ITEM 1. BUSINESS
The Company
CAM Commerce Solutions, Inc. was incorporated in California in 1983, and reincorporated in Delaware in 1987. Our principal business is to provide total commerce solutions for small to medium size, traditional retailers and Web retailers. We offer complete retailing systems, consisting of software, hardware, installation, training, technical support services and web hosting services. We also offer comprehensive payment processing solutions and services that integrate with our retailing systems as well as other suppliers’ systems. These solutions are based on our open architecture software products for managing inventory, point of sale, sales transaction processing, accounting and payment processing. Sales, service, research, and development staff are located in California and Nevada, while our customers are located throughout the United States.
Payment Processing Services (X-Charge)
We provide payment processing services for our customers utilizing our X-Charge software and a third party credit card payment processor. This generates revenues for us based on the number of credit card transactions processed by our customers.
X-Charge is integrated with our point of sale software, which allows our customers to integrate their payment processing with their point of sale system. This integration means they no longer need the stand alone credit card terminals. When one of our retailers who is using X-Charge rings up a sale at the cash register and selects to take payment with a credit card, the X-Charge software takes over automatically. It asks the operator to swipe the card on the cash register and then handles the approval, printing of the customer receipt on the cash register and all settlement functions and reporting after the fact. Thus, the sale takes place for the customer and the retailer in one transaction rather than the two transactions it would take to separately ring up the credit card on a stand alone credit card terminal in addition to ringing the sale on the cash register. Transactions are faster and more efficient with X-Charge.
Our X-Charge customer accounts can be broken up into two types. First, there are customers who have our own retailing solutions, such as Retail ICE, Retail Star, CAM-32, Profit$ or MicroBiz. Second, there are the customers of our resellers who are using a business software solution that the reseller has developed for their customers.
The Systems
We offer the following turnkey systems:
| (1) | CAM32 – designed for hard goods retailers whose inventory is re-orderable in nature. | ||
| (2) | Profit$ – designed for apparel and shoe retailers whose inventory is seasonable in nature, and color and size oriented. | ||
| (3) | Retail STAR – a Windows-based system designed to incorporate multiple functions of both the CAM and Profit$ systems. | ||
| (4) | Retail ICE – single-user derivative of Retail STAR. | ||
| (5) | MicroBiz – a Windows-based system designed for single-store, hard goods retailers that are generally smaller in size than customers that utilize the CAM32 system. |
Our systems offer the ability to obtain: (i) automated pricing of each item; (ii) billing for charge account customers; (iii) printing of a customer invoice; (iv) tracking of inventory count on an item by item basis; (v) computation of gross profit, dollars and/or percentage of each item; and (vi) tracking of sales by clerk and department by day and/or month. In addition, our systems provide full management reporting including zero sales reports, inventory ranking, overstock and understock, sales analysis, inventory valuation (last cost, average cost and retail) and other reports. The systems can also provide integrated or interfaced accounting functions including accounts receivable, accounts payable, and general ledger. Our systems integrate Intel-based personal computers, computer point of sale stations, hand-held and table top barcode laser scanners, computer workstations, laser printers, and our software. Each system is configured to meet the customer’s particular needs and, as a result, the components included in each system, including the personal computer, printer, point of sale station and our software, depend on the needs, the size and the industry type of the customer.
We provide to each customer a turnkey system, which includes all of the hardware and the software as well as installation of the system at the customer’s premises. All systems, except the MicroBiz and Retail ICE systems, are capable of handling multiple stores. In a multiple-store system, we either install a computer network or work with the existing network infrastructure of the customer. The server computer at each store communicates with the server computer at the customer’s main office. The main server computer compiles all information from the other locations for processing and reporting.
Inventory Management
We believe that inventory control is the most important and time consuming task facing the management of retail stores. Each of our systems was designed to address the retailer’s need for simpler and yet more accurate means of controlling a large and diverse inventory. All inventory information, once entered into the system, is updated for each sale that is transmitted from the point-of-sale station to the server computer. The following managerial reports are examples of the type of reporting that the systems are capable of providing:
| (1) | Popularity Ranking. The systems will report on the popularity of each item in the store by producing a report listing each item of inventory ranked according to the number of sales of each item. The report is generated automatically or manually, and can produce a list of daily, weekly, monthly, year-to-date and/or trailing 12 or 13 months of sales basis. The systems will also analyze popularity data and indicate to the retailer which particular items of inventory are needed and which items are overstocked. | ||
| (2) | Zero Sales Report. The systems provide a sales analysis on a monthly and year-to-date basis for inventory items for which no sales have been made. The analysis can be reported on a total sales basis or on a departmental or item level basis. | ||
| (3) | Inventory Tabulation and Valuation. The systems provide reports listing all inventory on hand, the valuation of such inventory on a cost and retail basis, the average cost of each item in inventory, and all items of inventory on order but not yet received. | ||
| (4) | Automatic Purchasing. The systems provide a report listing all items that should be ordered based upon historical data stored in the system, including the number of items in inventory, the number on the shelf, the |
| number on order and the minimum quantities required. Certain systems can also automatically provide a purchase order if desired. | |||
| (5) | Pricing. The systems are capable of producing price stickers in various label formats, assigning Uniform Purchase Code numbers and printing barcodes directly upon the price labels for reading by laser scanners. In addition, if there is a price change, the systems will automatically update the pricing information and, if desired, print new pricing labels. | ||
| (6) | Reports. The systems permit the retailer to produce customized reports and forms utilizing data in the system. |
Accounting Management
We have developed our own accounting software called Retail STAR Accounting, which is integrated with Retail STAR and Retail ICE software products. The accounting modules include Sales Order, Accounts Receivable, Accounts Payable, General Ledger, and Bank Reconciliation.
i.STAR
We provide retailers the ability to set up an internet storefront with our i.STAR software that is integrated with Retail STAR and CAM32 systems. The internet storefront is established within the system as a virtual store location in a chain of stores. The integrated accounting features (i.e. order processing and accounts receivable) are used to process, track, and ship the orders that are received from the internet storefront. As a one source solution for our customers, we also provide web hosting service for i.STAR.
Service and Support
Customer service and support is a critical element in maintaining customer satisfaction. For a monthly fee, each purchaser of a system receives service and support from us. The service and support we provide includes:
| (1) | Technical Phone Support and Software Enhancements. We provide technical support by troubleshooting the customer’s systems problems via the telephone and via modem. We do not significantly customize our software for particular customers, but we are receptive to comments from customers concerning our software. Such comments, together with planned enhancements to the software, result in improvements, which are provided without additional cost to all customers on a service contract. | ||
| (2) | Installation and Training. In order to assure customers that they will be able to properly integrate our system into their business, we offer on-site installation and training on the use and application of our systems to each customer. The training can take place at our in-house training facilities or at the customer’s location. The amount of training required depends upon the knowledge and experience of the user plus the complexity of the business to which the system is being implemented. We also offer training to our customers via the telephone. | ||
| (3) | Hardware Service. We offer hardware service to our customers on a time and material billing basis. Our service representatives are trained to determine the source of the problem or malfunction in the hardware and, once determined, replace the defective component. Defective components are either repaired at our facility or sent to a manufacturer’s authorized service center for repair. |
Marketing
Direct Sales
We market our systems and services primarily through our direct sales force consisting of 45 salespersons and sales associates, all of whom work exclusively for us. Our marketing efforts extend nationwide with offices in the states of California, Nevada, Washington, Georgia, Florida, Missouri, Massachusetts, Texas and New Jersey. Each salesperson is assigned a specific geographical territory and is responsible for following up on sales leads in that territory. Each salesperson is provided with a sales kit and demonstration equipment. Each salesperson is trained by us to be able to define the needs of the potential customer, recommend a system configuration, and provide appropriate price quotes. Upon the execution of a typical sales contract, we are generally able to ship and install an entire system within four to six weeks. We are paid directly by the customer or by third-party leasing companies. Compensation for salespeople is based on a percentage of contract prices for each system sold.
Brochures, Trade Shows, and Advertising Media
We market our systems by advertising in trade journals, the Internet, and other print media targeted at retail businesses, by attending industry specific trade shows, by using sales promotional DVDs, and by direct mail advertising.
Sources of Supply
The computer hardware, which makes up our systems, consists primarily of standard components purchased by us from outside distributors and includes products such as Intel-based personal computers, Hewlett-Packard printers, Symbol Technologies hand-held laser scanners and portable data terminals, and Epson receipt printers. For most computer hardware components, we have more than one source of supply. We do not maintain a significant inventory of hardware component parts.
Customers
We have a wide base of customers with no single customer accounting for 10% or more of our revenues.
Backlog
We purchase component hardware for our systems based upon system purchase orders and our forecast of demand for our products. Orders from customers are usually shipped by us pursuant to an agreed upon schedule. Orders, however, may be canceled or rescheduled by the customer with a minimal penalty. For this reason, we believe such backlog information is not indicative of our future sales or business trends and is subject to fluctuation. As of September 30, 2006, backlog was approximately $719,000, as compared to $535,000 on September 30, 2005. This backlog is based upon purchase orders placed with us which we believe are firm orders that will be filled during fiscal year 2007.
Competition
The industry in which we operate is highly competitive. We compete with suppliers dedicated to servicing just one type of business and software suppliers that provide functions similar to our software to a variety of types of businesses. Most competitors sell their products through independent dealers on a regional and national basis. We sell our systems on a direct sales basis.
We consider our systems to have greater capabilities for the small and medium size retailers than suppliers of other systems. We believe that we offer unique software features including i.STAR (fully integrated Web store), gift card processing, and integrated accounting software. Included among such capabilities are ongoing software enhancements and a service organization in place to support the customer after the initial sale. We compete on the basis of product features, customer support, and our direct sales force against competitors that typically compete on the basis of lower pricing.
We also compete with vertical market suppliers of automated retail systems, which include hardware and software intended for use by a particular retail industry segment. Some of these suppliers compete with us on the basis of lower pricing.
Our ability to meet competition will depend upon, among other things, our ability to maintain our marketing effort, increase the capabilities of our systems through ongoing enhancements and improvements, and obtain financing when, and if, needed.
Intuit and Microsoft both offer competing point of sale software products. These products were either acquired or licensed from existing competitors in our marketplace. We have successfully competed against these products in the past. We believe our software products with their strong feature set will allow us to continue to compete successfully against Intuit and Microsoft’s products, but there is no assurance of this because of the significant financial resources available to Intuit and Microsoft and their ability to market and modify their products.
Patents and Trademarks
We have obtained federal trademark registration for the following trademarks: Retail STAR, Retail ICE, A-Trade and X-Charge. We are not aware of any infringement on our trademarks, nor of any claim that our trademarks infringe on the rights of any other party.
We rely on a combination of trade secrets, copyright laws, and technical measures to protect our proprietary software. The software included in a system is not accessible by customers for purposes of revisions or copying, because we do not release the software source code to customers. We do not hold any patents and believe that our competitive position is not materially dependent upon patent protection. We believe that most of the technology used in the design and manufacture of most of our products is generally known and available to others. Consequently, there are no assurances that others will not develop, market and sell products substantially equivalent to our products, or utilize technologies similar to those used by us.
Seasonality
We experience a decline in demand for new systems from late November through early January because many retailers are reluctant to purchase and implement a point-of-sale system during their busy season. To offset our slow season for system sales, we have built a base of recurring revenue from existing customers primarily through our X-Charge payment processing service. The revenue from this service increases during the retailers’ busy season because of the increase in credit card sales.
Software Development
We develop our software using a modular approach, wherever possible, which allows a programmer to incorporate, replace or delete parts of an existing computer software program into a new program without affecting the operation of the remaining parts of the program. The incorporation of existing software, which has already been fully tested, into new product designs reduces the time and expense that we would otherwise incur in developing and enhancing our products.
We spent approximately $1,808,000, $1,706,000, and $1,725,000 on software development, including amounts capitalized during the years ended September 30, 2006, 2005, and 2004, respectively. We anticipate we will continue to incur software development costs in connection with enhancements and improvements of our software and the development of new products. These activities may require an increase in our programming and technical staff.
Employees
As of September 30, 2006, we had 188 full time employees, including 19 employed in finance, administration and executive officers, 20 in programming and quality assurance, 49 in sales and marketing, 22 in training and installation, 69 in technical support and customer service, and 9 in operations.
None of our employees are represented by a labor union and we believe that we enjoy harmonious relationships with our employees.
Environmental Regulations
There has been no material effect on us from compliance with environmental regulations.
ITEM 1A. RISK FACTORS
Before deciding to buy, hold or sell our common stock, you should carefully consider the risks described below, in addition to the other information contained in this Report and in our other filings with the Securities and Exchange Commission, including our reports on Forms 10-Q and 8-K. The risks and uncertainties described below are what we consider our most significant risks, but they are not the only ones we face. Additional risks and uncertainties not presently known or that are currently deemed immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, they could have a material adverse effect on our business, financial
condition, results of operations, and cash flows. In that event, the market price for our common stock could decline and you may lose all or part of your investment.
The growth in our X-Charge payment processing business is primarily the result of adding new customers.
The revenue from our payment processing services grew by approximately 63% from fiscal 2005 to fiscal 2006 and accounted for approximately 39% of all revenue in fiscal 2006. This growth was due primarily to adding new customers, rather than increases in revenue from existing customers. We may not be able to continue to add new customers at the same rate in the future, in which case, our revenue growth may slow down substantially.
Our original core business of computer system sales is in decline.
The sales of turnkey computer systems for the retail market declined by approximately 14% in fiscal 2006. This decline is due to market factors outside of our control and may continue. We cannot predict if and when a turn around in our system sales will occur. In response to this decline, we have shifted our business emphasis to the processing of credit card payments and other similar transactions, but still continue to strive for improvement in our system sales.
The population of our target customers is declining.
Our target customers are small-to-medium size retailers. These target customers are under intense competitive pressure from large retail chains such as Wal-Mart and others. These large retailers are gaining market share at the expense of our target customers. This intense competition causes some small retailers to go out of business, and others to consolidate with other small regional retail chains. This results in a shrinking population of our target customers. This also causes our target customers to be more cautious about capital spending for their retail business. These factors can cause substantial fluctuations in our revenues and in our results of operations. This current trend in the retail industry may exist indefinitely and could seriously impact our revenue and harm our business, financial condition and results of operations.
Our stock is thinly traded. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid for them.
Our common stock has historically maintained a low trading volume of shares per day. This trend is likely to continue.
We face intense competition in the retail point of sale industry, which could reduce our market share.
Intuit and Microsoft both offer competing point of sale software products. These products were either acquired or licensed from our competitors. Although we have successfully competed against these products in the past, both Intuit and Microsoft have significant financial resources to market and modify their products, and, therefore, we may not be able to continue to successfully compete against them in the future.
We may face patent or proprietary rights litigation in the future.
Although we believe that our products do not infringe on any third party’s patents, we may become involved in litigation involving patents or proprietary rights. Patent and proprietary rights litigation entails substantial legal and other costs, and we may not have the necessary financial or management resources to defend or prosecute our rights in connection with any litigation.
Other factors which may affect operating results include:
| - | the availability and pricing of competing products and the resulting effects on sales; | ||
| - | the effectiveness of expense and cost control efforts; | ||
| - | the ability to develop and deliver software products to market in a timely manner; | ||
| - | the rate at which present and future customers adopt our new products and services in our target markets; | ||
| - | the effects of new and emerging technologies; |
| - | the ability to retain and hire key executives, management, technical personnel and other employees that are needed to implement business and product plans; | ||
| - | the level of orders received that can be shipped in a fiscal quarter. |
Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on past operating results as an indication of future performance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
