plan - - 8,686 9 2,076
Issuance of Common Shares - - 1,250,000 1,250 498,750
Issuance of shares in connection with Preferred Stock - - 150,000 150 (150)
Preferred stock accretion - - - - -
Issuance Costs Series C Redeemable Preferred Stock 216,750
Accretion Series C Redeemable Preferred Stock (216,750)
Redemption of Preferred Stock (375,000) (375,000) - - -
Dividend - Preferred Stock - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- --------------
Balance at December 31, 2000 25,000 $ 25,000 8,376,968 $ 8,377 $ 13,759,898
============= ============= ============= ============= ==============
See accompanying notes to consolidated financial statements.
40
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TREASURY STOCK
ACCUMULATED --------------
DEFICIT SHARES AMOUNT TOTAL
------------- ------------- ------------- -------------
Balance at December 31, 1997 $ (5,075,232) (5,000) $ (24,625) $ 6,193,386
Issuance of shares under Employee Stock plan - - - 52,459
Issuance of Preferred Stock - - - 758,084
Preferred stock accretion (241,916) - - -
Imputed dividend on Preferred Stock (227,589) - - -
Issuance of warrants to brokers - - - 69,500
Issuance of warrants to lender - - - 38,595
Conversion of Preferred Stock - - - 660
Issuance of shares in connection with acquisition - - - 500,000
Stock dividend-Preferred Stock (10,084) - - -
Cash dividends-Preferred Stock (23,580) - - (23,580)
Net loss (1,731,778) - - (1,731,778)
------------- ------------- ------------- -------------
Balance at December 31, 1998 (7,310,179) (5,000) (24,625) 5,857,326
Issuance of shares under Employee Stock plan - - - 21,560
Issuance of Series B Preferred Stock - - - 447,500
Issuance of warrant - - - 52,500
Preferred stock accretion (52,500) - - -
Redemption of Preferred Stock - - - (100,000)
Dividend-Preferred Stock (25,940) - - (25,940)
Net loss (362,284) - - (362,284)
------------- ------------- ------------- -------------
Balance at December 31, 1999 (7,750,903) (5,000) (24,625) 5,890,662
Issuance of shares under Employee Stock plan - - - 2,085
Issuance of Common Shares - - - 500,000
Issuance of shares in connection with Preferred Stock - - - -
Preferred stock accretion (354,056) - - (354,056)
Issuance Costs Series C Redeemable Preferred Stock 216,750
Accretion Series C Redeemable Preferred Stock (216,750)
Redemption of Preferred Stock - - - (375,000)
Dividend - Preferred Stock (126,970) - - (126,970)
Net loss (5,812,780) - - (5,812,780)
------------- ------------- ------------- -------------
Balance at December 31, 2000 $(14,044,709) (5,000) $ (24,625) $ (276,059)
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
41
BRISTOL RETAIL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December31,
------------------------------
2000 1999 1998
----------------------------------------------------
Cash flows from operating activities:
Net loss $(5,812,780) $ (362,284) $(1,731,778)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 199,078 297,893 283,566
Amortization 276,641 583,334 559,389
Provision for doubtful accounts 537,117 58,000 245,952
Provision for excess and obsolete inventories 46,103 - 40,000
Gain on sale of Smyth Imager assets (162,662) (1,171,373) -
Loss on sale of certain assets 538,261 - -
Changes in operating assets and liabilities, net of effect of
acquisitions and business dispositions
Accounts receivable 1,876,289 (1,442,569) (2,244,609)
Inventories (369,472) 748,186 (554,197)
Prepaid expenses and other assets 221,068 (75,252) (268,212)
Accounts payable 1,965,083 (1,379,493) 1,610,000
Other accrued expenses (265,496) (300,153) 5,801
Deferred service revenue 407,634 232,546 99,623
Customer advances (53,157) 80,243 127,176
Other long-term liabilities (67,557) (36,197) 36,756
----------------------------------------------------
Net cash used in operating activities: (663,850) (2,767,119) (1,790,533)
Cash flows from investing activities:
Proceeds from Sale of Smyth Imager, net - 2,607,609 -
Cash paid for acquisitions, net of cash acquired - (10,000) (562,305)
Receivables from rescinded acquisition - 84,956 97,335
Disposal of property and equipment 4,602 - -
Purchases of property and equipment (47,370) (137,406) (137,768)
----------------------------------------------------
Net cash provided by (used in) investing activities (42,768) 2,545,159 (602,738)
Cash flows from financing activities:
Repayment of capital lease obligations (20,330) (56,729) (39,105)
Issuance (repayment) of note payable to related party 834,423 (54,423) 70,000
Net borrowings (repayment) on line of credit (1,000,779) 121,168 1,353,845
Issuance (repayment) of long-term debt 134,015 (22,892) (51,148)
Issuance of preferred stock, net of offering costs 862,694 500,000 827,574
Redemption of preferred stock (375,000) (100,000) -
Payment of cash dividends-preferred stock (85,940) - (23,580)
Issuance (repurchase) of common stock 502,085 21,560 52,459
----------------------------------------------------
Net cash provided by financing activities 851,168 408,684 2,190,045
Net increase (decrease) in cash and cash equivalents 144,550 186,724 (203,226)
Cash and cash equivalents at beginning of year 332,959 146,235 349,461
----------------------------------------------------
Cash and cash equivalents at end of year $ 477,509 $ 332,959 $ 146,235
====================================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 597,877 $ 539,035 $ 330,830
Cash paid for income taxes - 9,259 21,089
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations 44,839 45,860 203,823
Inventory received - - 250,000
Transfer of prepaid license fee - 12,750 -
See accompanying notes to consolidated financial statements.
42
BRISTOL RETAIL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Nature of Operations
Bristol Retail Solutions, Inc and subsidiaries (the Company, formerly
Bristol Technology Systems, Inc.) was incorporated on April 3, 1996 in the State
of Delaware for the purpose of acquiring and operating a national network of
full-service retail automation solution providers. As of December 31, 2000, the
Company has completed seven acquisitions. The Company earns revenue from the
sale and installation of point-of-sale (POS) systems and turnkey retail
automation (VAR) systems, the sale of supplies and from service fees charged to
customers under service agreements. Sales and service operations are located in
various states throughout the western and mid-western United States.
Basis of Presentation
The accompanying consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America include the accounts of Bristol Retail Solutions, Inc. and its
wholly-owned subsidiaries: Cash Registers, Inc. (CRI), which includes MicroData,
Inc. (MicroData) and Electronic Business Machines, Inc. (EBM); Automated Retail
Systems, Inc. (ARS); Smyth Systems, Inc. (Smyth); Pacific Cash Register and
Computer, Inc., (PCR); and Quality Business Machines (QBM) from the dates of
acquisition. All inter-company accounts and transactions have been eliminated in
consolidation.
The Company's acquisitions were accounted for in the Company's
consolidated financial statements as purchases in accordance with Accounting
Principles Board Opinion (APB) No. 16. The purchase prices were allocated to the
underlying assets and liabilities based upon their respective fair values. The
allocation of the purchase price included the assignment of approximately
$644,000 to excess of cost over net assets acquired in 1998. The results of the
acquisitions are included in the Company's consolidated financial statements
subsequent to the respective dates of acquisition. Accordingly, the financial
statements for the period subsequent to the acquisitions are not comparable to
the financial statements for the periods prior to the acquisitions (see Note 3,
Acquisitions).
Cash Equivalents
Cash equivalents represent highly liquid investments with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market using the
specific identification method for inventories with identifying serial numbers
and the average cost method for all other inventories.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
principally by accelerated methods for income tax and straight-line basis for
financial reporting purposes over the estimated useful lives of the assets which
range from three to ten years. Leasehold improvements are amortized over the
shorter of their useful life or the remaining term of the lease using the
straight-line basis.
Intangible Assets
Intangible assets consist primarily of goodwill which represents the
excess of cost over the fair value of net assets acquired and is amortized on a
straight-line basis over estimated useful lives of 15 years and 20 years..
43
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of." In accordance
with SFAS No. 121, long-lived assets to be held are reviewed for events or
changes in circumstances that indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of long-lived
assets to determine whether or not an impairment to such value has occurred by
assessing their net realizable values based on estimated cash flows over their
remaining useful lives. Based on its most recent analysis, the Company believes
that no impairment exists at December 31, 2000.
Customer Advances
Customer advances represent deposits made in advance of equipment
installation and are applied against invoices when revenue is recorded.
Revenue Recognition
The Company recognizes revenue for systems sales upon shipment and
completed installation at which time there are no other significant vendor
obligations. Hardware sales are recognized as revenue upon shipment as there are
no other significant vendor obligations. Training and other services are
recognized as revenue when such items are delivered. Revenue from maintenance
contracts is recognized ratably over the term of the agreement.
Software revenue is recognized in accordance with the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, "Software Revenue Recognition." Pursuant to SOP 97-2, software revenue is
recognized on sales contracts when all of the following conditions are met: a
signed contract or purchase order is obtained, delivery has occurred, the total
sales price is fixed and determinable, collectibility is probable, and any
uncertainties with regard to customer acceptance are insignificant. For those
contracts that include a combination of software, hardware and/or services,
revenue is allocated among the different elements based on Company-specific
evidence of fair value of each element. Revenue allocated to software and
hardware is recognized as the above criteria are met. Revenue allocated to
services is recognized as services are performed and accepted by the customer
or, for maintenance agreements, ratably over the life of the related contract.
Software Development Costs
As a systems integrator, the Company provides its customers with
turnkey software solutions including proprietary software products exclusively
for application to retail operations. Purchased software, which generally has
alternative future uses, is included in other assets and amortized, using the
straight-line method, over the estimated economic life of the software of three
to five years. Unamortized purchased software costs at December 31, 2000 and
1999 and related amortization expense for the years then ended were not
material.
The costs of internal development of proprietary software are expensed
as research and development costs until technological feasibility is
established, pursuant to accounting principles generally accepted in the United
States of America. The rights to all capitalized internally developed software
were sold in connection with the sale of Smyth Imager, See Note 4. For the year
ended December 31, 1998, the Company had $375,768 of capitalized internal
software development costs. Commencing upon initial product release, those costs
were amortized using the straight-line method over the estimated useful life of
three years. For the years ended December 31, 2000 and 1999, the Company
recorded $7,247 and $135,480, respectively, of amortization of capitalized
software costs. Amortization of capitalized costs is included in cost of
revenues in the accompanying consolidated statement of operations.
Company Life Insurance
The Company's wholly owned subsidiaries purchased life insurance
policies on the lives of certain key employees. The Company pays all premiums.
For the year ended December 31, 1998, included in other income, is life
insurance benefits of $504,000.
Income Taxes
The Company uses the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax assets are recognized and measured based on the likelihood
of realization of the related tax benefit in the future. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
44
Fair Value of Financial Instruments
The fair value of the Company's cash, accounts receivable and accounts
payable approximated their carrying amounts due to the relatively short maturity
period of time between origination of the instruments and their expected
realization. The fair value of debt approximated its carrying amount at the
balance sheet date based on rates currently available to the Company for debt
with similar terms and remaining maturities.
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Credit Risk
The Company sells its products on credit terms, performs ongoing credit
evaluations of its customers and generally does not require collateral.
45
Basic and Diluted Per Share Information
Basic net loss per share is computed using the weighted average number
of common shares outstanding during the periods presented. Diluted net loss per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the periods presented assuming the exercise
of the Company's stock options and warrants. Common equivalent shares have not
been included where inclusion would be antidilutive.
BASIC AND DILUTED LOSS PER SHARE Net Loss Wt Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Net loss $ (5,812,780)
Accretion related to Preferred Stock (570,806)
Cumulative dividends for Preferred Stock (126,970)
---------------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE $ (6,510,556) 7,432,030 $ (0.88)
Effect of Dilutive Securities - - -
----------------------------------------------------
DILUTED LOSS TO COMMON STOCKHOLDERS PER SHARE $ (6,510,556) 7,432,030 $ (0.88)
====================================================
FOR THE YEAR ENDED DECEMBER 31, 1999
Net loss $ (362,284)
Accretion related to Preferred Stock (52,500)
Cumulative dividends for Preferred Stock (25,940)
---------------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE $ (440,724) 6,951,505 $ (0.06)
Effect of Dilutive Securities - - -
----------------------------------------------------
DILUTED LOSS TO COMMON STOCKHOLDERS PER SHARE $ (440,724) 6,951,505 $ (0.06)
====================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
Net loss $ (1,731,778)
Accretion related to Preferred Stock (241,916)
Imputed dividends for Preferred Stock (227,589)
Cumulative dividends for Preferred Stock (23,580)
---------------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE $ (2,224,863) 5,826,839 $ (0.38)
Effect of Dilutive Securities - - -
----------------------------------------------------
DILUTED LOSS TO COMMON STOCKHOLDERS PER SHARE $ (2,224,863) 5,826,839 $ (0.38)
====================================================
Basic and diluted loss per share is based on the weighted average
number of common shares outstanding. Common stock equivalents, which consist of
stock options to purchase 3,365,900 shares of common stock at prices ranging
from $0.188 to $3.188 per share and warrants to purchase 1,733,791 shares of
common stock at prices ranging from $.01 to $6.00 per share, were not included
in the computation of diluted loss per share because such inclusion would have
been antidilutive for the year ended December 31, 2000.
Common stock equivalents, which consist of stock options to purchase
3,430,000 shares of common stock at prices ranging from $0. 1875 to $3.188 per
share and warrants to purchase 1,256,312 shares of common stock at prices
ranging from $1.00 to $8.70 per share, were not included in the computation of
diluted loss per share because such inclusion would have been antidilutive for
the year ended December 31, 1999.
46
Common stock equivalents, which consist of stock options to purchase
1,539,000 shares of common stock at prices ranging from $.91 to $3.188 per share
and warrants to purchase 1,106,312 shares of common stock at prices ranging from
$3.26 to $8.70 per share, were not included in the computation of diluted loss
per share because such inclusion would have been antidilutive for the year ended
December 31, 1998.
Comprehensive Operations
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the reporting of
comprehensive income and its components. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from transactions
and other events and circumstances from non-owner sources. As of December 31,
2000, 1999, and 1998, there is no difference between net loss and comprehensive
loss.
Segment Disclosures
In 1998, the Company implemented SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.131 establishes
standards for reporting information about operating segments and related
disclosures about products, geographies and major customers. As the Company
operates in one product line and geographic region, the Company determined that
there are no separate segment disclosures necessary at December 31, 2000, 1999,
and 1998.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FAS No.
133", which delayed the effective date of FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", by one year. FAS No. 133 is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). In June 2000, the FASB issued FAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133". FAS No. 138 amends FAS No.
133 and will be adopted concurrently with FAS No. 133. FAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or accumulated other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability, or firm commitment, changes in the fair value of the
derivative instrument will be included in the income statement along with the
offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
accumulated other comprehensive income. The gains and losses on the derivative
instruments that are reported in accumulated other comprehensive income will be
reclassified to earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
of the hedges will be recognized in current period earnings. The impact of FAS
No. 133 as amended by FAS No. 138 on the Company's financial statements will
depend on a variety of factors, including the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments. The Company believes that the cumulative effect of adoption would
not be material to the Consolidated Financial Statements.
Effective January 1, 2000, the Company's accounting policies were
reviewed for compliance with the guidelines provided by Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 provides the Securities and Exchange Commission's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. The Company recognizes revenue for systems sales upon shipment and
completed installation at which time there are no other significant vendor
obligations. Hardware sales are recognized as revenue upon shipment and passage
of title as there are no other significant vendor obligations. Training and
other services are recognized as revenue when such items are delivered. Revenue
from maintenance contracts is recognized ratably over the term of the agreement.
In September 2000, the Emerging Issues Task Force ("EITF") issued EITF
00-10, "Accounting for Shipping and Handling Fees and Costs". Under the
provisions of EITF 00-10, amounts billed to a customer in a sales transaction
related to shipping and handling should be classified as revenue. EITF 00-10
also requires the disclosure of the income statement classification of any
shipping and handling costs. The Company was in compliance with EITF 00-10 for
the year ended December 31, 2000. The adoption resulted in no impact on the
classification of revenue for the Company and had no impact on the determination
of net income.
In March 2000, the EITF reached a consensus on the application of EITF
Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock", with Issue No. 00-7, "Equity
Derivative Transactions that Require Net Cash Settlement if Certain Events
Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity derivative
contracts that contain any provision that could require net cash settlement
(except upon the complete liquidation of the Company) must be marked to fair
value through earnings under EITF 00-7. In September 2000, the EITF reached a
consensus onIssue No.00-19, "Determination of Whether Share Settlement Is Within
the Control of the Issuer for Purposes of Applying Issue No. 96-13, "Accounting
47
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF 00-19"). EITF 00-19 addresses questions regarding
the application of EITF 00-7 and sets forth a model to be used to determine
whether equity derivative contracts should be recorded as equity. Under the
transition provisions of EITF 00-19, all contracts existing prior to the date of
the consensus are grandfathered until June 30, 2001, with a cumulative catch-up
adjustment to be recorded at that time. Additionally, any contracts entered into
prior to September 20, 2000, which are not revised to comply with the
requirements of EITF 00-19 by December 31, 2000, will require reclassification
out of permanent equity and into temporary equity pursuant to Accounting Series
Release No. 268. This reclassification will remain until the contracts are
revised to comply with EITF 00-19 through June 30, 2001. The Company believes
that the equity derivative contracts that may remain outstanding at June 30,
2001, if any, will be in accordance with the requirements of EITF 00-19 and does
not anticipate that such adoption will have a material impact on the
consolidated financial statements.
In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting
for Certain Sales Incentives", which provides guidance on accounting for
discounts, coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. EITF
00-14 is effective April 1, 2001, for the Company. The Company is currently
evaluating the impact of this new guidance.
In March 2000, the FASB issued interpretation No 44, "Accounting for
Certain Transactions Involving Stock Compensation, the Interpretation of APB
Opinion No. 25" (FIN 44). The interpretation is intended to clarify certain
problems that have arisen in practice since issuance of APB No. 25, "Accounting
for Stock Issued to Employees." The effective date of the interpretation was
July 1, 2000. The provisions of the Interpretation apply prospectively, but they
will also cover certain events occurring after December 15, 1998 and after
January 12, 2000. The adoption of FIN 44 did not have a material effect on the
Company's consolidated financial statements. .
Reclassifications
Certain reclassifications have been made to prior year information to
conform with the current year presentation.
2. GOING CONCERN
The Company has experienced recurring net operating losses and has a
tangible net worth and capital deficiency. Further, the Company has been unable
to raise adequate capital to fulfill its bank loan agreements and its
obligations to its trade creditors. During the unaudited nine month period ended
September 30, 2000, the Company incurred losses applicable to common
stockholders on an unaudited basis of approximately $4.4 million and negative
cash flows from operations and at September 30, 2000 had a working capital
deficit of approximately $2.1 million. For the year ended December 31, 2000, the
Company incurred losses applicable to common stockholders of approximately $6.5
million and had a working capital deficit of approximately $3.8 million. The
Company also has borrowed $1,910,000 from Registry Magic Incorporated (Registry)
through April 2001, to fund current operations and is contemplating a merger
with Registry. Registry is also experiencing financial difficulties and
Registry's independent auditors issued a report on its July 31, 2000 financial
statements that included an explanatory paragraph referring to substantial doubt
about Registry's ability to continue as a going concern. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management believes by effectively consolidating technical operations,
converting remote field office to support of sales only, incorporating a new
incentive based salesman compensation package and the completion of the
consolidation of financial services support will result in an significant
reduction in annual operating expenses and improve financial results while
maintaining required customer support and service levels. In addition sales
increases are anticipated from the deployment of new technology and software
being developed by Registry. (See Note 16). Management intends to continue to
seek additional debt and equity financing and to refinance the Company's
existing line of credit so that adequate cash flows are available until the
Company achieves profitable operations. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
3. ACQUISITIONS
On May 8, 1998, the Company, through its wholly-owned subsidiary ARS,
acquired all of the outstanding common stock of QBM, a POS dealer with
operations in Sacramento, California, for consideration of $564,000 in cash,
including $26,000 of acquisition costs; 183,276 shares of restricted common
stock of the Company, valued at approximately $500,000 at the acquisition date;
and a promissory note in the principal amount of $70,000 at an interest rate of
8.5%. The excess of purchase price over the fair values of the net assets
acquired was $644,000 and was recorded as goodwill, which is being amortized on
a straight-line basis over 20 years.
48
The purchase prices have been allocated to the assets acquired and the
liabilities assumed based upon the fair values at the dates of acquisition (see
Supplemental Disclosures of Cash Flow Information).
4. SALE OF CERTAIN ASSETS
On August 24 and 31, 2000, the Company sold certain assets of its
London, KY and Canton OH offices associated with its Cash Registers, Inc.
division. The assets consisted primarily of inventories totaling $695,700 and
fixed assets net of depreciation totaling $59,600. The liabilities transferred
included deferred maintenance contracts valued at $116,600, and other
liabilities totaling $100,500. The Company recorded a loss of $538,261 related
to this transaction.
On November 24, 1999, the Company sold certain assets and certain
associated obligations of its Smyth Imager Division to PHX-2000 LLC (Buyer).
Pursuant to the Asset Purchase Agreement (the Agreement) between the Company and
Buyer, the Buyer paid cash of $2,800,000. The assets included accounts
receivable of $1,532,405, inventory of $80,435, fixed assets of $142,340,
capitalized software of $372,175 and other assets of $57,789. The liabilities
assumed by the Buyer included $753,043 of deferred maintenance contracts with
existing customers. The Company used the proceeds of this transaction to pay
certain existing liabilities and $2,021,855 was forwarded to the Company's
lender to reduce its obligations under its existing credit line. After recording
broker and legal fees, a $1,171,373 gain was recognized and is recorded as the
gain on sale in the Consolidated Statement of Operations.
With respect to certain identified accounts receivable, the Buyer will
pay to the Company, when and if received, 80% of any net proceeds. Net proceeds
shall be an amount equal to (i) the amount collected with respect to any
receivables, less (ii) the direct external cost of collecting on the accounts,
including, but not limited to, collection agency fees, attorneys' fees, court
costs and other expenses associated with the collection procedure. As of
December 31, 2000 and 1999, there was no receivable recorded on the balance
sheet and there have been no collections. The Company does not expect
significant collections from this provision in the agreement.
In connection with the agreement, the Company agreed that for a period
of five years from the closing date, neither the Company nor any affiliate of
the Company (other than individuals) would engage in the business of systems and
software associated with golf course operations.
5. CONCENTRATIONS
The Company sells its products primarily to quick service and table
service restaurants, grocery stores and other retailers. Credit is extended
based on an evaluation of the customer's financial condition and collateral is
generally not required. Credit losses have historically been minimal and such
losses have been within management's expectations.
For the years ended December 31, 2000, 1999 and 1998, there was no
customer that accounted for more than 10% of consolidated net revenue. The
Company purchases its hardware primarily from three main vendors. Sales of
products from these vendors accounted for 39%, 33% and 27% of consolidated net
revenue for the years ended December 31, 2000, 1999 and 1998, respectively.
6. INVENTORIES
Inventories consist primarily of POS terminals, peripherals, paper and
other supplies for resale to customers, as well as items to support maintenance
contracts. Inventories held by revenue type were as follows:
December 31,
2000 1999
---- ----
Systems and installation inventories $2,623,566 $2,756,973
Services and supplies inventories $ 857,127 $1,096,068
---------- ----------
$3,480,693 $3,853,041
---------- ----------
Included in services and supplies inventories at December 31, 2000 and
1999 is approximately $370,862 and $486,797, respectively, of used or
refurbished parts and components which the Company has on hand to fulfill
maintenance contract requirements. Due to the nature of the systems installed
and the longevity of the systems in general, service may be provided for several
years after sale, causing much of the refurbished inventories on hand to be
composed of older items. For the years ended December 31, 2000 and 1999, the
Company recorded reserves for excess and obsolete inventories aggregating
$73,829 and $52,500, respectively.
49
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2000 1999
---- ----
Furniture and equipment $ 479,862 $ 742,599
Automobiles 212,672 234,788
Leasehold improvements 110,002 107,066
------------ ------------
802,536 1,084,453
Less accumulated depreciation and amortization (376,829) (487,672)
------------ ------------
Property and equipment, net $ 425,707 $ 596,781
============ ============
8. SHORT-TERM BORROWINGS
On December 17, 1997, the Company entered into a line of credit that
provides for aggregate borrowings up to $5,000,000 computed based on eligible
accounts receivable and inventories; bears interest at the bank's prime rate
plus 1.75%; matures December 31, 2000 (subsequently extended to May 31, 2001);
and is collateralized by the Company's accounts receivable and inventory.
Ineligible accounts receivable includes any customer invoice that is ninety-days
past due or any customer account where 25% or more of the amount due is
ninety-days delinquent. Pursuant to the terms of the line of credit, the Company
is subject to covenants that, among other things, impose certain financial
reporting obligations on the Company and prohibit the Company from engaging in
certain transactions prior to obtaining the written consent of the lender. Some
of the significant transactions include: (i) acquiring or selling any assets
over $50,000 excluding purchases of dealers; (ii) selling or transferring any
collateral except for finished inventory in the ordinary course of business;
(iii) selling inventory on a sale-or-return, guaranteed sale, consignment, or
other contingent basis; (iv) incurring any debts, outside the ordinary course of
business, which would have a material adverse effect; (v) guaranteeing or
otherwise become liable with respect to obligations of another party or entity;
(vi) paying or declaring any dividend (except for dividends payable solely in
stock) or (vii) making any changes in the Company's capital structure that would
have a material adverse effect upon the Company's business, results of
operations or financial condition. The Company obtained waivers from the lender
on the dividends issued on its preferred stock and on the sale of its Smyth
Imager Division, See Note 4. The Company had outstanding borrowings under this
line of credit included in short term borrowings of $2,215,655 and $3,256,434
bearing interest at 10.68% and 10.25% at December 31, 2000 and 1999,
respectively. At December 31, 2000, the Company was in compliance with the
covenants on the line of credit and approximately $119,715 of eligible
collateral was available for the Company to borrow under the credit facilities.
50
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, equipment and vehicles under
non-cancelable capital leases and operating lease arrangements expiring in
various years through 2008. Certain of the operating leases may be renewed for
periods ranging from one to three years.
Future annual minimum lease payments for non-cancelable capital and
operating leases at December 31, 2000 were:
Capital Operating
Leases Leases
------ ------
2001 $ 61,111 $ 759,061
2002 46,598 668,502
2003 37,009 606,416
2004 8,902 312,263
2005 1,910 155,565
Thereafter -- 359,635
----------- -----------
Total minimum lease payments 155,530 $2,861,442
Less amounts representing interest (29,230) ===========
-----------
Present value of minimum lease payments 126,300
Current portion (53,893)
-----------
Long-term capital lease obligations $ 72,407
===========
Total rent expense under these operating leases was $937,587 for the
year ended December 31, 2000 of which $70,321 was paid to the former owner of
CRI, $150,633 to an former officer of ARS and $95,382 paid to an former officer
of QBM. Total rent expense under these operating leases was $1,043,499 for the
year ended December 31, 1999, of which $86,380 was paid to a former owner of
CRI, $180,760 to an officer of ARS and $114,642 paid to an officer of QBM. Rent
expense for the year ended December 31, 1998 was $907,579, respectively, of
which $80,274 was paid to the former owner of CRI and $180,760 was paid to an
officer of ARS and $81,613 paid to an officer of QBM.
The net book value of assets under capital leases at December 31, 2000
and 1999 was $91,178 and $103,932, respectively, and are included in property
and equipment in the accompanying consolidated balance sheets.
In connection with its move from its current location in London,
Kentucky, CRI agreed in good faith to a new definitive lease regarding up to
12,000 square feet of office and warehouse space constructed by two officers and
former owners of CRI. Terms of the lease are for 10 years and the rate is $6.00,
$8.00, $10.00 and $11.00 per square foot for years one, two, three through eight
and nine through ten, respectively. The Company has agreed to guarantee these
lease payments. The Company believes that the terms of the contract are
equivalent or more favorable than those that would be obtained under an
arm's-length transaction. Rent expense is recognized on a straight-line basis.
This lease, and all provisions therein, was cancelled in connection with the
sale of the two offices.
In connection with the merger of ARS into the Company on December 31,
1996, an amended lease agreement was executed with the former owners of ARS,
certain of whom are now officers of ARS, for the office facility that ARS
currently occupies. The amended lease is at a monthly rate of $15,063 and
expires in December 2003.
Employment Agreements
The Company has employment agreements with certain officers and
employees, the terms of which expire at various times through 2002 and provide
for minimum salary levels. In addition, certain officers of the acquired
companies receive a portion of the acquired Company's pre-tax profits greater
than the amount defined in the officer's employment agreement. At December 31,
2000 and 1999, no provision for bonus payments were made for these certain
employment agreements due to the fact that that the acquired companies incurred
pre-tax losses. The aggregate commitment for future salaries and the guaranteed
bonus amounts was $875,000 and $2,316,467 at December 31, 2000 and 1999
excluding bonus amount contingent on achieving certain pre-tax profits. The
Company believes payment of these contingent bonuses will not have a material
adverse effect on results of operations, financial condition or cash flows. In
addition, the Company has entered into an employment contract with a former
owner of a subsidiary, expiring in 2009, that provides for a minimum salary that
is payable even in the event of termination for cause or upon death. The
aggregate commitment for future salaries and guaranteed bonus amounts under this
contract at December 31, 1999, as amended in March 1999, was $205,545, however,
this contract provision was voided per the terms of the sale agreement of the
London, KY office. At December 31, 1999, the Company had an accrual of $67,557
for future bonus payments under this contract, which has also been voided per
the terms of the sale.
51
The Company has an independent contractor agreement, with a former
owner of a subsidiary, expiring in 2002. The commitment for future payments
under this contract at December 31, 2000 and 1999, as amended in March 1999 was
$104,519 and $188,135 respectively.
Litigation
The Company's subsidiaries have been, from time to time, parties to
various lawsuits and other matters involving ordinary and routine claims arising
in the normal course of business. In the opinion of management of the Company
and its counsel, although the outcomes of these claims and suits are not
presently determinable, in the aggregate, they should not have a material
adverse affect on the Company's business, financial position or results of
operations or cash flows.
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering were also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged claims under the federal securities
laws for alleged misrepresentations and omissions in connection with sales of
the Company's securities. On December 23, 1997, the Company filed a motion to
dismiss the complaint, and on May 14, 1998, the court denied the Company's
request. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court). The
Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and made a provision of $100,000 in the accompanying
consolidated financial statements for the twelve months ended December 31, 1999.
During the twelve months ended December 31, 2000, the company dispersed all
$100,000 reducing the provision to $0. Currently, the settlement money from the
insurance company is in a trust fund. Final disposition of funds to the
plaintiffs will occur when the Company pays the money owed as agreed to per the
settlement.
In the United States District Court for the Southern District of Ohio,
Maurice R. Johnson filed on September 30, 1998, a complaint against the Company,
Automated Retail Systems, Inc. dba, and Cash Registers, Inc. alleging breach of
employment contract and violation of the Age Discrimination in Employment Act,
29 U.S.C., Sec Et Seq. The plaintiff, Mr. Maurice R. Johnson, claimed that the
Company owed Mr. Johnson, $534,498 in lost salary, guaranteed bonuses per his
employment agreement and lost stock options. On October 25, 1999, the Company
reached a settlement with Mr. Johnson. Under the settlement agreement, the
Company paid Mr. Johnson $24,050 in consideration for the case to be dismissed.
In addition, the Company agreed to hire Mr. Johnson as a consultant until April
1, 2002 at a monthly rate of $1,300 per month and pay approximately $472 per
month for group medical insurance for the duration of his consulting agreement.
Based on this agreement, all claims by either party have been dismissed.
On April 14, 1999, Richard H. Walker, former President and Chief
Executive Officer of the Company, filed a complaint against the Company for
breach of written contract related to Mr. Walker's employment agreement with the
Company. Mr. Walker claimed that the Company owed Mr. Walker $1,500,000 in lost
salary, employee benefits, paid vacation days, bonuses and lost stock options.
On May 13, 1999, the Company filed a cross-complaint with the Superior Court of
California against Richard H. Walker, individually and as Trustee of the Walker
Family Trust and Paul Spindler, former Chairman of the Board and Executive Vice
President of the Company for breach of fiduciary duty, mismanagement and waste
of corporate assets, negligence, fraud, conspiracy and injunctive relief. The
Company had requested to be awarded compensatory damages in excess of
$1,000,000, exemplary damages, transfer of 710,477 shares of stock to the
Company, court costs and reasonable attorney fees. On July 8, 1999, the Company
entered into Settlement Agreements with Mr. Richard H. Walker and Mr. Paul
Spindler. Mr. Lawrence Cohen, the Company's Chairman was also party to these
Settlement Agreements with Msrs. Walker and Spindler. Under the terms of the
separate Settlement Agreements, the parties dismissed the above pending actions.
The parties exchanged general releases as part of the Settlement Agreements.
Under the terms of the Settlement Agreement, as amended, with Paul Spindler and
the Spindler Family Trust, the Company agreed to pay the compensation owing to
Mr. Spindler under his previous Consulting Agreement with the Company in the
amount of $40,000 no later than September 9, 1999 or prior thereto in the event
the Company completed certain financing. The Spindler Family Trust has also
agreed to sell to Larry Cohen and certain third parties 595,478 shares of common
stock of the Company owned by the Trust for $83,367 at any time on or prior to
September 9, 1999, in the event that certain financing occurs. On September 9,
1999, the Company and Paul Spindler amended the previous agreement to extend the
previous agreement until December 9, 1999. The Company paid Paul Spindler
one-half of the $40,000 consulting fee on September 9, 1999 and the remaining
one-half on December 9, 1999. The shares related to the settlement were
purchased by Larry Cohen and certain third parties and not by the Company on
October 13, 1999. Under the Settlement Agreement with Richard Walker, the Walker
Family Trust provided Mr. Cohen and certain third parties unrelated to the
Company the right to purchase 710,477 shares of common stock of the Company for
an aggregate consideration of $100,000. The 710,477 shares of common stock,
previously owned by Richard Walker, were transferred to Larry Cohen and certain
third parties, as approved by the Board of Directors, on September 30, 1999.
52
10. STOCKHOLDERS' EQUITY
Common Stock
On April 11, 2000, the Company issued 8,686 shares of common stock to
its employees under the 1997 Employee Stock Purchase Plan.
On August 21, 2000, the Company issued 1,250,000 shares of common stock
for $500,000 to an accredited investor.
On November 21, 2000, the holder of the Series B Preferred Stock
converted warrants for a total of 150,000 shares of common stock.
Preferred Stock
On March 18, 1998, the Company entered into a definitive agreement for
a private placement of shares of Series A Convertible Preferred Stock (the
Preferred Stock). The investment commitment was up to $2,000,000 and was to be
issued in three installments. The first installment of $1,000,000, consisting of
10,000 shares, funded on March 18, 1998. The second and third installments of up
to $500,000 each were to close within thirty and ninety days, respectively,
after the effective date of the Company's registration statement on Form S-3
(No. 333-50385), filed with the Securities and Exchange Commission on April 17,
1998, assuming that the various conditions set forth in the purchase agreement
were met. The Securities and Exchange Commission declared the registration
statement effective on August 14, 1998. The Company incurred penalty fees of
$50,000 due to the registration statement not being declared effective within 90
days following the closing date, pursuant to paragraph 2 (b) of the Registration
Rights Agreement. In January 2000, all authorized and unissued shares of
Preferred Stock were cancelled. There are no additional shares of Preferred
Stock that can be issued under the terms of this agreement.
The dividends on the Preferred Stock are cumulative and are payable
quarterly in stock or in cash, at the holder's option, at the rate of 6% per
annum of the original issue price of the stock. The liquidation preference of
each share of Preferred Stock is $100 plus unpaid dividends. The purchaser of
the Preferred Stock received warrants to purchase 125,000 shares of the
Company's common stock concurrently with the first $1,000,000 installment. These
warrants were valued by the Company at $181,000 using a Black-Scholes option
pricing model and are exercisable at $3.26 per share. The amounts that may be
purchased under the second and third installments are limited by a provision in
the Preferred Stock agreement that prohibits the purchaser from owning more than
20% of the Company's common stock on an as-converted basis. In connection with
the sale of the Preferred Stock, the Company issued warrants to purchase 25,000
shares of the Company's common stock to each of Wharton Capital Partners, Ltd.
and H D Brous as compensation for services provided by them as placement agents.
These warrants were valued by the Company at $70,000 using a Black-Scholes
option pricing model and are exercisable at $3.556 per share.
The Preferred Stock was recorded at fair value on the date of issuance
less issue costs. At any time after the date of issuance of the Preferred Stock,
the Company may redeem some or all of the outstanding Preferred Stock. The
Company recorded accretion of $241,926 to increase the carrying value to the
redemption value of $1,000,000. The Preferred Stock is convertible by the
holders at any time into common stock at a conversion rate that is less than the
fair value of the common stock. Accordingly, the Company recorded as imputed
dividends the value of the beneficial conversion feature of $227,589.
As of December 31, 1998, 9,450 shares of the Preferred Stock were
converted into 1,060,715 shares of common stock and the remaining 550 shares
were redeemed by the Company in a separate agreement with H D Brous, wherein the
Company negotiated the conversion of the 550 shares of Preferred Stock into
101,633 shares of common stock for the amount of $70,762. In addition, the
Company issued 5,993 shares in common stock valued at $10,084 representing the
accrued but unpaid dividends on the preferred shares being converted. During
1998, the Company also paid cash dividends of $23,580 to the holders of the
Preferred Stock. For the year ended December 31, 1998, all Preferred Stock had
been converted to common stock.
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock (the Series B) for $500,000 to an accredited investor. The
holder of shares of Series B shall be entitled to receive semi-annually,
commencing January 15, 2000 and each July 15 and January 15, thereafter,
cumulative dividends, at the rate of twelve (12%) per annum of the original
issue price of the Series B. The Series B is not convertible, has no voting
rights, has a liquidation preference of $1.00 per share plus unpaid dividends
and is redeemable at the option of the Company at any time. During the twelve
months ended December 31, 2000, the company redeemed 375,000 shares of the
Series B stock and recorded preferred dividends of $6,970. On September 10,
1999, the Company redeemed $100,000 of the Series B shares. The Company recorded
cumulative preferred dividends of $25,940 as of December 31, 1999.
53
The purchaser of the Series B received warrants to purchase 150,000
shares of the Company's common stock concurrently with the $500,000 investment.
These warrants were valued by the Company at $52,500 using a Black-Scholes
option pricing model and are exercisable at $1.00 per share and were charged
against the carrying value of the Series B. The Company recorded accretion of
$52,500 to increase the carrying value to the liquidation value of $1.00 per
share. The holder of the Series B Preferred Stock converted the warrants and the
Company issued 150,000 shares of common stock on November 21, 2000.
On January 12, 2000, the Company and Berthel SBIC, LLC (Berthel)
entered into an Investment Agreement whereby the Company issued 500,000 shares
of its Series C Convertible Preferred Stock (the Series C) and a warrant to
purchase 425,000 shares of its common stock for $920,000, net of offering costs.
The warrant has an exercise price per share of $0.01 and is exercisable until
January 12, 2005. In connection with the purchase price by Berthel, the Company
and the Chairman of the Board, Larry Cohen agreed to surrender, without
exercise, options held by him for the acquisition of 1,330,000 shares of common
stock of the Company, at which time the Company cancelled the options
Upon certain circumstances, Berthel may put to the Company the warrant
or shares underlying the warrant and shares of common stock resulting from the
conversion of all or part of the Series C Preferred Stock. The Company will pay
Berthel a put price equal to the fair market value of the Company, multiplied by
a fraction, the numerator of which is the total of (i) the number of warrant
shares tendered by Berthel, (ii) the number of shares of common stock for which
the portion of the warrant tendered by Berthel remains exercisable, (iii) the
number of conversion shares tendered by Berthel and (iv) the number of shares of
common stock for which the Series C Preferred Stock tendered by Berthel remain
convertible; and the denominator of which is the total of (x) the total shares
of outstanding common stock of the Company, (y) the number of shares of common
stock for which the warrant remains exercisable, and (z) the number of
conversion shares for which all shares of Series C Preferred Stock held by
Berthel remain convertible. Berthel may exercise it rights to this put at any
time after the fifth anniversary of the closing date and prior to the close of
business on the seventh anniversary of the closing date unless certain events as
defined occur earlier. In addition, at any time after the closing date, the
investor may demand registration of its shares of common stock on Form S-2 or
S-3 or any similar short form registration.
The holder of the Series C Preferred Shares is entitled to receive
cumulative cash dividends at the rate of $0.24 per year per share, payable
quarterly no later than the last business day of each March, June, September and
December. The Company recorded cumulative dividends of $120,000 as of December
31, 2000.
The purchaser received warrants to purchase 425,000 shares of common
stock. These warrants were valued by the Company at $216,750, using a
Black-Scholes option-pricing model. Pursuant to antidilutive terms of the
agreement, the company issued warrants to purchase an additional 39,979 shares
of common stock on August 21, 2000. The Series C Preferred Stock was recorded at
fair value on the date of issuance less issuance costs. The Company recorded
accretion of $354,056 to increase the carrying value to the redemption value of
$1,000,000.
Warrants
At December 31, 2000 the Company had an additional 814,979 warrants
outstanding. Berthel the buyer of the Series C Preferred Shares received 425,000
of these warrants. These warrants were valued by the Company at $216,750, using
a Black-Scholes option-pricing model. Pursuant to anti-dilutive terms of the
agreement, the company issued warrants to purchase an additional 39,979 shares
of common stock on August 21, 2000. On June 1, 2000 Jmann Capital Corporation
and Bernard Musman received 300,000 and 50,000 respectively for their
participation in raising additional funds. These warrants were valued by the
Company at $228,117 using a Black Scholes option-pricing model.
At December 31, 2000, 1999 and 1998, the Company had outstanding
718,750 Class A Redeemable Common Stock Purchase Warrants (Warrants) that
entitle each holder to purchase one share of common stock for $6.00 during a
five-year period commencing December 12, 1997. The exercise price and the number
of shares issuable upon exercise of the Warrants are subject to adjustment in
certain circumstances. Commencing February 12, 1998, the Warrants are redeemable
by the Company at $.01 per Warrant upon thirty-days' prior written notice,
provided the closing bid price of the common stock shall have been at least
$10.00 per share for the twenty consecutive trading days ending on the third day
prior to the date of the notice of redemption.
At December 31, 1999 and 1998, the Company had outstanding 125,000
Underwriters' Stock Warrants that entitle the holders thereof to purchase up to
125,000 shares of common stock at $8.70 per share. In addition, the Company had
62,500 Underwriters' Warrants entitling the holders to purchase up to 62,500
Warrants at $.125 per Warrant. The Warrants underlying the Underwriters'
Warrants entitle the holders to purchase up to 62,500 shares of common stock at
$8.70 per share. Both the Underwriters' Stock Warrants and the Underwriters'
Warrants are exercisable during a four-year period commencing November 12, 1996.
The Underwriters' Stock Warrants and Underwriters' Warrants contain antidilution
provisions providing for adjustment upon the occurrence of certain events. These
warrants expired in November 2000.
54
In 1998, the Company issued to Coast Business Credit warrants to
purchase 25,062 shares of common stock at an exercise price of $3.99 per share
in connection with the $5,000,000 credit line. These warrants were valued by the
Company at $39,000 using the Black-Scholes option pricing model and are being
amortized as part of the debt issuance costs in setting up the credit line. The
warrants expire on December 16, 2002.
Holders of the Company's warrants do not possess any rights as
stockholders of the Company until they exercise their warrants and, accordingly,
holders of the Company's warrants are not entitled to vote in matters submitted
to the shareholders and are not entitled to receive dividends.
Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan of Bristol Retail Solutions, Inc.
(the 1997 Employees Plan) was adopted by the Board of Directors and approved by
the Company's stockholders at the Annual Meeting of Stockholders held on May 20,
1997. The 1997 Employees Plan allows eligible employees of the Company to
subscribe for, and purchase shares of, the Company's common stock directly from
the Company at a discount from the market price, in installments through
authorized payroll deductions. A total of 200,000 shares of common stock are
authorized to be issued.
Common stock is purchased on each semi-annual purchase date at a
purchase price equal to eighty-five (85%) percent of the lower of (i) the fair
market value per share of common stock on the entry date into that offering
period or (ii) the fair market value per share on that semi-annual purchase
date. The maximum number of shares of common stock purchasable per participant
on any semi-annual purchase date shall not exceed 1,000 shares. Purchase rights
are not granted under the 1997 Employees Plan to any eligible employee if such
individual would, immediately after grant, own or hold outstanding options or
other rights to purchase stock representing five percent or more of the total
combined voting power of all classes of stock of the Company or any of its
corporate affiliates.
On April 11,2000, the Company issued 8,686 shares of common stock to
its employees under the 1997 Employee Stock purchase Plan.
During 1999 and 1998, the Company issued 47,763 and 20,392 shares,
respectively, of common stock to its employees under the 1997 Employees Plan. On
November 1, 1999, the Board of Directors suspended the 1997 Employee Stock
Purchase Plan.
Equity Participation Plan
The 1996 Equity Participation Plan of Bristol Retail Solutions, Inc.
(the Stock Option Plan) was adopted by the Board of Directors and approved by
the written consent of the majority of the stockholders on July 31, 1996. The
Stock Option Plan provides for the grant of stock options, restricted stock,
performance awards, dividend equivalents, deferred stock, stock payments and
stock appreciation rights to employees, consultants and affiliates. Options
granted under the Stock Option Plan may be incentive stock options (ISOs) or
non-statutory stock options (NSOs). ISOs may be granted only to employees and
the exercise price per share may not be less than 100% of the fair market value
of a share of common stock on the grant date and the term of the options may not
be more than ten years from the date of grant (110% of the fair market value and
five years from the date of grant if the employee owns more than 10% of the
total combined voting power of all classes of stock of the Company). All other
stock awards may be granted to employees, consultants, or affiliates. The
exercise price of NSOs shall be determined by a committee appointed by the Board
of Directors to administer the Stock Option Plan (the Committee) but shall not
be less than the fair market value of a share of common stock on the grant date.
The Committee shall determine the term of the NSOs.
On April 3, 1998, the Board of Directors amended the Stock Option Plan
to increase the number of shares authorized to 3,450,000 from 2,450,000 shares
of common stock. The stockholders approved the increase on May 15, 1998. At
December 31, 2000, options to purchase 3,365,900 shares of common stock were
outstanding at exercise prices ranging from $0.1875 to $3.188 per share. All
options vest at a rate of 25% per year commencing on the first anniversary of
the grant date. On May 21, 2000, each of the independent directors was awarded
50,000 options that vest immediately from the date of grant.
On February 27, 1998 and July 21, 1999, each of the independent
directors was awarded 30,000 and 50,000 of options respectively, that vest
immediately from the date of grant. No other stock-based awards have been
offered under the Stock Option Plan.
55
On May 20, 1997, 50,000 options to purchase common stock were granted
to non-employees and were accounted for at their fair value in accordance with
SFAS No. 123. The remaining options were issued to employees and were accounted
for in accordance with APB No. 25. SFAS No. 123 requires the calculation of pro
forma information regarding net loss and net loss per share as if SFAS No. 123
had been adopted for options issued to employees.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25, Accounting for Stock
Issued to Employees.
To calculate the pro forma information required by SFAS No. 123, the
Company uses the Black-Scholes option-pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
In calculating the pro forma information, the fair value was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for the years ended December 31, 2000,
1999, and 1998: risk-free interest rates of ranging 4.6% to 6.5%, dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of 118% in 2000 and 80% in 1999 and 1998; and a weighted-average expected
life of the options of five years. Pro forma compensation costs of shares issued
under the Employee Qualified Stock Purchase Plan is measured based on the
discount from market value on the date of purchase in accordance with SFAS No.
123.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 2000, 1999 and 1998 is as
follows:
Years Ended December 31,
2000 1999 1998
---- ---- ----
Reported net loss applicable to common stockholders ($6,510,556) ($440,724) ($2,224,863)
Pro forma net loss ($6,635,298) ($385,479) ($2,399,602)
Reported basic and diluted net loss per share ($0.88) ($0.06) ($0.38)
Pro forma basic and diluted net loss per share ($0.89) ($0.06) ($0.41)
56
Option activity under the Stock Option Plan is as follows:
Weighted-Average
Number of Options Exercise Price
----------------- --------------
Outstanding - December 31, 1997 1,405,000 3.02
Granted-weighted-average fair value of $1.94 489,850 2.87
Forfeited (355,850) (2.77)
----------
Outstanding - December 31, 1998 1,539,000 2.97
Granted-weighted-average fair value of $0.28 2,650,000 0.41
Forfeited (759,000) (3.03)
----------
Outstanding - December 31, 1999 3,430,000 0.98
Granted-weighted-average fair value of $0..137 1,585,900 0.57
Forfeited (1,650,000) (1.44)
----------
Outstanding - December 31, 2000 3,365,900 0.60
----------
Exercisable at end of period 1,556,250 0.81
===========
This table summarizes information concerning currently outstanding and
exercisable options:
Weighted Weighted
Weighted Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Price Outstanding Contractual Life Price Exercisable Price
- ----------------------- ------------ ---------------- -------- ----------- --------
$0.1875-$0.6875 3,110,900 9.08 $0.41 1,343,750 $0.46
$2.375-$2.875 140,000 6.16 $2.88 118,750 $2.88
$3.125-$3.188 115,000 7.08 $3.14 93,750 $3.15
---------- ----------
$0.1875-$3.188 3,365,900 8.83 $0.60 1,556,250 $0.81
========== ==========
Shares Reserved for Future Issuance
At December 31, 2000, 84,100 shares of common stock were reserved for
future issuance in connection with the Company's incentive stock options and
1,733,791 shares in connection with outstanding warrants.
57
11. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
Current: 2000 1999 1998
- -------- ---- ---- ----
Federal $ - $ - $ -
State 2,400 9,259 19,349
------------ ------------ ------------
Total current 2,400 9,259 19,349
Deferred:
Federal (1,920,041) 67,947 (675,040)
State (464,474) 49,711 (209,697)
Change in valuation allowance 2,384,515 (117,658) 884,737
------------ ------------ ------------
Total deferred - - -
Provision for income taxes $ 2,400 $ 9,259 $ 19,349
============ ============ ============
Deferred income taxes reflect the net tax effect of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
2000 1999
---- ----
Deferred tax assets:
Net operating loss $ 4,297,329 $ 1,838,969
Inventories 106,582 99,964
Allowance for doubtful accounts 258,026 123,936
Deferred revenue 47,909 121,060
Accrued compensation 11,548 64,479
Other reserves and allowances 4,070 74,406
------------ ------------
Total deferred tax assets 4,725,464 2,322,814
Deferred tax liabilities:
Tax over book depreciation (18,135) -
------------ ------------
Net deferred tax assets 4,707,329 2,322,814
Valuation allowance on net deferred
tax assets (4,707,329) (2,322,814)
------------ ------------
Net deferred taxes $ - $ -
============ ============
The Company has recorded a valuation allowance against deferred tax
assets as deemed necessary to reduce deferred tax assets to amounts that are
more likely than not to be realized. A portion of the valuation allowance
relates to acquired temporary differences that, when realized, will be recorded
as an adjustment to goodwill.
At December 31, 2000, the Company has federal net operating loss
carry-forwards of $9,918,055 that begin to expire in the year 2016. Pursuant to
Section 382 of the Internal Revenue Code, use of the Company's net operating
loss and credit carry-forwards for federal and state income tax purposes may be
limited if the Company experiences a cumulative change in ownership of greater
than 50% in a moving three-year period. Ownership changes could impact the
58
Company's ability to utilize net operating losses and credit carry-forwards
remaining at the ownership change date. The limitation will be determined by the
fair market value of common stock outstanding prior to the ownership change,
multiplied by the applicable federal rate. The reconciliation of income tax
computed at the U.S. federal statutory tax rates to income tax provision is:
2000 1999 1998
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tax at U.S. statutory rates $(2,035,633) (35.0%) $ (123,559) (39.4%) $ (599,350) (35.0%)
State income taxes (455,232) (7.8%) 63,577 20.3% (183,041) (10.7%)
Nondeductible goodwill amortization 99,328 1.7% 97,379 31.0% 93,248 5.5%
Change in valuation allowance 2,384,515 41.0% (117,658) (37.5%) 884,737 51.7%
Officers' life insurance 5,950 0.1% 6,096 1.9% (184,924) (10.8%)
Meals & entertainment 56,843 1.0% 68,401 21.8% -- --
Other (53,371) (1.0%) 15,023 4.8% 8,679 0.5%
------------ ------- ----------- ------- ------------ ------
$ 2,400 0.0% $ 9,259 2.9% $ 19,349 1.2%
============ ======= =========== ======= ============ ======
12. EMPLOYEE BENEFIT PLAN
The Company, on December 1, 1998 consolidated the wholly owned
subsidiaries Section 401(k) Employees' Savings Plans into the Bristol Profit
Sharing Plan (the Plan). The Plan covers substantially all full-time employees
who have worked for more than one year. Contributions are based on the
profitability of the Company and are made at the sole discretion of the Company.
The Company made no discretionary contributions for the years ended December 31,
2000 and 1999. There was $26,550 in discretionary contributions for the years
ended December 31, 1998.
59
13. RELATED PARTY TRANSACTIONS
The Company had various transactions with related parties that were
made in the normal course of business. A summary of these transactions is as
follows:
2000 1999 1998
---- ---- ----
Cash register purchases from R.S.M.G , which has an officer of
Smyth as an officer and member of its Board of Directors 588,814
Rent paid to a director of CRI 70,321 86,380 80,274
Rent paid to Pollastro Properties, Inc., owned by the former
owner of ARS, currently an officer of the Company(resigned
December 2000) 150,633 180,760 180,760
Rent paid to Schroeter, owned by former owner of QBM,
currently an employee of QBM (retired June 2000) 95,382 114,642 81,613
Auto leases paid to ARS Leasing Co, owned by an officer
of the Company(resigned December 2000) - 4,071 12,234
Payments to PRS, owned by an officer of the Company
(resigned December 2000) 26,296 11,776
Payments on note payable Schroeter, an employee of QBM
retired June 2000. 15,577 54,423
Facility lease transactions with related parties are further discussed in Note
9, Commitments and Contingencies.
60
14. SUPPLEMENTAL QUARTERLY INFORMATION (UNAUDITED):
1st 00 (1) 2nd 00 (1) 3rd 00 (1) 4th 00
---------- ---------- ---------- ------
Total revenue $ 6,144,011 $ 6,318,958 $ 5,167,364 $ 5,235,510
Gross margin 1,090,363 837,595 1,201,074 810,446
Operating loss (1,089,220) (1,393,231) (1,137,762) (1,765,136)
Other income (expense) (130,772) (102,349) (92,732) (261,840)
Gain on sale of assets - - - 162,662
Net loss (1,219,992) (1,499,880) (1,230,646) (1,862,262)
Net loss applicable to common shareholders $(1,588,026) $(1,532,872) $(1,260,646) $(2,129,012)
Basic and diluted loss to common shareholders per share $ (0.23) $ (0.22) $ (0.17) $ (0.26)
1st 99 (1) 2nd 99 3rd 99 4th 99
---------- ------ ------ ------
Total revenue $ 8,101,259 $ 9,650,520 $ 9,753,567 $ 9,195,706
Gross margin 2,232,239 2,855,743 2,692,318 3,396,655
Operating income (loss) (381,254) 161,636 84,343 (831,373)
Other income (expense) (116,561) (113,784) (144,645) (182,760)
Gain on sale of assets - - - 1,171,373
Net income (loss) (497,815) 44,902 (61,510) 152,139
Net income (loss) applicable to common shareholders $ (497,815) $ (20,098) $ (75,843) $ 153,032
Basic and diluted income (loss) to common shareholders per share $ (0.07) $ (0.00) $ (0.01) $ 0.03
(1) Quarterly financial data has been amended from the information originally
reported on Form 10 Q.
61
15. SUPPLEMENTAL CASH FLOW
The Company issued common stock and cash in connection with certain
business combinations completed during the year ended December 31, 1998. The
fair values of the assets acquired and the liabilities assumed at the date of
the respective acquisition is presented as follows:
Supplemental disclosures of non-cash investing and financing activities:
December 31,
Acquisitions 1998
- ------------ ----
Fair value of assets aquired $ 1,880,861
Liabilities assumed (748,556)
------------
Net assets aquired 1,132,305
Common stock issued (500,000)
Note payable (70,000)
------------
Cash paid for acquisition, net of cash acquired $ 562,305
============
On November 24,1999 the Company sold the Smyth Imager Division for
$2,800,000. The net book values of the assets sold were $2,185,144 and the
liabilities transferred were $753,043. See Note 4.
On August 24, 2000 and August 31,2000, the Company sold its sales
offices located in London, KY and Canton, OH respectively. The net book value of
the assets sold was $763,520 and the liabilities transferred were $225,529.
Other non-cash activities: Year ended December 31,
2000 1999 1998
-----------------------------------------
Non-cash transactions relating to Series C Redeemable Preferred Stock:
Preferred Stock Accretion recorded to increase Series C to redemption value $354,056
=========
Dividend payable on Series C Preferred Stock $ 66,970
---------
Warrants issued in connection with Series C Preferred Stock $216,750
=========
Non-cash transactions relating to Series B Preferred Stock:
Warrants issued in connection with Series B Preferred Stock $52,500
========
Series B warrant conversion to stock $ 150
---------
Preferred Stock Accretion recorded to increase Series B to redemption value $52,500
========
Dividend payable on Series B Preferred Stock $25,940
--------
Non-cash transactions relating to Series A Convertible Preferred Stock:
Warrants issued in connection with Series A Preferred Stock $ 69,500
---------
Preferred Stock Accretion recorded to increase Series A to redemption value $241,916
=========
Imputed Dividend on Series A Preferred Stock $227,589
---------
Preferred stock dividend $ 10,084
=========
Preferred stock conversion $ 660
---------
Warrants issued in connection with line of credit $ 38,595
=========
16. SUBSEQUENT EVENTS
On February 14, 2001 the Company filed a joint proxy/registration
statement on Form S-4 related to the proposed merger with Registry Magic. Under
the terms of the agreement, common shareholders of Bristol would receive .65
shares of Registry common stock.
The Company successfully negotiated an extension of its line of credit
with Coast Business Credit from December 31, 2000 to March 31, 2001 and again to
May 31, 2001.
62
The Company borrowed funds for working capital from Registry Magic. The funds
borrowed totaled $800,000 on December 31, 2000 and $1,910,000 as of April 12,
2001. Interest expense on these borrowed funds totaled $30,650 for the year
ended December 31, 2000.
The Company negotiated extended payment terms with three major creditors and was
able to convert a total of $1,537,000 of Accounts Payable balances into interest
bearing notes. The Company believes that these more favorable terms will ease
the pressure on its cash flow and allow it to operate in a more efficient manner
63
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Bristol Retail Solutions, Inc.
The audits referred to in our report dated March 30, 2001 relating to the
consolidated financial statements of Bristol Retail Solutions, Inc. and
subsidiaries, which is contained in item 14 of this Form 10-K and includes an
explanatory paragraph regarding the Company's ability to continue as a going
concern, included the audit of the financial statement schedule listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audit.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman LLP
Seattle, Washington
March 30,2001
64
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Bristol Retail Solutions, Inc.
We have audited the consolidated financial statements of Bristol Retail
Solutions, Inc. and subsidiaries (the Company) as of December 31, 1999, and for
the years ended December 31, 1999 and 1998, and have issued our report thereon
dated April 8, 2000 (except for Note 2 as to which the date is February 13,
2001) which report expresses an unqualified opinion and includes an explanatory
paragraph referring to substantial doubt about the Company's ability to continue
as a going concern. Such consolidated financial statements and report are
included elsewhere in this Form 10-K. Our audits also included the financial
statement schedule for 1999 and 1998 of Bristol Retail Solutions, Inc. and
subsidiaries, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule for 1999 and 1998, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 8, 2000 (except for Note 2 as to which the date is February 13, 2001)
65
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
Charged
Balance at to Costs Balance
Beginning and at End
of Period Expenses Deductions of Period
- ------------------------------------------- --------- --------- --------- ---------
Year ended December 31, 2000:
Inventory reserves $ 52,500 46,103 24,774 $ 73,829
Allowance for doubtful accounts $286,497 537,117 223,553 $600,061
Year ended December 31, 1999:
Inventory reserves $314,558 -- 262,058(1) $ 52,500
Allowance for doubtful accounts $524,356 58,000 295,859(2) $286,497
Year ended December 31, 1998:
Inventory reserves $553,321 40,000 278,763(1) $314,558
Allowance for doubtful accounts $382,990 245,952 104,586(2) $524,356
(1) Consists primarily of the write-off of excess/obsolete inventories and
includes for the year ended December 31, 1999 the inventory reserves included in
the assets of the Smyth division that was sold November 1999.
(2) Consists primarily of the write-off of uncollectible customer invoice
amounts and for the year ended December 31, 1999, the allowance for doubtful
accounts included in the assets of the Smyth division that was sold November
1999.
66
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in Form S-8 of Bristol
Retail Solutions, Inc. of our reports dated March 30, 2001, relating to the
consolidated financial statements and schedule of Bristol Retail Solutions, Inc.
and subsidiaries appearing in this Annual Report on Form 10-K for the year ended
December 31, 2000. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
BDO SEIDMAN, LLP
Seattle, Washington
May 3, 2001
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-5570-LA and No. 333-43899 on Form S-3 and Form S-8, respectively, and in
Amendment No. 3 to Registration Statement No. 333-50385 on Form S-3 of Bristol
Retail Solutions, Inc. of (1) our report dated April 8, 2000 (except for Note 2
as to which the date is February 13, 2001), which report expresses an
unqualified opinion and includes an explanatory paragraph referring to
substantial doubt about the Company's ability to continue as a going concern
related to the consolidated financial statements of Bristol Retail Solutions,
Inc. and subsidiaries as of December 31, 1999 and for the years ended December
31, 1999 and 1998, and (2) our report dated April 8, 2000 (except for Note 2 as
to which the date is February 13, 2001) relating to the financial statement
schedule for 1999 and 1998 appearing in this Annual Report on Form 10-K of
Bristol Retail Solutions, Inc. for the year ended December 31, 2000.
DELOITTE & TOUCHE LLP
Costa Mesa, California
May 1, 2001
67