-----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, U9QlYRq4v6Q/Dt1HZ2xqXeAOMUwwqyQ38i8Dgb8TCBb+eU2guadwh4k1C+bSp0J4 dcOAyrgopcpGTAq76H0Ykw== 0000921895-98-000239.txt : 19980330 0000921895-98-000239.hdr.sgml : 19980330 ACCESSION NUMBER: 0000921895-98-000239 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRINITECH SYSTEMS INC CENTRAL INDEX KEY: 0000099047 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 061344888 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-12292 FILM NUMBER: 98576077 BUSINESS ADDRESS: STREET 1: 333 LUDLOW STREET CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2034258000 10KSB 1 ANNUAL REPORT ON FORM 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark one) /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 OR / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________to________ Commission file number: 0-21324 TRINITECH SYSTEMS, INC. (Exact name of registrant as specified in its charter) NEW YORK 06-1344888 (State of incorporation) (I.R.S. Employer identification number) 333 LUDLOW STREET, STAMFORD, CT 06902 (Address of principal executive offices) Registrant's telephone number, including area code: (203) 425-8000 Securities registered under Section 12(b) of the Exchange Act: COMMON STOCK, $.001 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE (Title of each class) (Name of each exchange on which registered) Securities registered under Section 12(g) of the Exchange Act: NONE Check whether the registrant (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 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-KSB or any amendment to this Form 10-KSB. X The Issuer's revenues for the fiscal year ended December 31, 1997 were $5,006,017. The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $59.3 million, as of March 23, 1998. Solely for the purposes of this calculation, shares held by directors and officers of the Registrant have been excluded. Such exclusion should not be deemed a determination by the Registrant that such individuals are, in fact, "affiliates" of the Registrant. As of March 23, 1998 there were 8,663,530 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENTS FORM 10-KSB REFERENCE --------- --------------------- Proxy Statement for Annual Meeting of Stockholders to be held June 3, 1998 Part III, Items 9 - 12 PART I ITEM 1. BUSINESS GENERAL TRINITECH SYSTEMS, INC. (the "Company" or "Trinitech") develops and markets advanced electronic trading systems to brokerage firms, international banks and global exchanges trading in equities, currencies and futures & options. The Company continues to market its patented flat panel hardware technology, the Trinitech Touchpad(R), in addition to a complete line of Flat Panel monitors. The Company's goal is to become the leading provider of real-time electronic trade entry and routing systems to the global financial services industry thereby offering its customers the ability to enter and route orders and executions from "end-to-end," from the buy-side/retail institution or remote branch office through to the exchange floors and electronic exchanges. The Company is setting new standards for the future in this regard and its technology is being used by such firms as Morgan Stanley Dean Witter Discover, J.P. Morgan Securities, Inc., Lehman Brothers, Inc., Merrill Lynch, Smith Barney, Inc., CS First Boston, Paine Webber, Incorporated, the Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, and Optimark Technologies, Inc., among others. The Company's systems provide electronic order entry, order routing, tracking and risk monitoring capabilities, replacing existing paper and telephone based trading and eliminating a number of redundant steps in the order flow and execution reporting process. The Company believes that the trading industry is inevitably moving from a paper and voice driven tracking environment to real-time electronic-based trading. The Company believes that the primary reasons for this transition are the increased order and information flow provided by an electronic trading environment, the subsequent improvement in trading performance and elimination of trading errors as a result of the availability of on-line risk management, and the cost efficiencies associated with electronic trading. Recurring, high profile trading scandals have provided further impetus for the implementation by financial risk managers of electronic trading systems with risk monitoring and audit tracking capabilities. All the Company's products are available in flexible building blocks that can be sold either together or separately to complement existing customer components. This has given the Company the ability to collect revenue from each "link" of the trading process. The Company also continues to expand its product portfolio with new and complementary software modules that allow the Company to collect revenue from multiple levels. The Company now offers its trading systems on a subscription or transaction basis, with hardware, software and maintenance provided for a monthly fee. For the Company's customers, the new pricing model offers minimal up-front investment in technology as well as an alternative to costly in-house development. For the Company, it offers a simplification of the sales cycle as well as significant recurring revenue. (R)-TRINITECH TOUCHPAD, GUIDED-INPUT, X-PAD, TRINITECH, THE COMPANY'S LOGO "T", AND TRINITECH SYSTEMS ARE REGISTERED TRADEMARKS OF TRINITECH SYSTEMS, INC. -2- In September 1997, the Company launched its NYFIX Network, a FIX (Financial Information Exchange Protocol) and Exchange Access Network designed to provide the financial community with a central electronic meeting place for routing real-time orders and other FIX messages. NYFIX was built upon the original infrastructure of Trinitech's NYSE Data Center which was established in October 1996. NYFIX provides the Company's equities customers access to its subscription-based quote, order and execution routing systems as well as providing connectivity between the buy-side, sell-side and exchange floor environments. NYFIX offers member firms the ability to utilize the Company's systems without having to invest in a communications infrastructure. Furthermore, the Company's NYFIX Data Center offers the potential for an "any to any" relationship for routing orders and executions between and among firms and the NYSE. Going forward into 1998, the Company is well positioned for substantial growth. Trinitech continues to provide the raw terminals (through its hardware products), the software, and the infrastructure (through its NYFIX Data Centers) to tie the trading industry together for the electronic entry and routing of orders and executions. The Company was incorporated in New York in 1991. PRODUCTS PORTFOLIO OF COMPLETE ELECTRONIC TRADING SYSTEMS Trinitech supplies complete turnkey trading solutions that consist of hardware, complete proprietary software packages and network technology for the trading of equities, currencies and futures & options. In addition, the Company supports its customers in all aspects of planning and implementing these systems as well as providing on-going technical support. Based on these well received and maturing turnkey systems developed with leading international firms, the Company's principal business groups, the Equities Group, the Futures and Options Group, and the Hardware Technology Group, address each of its core product lines. Each group has built its business and technical management staff with expert knowledge so that their individual product segments are efficiently targeted to their respective customers. EQUITIES GROUP-PRODUCTS The Company sells five complete systems for equities trading: the Trinitech FLOORLOOK SYSTEM, the Trinitech FLOORREPORT SYSTEM, the Trinitech FIXTRADER SYSTEM, FIRST (FIX INDICATION ROUTING SYSTEM TERMINAL) and FIXTALK. As planned, the Company formally launched its Indication of Interest (IOI) Module, FIRST, in early 1997. The Trinitech FLOORLOOK SYSTEM consists of the Trinitech Touchpad(R), a scanner, server and proprietary software. FLOORLOOK solves the challenge faced by member firms in getting fast quotes on stocks directly from the exchange floor to their upstairs trading operations. The Trinitech FLOORLOOK SYSTEM works by scanning handwritten quote slips called "LOOKS" into a scanner by a floor clerk located at the member's booth. These scanned LOOKS are instantly transmitted to upstairs traders at their workstations in multiple sites and remote offices. Implementation of the system results in the elimination of repetitive and error prone telephone traffic between clerks and traders resulting in better execution of large trades. The Trinitech FLOORREPORT SYSTEM is a complete electronic order management system designed for member firms' exchange floor operations. Orders are received from upstairs traders (via the FIX Protocol), with execution information routed back in the same efficient manner. FloorReport enables floor clerks to route execution information to sales and block traders in real time, enabling them to better service their customers. The Trinitech FIXTRADER SYSTEM is a complete order management system for traders which allows the entry and routing of orders and executions between the buy-side institution and the sales and block desks. Connectivity with the exchange floor can be achieved by utilizing FIXTRADER in conjunction with the FLOORREPORT system. -3- Orders by traders are quickly and efficiently captured utilizing the Trinitech Touchpad(R) and can be routed to the appropriate venue in seconds, with executions routed back in the same efficient manner. With the financial industry embracing FIX as the means for communicating electronically, FIXTRADER offers an easy way for firms to gain FIX compliance. With the added benefit of FIX compliance, FIXTRADER allows firms to capture and secure buy-side order flow, thereby increasing buy-side business for firms utilizing the system. FIRST (FIX INDICATION ROUTING SYSTEM TERMINAL) is a user-friendly FIX (Financial Information eXchange protocol ) message routing application. A new software piece introduced in 1997, FIRST, Trinitech's Indications of Interest Module, is based on the latest 4.0 version of the FIX protocol and Trinitech's industry proven FIXTalk Subscription Routing Engine. FIRST allows sell-side firms to broadcast positions and inventory to be traded to the buy-side through the FIX protocol and allows buy-side institutions to receive and efficiently manage indications of interest or any FIX message type. The Trinitech FIXTALK System ("FIX" - Financial Information eXchange protocol), offers firms the ability to establish and maintain FIX sessions, send FIX messages and route incoming messages to different applications (utilizing any operating platform) residing on trader or broker workstations over the Internet or private lines. The FIX protocol offers the ability to connect the buy-side and sell-side of an equities transaction for electronic order/execution routing and trade information sharing and is recognized as being the standard in the industry. Trinitech's FIXTALK System, co-developed with Morgan Stanley and based on the latest 4.0 version of the FIX protocol, consists of a C++ object oriented class library, the Trinitech FIXTALK CLIENT TOOLKIT, which allows easy development of applications in order to utilize the FIX protocol. PRODUCT PRICING-EQUITIES GROUP All of Trinitech's products for equities trading are available on a subscription basis, with hardware, software and maintenance provided for a monthly subscription fee. Subscription agreements usually run from one to three years, with automatic multiple year renewal provisions included. For the Company's customers, subscription- based pricing offers a low up front investment in mission critical technology as well as an alternative to costly in-house development. For Trinitech it offers a simplification of the sales cycle as well as significant recurring revenue. Pricing for the FLOORLOOK and FLOORREPORT SYSTEMS is based on a monthly fee per booth on the NYSE floor, with an additional monthly upstairs fee per trader workstation using the Systems. Both FIXTRADER and FIRST are sold on a monthly fee basis per trader workstation. FIX-TALK is sold through a one-time domestic licensing fee or a global licensing with a recurring monthly maintenance fee per user. PRODUCT PENETRATION-EQUITIES GROUP NYFIX-FIX AND EXCHANGE ACCESS NETWORK- Building upon the NYSE Data Center it established in late 1996, the Company launched NYFIX, a combined FIX and Exchange Access Network, in September 1997. The Network and data center, strategically located several blocks from the New York Stock Exchange, offers easy monthly subscription-based access to all of the Company's quote, order and execution routing systems. NYFIX also allows smaller "two-dollar" and independent brokers access to the Company's systems. Firms no longer need a communications infrastructure to utilize the Company's systems, they can simply subscribe to the service. During 1997, proceeds from the Company's private placement (see "Management's Discussion and Analysis of Financial Condition and Results of Operation" section) were used to expand the original data center. The Company plans to launch an additional data center during 1998, EuroFix, which will be located in London. Building on the success of its original NYSE data center, the Company intends to provide its customers with global connectivity for routing of orders, executions, and other FIX messages. EuroFix will provide the capability to route orders and executions globally through one centralized "hub." Developing trading systems with a number of the leading firms, the Company has successfully moved from primarily a hardware vendor to a provider of complete electronic trading systems. Leading customers include -4- Morgan Stanley Dean Witter Discover, J.P. Morgan Securities, Inc., Lehman Brothers, Inc., Merrill Lynch, Smith Barney, Inc., CS First Boston, Paine Webber Incorporated, Nicholas Applegate, SAC Capital Management, among others. Since the Company's official launch of NYFIX in September 1997, the Company has signed a number of new customers including: Prudential Securities, ABN Amro Securities Inc., Deutsche Morgan Grenfell, and Dresdner Securities, among others. FUTURES AND OPTIONS GROUP-PRODUCTS For the futures & options trading market, the Company markets its Futures and Options ORDER BOOK MANAGEMENT SYSTEM ("OBMS"), which enables futures and options traders to enter, route and manage orders and executions in real-time. Global order-routing between different international branches of the same firm and all the major global exchanges, both open outcry and electronic, is supported by this comprehensive system. OBMS is offered utilizing the Company's patented Trinitech Touchpad(R) or in stand-alone software versions. The Company's plans to launch a London-based data center, EuroFix, which will provide connectivity for customers utilizing the Company's OBMS for futures and options trading. EuroFix will provide Trinitech's customers with the capability to route orders and executions globally through one centralized "hub." PRODUCT PRICING-FUTURES AND OPTIONS GROUP The Company offers OBMS on a subscription or transaction basis, with hardware, software and maintenance provided for a monthly fee. Subscription agreements usually run from one to three years with automatic multiple year renewal provisions included. When OBMS is sold on a transaction basis, the Company will receive a fee per futures contract traded through the system with a guaranteed monthly minimum payment. PRODUCT PENETRATION-FUTURES AND OPTIONS GROUP OBMS has been utilized by a number of leading firms in the futures & options industry, including J.P. Morgan, Citi-futures, and Lloyd Bank, among others. New customers for 1997 include ABN AMRO, CS First Boston, Deutsche Morgan Grenfell, Dresdner Kleinwort Benson, and Cantor Fitzgerald, among others. HARDWARE TECHNOLOGY GROUP-PRODUCTS Trinitech Touchpad(R): Utilizing a touch-screen interface, the Company's original product, the Guided-Input(R) Trinitech Touchpad(R) was designed to simplify and expedite the entry of orders and information related to the trading of financial instruments. The Trinitech Touchpad(R), with its patented flat panel design, was developed to optimize critical trader/broker desktop real estate. Its proprietary open architecture offers seamless integration with all major industry operating systems, thereby allowing customers to freely choose between MS-DOS, MS-Windows, Windows NT, OS/2, and UNIX applications. By offering what it believes to be a unique concept in intuitive, high-speed data entry and on-line information retrieval, the Company has managed to combine its touch-screen technology with proprietary software in such a manner that it has become possible to virtually eliminate the process of manual collection and processing of paper deal, order or quote tickets. Traders and brokers using the Company's Trinitech Touchpad(R) are able to record all of their trading activities electronically as they happen. As a result, it is now possible to automatically update on-line trader and management overview screens, thereby reducing the risk of errors and uninformed trading both in slow and frenetic markets. The Hardware Technology Group is responsible for the sale of the Company's flat panel touchscreens and monitors, as well as new product development. The Company continues to produce a line of high-end flat panel monitors with optional touchscreens, including the TRINITECH XGA MONITOR, which is available in 12.1", 14.1" and 20.0" versions. By offering the Company's patented high quality flat panel design utilized by its Trinitech Touchpad(R), the Company believes it can capture an increasing share of the market for flat panel displays and touchscreens in the financial sector. In addition, the Company offers different variations of its Trinitech Touchpad(R), including its S-Bus Trinitech Touchpad(R), which is designed specifically for Sun SPARC workstations. The Company has recently entered into -5- an agreement with Samsung to distribute its Flat Panel monitors to the Company's financial industry clients. Such reseller agreements represent an opportunity for the Company to provide complete trading desk solutions in a cost effective manner. PRODUCT PRICING-HARDWARE TECHNOLOGY GROUP The price of the Company's hardware products depends upon the features desired by customers, excluding software. Generally, customers enter into sales agreements with the Company that provide for initial orders from one to twenty Trinitech Touchpads(R) or Flat Panel monitors. PRODUCT PENETRATION-HARDWARE TECHNOLOGY GROUP To date, the Company's Trinitech Touchpad(R) products have been extensively utilized by major international banks, securities firms and exchanges in the United States, Europe and the Far East, including the American Stock Exchange, Arab Bank, Bank of Tokyo, Berliner Bank, CBOE (Chicago Board of Options Exchange), Citi- Futures, Daichi Kangyo Bank, Dean Witter, CS First Boston, JP Morgan, Lehman Brothers, Lloyds Bank, Merrill Lynch, Montreal Stock Exchange, Morgan Stanley, Paine Webber, Smith Barney, Swiss Bank, Shell Oil, and Yamaichi International, among others. The Company continues to selectively pursue the sale of its hardware products outside of the financial industry. MARKETING ELECTRONIC TRADING SYSTEMS The Company believes that the financial trading industry represents an ideal example of a uniform niche market. The characteristics of this market, particularly its low level of automation at the trade-entry or deal-making level, provide an excellent opportunity for the marketing of cost-effective and innovative technical solutions. The Company believes that this market is clearly defined, readily accessible, and accustomed to technological investment. As a single, coherent community, the trading industry allows the Company to market standardized products in a uniform manner in each of its market segments for equities, currencies and futures & options trading on a global basis. The Company's offering of products on a subscription or transaction basis through a data center solution, management believes, will significantly aid the roll-out of its products on an industry-wide basis, opening up new market segments for the Company's products. The Company expanded its marketing efforts in 1997. The Company continued to increase its global presence by exhibiting its products at numerous domestic and international technology and financial industry conferences. In addition, the Company initiated an advertising campaign for its NYFIX network encompassing the major trade publications. Additional marketing efforts included the launch of Trinitech's new website, www.trinitech.com, which has been a growing source of sales leads in recent months. In addition to having a presence at major industry events, the Company's Chief Executive Officer appeared on CNN during 1997. The Company also generated significant press coverage with respect to its FIX trading solutions and industry wide FIX and exchange connectivity network, NYFIX. The Company intends to continue its marketing initiatives in 1998. COMPETITION ELECTRONIC TRADING SYSTEMS Competition exists in the Company's primary market. The Company believes that it competes favorably with its turnkey trading systems, where additional leverage is achieved through optimized integration of Trinitech Touchpad(R) technology, modular trading software and data center solutions. To further enhance the marketability of its systems, the Company is implementing its solutions on the most popular and well established client server architectures. -6- The Company believes that its technology offers unique advantages compared to alternative technologies utilized by competitors. The Company believes, based upon customer feedback, that its systems successfully fulfill their promise of immediate entry, routing and reporting of trading positions, operational savings, reduction of input error and improvement in reporting for compliance purposes. Having been a early pioneer in providing electronic order capture and routing solutions to the trading industry, the Company has established close relationships with a number of large firms on Wall Street which can increase its leverage in selling its products. The Company also believes that its management and staff have an in-depth knowledge of the inner-workings of trading rooms, exchange floors, and the overall marketplace, thus facilitating its ability to serve client needs with technological hardware and software adaptations. SALES OPERATIONS To take advantage of opportunities in the global market, the Company has established sales offices in the United States (New York and Chicago) and European (London) markets. The Company during 1997 continued to increase its global presence by exhibiting the Company's products at approximately six international technology and financial industry conferences held in both the US and Europe. In addition, the Company, on a selective basis, advertises in various trade publications. The Company intends to continue these programs during 1998. PRODUCT PRODUCTION The Company designs and develops its proprietary software and prototypes of its hardware products at its facility in Stamford, Connecticut. Once tested and blueprinted, various hardware parts developed by the Company are manufactured by subcontractors and delivered to the Company for final complete assembly, quality control and burn-in testing. To date, the Company has not experienced any returns of its products for generic manufacturing defects. The Company is not dependent upon any one supplier, vendor or subcontractor for any of its manufacturing components. PROPRIETARY ASSETS The Company actively seeks protection for its copyrights and trade names and, accordingly, the Company, during 1997, received notices of registration of a service mark for NYFIX. All employees of the Company, irrespective of job description, are subject to nondisclosure and anti-competitive restrictions. EMPLOYEES As of March 23, 1998, the Company had 50 full-time employees. None of the Company's employees are subject to a collective bargaining agreement. The Company considers its relationship with its employees to be satisfactory. RISK FACTORS: FORWARD LOOKING STATEMENTS The management discussion and analysis and the information provided elsewhere in this Form 10-KSB contain forward looking statements regarding the Company's future plans, objectives and expected performance. Those statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward looking statements referred to above. These factors include, among others, the Company's ability to further penetrate the financial services market with a full range of the Company's products and the highly competitive market in which the Company operates. -7- ITEM 2. PROPERTIES The Company maintains its executive offices and production facilities in leased premises at 333 Ludlow Street, Stamford, CT 06902 and its European Sales Office in London, England. The Company's US headquarters consists of approximately 10,500 square feet at a current annual rental of approximately $180,000, expiring on April 30, 2002. The Company's London premises consist of approximately 1,500 square feet at a current annual rental of $15,000, excluding local taxes, expiring on February 17, 1999. In addition, the Company also rents office space in New York City (Data Center) and Chicago on a monthly basis. Management believes that its facilities are adequate for the Company's purposes for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings which are currently pending or, to the Company's knowledge, contemplated against the Company or to which it is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) MARKET INFORMATION The Company's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "TSI". The following table sets forth the high and low sales prices for the Common Stock, for the periods presented, as reported by the AMEX. PRICES OF COMMON STOCK High Low ---- --- 1997 Fiscal Year - ---------------- First Quarter $7.00 $5.13 Second Quarter $6.38 $5.56 Third Quarter $9.94 $8.75 Fourth Quarter $9.00 $7.75 -8- 1996 Fiscal Year - ---------------- First Quarter $6.63 $4.50 Second Quarter $6.13 $4.63 Third Quarter $5.00 $2.38 Fourth Quarter $6.00 $2.88 (B) HOLDERS At March 23, 1998, the records of the Company's transfer agent indicated that there were 429 holders of record of the Company's Common Stock. (C) DIVIDENDS Stockholders of the Company's Common Stock are entitled to dividends if and when declared by the Board of Directors out of funds legally available therefor. The Company has not paid or declared any dividends on any class of its capital stock since its organization and has no present intention of paying cash dividends on its Common Stock. In addition, the payment of cash dividends on the Common Stock is restricted under the provisions of the Company's revolving credit facility and term loan agreements. The Company intends to utilize any earnings it may achieve for the development of its business and for working capital purposes. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto. Historical results and percentage relationships are not necessarily indicative of the operating results for any future period. The Company commenced its present business operations in January 1991 through the acquisition of a software license for its Guided-Input(R) Touchpad system. The Company is in process of transforming its business from traditional capital equipment sales to licensing-based and subscription-based revenue. The Company is now offering its trading products together with linkage through its data-center. Subscription revenue contracts are generally for an initial period of one year with one to three year renewal periods. Initial annual revenues range from $15,000 to over $100,000, per contract. Most contracts provide the customer with a basic system or infra-structure, via the Company's data-center. Most contracts are entered into by the customer with the intention to expand the level of services subscribed to, once the basic system and infra-structure is operational. Although subscription-based revenue has the short-term negative impact of reduced revenues in the early stage, management believes that the change will have a long-term positive impact on the future revenue growth of the Company. Management is of the opinion that this change will result in additional new orders and increased market share that it otherwise would not have had, as well as longer-term predictable revenues per customer. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 REVENUES The decrease in revenues for the year ended December 31, 1997 over the comparable 1996 period was principally due to the Company's strategy of transforming its operations from capital equipment sales to subscription based sales, specifically for the Company's FIXtalk software system. Sales revenues for the Company decreased by 37% in fiscal 1997 (from $6,295,468 to $3,961,812). During the year ended December 31, 1997, capital equipment sales, software and subscription revenue were approximately 62%, 31% and 7% of sales revenues, respectively as compared to 85%, 15% and 0%, respectively during the year ended December 31, 1996. Approximately 31% of the Company's sales revenues for the year ended December 31, 1997 were derived from software licenses as compared to approximately 15% during the comparable period in 1996. The export market continues to be an important source of revenue. -9- Revenue from export sales approximated $1,283,000 (26% of sales) during the year ended December 31, 1997 as compared to approximately $4,669,000 (67% of sales) during the comparable period in 1996. Foreign operation revenues amounted to approximately $1,293,000 and $1,164,000 for the years ended December 31, 1997 and 1996, respectively. In addition, revenues from service contracts increased by 45% in the year ended December 31, 1997 over the comparable 1996 period. The increase in service revenue resulted from increased sales of hardware and software products during the past year. During fiscal 1997 sales to one customer accounted for approximately 17% of total revenue. During fiscal 1996, sales to two customers accounted for approximately 72% of total revenue. COST OF SALES AND SERVICE AND GROSS PROFIT The Company's cost of sales and service is principally comprised of labor, materials, overhead and amortization of capitalized product enhancement costs. Gross profit as a percentage of total revenue was approximately 46% and 41% during 1997 and 1996, respectively. The increase in gross profit percentage experienced by the Company during fiscal 1997 principally resulted from an increase in the amount of higher margin software installations which was partially offset by lower margins associated with the Company's touch vending terminal products sold during the first quarter of 1997. The Company obtains its materials and supplies from a variety of vendors in the US and Far East. During 1997, the Company did not experience any significant price increases in its component parts purchased. Included in cost of sales is amortization expense for product enhancement costs of approximately $373,000 and $316,000 for 1997 and 1996, respectively. Also included in cost of sales is depreciation expense for subscription based equipment of approximately $112,000 for 1997. SELLING, GENERAL AND ADMINISTRATIVE During fiscal 1997, selling general and administrative expenses increased 51% (from $3,219,000 to $4,843,824) when compared to fiscal year 1996. Such increases reflect the continued expansion of the development teams both in the U.S. and in London. The expansion in development efforts relates to the Company's plans of providing an increased number of new additional services. These services relate to offering subscription and transaction based order-routing, via the Company's data-center, to multiple exchange-floors and between the "Buy-side" and "Sell-side" industry. As a result, the Company experienced increases in salaries and related personnel costs, travel expenses, recruiting fees and various office expenses. During the past two years the Company added personnel principally to its technical programming, service, support and sales staff. During 1997, the Company added 18 new employees. The Company's recruitment effort, which began during 1993, continues to strengthen the Company's infrastructure and position the Company to respond to increasing market and revenue opportunities. The Company, during the past several years, has spent a considerable effort in developing a variety of "trader desk-top" and "exchange-floor" trading systems. Management believes that the investment in development of the new data-center, and its services, are designed to better leverage the existing products together with providing additional sources of revenue. The Company has continued its marketing programs in 1997 primarily focusing on public relations activities, production of various product brochures, and representation at technological exhibitions planned throughout the year. The Company will continue to expand these programs during 1998. Research and development (new explorative research) expenses for the year ended December 31, 1997 and 1996 were approximately $321,600 and $241,900, respectively, (an increase of 33%) and are included in selling, general and administrative expenses. OTHER INCOME Other income consists principally of interest earned on cash balances and sublease income earned. Interest income in 1997 and 1996 approximated $133,000 and $34,600, respectively. The 99% increase in other income principally results from interest earned on higher cash balances maintained by the Company during 1997. The Company previously leased a portion of its corporate office facility under a three-year sublease which expired on April 30, 1997. Due to the continuing expansion of operations, (See "Selling, General and Administrative" above) the Company has decided not to renew the sublease and incorporated such space into its existing corporate facility. Sublease rental income earned during 1997 and 1996 approximated $13,000 and $36,000 respectively. -10- NET LOSS Net loss for fiscal 1997 was $2,594,040 ($0.32 per share) compared to a net loss of $445,285 ($0.06 per share) for fiscal 1996. The increase in net loss, principally resulted from 1) decrease in "capital sales" type revenue resulting from the Company moving to a subscription-based revenue model which presently is in its early stage of growth, and 2) increase in selling, general and administrative expenses. See "Revenues", "Cost of sales and Service and Gross Profit" and "Selling, General and Administrative" above. Management has made a considerable effort with respect to an expansion of its operations, development of various trading systems which began in 1993 and continues into 1997 and changes to its business model to that of a subscription-based product offering. The Company believes that this expansion of personnel, facilities, product portfolio and subscription-based model will better position the Company and facilitate its future growth. However, in spite of its optimism, management is also cautioning that the Company's aggressive conversion from a capital sales model to subscription-based model is causing revenue recognition from subscription-based orders to be realized over a longer period of time than the previous capital sales model. At December 31, 1997, the Company had net operating loss carryforwards of approximately $3,100,000 which expire between 2007 and 2012. These carryforwards may be significantly limited under the Internal Revenue Code of 1986, as amended, as a result of ownership changes resulting from the Company's equity offerings. A valuation allowance of approximately $1,500,000 has been established at December 31, 1997 to offset any benefit from the net operating loss carryforwards, as it cannot be determined when or if the Company will be able to utilize the net operating losses. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 REVENUES Sales revenues for the Company increased by 38% in fiscal 1996 (from $4,560,935 to $6,295,468). The increase in sales revenues was principally due to increased deliveries of Trinitech TouchPad(R) System, primarily 1,750 units of its touch vending terminal to a non-financial service firm customer during fiscal 1996. The Company's sales revenues were comprised of both hardware and software installations. Approximately 15% and 21% of the Company's 1996 and 1995 sales, respectively, were derived form software installations. In addition, revenues from service contracts increased by 48% in fiscal 1996 (from $487,712 to $718,137). The increase in service contract revenue resulted from an increase of equipment in use by customers. The service contract revenue generally begins between three to six months after the delivery and installation of the hardware and software. Service and maintenance for 1996 sales of the Company's touch vending terminal products (1,750 units) will be managed on an actual time and material arrangement. Even though the Company expects its service and maintenance revenue to grow in the financial sector, management does not anticipate receiving any significant future service and maintenance revenue from its 1996 sales of touch vending terminal products. The export market continued to be an important source of revenue, with sales approximating 67% and 40% of sales in fiscal 1996 and 1995, respectively. During fiscal 1996, sales to two customers accounted for approximately 72% of total revenue. During fiscal 1995, sales to three customers accounted for approximately 38% of total revenue. The Company did not experience any significant price changes in its product line in fiscal 1996 or fiscal 1995. COST OF SALES AND SERVICE AND GROSS PROFIT The Company's cost of sales and service is principally comprised of labor, materials, overhead and amortization of capitalized product enhancement costs. Gross profit as a percentage of total revenues was 41% and 53% in fiscal 1996 and 1995, respectively. The decrease in gross margin between 1996 and 1995 principally resulted from lower margins associated with the Company's touch vending terminal products sold during 1996. The Company continues to maintain higher margins (in the 50% range) in its core business groups that serve the financial community. The Company obtains its materials, parts and supplies from a variety of vendors in the U.S. and Far East. During 1996, the Company did not experience any significant price increase in its component parts purchased. -11- SELLING, GENERAL AND ADMINISTRATIVE During fiscal 1996, selling, general and administrative expenses increased 28% (from $2,525,684 to $3,219,000) when compared to fiscal year 1995. The increase in fiscal 1996 was principally due to continued expansion of operations in both the U.S. and in London, which began during 1994. As a result, the Company experienced increases in salaries and related benefits, travel expenses, recruiting fees and various related office expenses. During 1996, the Company added personnel to its technical programming and sales staff. Such employees were added to technical positions with a primary focus on customer hardware and software project implementation and development. During 1996, the Company established a sales presence in Chicago with the addition of a sales office. The Company has expanded its advertising and marketing programs in 1996 which included production of various product brochures, advertisements in several financial trade publications as well as representation at several technological exhibitions. Research and development expenses for fiscal 1996 and 1995 were approximately $241,900 and $194,500, respectively (an increase of 24%), and are included in selling and administrative expenses. OTHER INCOME Other income consists principally of interest earned on cash balances and sublease income earned. The Company leases a portion of its corporate office facility under a three year sublease which expired on April 30, 1997 Sublease rental income earned during 1996 and 1995 totaled approximately $36,000 per year. The interest income earned by the Company during 1996 increased slightly from 1995 principally due to higher interest rates earned on the Company's cash balances during 1996. NET INCOME/LOSS Net loss for fiscal 1996 was $445,285 ($0.06 per share) as compared to a net income of $81,466 ($0.01 per share) for fiscal 1995. The net loss during fiscal 1996 principally resulted from the continued expansion of operations as described in "Selling, General and Administrative" above combined with lower gross margins associated with the Company's touch vending terminal products sold during 1996. Net income for the three months ended December 31, 1996 principally resulted from a 95% increase in revenues during the period as compared to the three months ended December 31, 1995 (from $1,756,725 to $3,419,623). This increase in revenues during the three months ended December 31, 1996 principally resulted from increased deliveries of the Company's touch vending terminal products enabling the Company to record a profit in three month period ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity has been equity capital. Since the commencement of operations, the Company has raised approximately $9.8 million of working capital through various private placements of its securities. During March 1997, the Company completed a private placement of 800,000 shares of Common Stock at a price of $4.50 per share, for an aggregate value of $3,600,000. Costs related to this offering amounted to approximately $85,000 resulting in net proceeds to the Company of approximately $3,515,000. At December 31, 1997, cash balances increased to $2,141,307 from $1,198,730 at December 31, 1996. The Company's current assets at December 31, 1997 exceeded its current liabilities by approximately $3.8 million. The Company at December 31, 1997 had long-term debt totaling approximately $93,500 which represents secured term loans (three at December 31, 1997) on the purchase of development equipment. Interest on these loans vary from 7.95% to 9.0%. In addition, at December 31, 1997, the Company had no material commitments for capital expenditures or inventory purchases. The Company has available a one million dollar bank line of credit facility for the purpose of financing accounts receivable. At December 31, 1997, the Company had not drawn down on the line of credit facility. The line of credit, which is secured by accounts receivable and inventory, expires on June 30, 1999. Interest on the line of credit is based on the bank's prime rate plus one percent. The bank agreements and line of credit agreement require the Company, among other things, to maintain minimum tangible net worth and a minimum current ratio. At December 31, 1997, the Company obtained a waiver of the required minimum tangible net worth. Such covenant was amended by the financial institution in the first quarter of 1998. The Company believes that with its available capital, including the proceeds from the March 7, 1997 private placement, the line of credit facility and anticipated funds generated from operations it will be able to fund its cash -12- needs through the end of 1998 without the need for additional capital or financing. The Company intends to utilize its positive financial position to internally finance its continuing research and development activities and anticipated sales growth. The Company's financial requirements and its ability to meet them thereafter will depend largely on its future financial performance. However, in the event the Company's operations do not generate cash to the extent currently anticipated by management of the Company and grow more rapidly than anticipated, it is possible that the Company could require additional funds beyond 1998. At this time, the Company does not know what sources, if any would be available to it for such funds, if required. In addition, the Company has warrants outstanding for the purchase of 263,837 shares of its Common Stock. Assuming the exercise of all such outstanding Warrants, the Company would receive approximately $926,600 in gross proceeds. WORKING CAPITAL At December 31, 1997 and 1996 the Company had working capital of approximately $3,803,000 and $3,523,000, respectively. The Company's present capital resources include proceeds from its March 7, 1997 private placement of Common Stock and available borrowing capacity under its bank credit facility. Through March 23, 1998, 139,000 stock options and warrants to purchase common stock were exercised with the Company receiving proceeds of approximately $465,000. CASH USED IN OPERATING ACTIVITIES During fiscal 1997, net cash used in operations was approximately $502,000 as compared to cash used in operations in fiscal 1996 of approximately $449,000. The decline from fiscal 1996 to fiscal 1997 is primarily attributable to the Company's increasing losses as previously discussed. CASH USED IN INVESTING ACTIVITIES During fiscal 1997 and fiscal 1996, net cash used in investing activities was approximately $1,799,000 and $535,000, respectively, and principally represents payments for the purchases of equipment and payments related to product enhancement costs for the Company's product portfolio. PROCEEDS FROM FINANCING ACTIVITIES During fiscal 1997 and fiscal 1996, proceeds from financing activities were approximately $3,243,000 and $925,000, respectively. Such increase in fiscal 1997 primarily resulted from the issuance of Common Stock through exercise of warrants and stock options totaling approximately $817,000 and proceeds from the March 7, 1997 private placement ($3,515,000). YEAR 2000 COMPLIANCE The Company believes its information systems are in compliance with year 2000 information technology requirements. SEASONALITY The Company believes that its operations are not significantly effected by seasonality. NEW ACCOUNTING ANNOUNCEMENT In October 1997, the American Institute of Certified Public Accountants issued statement of position 97-2, "Software Revenue Recognition," which supercedes SOP 91-1 and clarifies the guidelines for the existing practices regarding revenue recognition of certain computer software products. The Company adopted SOP 97-2 in the first quarter of 1998 and the effect is not expected to be material to the Company's operations or financial position taken as a whole. In June 1997, the Financial Accounting Standards board issued FASB Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information." Statement 131 requires that segment data be disclosed based on how management makes decisions about allocating resources to segments and measuring their performance. While -13- the Company is studying the application of the disclosure provisions, it does not expect this statement to materially affect its financial position or results of operations. This Statement will become effective in 1998. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See index to Financial Statements on Page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the Section entitled "Proposal No. 1. Election of Directors" and "Executive Compensation" in the Company's Proxy Statement for the June 3, 1998 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than April 30, 1998. ITEM 10. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation and Transactions with Management" in the Company's Proxy Statement for the June 3, 1998 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than April 30, 1998. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Sections entitled "Principal Holders of Voting Securities" and "Security Ownership of Officers and Directors" of the Company's Proxy Statement for the June 3, 1998 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than April 30, 1998. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation and Transactions with Management" in the Company's Proxy Statement for the June 3, 1998 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than April 30, 1998. ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT (1) Financial Information See index to Financial Statements on Page F-1 (2) Financial Statement Schedules -14- Supplemental schedules are omitted because they are not required, inapplicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits * 3.1 Articles of Incorporation of Trinitech Systems, Inc. (Exhibit 3.1 to Registrant's Form 10 filed March 5, 1993). 3.2 By-Laws of Trinitech Systems, Inc. (Exhibit 3.2 to Registrant's Form 10 filed March 5, 1993). 4.1 Certificate of Designation of Series A Preferred Stock (Exhibit 4.1 to Registrant's Form 10 filed March 5, 1993). 4.2 Specimen - Common Stock Certificate (Exhibit 4.2 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1993). 10.1 Employment Agreement with Peter Kilbinger Hansen dated January 1, 1991 (Exhibit 3.2 to Registrant's Form 10 filed March 5, 1993). 10.2 Revolving Credit Agreement, dated June 2, 1997, between First Union Bank and Trinitech Systems, Inc.** 10.3 Amended and Restated 1991 Incentive Stock Option Plan of Trinitech Systems, Inc. (Exhibit 10.3 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996) 21.1 Subsidiaries of the Registrant (Exhibit 21.1 to Company's Annual Report on Form 10-KSB for the year ended December 31, 1994). 24.1 Consent of Independent Public Accountants.** 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information purposes only and not filed. ________________ * - Except as noted, all exhibits have been previously filed. ** - Filed herewith. (B) REPORTS ON FORM 8-K On September 11, 1997, Trinitech Systems, Inc. filed a Current Report on Form 8-K in respect of the Rights Agreement dated as of September 1, 1997 between the Company and Chase Mellon Shareholder Services, L.L.C. as Rights Agent. -15- Index to Financial Statements ----------------------------- Page ---- Report of Independent Public Accountants.............................. F-2 Financial Statements: Consolidated Balance Sheets at December 31, 1997 and 1996.......... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996.................................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996............................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996................................... F-6 Notes to Consolidated Financial Statements........................... F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Trinitech Systems, Inc.: We have audited the accompanying consolidated balance sheets of Trinitech Systems, Inc. (a New York Corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. 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 generally accepted auditing standards. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trinitech Systems, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Stamford, Connecticut, March 24, 1998 F-2 TRINITECH SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 - ---- ---- CURRENT ASSETS: Cash and cash equivalents $2,141,307 $1,198,730 Accounts receivable - less allowance of $144,000 and $30,000 1,859,301 3,802,364 Inventories - less allowance of $82,000 in 1997 1,208,373 1,154,187 Prepaid expenses and other current assets 102,500 193,134 Receivable from officers 91,597 72,777 ---------- ---------- Total Current Assets 5,403,078 6,421,192 ---------- ---------- EQUIPMENT - net of accumulated depreciation of $714,759 and $417,087 1,361,707 434,638 OTHER ASSETS - net of accumulated amortization of $1,040,952 and $832,652 782,478 617,506 ---------- ---------- TOTAL $7,547,263 $7,473,336 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 927,672 $1,386,306 Accrued expenses 389,174 525,653 Current portion of term loans payable 47,709 25,994 Credit line payable - 745,000 Advance billings 171,414 149,675 Payroll and other taxes payable 63,706 65,808 ---------- ---------- Total Current Liabilities 1,599,675 2,898,436 TERM LOANS PAYABLE 45,855 31,065 ---------- ---------- Total Liabilities 1,645,530 2,929,501 ========== ========== COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: 10% Convertible preferred stock - par value $1.00; 1,000,000 shares authorized; -0- issued and outstanding - - Common stock - par value $.001; 15,000,000 authorized; 8,524,530 and 7,375,030 shares issued and outstanding 8,525 7,375 Additional paid-in capital 10,419,763 6,088,975 Accumulated deficit (4,096,555) (1,502,515) Due from officers (430,000) (50,000) ----------- ----------- Total Stockholders' Equity 5,901,733 4,543,835 ---------- ---------- TOTAL $7,547,263 $7,473,336 ========== ==========
See Notes to Consolidated Financial Statements. f-3 TRINITECH SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ---- ---- REVENUES: Sales $3,961,812 $6,295,468 Service contracts 1,044,205 718,137 ----------- ---------- Total Revenues 5,006,017 7,013,605 COST OF SALES AND SERVICE 2,680,138 4,146,490 ----------- ---------- GROSS PROFIT 2,325,879 2,867,115 ----------- ---------- EXPENSES: Selling, general and administrative 4,843,824 3,219,000 Depreciation 186,324 133,780 Amortization 36,227 33,116 ----------- ---------- Total Expenses 5,066,375 3,385,896 ----------- ---------- LOSS FROM OPERATIONS (2,740,496) (518,781) OTHER INCOME - NET 146,456 73,496 NET LOSS $(2,594,040) $(445,285) ----------- ---------- NET LOSS PER COMMON SHARE ($0.32) ($0.06) =========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,103,330 7,297,900 =========== ==========
See Notes to Consolidated Financial Statements. F-4 TRINITECH SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Common Stock Additional ---------------------------- Paid-in Accumulated Due from Description Shares Amount Capital Deficit Officers Total - ----------- ------ ------ ------- ------- -------- ----- BALANCE, DECEMBER 31, 1995 7,272,530 $7,273 $5,920,203 $(1,057,230) $ - $ 4,870,246 Stock issued from exercise of options and warrants 102,500 102 168,772 - - 168,874 Due from Officers - - - - (50,000) (50,000) Net loss - - - (445,285) - (445,285) --------- ------ ---------- ---------- --------- ------------ BALANCE, DECEMBER 31, 1996 7,375,030 7,375 6,088,975 (1,502,515) (50,000) 4,543,835 Stock issued from exercise of options and warrants 349,500 350 816,588 - - 816,938 Issuance of common stock 800,000 800 3,514,200 - - 3,515,000 Due from Officers - - - - (380,000) (380,000) Net loss - - - (2,594,040) - (2,594,040) --------- ------ ---------- ---------- --------- ------------ BALANCE, DECEMBER 31, 1997 8,524,530 $8,525 $10,419,763 $(4,096,555) $(430,000) $5,901,733 ========= ====== =========== =========== ========= ============
See Notes to Consolidated Financial Statements. F-5 TRINITECH SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ---- ---- OPERATING ACTIVITIES: Net loss $(2,594,040) $(445,285) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 297,672 133,780 Amortization 409,346 349,294 Provision for bad debts 144,269 70,634 Provision for inventory obsolescence 82,000 - Changes in assets and liabilities: Accounts receivable 1,798,794 (1,463,564) Inventories (136,186) (153,737) Prepaid expenses and other current assets 90,634 (89,956) Receivable from officers (18,820) (24,106) Accounts payable (458,634) 1,033,177 Accrued expenses (136,479) 71,204 Advance billings 21,739 29,041 Payroll and other taxes payable (2,102) 40,175 ----------- ---------- Net cash used in operating activities (501,807) (449,343) ----------- ---------- INVESTING ACTIVITIES: Payments for equipment, net of retirements (1,224,742) (164,907) Payments for other assets (574,317) (370,238) ----------- ---------- Net cash used in investing activities (1,799,059) (535,145) ----------- ---------- FINANCING ACTIVITIES : Proceeds from borrowings 75,000 1,025,000 Repayment of borrowings (783,495) (268,775) Issuance of common stock 3,951,938 168,874 ----------- ---------- Net cash provided by financing activities 3,243,443 925,099 ----------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 942,577 (59,389) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,198,730 1,258,119 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,141,307 $ 1,198,730 =========== =========== SUPPLEMENTAL INFORMATION: Cash paid during the year for interest $ 16,404 $ 8,443 =========== ===========
F-6 See Notes to Consolidated Financial Statements. TRINITECH SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR THE YEARS THEN ENDED 1. ORGANIZATION AND PRESENTATION Trinitech Systems, Inc. and subsidiary (the "Company") develops and markets advanced electronic trading systems to brokerage firms, international banks and global exchanges trading in equities, currencies and futures and options in both the United States and Europe. The Company's turnkey systems, developed using patented hardware technology and proprietary software, permit real time execution monitoring of trading transactions. The Company has also leveraged its patented flat panel hardware technology outside the financial sector through sales of equipment to a non-financial service customer. In addition, the Company offers a range of related information technology services and maintenance support. The Company has sales offices in both the U.S. and Europe. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Trinitech Services, Inc. and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain 1996 balances have been reclassified to conform with the 1997 presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories consist of parts and finished goods and are stated at the lower of cost, determined on a first-in, first-out basis, or market. F-7 EQUIPMENT Equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from two to eight years. The estimated useful lives for subscription and service based equipment is generally two to three years. OTHER ASSETS Other assets consist principally of patents, organization and deferred product enhancement costs (capitalized based on time incurred for enhancement of products which have achieved technological feasibility) and deposits. Product enhancement costs and organization costs are being amortized using the straight-line method over three and five years, respectively. Patent costs are being amortized over seventeen years. LONG-LIVED ASSETS Long-lived assets, primarily equipment and other assets, are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated based upon the present value of expected future cash flows. REVENUE RECOGNITION Sales are generally recorded upon shipment of the product to and acceptance by customers. Revenue from service contracts is recognized ratably over the period the services are performed. Costs to fulfill service contracts have been insignificant during the periods presented. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. ADVERTISING The Company expenses advertising costs as incurred. Advertising expense was approximately $320,000 and $88,000 for the years ended December 31, 1997 and 1996, respectively. FOREIGN CURRENCY TRANSLATION The Company's functional currency is the U.S. dollar. Accordingly, the monetary assets and liabilities of the European sales office are translated at year-end exchange rates while nonmonetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates in effect during the year, except for depreciation and cost of sales which are translated at historical rates. The resulting currency translation gain or loss is included in the results of operations for the periods presented. NET LOSS PER COMMON SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earning Per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very F-8 similar to the previously reported fully diluted earnings per share. Diluted earning per share is not presented in either 1997 or 1996 because the effect of the Company's common stock equivalents (employee stock options and warrants) is antidilutive. All earnings per share amounts for all periods have been presented, and restated to conform to the Statement 128 requirements. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." The Company uses different methods of accounting for financial reporting and tax purposes, principally through the utilization of accelerated depreciation methods for income tax purposes, certain valuation allowances and net operating loss carryforwards; accordingly deferred taxes are provided on the basis of such differences. FINANCIAL INSTRUMENTS The carrying value for all current assets and current liabilities approximates fair value because of their short-term nature. The carrying value of the Company's long-term debt also approximates its fair value based on prevailing interest rates. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition," which supercedes SOP-91-1 and clarifies the existing guidance regarding revenue recognition of certain computer software products. The Company adopted SOP 97-2 in the first quarter of 1998 and the effect is not expected to be material to the Company's operations or financial position taken as a whole. In June 1997, the Financial Accounting Standards board issued FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Statement 131 requires that segment data be disclosed based on how management makes decisions about allocating resources to segments and measuring their performance. While the Company is studying the application of the disclosure provisions, it does not expect this statement to materially affect its financial position or results of operations. This Statement will become effective in 1998. 3. INVENTORIES Inventories consists of the following: December 31, ----------------------- 1997 1996 ------------ ---------- Parts $ 875,822 $ 750,722 Finished goods 414,551 403,465 Less Allowance for obsolescence 82,000 - ---------- ---------- Total $1,208,373 $1,154,187 ========== ========== F-9 4. EQUIPMENT Equipment consists of the following:
December 31, ---------------------------------- 1997 1996 ----------- --------- Computer software $ 331,668 $233,681 Leasehold improvements 81,957 39,169 Furniture and equipment 878,518 578,875 Subscription and service bureau equipment 784,323 - ---------- -------- Subtotal 2,076,466 851,725 Less accumulated depreciation 714,759 417,087 ---------- -------- Total $1,361,707 $434,638 ========== --------
5. COMPUTER SOFTWARE Included in other assets are unamortized deferred product enhancement costs aggregating approximately $686,000 and $500,400 as of December 31, 1997 and 1996, respectively. Included in cost of sales is amortization expense for product enhancement costs of approximately $373,000 and $316,000 for 1997 and 1996, respectively. Also included in cost of sales is depreciation expense for subscription based and service bureau equipment of approximately $111,000 for 1997. 6. CAPITAL STOCK On March 7, 1997, the Company completed a private placement of 800,000 shares of Common Stock at a price at $4.50 per share, for an aggregate value of $3,600,000. Costs related to this offering amounted to approximately $85,000 resulting in net proceeds to the Company of approximately $3,515,000. On September 1, 1997, the Board of Directors declared a dividend distribution of one Preference Share Purchase right (a "Right") for each outstanding share of Common Stock, par value $.001 per share, of the Company to stockholders of record on September 19, 1997. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Preference Stock, par value $.001 per share, of the Company, at a price of $40 per one one-hundredth of a Preference Share, subject to adjustment, upon change of control in the Company, as defined in the rights agreement. Because of the nature of the Preference Shares' dividend liquidation and voting rights, the value of a Preference Share should approximate the value of one share of Common Stock. During 1997, 307,000 warrants were exercised resulting in the issuance of 307,000 shares of Common Stock. The Company received approximately $686,000 from the exercise of such warrants. During 1996, 27,500 warrants were exercised resulting in the issuance of 27,500 shares of Common Stock. The Company received $55,000 from the exercise of such warrants. F-10 As of December 31, 1997, there are outstanding warrants (the "Warrants") to purchase 263,837 shares of Common Stock. The Warrants expire as follows:
Per Share Warrants Exercise Price Expiration Date -------- -------------- --------------- 50,000 $3.50 January 9, 1998 43,000 $3.00 June 30, 1998 82,587 $2.25-$2.67 December 31, 1998 60,000 $5.13 December 31, 2000 28,250 $4.50 March 2, 2006
7. MAJOR CUSTOMERS AND EXPORT SALES For the year ended December 31, 1997, one customer accounted for approximately 17% (non-financial service firm customer) of total sales. For the year ended December 31, 1996, two customers accounted for approximately 57% (non-financial service firm customer) and 15%, respectively, of total sales. Export sales amounted to approximately $1,283,000 and $4,669,000 for the years ended December 31, 1997 and 1996, respectively. Foreign operation revenues amounted to approximately $1,293,000 and $1,164,000 for the years ended December 31, 1997 and 1996, respectively. 8. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the years ended December 31, 1997 and 1996 totaled approximately $321,600 and $241,900, respectively and are included in selling and administrative expenses. 9. TERM LOANS PAYABLE At December 31, 1997 and 1996, the Company had term loans payable (the "Term Loans" - three in 1997 and two in 1996) totaling $93,564 and $57,059, respectively, for purposes of financing development equipment. The Term Loans are secured by the underlying equipment. Interest rates on the Terms Loans are 7.96%, 8.95% and 9.0%, respectively. Interest expense was approximately $8,500 and $3,800 for the years ended December 31, 1997 and 1996, respectively. The Term Loans are payable in monthly installments through September 1998, September 1999 and September 2000, respectively. The Term Loans require the Company, among other things, to maintain minimum tangible net worth and a minimum current ratio. At December 31, 1997, the Company obtained a waiver of the required minimum tangible net worth. Such covenant was subsequently amended by the financial institution in the first quarter of 1998. The following is a schedule of principal payments as of December 31, 1997: 1998 $47,709 1999 33,355 2000 12,500 F-11 10. CREDIT LINE PAYABLE The Company has a $1 million line of credit agreement bearing interest at 1 percent over the bank's prime rate (8.50% at December 31, 1997) available through June 1999 and is secured by accounts receivable, inventory and certain equipment. The Company repaid the amounts outstanding under the previous line of credit ($745,000 at December 31, 1996) with a portion of the proceeds from its private placement of Common Stock in March 1997. At December 31, 1997, the Company had not drawn down any amount under the existing line of credit agreement. The weighted average outstanding borrowings during 1997 were approximately $57,300 at a weighted average interest rate of 9.25%. The line of credit agreement requires the Company, among other things, to maintain minimum tangible net worth and a minimum current ratio. At December 31, 1997, the Company obtained a waiver of the required minimum tangible net worth. Such covenant was subsequently amended by the financial institution in the first quarter of 1998. Interest expense for 1997 and 1996 totaled approximately $5,000 and $8,000, respectively. 11. COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Company was committed under operating leases for offices, production facilities and equipment for terms expiring through April 30, 2002. Future minimum annual rental payments are as follows: Year Amount ---- ------ 1998 $493,062 1999 421,247 2000 390,081 2001 185,156 2002 61,719 Aggregate rental expense amounted to approximately $228,900 and $139,400 for the years ended December 31, 1997 and 1996, respectively. Sublease income for the years ended December 31, 1997 and 1996 totaled $13,000 and $35,800. The sublease agreement expired in April 1997. In 1991 the Company entered into an employment agreement with its President. The agreement calls for a base salary of $114,000 for the first year, such base salary to be reviewed on an annual basis thereafter by the Compensation Committee of the Board of Directors. In addition, the President is entitled to receive a sales commission on the gross sales of any products of the Company which are sold through the direct sales effort of the executive, which is equivalent to the normal sales commission paid to all Company commission employees. The President received approximately $57,900 and $41,900 in sales commissions during 1997 and 1996, respectively. The Company is subject to legal proceedings which arise in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not materially affect the Company's financial position or results of operations. 12. RELATED PARTIES Certain executive officers of the Company have amounts due to the Company for the exercise of capital stock. Such amounts aggregated $430,000 and $50,000 as of December 31, 1997 and 1996, respectively, and have been shown as a reduction to stockholders' equity. F-12 At December 31, 1997 and 1996, the Company had amounts receivable from officers of $91,597 and $72,777, respectively. 13. DEFINED CONTRIBUTION PLAN The Company, on January 1, 1994, established a 401(k) retirement plan (the "Plan") covering substantially all of its U.S. employees who meet eligibility requirements. The Plan permits participants to contribute up to a maximum of 15% of their annual compensation, as defined, not to exceed the federal limit of $9,500 in 1997. The Plan permits the Company to match employees' tax deferred contributions up to a maximum of 3% of employees' compensation provided the employee is employed by the Company at the end of the year. Remaining contributions under the plan are discretionary. Total expense under the Plan approximated $63,000 and $30,000 in 1997 and 1996, respectively. 14. STOCK OPTION PLAN The Company maintains an incentive stock option plan for its officers and key employees and reserved 1,500,000 shares of its Common Stock to cover the exercise of options which may be granted under such plan. The option exercise price equals the stock's market price on the date of grant. The options vesting period is determined by the Board of Directors at the date of grant. All options granted under the plan expire ten years from date of grant, unless an earlier expiration date is set at the time of grant. At December 31, 1997, options to purchase 457,500 shares were available for grant under the stock option plan. The Company accounts for this plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees", under which no compensation cost has been recognized. During 1997, the Company also issued 30,000 variable incentive stock options. Since the targets associated with such options were not achieved, all 30,000 stock options were cancelled during 1997. Had compensation cost been determined consistent with FASB Statement No. 123, "Accounting for Stock Based Compensation", the Company's net loss and loss per share would have been reduced to the following pro forma amounts: 1997 1996 ---- ---- Net loss: As reported $(2,594,040) $(445,285) Pro forma $(3,140,435) $(666,561) Loss per share: As reported $(0.32) $(0.06) Pro forma $(0.39) $(0.09) Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F-13 The fair values of the option grants were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996: expected life of 5 years, no expected dividend yields, expected volatility of 69% and risk-free interest rates of 6.20%. A summary of the status of the Company's stock option plan at December 31, 1997 and 1996, and changes during the years then ended are as follows: Number of Weighted Average Shares Exercise Price --------- -------------- Outstanding December 31, 1995 256,500 $2.52 Granted 207,000 $4.26 Exercised (75,000) $1.52 Cancelled (83,500) $5.31 Forfeited (15,000) $3.63 ------- Outstanding December 31, 1996 290,000 $3.06 Granted 722,500 $4.97 Exercised (42,500) $3.07 Cancelled (18,000) $4.11 ------- Outstanding December 31, 1997 952,000 $4.51 ======= Exercisable at December 31, 1997 239,500 $3.04 ======= 239,500 of the 952,000 options outstanding at December 31, 1997 have exercise prices between $2.25 and $3.63, with a weighted average exercise price of $3.04 and a weighted average remaining contractual life of 7.6 years. The 239,500 options are all exercisable. The remaining 712,500 options have exercise prices between $4.50 and $7.50, with a weighted average exercise price of $5.04 and a weighted average remaining contractual life of 9.4 years, none of these options are exercisable. No options expired during 1997. 15. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities recognized as December 31, 1997 and 1996 are presented below: F-14
December 31, --------------------------------------- 1997 1996 ----------- ----------- Deferred tax assets: Bad debt expense $ 57,600 $ 12,000 Inventory obsolescence 32,800 - Product development costs 158,000 123,000 Other 29,000 20,000 Operating loss carryforward 1,284,000 412,000 ----------- --------- Total deferred tax assets 1,561,400 567,000 Less valuation allowance 1,545,400 525,000 ----------- --------- Net deferred tax assets 16,000 42,000 Deferred tax liabilities: Depreciation 16,000 42,000 ----------- --------- Total deferred tax liabilities 16,000 42,000 ----------- --------- Net deferred tax amount $ - $ - =========== =========
At December 31, 1997 and 1996, the Company had net operating loss carryforwards of approximately $3,100,000 and $1,000,000, respectively. These losses expire between 2007 and 2012. The tax benefit of such operating loss carryforwards will be credited to income when realization is considered more likely than not. In addition, these amounts may be limited under Internal Revenue Code Section 382 as a result of ownership changes resulting from the Company's equity offerings. Significant components of the provision for income taxes are as follows for the years ended:
December 31, --------------------------------- 1997 1996 ---- ---- Current $ - $ - Deferred: Federal 918,000 402,000 State 102,400 40,000 Increase in valuation allowance (1,020,400) (442,000) ----------- ------------ Total deferred - - ----------- ------------ Total provision for income taxes $ - - $ - =========== ============
The reconciliation between the statutory tax rate and those reflected in the Company's income tax provision is as follows: December 31, ------------ 1997 1996 ---- ---- Statutory tax rate (34%) (34%) State and local taxes, net of federal benefit (6) (6) Valuation allowance 40 40 ---- ----- 0% 0% F-15 16 SUBSEQUENT EVENT: In January 1998, the Company entered into a seven and one-half year operating lease for its facilities in New York City. Monthly payments under such lease aggregate approximately $12,100 for the first five years and approximately $12,500 thereafter. 17. VALUATION AND QUALIFYING ACCOUNTS:
Additions Balance at Charged to Beginning Costs and Deductions Balance at of Year Expenses Write-Offs End of Year ------- -------- ---------- ----------- December 31, 1996: Allowance for doubtful accounts $ - $ 70,634 $40,634 $ 30,000 ======== ======== ======= ======== December 31, 1997,: Allowance for doubtful accounts $30,000 $144,269 $30,269 $144,000 ======== ======== ======= ========
F-16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed this 27th day of March, 1998 on its behalf by the undersigned, thereunto duly authorized. TRINITECH SYSTEMS, INC. By:/s/ Peter Kilbinger Hansen --------------------------- Peter Kilbinger Hansen Chairman of the Board and President (Chief Executive Officer) By:/s/ Kevin C. Cassidy ---------------------------- Kevin C. Cassidy Chief Financial Officer POWER OF ATTORNEY Trinitech Systems, Inc. and each of the undersigned do hereby appoint Peter Kilbinger Hansen and Kevin C. Cassidy, and each of them severally, its or his true and lawful attorney to execute on behalf of Trinitech Systems, Inc. and the undersigned any and all amendments to this Annual Report on Form 10-KSB and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission; each of such attorneys shall have the power to act hereunder with or without the other. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Peter Kilbinger Hansen - --------------------------- Chairman of the Board March 27, 1998 Peter Kilbinger Hansen (Principal Executive Officer) /s/ Kevin C. Cassidy - --------------------------- Chief Financial Officer March 27, 1998 Kevin C. Cassidy (Principal Accounting Officer) /s/ John H. Chapman - --------------------------- Director March 27, 1998 Dr. John H. Chapman /s/ Craig M. Shumate Director March 27, 1998 - --------------------------- Craig M. Shumate /s/ Carl E. Warden Director March 27, 1998 - --------------------------- Carl E. Warden EX-10.2 2 LOAN AGREEMENT LOAN AGREEMENT First Union Bank of Connecticut 300 Main Street Stamford, Connecticut 06904 (Hereinafter referred to as the "Bank") Trinitech Systems, Inc. 333 Ludlow Street Stamford, Connecticut 06902 (Individually and collectively "Borrower") This Loan Agreement ("Agreement") is entered into June 2, 1997, by and between Bank and Borrower, a Corporation (For profit) organized under the laws of Connecticut. Borrower has applied to Bank for a loan or loans (individually and collectively, the "Loan") evidenced by one or more promissory notes (whether one or more, the "Note") as follows: Line of Credit - in the principal amount of $1,000,000.00 which is evidenced by the Promissory Note dated June 2, 1997 ("Line of Credit Note"), under which Borrower may borrow, repay, and reborrow, from time to time, so long as the total indebtedness outstanding at any one time does not exceed the principal amount. The Loan proceeds are to be used by Borrower solely to finance accounts receivable. Bank's obligation to advance or readvance under the Line of Credit Note shall terminate if Borrower is in Default under the Line of Credit Note. Term Loan - in the principal amount of $75,000.00 which is evidenced by the Promissory Note dated June 2, 1997. The Loan proceeds are to be used by Borrower solely to finance leasehold improvements on office space. This Agreement amends and restates in its entirety that certain Revolving Credit Agreement dated May 17, 1996 and applies to govern all of the loans thereby. This Agreement applies to the Loan and all Loan Documents. The terms "Loan Documents" and "Obligations," as used in this Agreement, are defined in the Note. The term "Borrower" shall include its Subsidiaries and Affiliates. As used in this Agreement as to Borrower, "Subsidiary" shall mean any corporation of which more than 50% of the issued and outstanding voting stock is owned directly or indirectly by Borrower. As to Borrower, "Affiliate" shall have the meaning as defined in 11 U.S.C. Section 101, except that the term "debtor" therein shall be substituted by the term "Borrower" herein. Relying upon the covenants, agreements, representations and warranties contained in this Agreement, Bank is willing to extend credit to Borrower upon the terms and subject to the conditions set forth herein, and Bank and Borrower agree as follows: REPRESENTATIONS. Borrower represents that from the date of this Agreement and until final payment in full of the Obligations: ACCURATE INFORMATION. All information now and hereafter furnished to Bank is and will be true, correct and complete. Any such information relating to Borrower's financial condition will accurately reflect Borrower's financial condition as of the date(s) thereof, (including all contingent liabilities of every type), and Borrower further represents that its financial condition has not changed materially or adversely since the date(s) of such documents. AUTHORIZATION; NON-CONTRAVENTION. The execution, delivery and performance by Borrower and any guarantor, as applicable, of this Agreement and other Loan Documents to which it is a party are within its power, have been duly authorized by all necessary action taken by the duly authorized officers of Borrower and any guarantors and, if necessary, by making appropriate filings with any governmental agency or unit and are the legal, binding, valid and enforceable obligations of Borrower and any guarantors; and do not (i) contravene, or constitute (with or without the giving of notice or lapse of time or both) a violation of any provision of applicable law, a violation of the organizational documents of Borrower or any guarantor, or a default under any agreement, judgment, injunction, order, decree or other instrument binding upon or affecting Borrower or any guarantor, (ii) result in the creation or imposition of any lien (other than the lien(s) created by the Loan Documents) on any of Borrower's or guarantor's assets, or (iii) give cause for the acceleration of any obligations of Borrower or any guarantor to any other creditor. ASSET OWNERSHIP. Borrower has good and marketable title to all of the properties and assets reflected on the balance sheets and financial statements supplied Bank by Borrower, and all such properties and assets are free and clear of mortgages, security deeds, pledges, liens, charges, and all other encumbrances, except as otherwise disclosed to Bank by Borrower in writing ("Permitted Liens"). To Borrower's knowledge, no default has occurred under any Permitted Liens and no claims or interests adverse to Borrower's present rights in its properties and assets have arisen. DISCHARGE OF LIENS AND TAXES. Borrower has duly filed, paid and/or discharged all taxes or other claims which may become a lien on any of its property or assets, except to the extent that such items are being appropriately contested in good faith and an adequate reserve for the payment thereof is being maintained. SUFFICIENCY OF CAPITAL. Borrower is not, and after consummation of this Agreement and after giving effect to all indebtedness incurred and liens created by Borrower in connection with the Loan, will not be, insolvent within the meaning of 11 U.S.C. Section 101(32). COMPLIANCE WITH LAWS. Borrower is in compliance in all respects with all federal, state and local -2- laws, rules and regulations applicable to its properties, operations, business, and finances, including, without limitation, any federal or state laws relating to liquor (including 18 U.S.C. Section 3617, et seq.) or narcotics (including 21 U.S.C.Section 801, et seq.) and/or any commercial crimes; all applicable federal, state and local laws and regulations intended to protect the environment; and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if applicable. ORGANIZATION AND AUTHORITY. Each corporate or limited liability company Borrower and any guarantor, as applicable, is duly created, validly existing and in good standing under the laws of the state of its organization, and has all powers, governmental licenses, authorizations, consents and approvals required to operate its business as now conducted. Each corporate or limited liability company Borrower and any guarantor, if any, is duly qualified, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers, and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of Borrower or any such guarantor. NO LITIGATION. There are no pending or threatened suits, claims or demands against Borrower or any guarantor that have not been disclosed to Bank by Borrower in writing. REGULATION U. None of the proceeds of the Loan made pursuant to this Agreement shall be used directly or indirectly for the purpose of purchasing or carrying any margin stock in violation of any of the provisions of Regulation U of the Board of Governors of the Federal Reserve System ("Regulation U"), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry margin stock or for any other purchase which might render the Loan a "Purpose Credit" within the meaning of Regulation U. ERISA. Each employee pension benefit plan, as defined in ERISA, maintained by Borrower meets, as of the date hereof, the minimum funding standards of ERISA and all applicable regulations thereto and requirements thereof, and of the Internal Revenue Code of 1954, as amended. No "Prohibited Transaction" or "Reportable Event" (as both terms are defined by ERISA) has occurred with respect to any such plan. AFFIRMATIVE COVENANTS. Borrower agrees that from the date of this Agreement and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will: BUSINESS CONTINUITY. Conduct its business in substantially the same manner and locations as such business is now and has previously been conducted. MAINTAIN PROPERTIES. Maintain, preserve and keep its property in good repair, working order and condition, making all needed replacements, additions and improvements thereto, to the extent allowed by this Agreement. ACCESS TO BOOKS & RECORDS. Allow Bank, or its agents, during normal business hours, access to the books, records and such -3- other documents of Borrower as Bank shall reasonably require, and allow Bank to make copies thereof at Bank's expense. INSURANCE. Maintain adequate insurance coverage with respect to its properties and business against loss or damage of the kinds and in the amounts customarily insured against by companies of established reputation engaged in the same or similar businesses including, without limitation, commercial general liability insurance, workers compensation insurance, and business interruption insurance; all acquired in such amounts and from such companies as Bank may reasonably require. NOTICE OF DEFAULT AND OTHER NOTICES. (a) Notice of Default. Furnish to Bank immediately upon becoming aware of the existence of any condition or event which constitutes a Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, may become a Default, written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. (b) Other Notices. Promptly notify Bank in writing of (i) any material adverse change in its financial condition or its business; (ii) any default under any material agreement, contract or other instrument to which it is a party or by which any of its properties are bound, or any acceleration of the maturity of any indebtedness owing by Borrower; (iii) any material adverse claim against or affecting Borrower or any part of its properties; (iv) the commencement of, and any material determination in, any litigation with any third party or any proceeding before any governmental agency or unit affecting Borrower; and (v) at least 30 days prior thereto, any change in Borrower's name or address as shown above, and/or any change in Borrower's structure. COMPLIANCE WITH OTHER AGREEMENTS. Comply with all terms and conditions contained in this Agreement, and any other Loan Documents, and swap agreements, if applicable, as defined in the Note. PAYMENT OF DEBTS. Pay and discharge when due, and before subject to penalty or further charge, and otherwise satisfy before maturity or delinquency, all obligations, debts, taxes, and liabilities of whatever nature or amount, except those which Borrower in good faith disputes. REPORTS AND PROXIES. Deliver to Bank, promptly, a copy of all financial statements, reports, notices, and proxy statements, sent by Borrower to stockholders, and all regular or periodic reports required to be filed by Borrower with any governmental agency or authority. OTHER FINANCIAL INFORMATION. Deliver promptly such other information regarding the operation, business affairs, and financial condition of Borrower which Bank may reasonably request. NON-DEFAULT CERTIFICATE FROM BORROWER. Deliver to Bank, with the Financial Statements required herein, a certificate signed by Borrower, if Borrower is an individual, or by a principal financial officer of Borrower warranting that no "Default" as specified in the Loan Documents nor any event which, upon the giving of notice or lapse of time or both, would constitute such a Default, has occurred. ESTOPPEL CERTIFICATE. Furnish, within 15 days after request by Bank, a written statement duly acknowledged -4- of the amount due UNDER THE Loan and whether offsets or defenses exist against the Obligations. NEGATIVE COVENANTS. Borrower agrees that from the date of this Agreement and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will not: DEFAULT ON OTHER CONTRACTS OR OBLIGATIONS. Default on any material contract with or obligation when due to a third party or default in the performance of any obligation to a third party incurred for money borrowed in an amount in excess of $50,000.00. JUDGMENT ENTERED. Permit the entry of any monetary judgment or the assessment against, the filing of any tax lien against, or the issuance of any writ of garnishment or attachment against any property of or debts due Borrower in an amount in excess of $50,000.00 and that is not discharged or execution is not stayed within Thirty (30) days of entry. GOVERNMENT INTERVENTION. Permit the assertion or making of any seizure, vesting or intervention by or under authority of any government by which the management of Borrower or any guarantor is displaced of its authority in the conduct of its respective business or such business is curtailed or materially impaired. PREPAYMENT OF OTHER DEBT. Retire any long-term debt entered into prior to the date of this Agreement at a date in advance of its legal obligation to do so. RETIRE OR REPURCHASE CAPITAL STOCK. Retire or otherwise acquire any of its capital stock. CHANGE OF CONTROL. Make or suffer a change of ownership that effectively changes control of Borrower. CHANGE IN FISCAL YEAR. Borrower or guarantor shall not change its fiscal year without the consent of Bank. ENCUMBRANCES. Create, assume, or permit to exist any mortgage, security deed, deed of trust, pledge, lien, charge or other encumbrance on any of its assets, whether now owned or hereafter acquired, other than: (i) security interests required by the Loan Documents; (ii) liens for taxes contested in good faith; (iii) liens accruing by law for employee benefits; or (iv) Permitted Liens. INVESTMENTS. Purchase any stock, securities, or evidence of indebtedness of any other person or entity except investments in direct obligations of the United States Government and certificates of deposit of United States commercial banks having a tier 1 capital ratio of not less than 6% and then in an amount not exceeding 10% of the issuing bank's unimpaired capital and surplus. FINANCIAL COVENANTS. Borrower, on a consolidated basis, agrees to the following provisions from the date of this Agreement and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing: CURRENT RATIO. Borrower shall, at all times, maintain a Current Ratio of not less than 3.00 to 1.00. "Current Ratio" shall mean the ratio of current assets divided by current liabilities. TANGIBLE NET WORTH. Borrower shall, at all times, maintain Tangible Net Worth of at least $6,400,000.00. "Tangible Net Worth" shall mean the total assets minus total liabilities. For purposes of this computation, the aggregate amount of any intangible assets of Borrower including, -5- without limitation, goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, and brand names, shall be subtracted from total assets, and total liabilities shall include fully subordinated debt. DEPOSIT RELATIONSHIP. Borrower shall maintain its primary depository account with Bank. ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 90 days after the close of each fiscal year, audited financial statements reflecting its operations during such fiscal year, including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules; all on a consolidated and consolidating basis and in reasonable detail, prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. All such statements shall be examined by an independent certified public accountant acceptable to Bank. The opinion of such independent certified public accountant shall not be acceptable to Bank if qualified due to any limitations in scope imposed by Borrower or its Subsidiaries, if any. Any other qualification of the opinion by the accountant shall render the acceptability of the financial statements subject to Bank's approval. PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank unaudited management-prepared quarterly financial statements, including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules, as soon as available and in any event within 45 days after the close of each such period; all in reasonable detail and prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. Such statements shall be certified as to their correctness by a principal financial officer of Borrower. FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information as Bank may reasonably request from time to time, including without limitation, financial statements and information pertaining to Borrower's financial condition. Such information shall be true, complete, and accurate. BORROWING BASE. As to the Line of Credit Note in the principal amount of $1,000,000.00, the following provisions shall apply: BORROWING LIMITATION. The maximum principal amount that Borrower may borrow shall be the lesser of the principal amount stated in the Line of Credit Note or the maximum principal amount allowed under this addendum (the "Maximum Principal Amount"). The Maximum Principal Amount shall be an amount equal to 75% of the net amount of Eligible Accounts, less the amount of any Reserve required by Bank. -6- "Eligible Account" refers to an account receivable not more than 90 days from the date of the original invoice that arises in the ordinary course of Borrower's business and meets the following eligibility requirements: (a) the sale of goods or services reflected in such account is final and such goods and services have been delivered or provided and accepted by the account debtor and payment for such is owing; (b) the invoices comprising an account are not subject to any claims, returns or disputes of any kind; (c) the account debtor is not insolvent; (d) the account debtor has its principal place of business in the United States; (e) the account debtor is not an affiliate of Borrower and is not a supplier to Borrower and the account is not otherwise exposed to risk of set-off; (f) not more than thirty percent of the original invoices owing Borrower by the account debtor are more than ninety days from the date of the original invoice. "Reserves" may be required at any time and from time to time by Bank without prior notice to Borrower in amounts deemed by Bank to be adequate to reserve against outstanding letter of credit, outstanding bankers acceptances, Borrower's obligations to Bank or its affiliates or any guaranties or other contingent debt of Borrower. REQUIRED REPORTS. Borrower shall certify to Bank by the tenth day of each month, the amount of Eligible Accounts as of the first day of each month, on forms required by Bank together with all detail and supporting documents requested by Bank. Bank may at any time and from time to time, during Bank's normal business hours, enter upon any business premises of Borrower and audit Borrower's accounts. Bank's determination of the amount of Eligible Accounts shall at all times be indisputable and deemed correct. The Borrower, at all times, shall cooperate with Bank without limitation by providing Bank information and access to Borrower's premises and business records and shall be courteous to Bank's agents. CONTINUING REPRESENTATIONS. Borrower warrants and represents as a continuing warranty, that so long as principal is outstanding under the Line of Credit Note, the outstanding principal balance shall not exceed the lesser of the Maximum Principal Amount or the principal amount stated in the Line of Credit Note (the "Borrowing Limit"). Borrower agrees to pay any advances in excess of the Borrowing Limit immediately upon receipt by Borrower of written notice that the Borrowing Limit has been exceeded. CONDITIONS PRECEDENT. The obligations of Bank to make the Loan and any advances pursuant to this Agreement are subject to the following conditions precedent: ADDITIONAL DOCUMENTS. Receipt by Bank of such additional supporting documents as Bank or its counsel may reasonably request. -7- EX-24.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-KSB, into the Company's previously filed Registration Statement File Nos. 33-61298 and 33-85522. Stamford, Connecticut March 27, 1998 EX-27 4 ARTICLE 5 FDS FOR 10-KSB
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 2,141,307 0 2,003,134 144,000 1,290,373 5,403,078 2,076,466 714,759 7,547,263 1,599,675 0 0 0 8,525 10,419,763 7,547,263 5,006,017 5,006,017 2,680,138 7,746,513 0 0 13,463 (2,594,040) 0 (2,594,040) 0 0 0 (2,594,040) (.32) 0
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