-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OR/NrczfVJEqHmMlIl3YxR/6y0za+UIhkkOlHm7a0kcovY6tymSHwybcGoylOGSP QH2BKaoKkeMHGkUDkou0Uw== 0001019687-98-000299.txt : 19981118 0001019687-98-000299.hdr.sgml : 19981118 ACCESSION NUMBER: 0001019687-98-000299 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRISTOL RETAIL SOLUTIONS INC CENTRAL INDEX KEY: 0001016657 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 582235556 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21633 FILM NUMBER: 98751728 BUSINESS ADDRESS: STREET 1: 5000 BIRCH ST STREET 2: STE 205 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7144750800 MAIL ADDRESS: STREET 1: 5000 BIRCH ST STREET 2: STE 205 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: BRISTOL TECHNOLOGY SYSTEMS INC DATE OF NAME CHANGE: 19960924 10QSB 1 BRISTOL RETAIL SOLUTIONS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-QSB (Mark One) ( X ) Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 ( ) Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from _________________to_________________ Commission file number: 0-21633 BRISTOL RETAIL SOLUTIONS, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 58-2235556 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No). 5000 Birch Street, Suite 205, Newport Beach, California 92660 (Address of Principal Executive Offices) (Zip Code) (949) 475-0800 (Issuer's Telephone Number, Including Area Code) Not Applicable (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) 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 --- --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, $.001 par value - 6,215,686 shares as of October 31, 1998 Class A Redeemable Common Stock Purchase Warrants - 718,750 as of July 31, 1998 Transitional Small Business Disclosure Format (check one): Yes No X --- --- Page 1 BRISTOL RETAIL SOLUTIONS, INC. Index Part I --- FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Consolidated Balance Sheet as of September 30, 1998 3 Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997 4 Consolidated Statements of Operations for the nine months ended September 30, 1998 and 1997 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 6-7 Notes to Consolidated Financial Statements 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-21 Part II --- OTHER INFORMATION Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 Page 2 BRISTOL RETAIL SOLUTIONS, INC. Consolidated Balance Sheet (Unaudited) September 30, 1998
ASSETS Current assets Cash and cash equivalents $ 445,086 Accounts receivable, net of allowance for doubtful accounts of $300,553 7,078,888 Inventories, net 4,050,776 Prepaid expenses and other current assets 459,082 Current portion of note receivable 149,907 ------------- Total current assets 12,183,739 Property and equipment, at cost: Furniture and equipment 877,383 Automobiles 214,449 Leasehold improvements 114,241 ------------- 1,206,073 Accumulated depreciation and amortization (413,283) ------------- Property and equipment, net 792,790 Intangible assets, net of accumulated amortization of $462,802 4,639,837 Note receivable - noncurrent portion 187,901 Other assets 1,039,789 ------------- Total assets $ 18,844,056 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 4,148,169 Accounts payable 3,757,962 Accounts payable to related party 69,924 Accrued salaries, wages and related benefits 948,045 Accrued expenses 407,460 Deferred service revenue 1,929,105 Customer deposits 496,951 Note payable to related party 34,478 Current portion of capital lease obligations 43,300 Current portion of long-term debt 19,162 ------------- Total current liabilities 11,854,556 Note payable to related party - noncurrent portion 24,663 Capital lease obligations - noncurrent portion 39,864 Long-term debt 29,403 Other long-term liabilities 94,565 Commitments and contingencies Stockholders' equity Preferred stock, $.001 par value: 4,000,000 shares authorized; Series A Convertible Preferred Stock: 10,000 shares issued and outstanding (aggregate liquidation preference $1,000,000) 3 Common stock, $.001 par value: 20,000,000 shares authorized; 6,215,686 and 6,210,686 shares issued and outstanding 6,216 Additional paid-in capital 13,182,747 Accumulated deficit (6,363,336) ------------- 6,825,630 Less 5,000 shares of treasury stock, at cost (24,625) ------------- Total stockholders' equity 6,801,005 ------------- Total liabilities and stockholders' equity $ 18,844,056 =============
See accompanying notes to consolidated financial statements. Page 3 BRISTOL RETAIL SOLUTIONS, INC. Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 1998 1997 -------------- -------------- Revenue: System sales and installation $ 6,383,979 $ 4,568,572 Service and supplies sales 3,039,483 2,552,585 -------------- -------------- Total revenue 9,423,462 7,121,157 Cost of revenue: System sales and installation 4,430,008 2,819,210 Service and supplies sales 2,334,270 1,742,418 -------------- -------------- Total cost of revenue 6,764,278 4,561,628 -------------- -------------- Gross margin 2,659,184 2,559,529 Operating expenses: Selling, general and administrative expenses 2,693,541 2,574,024 Research and development costs 181,254 163,534 -------------- -------------- Total operating expenses 2,874,795 2,737,558 -------------- -------------- Operating loss (215,611) (178,029) Other expense 116,392 (16,510) -------------- -------------- Loss before income taxes (332,003) (194,539) Provision for income tax 6,991 1,450 -------------- -------------- Net loss $ (338,994) $ (195,989) ============== ============== Net loss before preferred stock dividends $ (338,994) $ (195,989) Cumulative dividends for Series A Convertible Preferred Stock (7,580) - - -------------- -------------- Net loss applicable to common stockholders $ (346,574) $ (195,989) ============== ============== Basic and diluted net loss to common stockholders per share $ (0.06) $ (0.04) ============== ============== Basic and diluted weighted average common shares outstanding 5,876,201 5,503,929 ============== ==============
See accompanying notes to consolidated financial statements. Page 4 BRISTOL RETAIL SOLUTIONS, INC. Consolidated Statements of Operations (Unaudited)
Nine Months Ended September 30, 1998 1997 -------------- -------------- Revenue: System sales and installation $ 15,291,245 $ 9,409,550 Service and supplies sales 8,312,927 4,956,326 -------------- -------------- Total revenue 23,604,172 14,365,876 Cost of revenue: System sales and installation 10,128,962 6,098,678 Service and supplies sales 5,962,959 3,521,376 -------------- -------------- Total cost of revenue 16,091,921 9,620,054 -------------- -------------- Gross margin 7,512,251 4,745,822 Operating expenses: Selling, general and administrative expenses 7,550,927 5,971,986 Research and development costs 501,775 235,636 -------------- -------------- Total operating expenses 8,052,702 6,207,622 -------------- -------------- Operating loss (540,451) (1,461,800) Other expense (income) 237,642 (60,097) -------------- -------------- Loss before income taxes (778,093) (1,401,703) Provision for income tax 9,626 2,500 -------------- -------------- Net loss $ (787,719) $ (1,404,203) ============== ============== Net loss before preferred stock accretion and dividends $ (787,719) $ (1,404,203) Preferred stock accretion and dividends: Accretion related to Series A Convertible Preferred Stock (241,916) - - Imputed dividends for Series A Convertible Preferred Stock (227,589) - - Cumulative dividends for Series A Convertible Preferred Stock (23,300) - - -------------- -------------- Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203) ============== ============== Basic and diluted net loss to common stockholders per share $ (0.22) $ (0.28) ============== ============== Basic and diluted weighted average common shares outstanding 5,697,308 5,086,616 ============== ==============
See accompanying notes to consolidated financial statements. Page 5 BRISTOL RETAIL SOLUTIONS, INC. Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 1997 -------------- -------------- Cash flows from operating activities: Net loss $ (787,719) $ (1,404,203) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 204,604 138,677 Amortization 375,485 213,278 Provision for doubtful accounts - - 48,946 Provision for excess and obsolete inventories - - 43,681 Stock compensation expense - - 8,021 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (3,586,554) (312,200) Inventories 167,114 (92,526) Prepaid expenses and other assets (557,990) (173,513) Accounts payable 1,552,071 (55,884) Other accrued expenses (124,300) 134,545 Deferred revenue 203,583 202,168 Customer advances 44,519 81,254 Other long-term liabilities 27,567 23,969 -------------- -------------- Net cash used in operating activities (2,481,620) (1,143,787) Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired (572,726) (3,007,702) Cash paid for rescinded acquisition - - (1,100,000) Cash received from rescinded acquisition - - 250,000 Receivables from rescinded acquisition 97,335 - - Purchases of property and equipment (103,435) (173,123) -------------- -------------- Net cash used in investing activities (578,826) (4,030,825) Cash flows from financing activities: Repayment of capital lease obligations (20,795) (16,341) Net borrowings on line of credit 1,915,702 272,970 Repayment of long-term debt (44,481) (17,298) Issuance (repayment) of note payable to related party 59,141 (47,922) Repurchase of stock - - (24,625) Issuance of preferred stock, net of offering costs 827,577 - - Issuance of common stock, net of offering costs 52,459 - - -------------- -------------- Net cash provided by financing activities 2,789,603 166,784 Net decrease in cash and cash equivalents (270,843) (5,007,828) Cash and cash equivalents at beginning of period 715,929 5,475,674 -------------- -------------- Cash and cash equivalents at end of period $ 445,086 $ 467,846 ============== ============== Supplemental disclosures of cash flow information: Cash paid for interest $ 290,006 $ 64,376 ============== ============== Cash paid for income taxes, net $ 21,424 $ 97,959 ============== ==============
See accompanying notes to consolidated financial statements. Page 6 BRISTOL RETAIL SOLUTIONS, INC. Consolidated Statements of Cash Flows (Unaudited)
Supplemental disclosures of cash flow information (continued): Nine Months Ended September 30, 1998 1997 -------------- -------------- Supplemental disclosures of non-cash investing and financing activities: Capital assets and lease obligation additions $ 108,804 $ - - ============== ============== Acquisitions: Fair value of assets acquired $ 1,845,722 $ 9,221,597 Liabilities assumed (702,996) (3,269,042) -------------- -------------- Net assets acquired 1,142,726 5,952,555 Stock issued (500,000) (2,944,853) Note payable (70,000) - - -------------- -------------- Cash paid for acquisition, net of cash acquired $ 572,726 $ 3,007,702 ============== ============== Warrants issued in connection with the line of credit $ 38,595 $ - - ============== ============== Warrants issued in connection with the sale of preferred stock $ 69,500 $ - - ============== ============== Inventory received in payment of rescinded acquisition receivable $ 250,000 $ - - ============== ============== For non-cash transactions relating to Series A Convertible Preferred Stock, see STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements. Page 7 BRISTOL RETAIL SOLUTIONS, INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 1998 NATURE OF OPERATIONS AND BASIS OF PRESENTATION Bristol Retail Solutions, Inc. (the Company) 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. From its inception through September 30, 1998, the Company has acquired seven companies. 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 maintenance agreements. Currently, the Company has sales and service operations located in seventeen cities and eight states, primarily located in the Western and Midwestern region of the United States. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 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 market values. 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 periods subsequent to the acquisitions are not comparable to the financial statements for the periods prior to the acquisitions. The accompanying consolidated financial statements have been prepared by the Company without audit in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB and Item 310 of Regulation S-B. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles (GAAP) and, therefore, should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1997. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The American Institute of Certified Public Accountants (AICPA) recently adopted Statement of Position (SOP) 97-2, Software Revenue Recognition, that supersedes SOP 91-1 and becomes effective for years beginning after December 15, 1997. The Company adopted SOP 97-2 at the beginning of the current year. Such adoption did not have a significant impact on the Company's financial statements for the three and nine months ended September 30, 1998. ACQUISITION On May 8, 1998, the Company, through its wholly-owned subsidiary Automated Register Systems, Inc., acquired all of the outstanding common stock of Quality Business Machines Co. (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 common stock of the Company, valued at $500,000 at the closing date of the acquisition; and a promissory note in the principal amount of $70,000 at an interest rate of 8.5% executed by the Company in favor of QBM. Of such consideration, the Company retained 36,655 shares of common stock, valued at approximately $100,000 and $10,000 in cash, in escrow, as the purchase price is subject to post-closing reduction in the event certain financial targets of QBM are not met. The transaction was recorded under the purchase method of accounting and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon the fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired has been recorded as goodwill. Goodwill acquired as part of the QBM acquisition aggregating $676,000 is being amortized on a straight-line basis over an estimated life of 20 years. The Company's consolidated statements of operations include the revenues and expenses of QBM since the acquisition closing date of May 8, 1998. INCOME TAXES The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete year. For the three and nine months ended September 30, 1998 and 1997, the estimated effective income tax rate is less than the U.S. statutory rate primarily due to a 100% valuation allowance provided against the deferred tax assets that arose from the current operating loss. Page 8 LOSS PER SHARE INFORMATION In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which is effective for financial statements for interim and annual periods ending after December 15, 1997. SFAS No. 128 redefines earnings per share under generally accepted accounting principles. SFAS No. 128 requires the Company to report Basic Earnings per Share (EPS), as defined therein, which excludes all common share equivalents from the earnings per share computation, and Diluted EPS, as defined therein, which is calculated similar to the Company's primary earnings per share computation. All historical earnings per share information has been restated as required by SFAS No. 128. 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 and conversion of outstanding preferred stock and preferred stock dividends on Series A Convertible Preferred Stock. Common equivalent shares have not been included where inclusion would be antidilutive. FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Income Shares Per-Share (Numerator) (Denominator) Amount -------------- -------------- -------------- Net loss $ (338,994) Less: Preferred dividends (7,580) -------------- BASIC EPS Loss applicable to common stockholders (346,574) 5,876,201 $ (0.06) ============== EFFECT OF DILUTIVE SECURITIES Convertible preferred stock -- -- -------------- -------------- DILUTED EPS Income applicable to common stockholders + assumed conversions $ (346,574) 5,876,201 $ (0.06) ============== ============== ============== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Net loss $ (787,719) Accretion related to preferred stock (241,916) Imputed dividends for preferred stock (227,589) Cumulative preferred dividends (23,300) -------------- BASIC AND DILUTED EPS Loss applicable to common stockholders $ (1,280,524) 5,697,308 $ (0.22) ============== ============== ==============
Options to purchase 1,545,000 shares of common stock at $2.875-$3.188 per share were outstanding during the period ended September 30, 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. Warrants to purchase 918,812 shares of common stock at $3.259-$6.00 per share were outstanding during the period ended September 30, 1998 but were not included in the computation of diluted EPS because the warrants' exercise price was greater than the average market price of the common shares. Common stock equivalents were antidilutive for the three- and nine-months ended September 30, 1998. STOCKHOLDERS' EQUITY On December 17, 1997, 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 a Black-Scholes option pricing model and are being amortized as part of the debt issue costs in setting up the credit line. The warrants expire on December 16, 2002. On January 2, 1998 and July 31, 1998, respectively, the Company issued 8,236 and 12,156 shares of common stock to its employees under the 1997 Employee Stock Purchase Plan. Page 9 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 is up to $2,000,000 and will 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 will 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 are met. The Securities and Exchange Commission has 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 after 90 days following the closing date, pursuant to paragraph 2 (b) of the Registration Rights Agreement. The Preferred Stock is convertible by the holders into common stock of the Company at any time into a number of shares of common stock determined by dividing the issue price by the conversion price, which is defined to be 78% of the lowest five-day average closing bid price for the 25-day period prior to the date of the conversion notice. At no time shall the conversion price be greater than $3.26 (110% of the five-day average bid price prior to the date such shares were purchased). 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. 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 HD Brous & Co., Inc., 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 $242,000 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 which 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 $228,000. The Company also accrued cumulative preferred dividends of $23,000 as of September 30, 1998. As of September 30, 1998, 6,700 shares of Preferred Stock were converted into 460,279 shares of common stock at $1.10-$1.67 per share. In addition, the Company issued 3,229 shares in common stock representing the accrued but unpaid dividends on the preferred shares being converted. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. The Company's total comprehensive loss for the nine months ended September 30, 1998, was $1,281,000, consisting of the Company's net loss for the period of $788,000, Preferred Stock accretion of $242,000, imputed dividends related to the beneficial conversion feature of the Preferred Stock of $228,000 and cumulative preferred dividends of $23,000. For the quarter ended September 30, 1998, the Company's total comprehensive loss consisted of net loss of $339,000 and cumulative preferred dividends of $8,000. There were no items of other comprehensive income for the three and nine months ended September 30, 1997. CONTINGENCIES 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, although the outcomes of these claims and suits are not presently determinable, in the aggregate, the outcome of any of these matters will 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 are 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. The case is pending in the United States District Court for the Southern District of New York. In addition to seeking to have themselves declared proper plaintiffs and having the case certified as a class action, plaintiffs seek unspecified monetary damages. The plaintiffs' complaint alleges 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. The Company denies that it has any liability to the class Page 10 action plaintiffs and intends to vigorously defend itself. The outcome of this litigation is not currently predictable, and the Company believes that all or a substantial part of the damages, if any, would be covered by insurance. Other than the related legal fees, the Company has not made a provision for any liability in the accompanying financial statements. SUBSEQUENT EVENT On October 28, 1998, the company received notice of conversion of 2,750 shares of Preferred Stock which converted into 600,437 shares of common stock at $.458 per share. In addition, the Company issued 2,763 shares of common stock representing the accrued but unpaid dividends on the preferred shares being converted. Page 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 1998 The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-QSB, as well as the Company's audited consolidated financial statements for the year ended December 31, 1997. The Company's financial condition and results of operations have changed considerably since the Company's inception in April 1996, as a result of the Company's acquisition strategy. The Company has completed six acquisitions since its inception through the end of December 31, 1997, all of which were accounted for under the purchase method of accounting. One acquisition was completed by the Company during the nine months ended September 30, 1998 and was accounted for under the purchase method of accounting. Due to the Company's growth through acquisitions, year-to-year comparisons of the historical results of the Company's operations have been affected primarily by the addition of acquired companies. The dollar increases in the various revenue and expense components of the Company's results are due primarily to growth from acquisitions. Therefore, these year-over-year changes are not necessarily indicative of changes that will occur in the future. The Company expects that acquisitions will continue to impact the Company's future operating results if the Company continues to pursue its acquisition strategy which has been suspended due to the lack of financing. Future acquisitions will be reliant upon the Company obtaining additional financing or if allowable, "pooling of interest" mergers. This Quarterly Report on Form 10-QSB contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Additional Factors That May Affect Future Results." REVENUE The Company'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). Total revenue for the quarter ended September 30, 1998 was $9,423,000 and was comprised of revenue from the Company's seven wholly-owned subsidiaries for the entire quarter. This represents an increase of 32% from the Company's total revenue of $7,121,000 for the quarter ended September 30, 1997. Of the increase in total revenue, 63% is attributable to the revenue contributed by QBM ( a 1998 acquisition) and PCR due to the fact that in 1997, only two months of PCR's revenue was recognized. Additionally, the Company began its distributor program with NCR and this program contributed to 12 percent of the increase in revenue. The remaining increase is due primarily to an improvement in Systems Revenue by the other acquired businesses over the comparable prior year quarter. Total revenue for the nine months ended September 30, 1998 was $23,604,000, a 64% increase over the comparable nine months ended September 30, 1997. Of the increase in total revenue, 90% is attributable to the revenue contributed by QBM, Smyth and PCR due to the fact that in 1997, only two months of PCR's revenue and four months of Smyth's revenue was recognized. The remaining increase is primarily attributable to an improvement in Service Revenue by the other acquired businesses. Future growth in revenue will be dependent upon the Company's ability to acquire additional companies or to expand its hardware and software product offerings as well as increase its maintenance business. Total revenue for the quarter ended September 30, 1998 was comprised of 68% Systems Revenue and 32% Service Revenue, as compared to a revenue composition of 64% Systems Revenue and 36% Service Revenue for the quarter ended September 30, 1997. Total revenue for the nine months ended September 30, 1998 and 1997 was comprised of 65% Systems Revenue and 35% Service Revenue for both periods. The mix of revenue change from 1997 to 1998 for the three month period was due primarily to the efforts by the Company in the third quarter to increase Systems Revenue. No customer accounted for more than 10% of total revenue for the three- and nine-month periods ended September 30, 1998 and 1997. Aggregate sales of products from the Company's three principal hardware vendors, Panasonic, ERC Parts, Inc. (ERC), a distributor of Panasonic products, and NCR Corporation (NCR), accounted for approximately 16% and 32% of total revenue for the three-and nine-month periods ended September 30, 1998, respectively, and approximately 26% and 37% of total revenue for the three- and nine-month periods ended September 30, 1997, respectively. The Company's supply agreements with these manufacturers are non-exclusive, have geographic limitations and may have renewable one-year terms depending upon the Company'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 the Company's subsidiaries can sell a manufacture's hardware or software. The actual sales territories for each manufacturer are Page 12 subsidiary-specific and some subsidiaries may not have permission to sell hardware or software of certain manufactures in certain regions or territories of the country. A change in the Company's or its subsidiaries' relationship with these principal vendors could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. GROSS MARGIN Gross margin for the quarter ended September 30, 1998 was 28% and was comprised of gross margin for Systems Revenue of 31% and gross margin for Service Revenue of 23%. Gross margin for the quarter ended September 30, 1997 was 36% and was comprised of gross margin for Systems Revenue of 38% and gross margin for Service Revenue of 32%. As a percentage of revenue, the decrease in Systems Revenue gross margin is attributable to product mix and a strategic effort by the Company to focus on internal growth with new software and point-of sale products in new regions that resulted in price discounting. As a percentage of revenue, the decrease in Service Revenue gross margin is primarily attributable to additional support and service personnel and increase of third party services to maintain a key maintenance account. Gross margin for the nine months ended September 30, 1998 was 32% and was comprised of gross margin for Systems Revenue of 34% and gross margin for Service Revenue of 28%. Gross margin for the nine months ended September 30, 1997 was 33% and was comprised of gross margin for Systems Revenue of 35% and Service Revenue of 29%. As a percentage of revenue, the decrease in Systems Revenue gross margin is attributable to product mix changes and a strategic effort by the Company in the third quarter to focus on internal growth with new software and point-of sale products in new regions that resulted in price discounting offset by a price increase in the billing rates of installation services. As a percentage of revenue, the decrease in Service Revenue gross margin is attributable to additional support and service personnel and increase of third-party services to maintain a key maintenance account in the third quarter offset by a price increase on hourly billing rates for service. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Total selling, general and administrative expenses in the third quarter of 1998 of $2,694,000 increased by $120,000 from the comparable prior-year period and represented 29% of total revenue, versus 36% of total revenue in the comparable prior year period. The increase in expenses in absolute dollars between the third quarter of 1998 as compared to the comparable quarter in 1997 was primarily due to the QBM acquisition and costs related to the registration of common stock. This increase was partially offset by cost reductions realized in 1998 through the consolidation of certain redundant branch locations and job functions at the other acquired companies. Total selling, general and administrative expenses for the nine months ended September 30, 1998 of $7,551,000 increased by $1,579,000 from the comparable prior-year period and represented 32% of total revenue, versus 42% of total revenue in the comparable prior year nine month period. The increase in expenses in absolute dollars between the nine months of 1998 versus the comparable nine months of 1997 was primarily due to the QBM, PCR and Smyth acquisitions. RESEARCH AND DEVELOPMENT COSTS Research and development costs were $181,000 and $502,000, respectively, during the three- and nine-month periods ended September 30, 1998 compared to $164,000 and $236,000, respectively, incurred during the three- and nine-month periods ended September 30, 1997. The increase in absolute dollars is attributable to software development costs at Smyth 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 and to make the previous version of the Company's golf course and resort proprietary software Year 2000 compliant. The Company's policy is to expense such costs until technological feasibility is established. OTHER EXPENSE (INCOME) The Company earned interest income of $23,000 and $93,000, respectively, for the three- and nine-month periods ended September 30, 1998 compared to $16,000 and $124,000, respectively, for the three- and nine-month periods ended September 30, 1997. For the periods ended September 30, 1997, the Company had earned interest income on the proceeds from an offering in November 1996. These proceeds were subsequently used to fund the cash consideration for acquisitions consummated during 1997. For the periods ended September 30, 1998, interest income primarily related to the recognition of finance charges on delinquent accounts and dividend income. The Company recognized interest expense of $138,000 and $329,000, respectively, for the three-and nine-month periods ended September 30, 1998 compared to $32,000 and $64,000, respectively, for the three- and nine-month periods ended September 30, 1997. Interest expense in both years consisted primarily of interest on outstanding balances on the Company's lines of credit. The increase was a direct result of increased borrowings under the existing credit facilities over the prior year and amortization in the current year of the debt issue costs. Page 13 INCOME TAX PROVISION The Company recorded a income tax provision for the three- and nine-month periods ended September 30, 1998 compared to a slight tax provision for the three- and nine-month periods ended September 30, 1997. Income tax expense in both years consisted solely of state taxes as the Company had a taxable loss for federal income tax purposes. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS The Company's loss applicable to common stockholders for the nine months ended September 30, 1998, was $1,281,000, consisting of the Company's net loss for the year of $788,000, accretion of $242,000 to increase the Preferred Stock issued on March 18, 1998 (see LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY) to its liquidation value of $100 per share, imputed dividends related to the beneficial conversion feature of the Preferred Stock of $228,000 and cumulative dividends on the Preferred Stock of $23,000. The Company's loss applicable to common stockholders for the quarter ended September 30, 1998 was $347,000, consisting of the Company's net loss of $339,000 and cumulated dividends on the Preferred Stock of $8,000. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY The Company had cash and cash equivalents of $445,000, working capital of $329,000 and capitalization of $6,801,000 at September 30, 1998. During the nine months ended September 30, 1998, the Company utilized $2,482,000 of cash in operations; utilized $573,000 for the acquisition of QBM and utilized $6,000 from other investing activities; and generated $2,790,000 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 and Preferred Stock. During the nine months ended September 30, 1997, the Company utilized $1,144,000 for operations; utilized $173,000 for the purchase of property and equipment; utilized $3,008,000 for the acquisitions of MicroData, Smyth and EBM and PCR; utilized $850,000 for rescinded acquisition; and generated $167,000 from financing activities, which consisted primarily of net borrowings and repayments under the Company's various line of credit facilities and the purchase of treasury stock. On December 17, 1997, the Company obtained a new line of credit which 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 on December 31, 2000; and is collateralized by the Company's accounts receivable and inventories. 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) acquire or sell any assets over $50,000 excluding purchases of dealers; (ii) sell or transfer any collateral except for finished inventory in the ordinary course of business; (iii) sell inventory on a sale-or-return, guaranteed sale, consignment or other contingent basis; (iv) incur any debts, outside the ordinary course of business which would have a material adverse effect; (v) guarantee or otherwise become liable with respect to obligations of another party or entity; (vi) pay or declare any cash dividends; or (vii) make any changes in the Company's capital structure that would have a material adverse effect. As of September 30, 1998, the Company was in compliance with the covenants under this credit facility. 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 $4,048,000 bearing interest at 10.25% at September 30, 1998 under this credit facility. 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 is up to $2,000,000 and will 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 will 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 (SEC) on April 17, 1998, assuming that the various conditions set forth in the purchase agreement are met. The SEC has 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 after 90 days following the closing date, pursuant to paragraph 2 (b) of the Registration Rights Agreement. The Preferred Stock is convertible by the holders into common stock of the Company at any time into a number of shares of common stock determined by dividing the issue price by the conversion price, which is defined to be 78% of the lowest five-day average closing bid price for the 25-day period prior to the date of the conversion notice. At no time shall the conversion price be greater than $3.26 (110% of the five-day average bid price prior to the date such shares were purchased). 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. The amounts that may be purchased under the second and third Page 14 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 HD Brous & Co., Inc., 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. At any time after the date of issuance of the Preferred Stock, the Company may at its option redeem some or all of the outstanding shares of Preferred Stock. The Company incurred $242,000 of issuance costs which were charged against the carrying value of the preferred stock. The Company recorded accretion of $242,000 to increase the carrying value to the liquidation value of $1,000,000. The Preferred Stock is convertible by the holders at any time into common stock at a conversion rate which is less than the fair value of the common stock. The Company recorded imputed dividends related to this beneficial conversion feature of $228,000. As of September 30, 1998, 6,700 shares of Preferred Stock were converted into 460,279 shares of common stock at $1.10-$1.67 per share. In addition, the Company issued 3,229 shares in common stock representing the accrued but unpaid dividends on the preferred shares being converted. The Company anticipates that its current cash on hand, cash flow from operations and credit facilities will be sufficient to meet the Company's liquidity requirements for its operations through the end of 1998. At September 30, 1998, approximately $952,000 was available for the Company to borrow under the credit facilities. However, the Company will require additional financing in order to continue its acquisition strategy and may incur additional costs and expenditures to expand operational and financial systems and corporate management and administration. Moreover, the Company may be limited in its ability to grow internally without additional working capital. The Company currently intends to obtain financing through future issuance of debt or equity securities during the remainder of 1998. However, there can be no assurance that the Company will be able to successfully obtain financing or that such financing will be available on terms the Company deems acceptable. The Company's long-term success is dependent upon its ability to obtain necessary financing, the successful execution of management's acquisition strategy and the achievement of sustained profitable operations. ACQUISITION On May 8, 1998, the Company, through its wholly-owned subsidiary Automated Register Systems, Inc., acquired all of the outstanding common stock of Quality Business Machines Co. (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 common stock of the Company, valued at $500,000 at the closing date of the acquisition; and a promissory note in the principal amount of $70,000 at an interest rate of 8.5% executed by the Company in favor of QBM. Of such consideration, the Company retained 36,655 shares of common stock, valued at approximately $100,000 and $10,000 in cash, in escrow, as the purchase price is subject to post-closing reduction in the event certain financial targets of QBM are not met. The transaction was recorded under the purchase method of accounting. LEGAL PROCEEDINGS 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 are 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. The case is pending in the United States District Court for the Southern District of New York. In addition to seeking to have themselves declared proper plaintiffs and having the case certified as a class action, plaintiffs seek unspecified monetary damages. The plaintiffs' complaint alleges 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. The Company denies that it has any liability to the class action plaintiffs and intends to vigorously defend itself. The outcome of this litigation is not currently predictable, and the Company believes that all or a substantial part of the damages, if any, would be covered by insurance. Other than the related legal fees, the Company has not made a provision for any liability in the accompanying financial statements. NEED FOR ADDITIONAL FINANCING FOR INTERNAL GROWTH AND TO IMPLEMENT ACQUISITION STRATEGY Historically, the Company's acquisitions had annual, average growth rates of five percent. To grow the business faster than the average growth rate will require working capital because of the historical cash flow trends. The current line of credit restricts borrowings based on eligible collateral of accounts receivable and inventory. Because of the lack of financing to continue the Company's original growth strategy, the Company has altered its strategy to grow the businesses internally. The rate of growth will be dependent on the Company's ability to either generate working capital from operations or to raise additional working capital. There are no assurances the Company will be successful with this strategy. Page 15 The Company has engaged, and in the foreseeable future will likely continue to engage, in discussions with several other retail automation solution businesses regarding possible acquisitions, some of which could be material. However, the Company currently has not entered into any definitive agreements with respect to any acquisitions that are, individually or in the aggregate, material to the Company other than the agreement with QBM discussed above. To continue this acquisition strategy, the Company will need to obtain additional financing. Currently, the Company has used proceeds of approximately $600,000 from the net proceeds of $870,000 from its Preferred Stock offering on March 18, 1998 to acquire Quality Business Machines on May 8, 1998. Until additional funds are obtained, the Company does not have enough cash available to acquire additional dealers and therefore, has suspended its acquisition activities. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, some computer systems and software used by companies may need to be upgraded to comply with such "Year 2000" requirements. Most of the POS products sold by the Company have date sensitive software which may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in report generation or even more significant operational problems that could hinder a business ability to function on a day to day basis. The Company has been upgrading its software for club and resort applications so that it will run on the latest operating systems. This effort began in early part of this year and involved checking each module and program to make sure it is in compliance and changing those that needed to be updated. The Company expects that this effort will take a year to complete beginning this year with an estimated completion of all compliance testing by the end of 1998. As of September 30, 1998, the Company had completed 81% of the checking of programs in its software. The software is released periodically to customers, including the enhancements for Year 2000. As programs in each module are completed, they are sent to the customer in a subsequent release. Release dates of these various modules will take place through the end of this year with the final completed modules shipping to customers in the first quarter of 1999. The key modules completed to date are Tee Time Scheduling, General Ledger, for budgets out into the future; and Accounts Payable, for payment requirements into the future. In addition, the point-of-sale software has been changed to comply and work with credit authorization systems that have credit card expiration dates into the new millennium. Each of these modules, along with Accounts Receivable, Member Profile, Tour Event and Job Costing, are among the ones that have been done and tested. The Company will make every effort and will allocate more resources to keep it on this time line. The Company currently estimates it will expend approximately $150,000 to $200,000 in 1998 to make such software Year 2000 compliant. Although the Company believes that such software will be Year 2000 compliant, there can be no assurances that compliance will be achieved. In the event such compliance is not achieved, it may have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. The Company is making inquiries of its vendors of POS systems and cash registers regarding whether the systems upon which they rely are Year 2000 compliant and whether they anticipate any impairment of their ability to deliver product and services as a result of Year 2000 issues. Manufacturers of these products are being required to document Year 2000 compliance for each product they sell by December 31, 1998. If the Company determines that a particular vendor will be impacted by this problem, the Company may attempt to identify additional or replacement vendors, which could delay accessibility of the products and/or services provided by such vendors. Such delay or failure to identify an additional or replacement vendor could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows. In addition, the Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase hardware and software products such as those offered by the Company. The Company cannot estimate at this time the potential loss of revenue based on this uncertainty. The Company will continue to assess all of its products it sells and services to verify Year 2000 compliance. The Company is in the process of formulating a support plan to ensure our customers will be Year 2000 compliant. FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS The Company's business can be subject to seasonal influences. The POS dealers and systems integrators which the Company has acquired to date have typically had lower revenues in the quarters ending March 31 and December 31; however, the Company's quarterly operating results are affected by a number of other factors, many of which are beyond the Company's control. A substantial portion of the Company's backlog is typically scheduled for delivery within 90 days. Delivery dates for products sold by the Company are subject to change due to customers changing the required installation date of a retail automation solution system. The changing of such delivery dates is beyond the Company's control primarily due to lower level of new store openings by customers caused by inclement weather, contractor delays, financing concerns and/or holidays. Quarterly sales and operating results, therefore, depend in large part on customer-driven delivery dates, which are subject to change. In addition, a significant portion of the Company's operating expenses are relatively fixed in Page 16 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 business, results of operations, financial condition and cash flows. The Company believes that due to these factors, quarterly results may fluctuate accordingly; therefore, there can be no assurances that results in a specific quarter are indicative of future results. In addition, quarterly results in the future may be materially affected by the timing and magnitude of acquisitions and costs related to such acquisitions, the timing and extent of staffing additions at corporate headquarters necessary to integrate acquired companies and support future growth and general economic conditions. Therefore, due to these factors and the factors stated above, results for any quarter are not necessarily indicative of the results that the Company may achieve for any subsequent quarter or for a full year. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS THIS QUARTERLY REPORT ON FORM 10-QSB 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, THAT ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. IN ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY MATERIALLY AFFECT REVENUES, EXPENSES AND OPERATING RESULTS INCLUDE, WITHOUT LIMITATION, THE SUCCESS OF THE COMPANY'S OPERATING SUBSIDIARIES; THE IMPACT OF THE COMPANY'S ACQUISITION STRATEGY AND THE COMPANY'S ABILITY TO SUCCESSFULLY INTEGRATE AND MANAGE THE ACQUIRED SUBSIDIARIES; THE ABILITY OF THE COMPANY TO OBTAIN FUTURE FINANCING ON ACCEPTABLE TERMS; AND SUBSEQUENT CHANGES IN BUSINESS STRATEGY OR PLAN. The forward-looking statements included herein are based on current assumptions that the Company will continue to sell and install products on a timely basis; that the Company will continue to sell maintenance contracts to service its installed base; that the Company will successfully implement its acquisition strategy; that competitive conditions within the Company's market will not change materially or adversely; that demand for the Company's products and services will remain strong; that the Company will retain existing key management personnel; that inventory risks due to shifts in market demand will be minimized; that the Company's forecasts will accurately anticipate market demand; that the Company will be able to obtain future financing on acceptable terms when needed; that the Company will be able to maintain key vendor relationships; and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect the Company's business, financial condition, results of operations and cash flows. Budgeting and other management decisions are subjective in many respects and are, thus, susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its acquisition strategy, marketing, capital expenditure, or other budgets, which may in turn affect the Company's business, results of operations, financial condition and cash flows. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Because of these and other factors affecting the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition to the factors discussed above in this section, as well as those discussed under the heading "Fluctuations in Quarterly Results of Operations," the following factors also may materially affect the Company's business, results of operations, financial condition and cash flows and therefore should be considered. LIMITED OPERATING HISTORY. The Company was founded in April 1996 and, prior to the acquisition of CRI in September 1996, the Company had no operations upon which an evaluation of the Company and its prospects could be based. There can be no assurance that the Company will be able to implement successfully its strategic plan, to generate sufficient revenue to meet its expenses or to achieve or sustain profitability. (See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.) RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company's strategy is to increase its revenue and the markets it serves through the acquisition of additional POS dealers and value added resellers serving retail end users. From its inception through August 14, 1998, the Company has completed seven acquisitions. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional companies or successfully integrate the operations of additional companies into those of the Company without encountering substantial costs, delays or other problems. In addition, there can be no assurance that companies acquired in the future will achieve sales and profitability that justify the Company's investment in them or that acquired companies will not have unknown liabilities that could materially adversely affect the Company's results of operations or financial condition. The Company may compete for acquisition and expansion opportunities with companies that have greater resources than the Company. There can be no assurance that Page 17 suitable acquisition candidates will continue to be available, that financing for acquisitions will be obtainable on terms acceptable to the Company, that acquisitions can be consummated or that acquired businesses can be integrated successfully and profitably into the Company's operations. Further, the Company's results of operations in quarters immediately following a material acquisition may be materially adversely effected while the Company integrates the acquired business into its existing operations. The Company may acquire certain businesses either that have been unprofitable or that have had inconsistent profitability prior to their acquisition. An inability of the Company to improve the profitability of these acquired businesses could have a material adverse effect on the Company. Finally, the Company's acquisition strategy places significant demands on the Company's resources and there can be no assurance that the Company's management and operational systems and structure can be expanded to effectively support the Company's continued acquisition strategy. If the Company is unable to implement successfully its acquisition strategy, this inability may have a material adverse effect on the Company's business, results of operations, financial condition and cash flows. In connection with seven of its acquisitions, the Company entered into employment agreements with certain individuals. Under the terms of such agreements, if certain performance standards of the acquired companies are met, the Company is obligated to pay a bonus to these individuals. The performance standards are based upon, among other things, the acquired companies' pre-tax profits. As of September 30, 1998, on average, the acquired companies have achieved 62% of their baseline, performance standards. Accordingly, the Company has not made any bonus payment or incurred any liability under any of such employment agreements. The Company does not expect to accrue bonuses until the acquired companies achieve an excess of 100 percent of their baseline, performance standards. At such time, the Company will accrue bonuses based on a percentage of the improvement over 100 percent. The employment agreements also allow the Company to take certain remedial action in the event the acquired companies do not meet their respective performance standards. With respect to five of the acquisitions, the Company has taken remedial action against certain employees who did not meet (or whose company did not meet) the performance standards set out in their respective employment agreements. Such remedial action includes the geographical transfer of one employee, placement of other employees on probation, and the restructuring of two of the acquisitions. NEED FOR ADDITIONAL FINANCING TO IMPLEMENT ACQUISITION STRATEGY. The Company currently intends to effect future acquisitions with cash generated from operations and future issuance of debt or equity securities. There can be no assurance that the Company will be able to obtain financing if and when it is needed on terms the Company deems acceptable. The inability of the Company to obtain financing would have a material adverse effect on the Company's ability to implement its acquisition strategy, and as a result, could require the Company to diminish or suspend its acquisition strategy. CONSIDERATION FOR ACQUIRED COMPANIES EXCEEDS ASSET VALUE. Valuations of the companies acquired by the Company have not been undertaken based on independent appraisals, but have been determined through arm's-length negotiations between the Company and representatives of such companies. The consideration for each such company has been based primarily on the judgment of management as to the value of such company as a going concern and not on the book value of the acquired assets. Valuations of these companies determined solely by appraisals of the acquired assets may have been less than the consideration paid for the companies. No assurance can be given that the future performance of such companies will be commensurate with the consideration paid. Specifically, during the fourth quarter of 1997, the Company recorded a goodwill write-down of approximately $1,871,000 which consisted of $1,442,000 related to Smyth Systems, $419,000 related to CRI and $10,000 related to its other subsidiaries. SEE "GOODWILL WRITE-DOWN" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB/A FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1997. No assurance can be given that the facts and circumstances surrounding the write-down will not occur in the future. Moreover, the Company has incurred and expects to incur significant amortization charges resulting from consideration paid in excess of the book value of the assets of the companies acquired and companies which may be acquired in the future. SUBSTANTIAL COMPETITION. The POS industry is highly fragmented and competitive. Competitive factors within the industry include product prices, quality of products, service levels, reputation and geographical location of dealers. The Company primarily competes with independent POS dealers and some of these dealers may have greater financial resources available to them than does the Company. In addition, there are original equipment manufacturers of POS equipment and value-added resellers that specialized in software applications for the POS industry that compete in certain product areas. The Company's ability to make acquisitions will also be subject to competition. The Company believes that, during the next few years, POS dealers may seek growth through consolidation with entities other than the Company. 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 effect distribution directly to many of the retail accounts of the Company in the markets served by the Company. Any of these developments could have a material adverse effect on the Company's business, results of operations, financial condition and cash flows. Page 18 SUBSTANTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS. The Company may experience substantial fluctuations in its annual and quarterly operating results in future periods. The Company's operating results are affected by a number of factors, many of which are beyond the Company's control. A substantial portion of the Company's backlog is typically scheduled for delivery within 90 days. Delivery dates for products sold by the Company are subject to change due to customers changing the required installation date of a retail automation solution system. The changing of such delivery dates is beyond the Company's control. Quarterly sales and operating results therefore depend in large part on customer-driven delivery dates, which are subject to change. In addition, a significant portion of the Company's operating expenses are 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 business, results of operations, financial condition and cash flows. DEPENDENCE ON MANUFACTURERS. A substantial portion of the Company's total revenue is and will be derived from the sale of POS systems, ECRs and related equipment, none of which are manufactured by the Company. The Company's business is dependent upon close relationships with manufacturers of POS equipment and software and the Company's ability to purchase equipment and software in the quantities necessary and upon competitive terms so that it will be able to meet the needs of its end user customers. The Company purchases its hardware principally from three vendors: Panasonic, ERC (a distributor of Panasonic products) and NCR. Sales of Panasonic, ERC and NCR products accounted for approximately 32% of revenues for the nine month period ended September 30, 1998, with sales of Panasonic and NCR products accounting for 12% and 20% of the Company's total revenue in that nine month period, respectively. There can be no assurance that the relationships with these manufacturers will continue or that the Company's supply requirements can be met in the future. The Company's inability to obtain equipment, software, parts or supplies on competitive terms from its major manufacturers could have a material adverse effect on the Company's business, results of operations, financial condition and cash flows. FIXED FEE CONTRACTS. Many of the Company's service contracts are fixed fee contracts pursuant to which the customer pays a specified fee for the Company's performance of all necessary maintenance and remedial services during the contract's term. Under these agreements, the Company is responsible for all costs incurred in maintaining and repairing the equipment, including the cost of replacement parts, regardless of actual costs incurred. Accordingly, the Company can incur losses from fixed fee contracts if the actual cost of maintaining or repairing the equipment exceeds the costs estimated by the Company. POTENTIAL INABILITY TO MARKET NEWLY DEVELOPED PRODUCTS. The technology of POS systems, ECRs, VARs and related equipment is changing rapidly. There can be no assurance that the Company's existing manufacturers will be able to supply competitive new products or achieve technological advances necessary to remain competitive in the industry. Further, there can be no assurance that the Company will be able to obtain the necessary authorizations from manufacturers to market any newly developed equipment or software. The Company's Smyth Systems, Inc. (Smyth) subsidiary operates in the VAR solutions segment, wherein it develops customized, turnkey retail automation solutions, consisting of both hardware and software for the golf course and resort markets. There can be no assurance that Smyth will be able to develop commercially viable and technologically competitive VAR solutions at competitive prices to compete in these markets. RELIANCE ON KEY PERSONNEL. Implementation of the Company's acquisition strategy is largely dependent on the efforts of a few senior officers. In particular, the Company's operations are dependent to a great degree on the continued efforts of its Chief Executive Officer, Richard H. Walker. Furthermore, the Company will most likely continue to be dependent on the senior management of companies that are acquired. Competition for highly qualified personnel is intense, and the loss of any executive officer or other key employee, or the failure to attract and retain other skilled employees, could have a material adverse effect upon the Company's business, results of operations or financial condition. The Company is a party to an agreement with Mr. Walker. The agreement with Mr. Walker terminates in 2004, unless terminated earlier pursuant to the agreement, and contains confidentiality provisions and covenants not to compete. State laws, however, may limit the enforceability of the confidentiality and/or non-competition provisions therein. The Company is currently the beneficiary of a key man life insurance policy in the amount of $1,000,000 on the life of Mr. Walker. There can be no assurance that the Company will maintain the policy in effect or that the coverage will be sufficient to compensate the Company for the loss of the services of Mr. Walker. ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. These provisions make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. For example, the Company has not elected to be excluded from the provisions of Section 203 of the Delaware General Corporation Law, which impose certain limitations on business combinations with interested stockholders upon acquiring 15% or more of the common stock. This statute may have the effect of inhibiting a non-negotiated merger or other business combination involving the Company, even if such event would be beneficial to the then-existing stockholders. In addition, the Company's Certificate of Incorporation authorizes the issuance of up to 4,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion, and voting or other rights, which could adversely affect the voting Page 19 power or other rights of the holders of the Company's common stock. The issuance of preferred stock could have the effect of entrenching the Company's Board of Directors and making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. As of March 31, 1998, the Company had issued 10,000 shares of Series A Convertible Preferred Stock (the Preferred Stock), at an issue price of $100 per share. Each share of Preferred Stock is convertible at the option of the holder thereof at any time into a number of shares of common stock determined by dividing the issue price by the conversion price, which is defined to be 78% of the lowest non-consecutive five-day average closing bid price for the common stock for the 25-day period prior to conversion. Each holder of shares of the Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which it could be converted. The Company cannot, without the vote or written consent of the holders of at least 66-2/3% of the then outstanding shares of Preferred Stock, (i) redeem, purchase or otherwise acquire for value any share of the Preferred Stock; (ii) redeem, purchase or otherwise acquire any of the Company's common stock; (iii) authorize or issue any other equity security senior to or on parity with the Preferred Stock as to voting rights, dividend rights, conversion rights, redemption rights or liquidation preferences; (iv) declare or pay any dividend or make any distribution with regard to any share of common stock; (v) sell, convey, lease or otherwise dispose of all or substantially all of its property or business; liquidate, dissolve or wind up the Company's business; or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary); (vi) effect any transaction or series of transactions in which more than 50% of the voting power of the Company is disposed of, unless the Company's stockholders of record as constituted immediately prior to such transaction will, immediately thereafter, hold at least a majority of the voting power of the surviving or acquiring entity; (vii) permit any subsidiary to issue or sell any of its capital stock (except to the Company); (viii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Preferred Stock; or (ix) alter or change the rights, preferences or privileges of the shares of Preferred Stock so as to adversely affect the outstanding shares. In the event of any liquidation dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distributions to holders of common stock, an amount per share equal to $100 plus any declared but unpaid dividends. VOLATILITY OF STOCK PRICE. The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of the particular companies. These broad market fluctuations may materially adversely affect the market price of the Company's common stock. In addition, the market price of the Company's common stock has been and may continue to be highly volatile. Factors such as possible fluctuations in the Company's business, results of operations or financial condition, failure of the Company to meet expectations of security analysts and investors, announcements of new acquisitions, the timing and size of acquisitions, the loss of suppliers or customers, the announcement of new or terminated supply agreements by the Company and its subsidiaries or its competitors, changes in regulations governing the Company's operations or its suppliers, the loss of the services of a member of senior management, litigation and changes in general market conditions all could have a material adverse affect on the market price of the Company's common stock. MAINTENANCE CRITERIA FOR NASDAQ; RISKS OF LOW-PRICED SECURITIES. The Company's common stock is presently traded on the Nasdaq SmallCap Market. To maintain inclusion on the Nasdaq SmallCap Market, the Company's common stock must continue to be registered under Section 12(g) of the Exchange Act, and the Company must continue to have at least $2,000,000 in net tangible assets or $500,000 in income in two of the last three years, a public float of at least 500,000 shares, $5,000,000 in market value of public float, a minimum bid price of $1.00 per share, at least two market makers and at least 300 stockholders. While the Company currently meets the maintenance standards, there is no assurance that the Company will be able to maintain the standards for Nasdaq SmallCap Market inclusion with respect to its securities. At September 30, 1998, the Company had $2,161,000 in net tangible assets. If the Company fails to maintain Nasdaq SmallCap Market listing, the market value of the Company's common stock in all likelihood would decline and stockholders would find it more difficult to dispose of or to obtain accurate quotations as to the market value of the common stock. INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Certificate of Incorporation (the Certificate) and Bylaws include provisions that eliminate the directors' personal liability for monetary damages to the fullest extent possible under Delaware Law or other applicable law (the Director Liability Provision). The Director Liability Provision eliminates the liability of directors to the Company and its stockholders for monetary damages arising out of any violation by a director of his fiduciary duty of due care. Under Delaware Law, however, the Director Liability Provision does not eliminate the personal liability of a director for (i) breach of the director's duty of loyalty, (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violation of law, (iii) payment of dividends or repurchases or redemption of stock other than from lawfully available funds, or (iv) any transaction from which the director derived an improper benefit. The Director Liability Provision also does not affect a director's liability under the federal securities laws or the recovery of damages by third parties. ABSENCE OF DIVIDENDS. The Company has not paid dividends on its common stock to date. The Company is obligated to pay, quarterly, cumulative dividends at a rate of six percent (6%) per annum of the issue price of the Preferred Stock, payable, at the holders' option, in cash or in common stock at the conversion price of the Preferred Stock. So long as any shares of Preferred Stock remain outstanding, the Company may not, without the vote or written consent of the holders of at least 66-2/3% of the then outstanding shares of Preferred Stock, voting together as a single class, declare or pay any dividend Page 20 with regard to any share of common stock. (See ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS, ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS) Additionally, although the current line of credit does not expressly prohibit the Company from paying dividends, the line of credit does contain certain covenants which restrict the reduction or depletion of the Company's capital. The Company anticipates that future financing, including any lines of credit, may further restrict or prohibit the Company's ability to pay dividends. RESTRICTIONS ON COMPANY'S ABILITY TO ENTER INTO CERTAIN TRANSACTIONS. On December 17, 1997, the Company obtained a new line of credit. Pursuant to the terms of the line of credit, the Company is prohibited from engaging in certain transactions without first obtaining the written consent of the lender. Such transactions include, but are not limited to, (i) the sale or acquisition of assets with a value exceeding $50,000; (ii) the sale or transfer of any collateral under the line of credit, except for the sale of items in the Company's finished inventory in the ordinary course of business; (iii) the sale of inventory on a sale-or-return, guaranteed sale, consignment or other contingent basis; and (iv) any other transaction outside the ordinary course of business. No assurance can be given that these restrictions will not impact the Company's ability to conduct business in the future, even though the line of credit does not prohibit or restrict the Company from acquiring other companies (including acquisitions for amounts greater than $50,000) pursuant to its acquisition strategy. Page 21 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 are 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. The case is pending in the United States District Court for the Southern District of New York. In addition to seeking to have themselves declared proper plaintiffs and having the case certified as a class action, plaintiffs seek unspecified monetary damages. The plaintiffs' complaint alleges claims under the federal securities laws for alleged misrepresentations and omissions in connection with the sale 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. The Company denies that it has any liability to the class action plaintiffs and intends to vigorously defend itself. The outcome of this litigation is not currently predictable, and the Company believes that all or substantial part of the damages if any would be covered by insurance. Other than the related legal fees, the Company has not made a provision for any liability in the accompanying financial statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 Calculation of Earnings per Share 27 Financial Data Schedule (b) Reports on Form 8-K During the three months ended September 30, 1998, the Company did not file any Current Reports on Form 8-K. Page 22 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bristol Retail Solutions, Inc. -------------------------------------------- (Registrant) November 13, 1998 By: /s/ MICHAEL S. SHIMADA - -------------------------------- -------------------------------------------- Date Michael S. Shimada Vice President and Chief Financial Officer (Principal financial and accounting officer) Page 23 EX-11 2 EXHIBIT 11-COMPUTATION OF EARNINGS(LOSS) PER SHARE EXHIBIT 11 BRISTOL RETAIL SOLUTIONS, INC. Computation of Earnings (Loss) per Share
Three Months Ended September 30, 1998 1997 -------------- -------------- (As Restated) BASIC LOSS PER SHARE Net loss $ (338,994) $ (195,989) Accretion related to Series A Convertible Preferred Stock - - - - Imputed dividends for Series A Convertible Preferred Stock - - - - Cumulative dividends for Series A Convertible Preferred Stock (7,580) - - -------------- -------------- Net loss applicable to common stockholders $ (346,574) $ (195,989) ============== ============== Weighted average number of common shares outstanding during the period 5,876,201 5,503,929 ============== ============== Basic loss to common stockholders per share $ (0.06) $ (0.04) ============== ============== DILUTED LOSS PER SHARE Net loss applicable to common stockholders $ (346,574) $ (195,989) Plus: Income impact of assumed conversion-Preferred dividends - - - - -------------- -------------- Net loss applicable to common stockholders $ (346,574) $ (195,989) ============== ============== Weighted average number of common shares outstanding during the period 5,876,201 5,503,929 Effect of stock options, warrants and convertible preferred stock treated as common stock equivalents under the treasury stock method - - - - -------------- -------------- Total shares 5,876,201 5,503,929 ============== ============== Diluted loss to common stockholders per share $ (0.06) $ (0.04) ============== ==============
Nine Months Ended September 30, 1998 1997 -------------- -------------- (As Restated) BASIC LOSS PER SHARE Net loss $ (787,719) $ (1,404,203) Accretion related to Series A Convertible Preferred Stock (241,916) - - Imputed dividends for Series A Convertible Preferred Stock (227,589) - - Cumulative dividends for Series A Convertible Preferred Stock (23,300) - - -------------- -------------- Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203) ============== ============== Weighted average number of common shares outstanding during the period 5,697,308 5,086,616 ============== ============== Basic loss to common stockholders per share $ (0.22) $ (0.28) ============== ============== DILUTED LOSS PER SHARE Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203) Plus: Income impact of assumed conversion-Preferred dividends -- - - -------------- -------------- Net loss applicable to common stockholders $ (1,280,524) $ (1,404,203) ============== ============== Weighted average number of common shares outstanding during the period 5,697,308 5,086,616 Effect of stock options, warrants and convertible preferred stock treated as common stock equivalents under the treasury stock method - - - - -------------- -------------- Total shares 5,697,308 5,086,616 ============== ============== Diluted loss to common stockholders per share $ (0.22) $ (0.28) ============== ==============
Page 24 EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE UNAUDITED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IN THE REPORT ON FORM 10-QSB FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF BRISTOL RETAIL SOLUTIONS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 445,086 0 7,379,441 300,553 4,050,776 12,183,739 1,206,073 413,283 18,844,056 11,854,556 0 0 3 6,216 6,794,786 18,844,056 23,604,172 23,604,172 16,091,921 24,144,623 237,642 0 0 (778,093) 9,626 0 0 0 0 (787,719) (0.22) (0.22)
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