<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: DECEMBER 31, 1997
COMMISSION FILE NO. 333-06121
COMPRESSENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
FLORIDA 65-0581474
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
2105 HAMILTON AVENUE, SUITE 140, SAN JOSE, CA 95125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NO. (408) 879-6600
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
REDEEMABLE STOCK PURCHASE WARRANTS
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or such shorter period that the Registrant was required to file such
reports); and, (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 5,048,869 shares of common stock, as
of February 1, 1998.
<PAGE> 2
COMPRESSENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Statements of Operations -
three months ended December 31, 1997 and 1996,
and for the period from inception (August 26, 1994)
to December 31, 1997 ............................................ 3
Condensed Balance Sheets -
December 31, 1997 and September 30, 1997 ........................ 4
Condensed Statements of Cash Flows -
three months ended December 31, 1997 and 1996,
and for the period from inception (August 26, 1994)
to December 31, 1997 ............................................ 5
Notes to Condensed Financial Statements ......................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................... 14
ITEM 6. Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES ...................................................... 16
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS.
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED INCEPTION
----------------------------- (AUGUST 26, 1994)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating costs and expenses:
Research and development ................... $ 426,671 $ 400,814 $ 2,835,514
Sales and marketing ........................ 1,072,425 564,879 2,939,277
General and administrative ................. 2,462,155 410,273 5,692,980
------------ ------------ ------------
Total operating costs and
expenses ............. 3,961,251 1,375,966 11,467,771
------------ ------------ ------------
Loss from operations ........................... (3,961,251) (1,375,966) (11,467,771)
Interest income and other, net ............. (21,206) 61,700 162,577
------------ ------------ ------------
Net loss ....................... (3,982,457) (1,314,266) (11,305,194)
Less: Accretion on preferred stock ............. -- -- (900,000)
------------ ------------ ------------
Net Loss applicable to common shareholders .. $ (3,982,457) $ (1,314,266) $(12,205,194)
============ ============ ============
Net loss per share applicable to common
shareholders:
Basic ...................................... $ (0.79) $ (0.26)
Diluted .................................... (0.79) (0.26)
Shares used in computing net loss per share
applicable to common shareholders:
Basic ...................................... 5,044,830 4,972,000
Diluted .................................... 5,044,830 4,972,000
</TABLE>
See accompanying notes
3
<PAGE> 4
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 ADJUSTMENTS 1997 1997
------------ ------------ ------------ -------------
(PRO FORMA)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............................... $ 74,426 $ 500 $ 74,926 $ 1,900,171
Short-term investments .................................. -- 3,500,000 3,500,000
Inventory ............................................... 102,311 102,311 55,620
Other current assets .................................... 247,447 247,447 114,709
------------ ------------ ------------
Total current assets ......................... 424,184 3,924,684 2,070,500
Property and equipment, net ................................. 220,590 220,590 217,656
Other assets
Capitalized software development costs, net ............. 323,159 323,159 369,324
Other assets ............................................ 183,945 183,945 207,665
------------ ------------ ------------
Total assets ................................. $ 1,151,878 $ 4,652,378 $ 2,865,145
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ....................................... $ 827,246 $ 827,246 $ 474,292
Other accrued liabilities .............................. 303,489 303,489 105,742
------------ ------------ ------------
Total current liabilities .................... 1,130,735 1,130,735 580,034
Long-term debt .............................................. 1,000,000 1,000,000 1,000,000
Shareholders' equity
Preferred stock ......................................... -- 2,240,500 2,240,500 --
Common stock and additional paid in capital .............. 10,350,337 1,260,000 11,610,337 8,655,848
Deficit accumulated during development stage ............ (11,305,194) (11,305,194) (7,322,737)
Deferred compensation ................................... (24,000) (24,000) (48,000)
------------ ------------ ------------
Total shareholders' equity ................... (978,857) 2,521,643 1,285,111
------------ ------------ ------------
Total liabilities and shareholders' equity ... $ 1,151,878 $ 4,652,378 $ 2,865,145
============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE> 5
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCEPTION
---------------------------- (AUGUST 26, 1994)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net cash used in operating activities......................... $(1,844,594) $ (935,290) $(7,846,532)
----------- ----------- -----------
Cash flows from investing activities
Purchases of available-for-sale investments ................... -- (4,755,387) (4,868,029)
Maturities of available-for-sale investments .................. -- 649,403 4,868,029
Purchase of property and equipment ............................ (30,518) (37,095) (408,800)
Capitalized software development costs ........................ -- -- (369,324)
----------- ----------- -----------
Net cash used in investing activities ......................... (30,518) (4,143,079) (778,124)
----------- ----------- -----------
Cash flows from financing activities
Sale of common stock .......................................... -- -- 1,952,263
Receipt of proceeds from underwriter in initial
public offering ............................................ -- 5,549,573 5,549,573
Initial public offering registration costs paid .............. -- -- (269,968)
Loans from shareholders ....................................... -- -- 75,000
Repayment of full recourse note payable ....................... -- -- 90,000
Sale of redeemable preferred stock ............................ -- -- 450,000
Redemption of preferred stock ................................. -- (450,000) (450,000)
Exercise of redeemable stock purchase warrants for common stock 32,700 -- 421,212
Proceeds from issuance of notes payable ....................... -- -- 1,250,000
Principal payment of notes payable ............................ -- -- (1,250,000)
Debt offering registration costs paid ......................... -- -- (135,665)
Proceeds from issuance of subordinated long-term debt ......... -- -- 1,000,000
Exercise of stock options ..................................... 16,667 -- 16,667
----------- ----------- -----------
Net cash provided from financing activities .................. 49,367 5,099,573 8,699,082
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents ................................... (1,825,745) 21,204 74,426
----------- ----------- -----------
Cash and cash equivalents at beginning of period .................. 1,900,171 155,533 --
----------- ----------- -----------
Cash and cash equivalents at end of period ........................ $ 74,426 $ 176,737 $ 74,426
=========== =========== ===========
Supplemental schedule of noncash investing and
financing activities
Common stock to be issued in redemption
of preferred stock ............................................. $ -- $ -- $ 900,000
Conversion of loan and advance from shareholder to
common stock .................................................... -- -- 75,000
Issuance of common stock in exchange for full recourse
note payable ................................................... -- -- 90,000
Fair value of warrants issued in exchange for services ............ 1,610,000 -- 1,610,000
</TABLE>
See accompanying notes
5
<PAGE> 6
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
Business
Compressent Corporation (the "Company") was incorporated in the state of
Florida on August 26, 1994, but did not commence formal operations until April
1995. The Company develops digital image coding and data compression software
products that will enable the facsimile transmission of color images from
computers equipped with the Company's software programs.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Articles 10
of Regulation S -X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Management recommends that
these interim financial statements be read in conjunction with the audited
financial statements and the related notes thereto included in the Company's
Annual Report on Form 10-K for the year ended September 30, 1997 previously
filed with the Securities and Exchange Commission.
The accompanying balance sheet as of December 31, 1997 includes an
illustration ("Pro Forma") of the effect of the issuance of Preferred Stock by
the Company during February 1998. See Note 8 of the accompanying financial
statements for additional information on the issuance of Preferred Stock by the
Company.
The balance sheet at September 30, 1997 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1997 previously filed with the SEC.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (SFAS 128), "Earnings per Share", which is required for all financial
statements issued for periods ending after December 15, 1997, including interim
periods. The new requirements include a calculation of basic earnings per share,
from which the dilutive effect of stock options, warrants and convertible debt
are excluded. The basic earnings per share calculation does not change the
primary earnings per share previously reported for the three month period ended
December 31, 1996. A calculation of diluted earnings per share is required;
however, this does not differ materially from the Company's reported primary
earnings per share because the Company had net losses for all prior periods
reported and therefore, the dilutive effect of stock options, warrants, and
convertible debt will be excluded. Accordingly, diluted earnings per share will
be the same as basic earnings per share until the Company has net income. The
accompanying condensed statement of operations for the three month period
ended December 31, 1997 and December 31, 1996 includes the presentation of both
basic and diluted earnings per share.
2. INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---------- ---------
<S> <C> <C>
Raw Materials $ 102,311 $ 55,620
Finished goods - -
---------- ---------
Total Inventories $ 102,311 $ 55,620
========== =========
</TABLE>
6
<PAGE> 7
3. Equity-Based Line of Credit
On December 3, 1997, the Company secured a $10,000,000 equity-based line of
credit from Kingsbridge Capital Limited, a company organized and existing under
the laws of the British Virgin Islands ("KCL"). Under the privately-placed
financing, the Company has the right to draw up to $10,000,000 in cash in
exchange for the Company's Common Stock. Each draw must be for an amount
greater than $300,000, but no more than $1,000,000. There must be a minimum of
20 business days between each draw. The number of shares to which KCL is
entitled pursuant to a draw shall be determined by dividing the dollar value
of the draw by the purchase price. The purchase price is defined as 88% of the
lowest closing bid price of the Company's Common Stock over the five trading
days beginning two trading days prior to the date of the draw. No more than
1,008,000 shares may be sold pursuant to the equity line. No draws may be
made under the line of credit until the Company registers for resale the shares
issued pursuant to the equity line of credit and the shares issuable on
exercise of the warrant, has been declared effective by the Securities and
Exchange Commission. No draws may be made during any 20 trading day period in
which the average daily trading volume of the Company's Common Stock is less
than 22,500 shares per day. The market price of the Company's common stock must
equal or exceed $6 per share for the previous 3 trading days prior to a draw.
No draws may be made without KCL's consent to the extent the draw would cause
KCL to hold more than 9.9% of the Company's Common Stock. The Company's common
stock must be qualified for continued listing on the NASDAQ SmallCap Market, for
which the Company must, among other requirements, maintain net assets in excess
of $2,000,000 or have a total market capitalization greater than $35,000,000.
The line of credit will remain in effect for a period of eighteen months. In
connection with the agreement, the Company issued KCL a warrant to purchase up
to 45,000 shares of the Company's Common Stock at a price of $10.64 per share.
The Warrant expires on December 3, 2000. The fair value of the warrant was
estimated at the date of grant using a Black-Scholes options pricing model
with the following assumptions, risk free interest rate of approximately 6%; no
dividend yield; volatility factor of .7; and a weighted average expected life of
3 years. The estimated fair value of the warrants is $108,000 and will be
amortized over 18 months.
As of February 20, 1998, no funds were available under the equity-based
line of credit as the Company has not filed a registration statement to the
register shares that may be sold pursuant to the line. Should the Company not
make any draws under the equity-based line of credit during the term of the
agreement, the Company will be required to pay $120,000 to KCL.
4. Warrant Issued to Member of Board of Directors
On December 30, 1997, in connection with assistance to be provided with
the Company's management changes and financing needs, the Company granted a
member of the Board of Directors warrants to purchase 700,000 shares of the
Company's Common Stock. The Warrants have an exercise price of $6.25 per share
and expire three years from the date of grant. The fair value of the warrant
was determined at the date of the grant using a Black-Scholes option pricing
model with the following assumptions, risk free interest rate of approximately
6%; no dividend yield; volatility factor of .7; and a weighted average expected
life of 3 years. The estimated fair value of the warrants of $1,610,000 will be
recorded as a charge against general and administrative expenses in the quarter
ended December 31, 1997.
5. Legal Matters
On December 10, 1997, the Company and Color Communications Corporation
entered into a settlement agreement which continued the prohibitions of the
preliminary injunction through January 15, 1998 and permanently prohibited the
defendants from using the Company's confidential information. The agreement
further prohibits the defendants from communicating with six specific companies
through April 15, 1998. As part of the settlement, the Company dismissed its
claims against the defendants and received a release of claims from them.
In December 1997, the Board of Directors replaced several members of
management with a new and smaller management team. On February 18, 1998, the
Company received a letter from one member of the former management alleging
wrongful termination and racial discrimination and seeking unspecified damages.
The Company believes the claims are without merit and intends to contest the
matter vigorously. Management does not believe that resolution of the matter
will have a material effect on the Company. However, litigation is inherently
costly and uncertain and there can be no assurance that the matter will be
resolved in the Company's favor or without material cost.
6. Agreement to Acquire Softlink, Inc.
On December 31, 1997, the Company entered into an agreement to acquire all
of the issued and outstanding shares of Softlink, Inc. (Softlink), a California
corporation, pursuant to a Stock Purchase Agreement dated December 31, 1997
between the Company and the shareholders of Softlink. The final agreement is
subject to certain conditions and the approval by Softlink's shareholders.
Softlink designs, manufactures, and distributes e-mail enhancement products for
sales under the "Voice" and "BravoMail" brand names. "Voice" is software and
hardware that allows for the addition of the voice dimension of communication
to e-mail. "BravoMail" is software that allows for e-mail presentations
complete with audio, graphics, and real time sequenced annotation and animation.
As of December 31, 1997, Softlink did not have significant operating revenues
and the book value of its total assets was not material to the Company.
7
<PAGE> 8
The closing of the acquisition is subject to a number of contingencies. If
the agreement is consummated on the terms currently anticipated, the Company
will acquire all of the capital stock of Softlink's shareholders, amounting to
4,059,449 shares of no par value common stock, for a negotiated purchase price
of 450,000 shares of the Company's $.001 par value common stock with a fair
value of $2,109,000 based on the average of the closing bid and ask prices for
the Company's common stock on December 31, 1997. The acquisition will be
accounted for using the purchase method of accounting and, accordingly, the
purchase price will be allocated to the assets purchased and the liabilities
assumed based on their fair values as of the date of the acquisition. The excess
of the purchase price over the fair values of the net liabilities acquired of
approximately $2,148,000 will be recorded as developed technology, and will be
amortized over the estimated useful life of 2 years using the greater of the
straight-line method or the ratio of current revenue to the total of current and
anticipated revenues.
7. Changes in Board of Directors and Management
In December 1997 the Board of Directors replaced several members of Company
management and the Company's Chairman and Chief Executive Officer and the
President resigned from the Board of Directors. In addition, on December 30,
1997, two other members of the Company's Board of Directors resigned and the
Company appointed a new Chief Executive Officer, Chief Financial Officer, and
Vice President of OEM Sales. The new Chief Financial Officer resigned in
February 1998. The Company's Board of Directors currently consists of four
members.
8
<PAGE> 9
SUBSEQUENT EVENTS
8. Sale of Preferred Stock
On February 3, 1998, the Company signed an agreement to sell 56,000 shares
of its redeemable convertible Series A Preferred Stock to Call Now, a related
party, for $62.50 per share for aggregate total proceeds of $3,500,000. As
payment for the preferred stock, on February 20, 1998, Call Now transferred to
the Company 1997 Series A, Retama Park Racetrack Project Special Facilities
Revenue Bonds with a face value of $3,500,000. The Retama Park Racetrack is a
horseracing facility in Selma, Texas that is managed by Retama Entertainment
Group, an 80 percent subsidiary of Call Now. The 1997 Series A Bonds pay
interest at a 7 percent per annum and are secured by the racetrack
facility. The bonds are not currently traded in the open market and prior to
the transfer of the bonds to the Company, all such bonds were owned by Call
Now. The Company believes that the fair value of the 1997 Series A bonds
approximates the face value. The Company may use the 1997 Series A Bonds as
loan collateral to provide operating cash.
The Preferred Stock sold to Call Now, is initially convertible into common
stock on a ten to one basis, subject to future adjustments for stock splits,
stock dividends or other similar events. The holders of the Preferred Stock
have no voting rights, except as required under any applicable state laws. The
Preferred Stock has mandatory cumulative dividends of $7.50 per share per
annum. The Preferred Stock has an aggregate liquidation preference over the
common stock of $62.50 per share plus cumulative unpaid dividends. The
Preferred Stock may be redeemed by the Company any time subsequent to 90 days
from the date of issuance for $100 per share plus unpaid dividends.
In connection with the issuance of the Series A Preferred Stock to Call
Now, for nominal proceeds of $500, the Company sold a warrant to Call Now to
purchase up to 500,000 shares of the Company's common stock with an exercise
price of $6.25 per share or the average bid and ask price of the common stock
for the three days prior to exercise. The warrant expires three years after the
date of grant. The fair value of the warrant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
assumptions, risk free interest rate of approximately 6%; no dividend yield;
volatility factor of .7; and a weighted average expected life of 3 years. The
fair market value of the warrant is estimated to be $1,260,000, which is
reflected as an adjustment to the "Pro Forma" Balance Sheet as of December 31,
1997.
Line of Credit
On February 3, 1998, the Company secured a $10,000,000 line of credit from
Call Now. Under the agreement, the Company has the right to draw up to
$10,000,000 on or before September 30, 1998. Proceeds paid to the Company upon
making draws under the line may be in the form of Retama Park Racetrack Bonds
similar to the proceeds received on the sale of Preferred Stock (see above).
Borrowings must be approved through resolution of the Company's Board of
Directors and must be used for working capital or acquisitions due within ten
days of the adoption of the resolution. The Company will be required to issue a
Promissory Note bearing interest at 15% per year, payable quarterly, for any
funds drawn against the line of credit. The Company is required to pay Call Now
a commitment fee of $400,000 within thirty (30) days after the first draw
pursuant to the line of credit.
In connection with the line of credit agreement, the Company issued
500,000 warrants (the "underlying warrants") to Call Now exercisable for $2.00
per warrant. Each underlying warrant may be exercised by Call Now to purchase
the Company's common stock at an exercise price of $6.25 per share. The
underlying warrants expire three years after the date of grant. The fair value
of the underlying warrants was determined at the date of the grant using a
Black-Scholes option pricing model with the following assumptions, risk free
interest rate of approximately 6%; no dividend yield; volatility factor of .7;
and a weighted average expected life of 3 years. The fair market value of the
underlying warrants is estimated to be $80,000 will be recorded as a component
of interest expense in the quarter ended March 31, 1998.
Loan From Shareholder
On January 15, 1998, the Company issued a promissory note to a certain
shareholder for $425,000. The note bears interest at 15% per year and is payable
on demand or within thirty (30) days of issuance. The Company also issued a
warrant to purchase up to 100,000 shares of the Company's common stock at an
exercise price of $6.25 per share. The warrants expire on January 15, 2001. The
fair value of the warrant determined at the date of the grant using a
Black-Scholes option pricing model with the following assumptions, risk free
interest rate of approximately 6%; no dividend yield; volatility factor of .7;
and a weighted average expected life of 3 years. The estimated fair value of
the warrants of $195,000 will be recorded as a component of interest expense
in the quarter ended March 31, 1998.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933 and Section 21E of the
Securities Act of 1934. All forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of many factors including, but not
limited to those listed below under "Risk Factors".
Overview
The Company was incorporated in the state of Florida on August 26, 1994, but
did not commence formal operations until April 1995. The Company's primary
activities since inception have been devoted to designing and developing its
initial color facsimile products and related technologies, preparation for
marketing, the recruitment of key management and technical personnel, including
outside consultants, and raising capital to fund operations. As a result, the
financial statements are presented in accordance with Statement of Financial
Accounting Standards No. 7 (SFAS 7), "Accounting and Reporting by Development
Stage Enterprises."
The Company believes its sale of preferred stock and warrant to purchase
common stock and the line of credit with Call Now, Inc. ("Call Now"), a related
party are sufficient to support planned operating activities through September
30, 1998 (see Note 10 -- Subsequent Events). Call Now is a publicly held real
estate investment company. Call Now's major asset is ownership of the Retama
Park Racetrack Project Special Facility Revenue Bonds. The Retama Park
Racetrack is a horse racing facility in Selma, Texas that is managed by the
Retama Entertainment Group, an 80 percent owned subsidiary of Call Now. A member
of the Company's Board of Directors is the Chairman and President of Call Now
and owns over 50 percent of Call Now stock. Another member of the Company's
Board of Directors is also a shareholder of Call Now. In addition, Call Now has
been involved in several sales of equity and debt financings with the Company
and Call Now owns common stock of the Company. The Company is reliant on the
availability of funds under the line of credit with Call Now.
Risk Factors
The Company's risk factors include, but are not limited to, the following:
Development Stage Company; Absence of Operating History. The Company has been
engaged primarily in the design and development of CHROMAFAX and CHROMAFAX LITE
and related technology. The Company's first product release commenced in June
1997. The risks, expenses and difficulties often encountered in a shift from the
research and development of products to the commercialization of new products
based on innovative technology must be considered. The prospects for the
Company's success must be considered in relation to the risks, expenses and
difficulties often encountered in establishing of a new business in a
competitive industry subject to rapid technological and price changes, and
characterized by an increasing number of competitors.
No Revenues; Anticipated Future Losses. From inception (August 26, 1994) to
September 30, 1997, the Company has had no revenue. The Company anticipates
incurring significant costs in connection with the development of its future
products and technologies and there can be no assurance that the Company will
achieve sufficient revenues to offset anticipated operating costs in the future.
Need for Additional Financing. The Company requires additional financing in
the future to acquire technologies that compliment its core products. The
Company believes that additional debt or equity financing, if required, will be
available from existing and future investors. However, there can be no assurance
as to the terms and conditions of any such financing and no certainty that funds
would be available when needed. The inability to obtain additional financing,
when needed, would likely curtail any technology acquisition efforts and may
have a material adverse effect on the Company. To the extent that any future
financing involves the sale of the Company's equity securities, the Company's
then existing shareholders could be substantially diluted.
Dependence on Lines of Credit. On December 3, 1997, the Company secured a
$10,000,000 equity-based line of credit to Kingsbridge Capital Limited, a
company organized and existing under the laws of the British Virgin Islands.
Under the privately-placed financing, the Company has the right to draw up to
$10,000,000 in cash in exchange for the Company's Common Stock, subject to
certain conditions. The line of credit will remain in effect for a period of
eighteen months. The Company's ability to make draws on the equity line of
credit is subject to a number of conditions which are not currently satisfied.
Accordingly, funds may not be available under the equity line of credit.
On February 3, 1998, the Company secured a $10,000,000 line of credit to Call
Now, Inc., a publicly held real estate investment company. Under the agreement,
the Company has the right to draw up to $10,000,000 on or before September 30,
1998. The Company will be required to issue a Promissory Note bearing interest
at 15% per year, payable quarterly, for any funds drawn against the line of
credit.
10
<PAGE> 11
The Company believes that the funds under the above Agreements are
sufficient to finance the Company's planned operating activities during fiscal
1998. However, should the Company be unable to meet the required terms and
conditions, funds under the Agreements may not be available when necessary to
finance the Company's planned activities and the Company's operations may be
adversely impacted.
Limited Sales and Marketing Experience. The Company markets and sells its
products through key manufacturers and distributors. Such companies could
develop competitive products to the Company's. As a result, demand and market
acceptance for the Company's technologies and future products are subject to a
high level of uncertainty. The Company relies in part on the manufacturers of
personal computers, fax modems, color printers and scanners for initial
distribution of its Initial Color Fax Products as a software package included
with such hardware purchase. The Company is therefore dependent upon such firms
to distribute its color fax products.
Rapid Technological Change. Research and development efforts are subject to the
risks inherent in the development of new technology and products, including but
not limited to, unanticipated delays, technical problems or difficulties, and
insufficiency of funding to complete development. There can be no assurance as
to when, or whether, such development projects will be successfully completed.
The markets for the Company's products are characterized by rapid changes and
evolving industry standards often resulting in product obsolescence or short
product life cycles. The Company's future operating results will depend upon its
ability to obtain market acceptance of its initial products and technology, to
continually enhance and improve such products and technology, to adapt its
proposed products to be compatible with specific products manufactured by
others, and to successfully develop and market new products and technology.
Substantial Competition. Other companies may be developing technologies or
products of which the Company is unaware which may be functionally similar, or
superior, to some or all of those being developed by the Company. These
companies may have substantially greater, technical, personnel and other
resources than the Company and may have established reputations for success in
developing, licensing and sales of their products. There is no assurance that
the Company will be able to compete successfully, that its competitors or future
competitors will not develop technologies or products that render the Company's
products and technology obsolete or less marketable or that the Company will be
able to successfully enhance its proposed products or technology or adapt them
satisfactorily.
Dependence Upon Qualified and Key Personnel. The success of the Company will be
largely dependent on its ability to hire and retain qualified executive,
scientific and marketing personnel. There is no assurance that the Company will
be able to attract or retain such necessary personnel, particularly in light of
the currently high demand for software engineers and other personnel in Silicon
Valley. The loss of key personnel or the failure to recruit additional personnel
could have a material adverse effect on the Company's business.
Protection of Proprietary Information. Competitors in both the United States and
foreign countries, many of which have substantially greater resources and have
made substantial investments in competing technologies, may have applied for or
obtained, or may in the future apply for and obtain, patents that will prevent,
limit or otherwise interfere with the Company's ability to make and sell its
products. The Company has not conducted an independent review of patents issued
to third parties. In addition, because of the developmental stage of the
Company, claims that the
11
<PAGE> 12
Company's products infringe on the proprietary rights of others are more likely
to be asserted after commencement of commercial sales incorporating the
Company's technology.
There can be no assurance that other third parties will not assert
infringement claims against the Company or that such claims will not be
successful. The Company has applied for 6 patents and is in the process of
applying for additional patents. There can also be no assurance that competitors
will not infringe the Company's patents if any such patents are granted to the
Company in the future. Defense and prosecution of patent suits, even if
successful, are both costly and time consuming. An adverse outcome in the
defense of a patent suit could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require the Company to cease selling its products.
The Company is in the process of applying for copyrights relating to
certain products and is also applying for patent protection. There is no
assurance that any patents will be obtained. If obtained, there is no assurance
that any patents or copyrights will afford the Company commercially significant
protection of its technologies or that the Company will have adequate resources
to enforce its patents and copyrights. The Company also intends to seek foreign
patent and copyright protection. With respect to foreign patents and copyrights,
the laws of other countries may differ significantly from those of the United
States as to the patentability of the Company's products or technology.
Moreover, the degree of protection afforded by foreign patents or copyrights may
be different from that in the United States. Patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, the Company cannot be certain that it will be the
first creator of inventions covered by any patent applications it makes or the
first to file patent applications on such inventions. Furthermore, in the
desktop computer application market today, patents and copyrights cannot give
substantial protection against competitors determined to introduce competing
products since it is likely that such competitors will be able to develop
similar technology which does not infringe on the Company's proprietary
technology.
The Company also relies on unpatented proprietary technology, and there can
be no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. To
protect its trade secrets and other proprietary information, the Company
requires employees, consultants, advisors and collaborators to enter into
confidentiality agreements. There can be no assurance that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
If the Company is unable to maintain the proprietary nature of its technologies,
the Company could be adversely affected.
Results of Operations
Three Months Ended December 31, 1997 and 1996.
Research and Development
From inception through December 31, 1997, a substantial part of the
Company's activities related to research and development. The Company's research
and development expenses were approximately $427,000 and $401,000 for the three
months ended December 31, 1997 and 1996, respectively. The increase is primarily
due to increased engineering labor and supplies costs related to increased
development and testing activities of the software functions and features. The
Company believes that significant investments in research and development will
be necessary for both new products and continuing enhancements to existing
products. As a consequence the Company may incur increased research and
development expenditures in the future.
12
<PAGE> 13
Sales and Marketing
Sales and marketing expenses were approximately $1,072,000 and $565,000 for
the three months ended December 31, 1997 and 1996, respectively. The increase is
primarily due to costs associated with staffing employees and consultants,
participation in trade shows and other events, and the Company's marketing
efforts and costs associated with the general product release.
In addition, in December 1996, the Company granted a stock option to Set 1
Communications, NSW, Australia ("Set 1"), to purchase up to 248,600 shares of
the Company's common stock. The option was granted in connection with a
preliminary agreement between the Company and Set 1 and has an exercise price
equal to the fair value of the Company's common stock on the date of grant of
$6.375 per share. The option vested immediately and expires two years from the
date of grant. Pursuant to the provision of SFAS 123, the fair value of the
option was estimated as of the date of grant using a Black-Scholes option
pricing model with the following assumptions: risk free interest rate of
approximately 6%; no dividend yield; volatility factor of .5; and a
weighted-average expected life for the option of one year. During the quarter
ended December 31, 1996, the Company recorded the entire estimated fair value of
this option of approximately $351,000 as sales and marketing expense.
Achieving significant market acceptance and commercialization of the
Company's products will require substantial marketing efforts and expenditures
to establish market share. The Company expects significant sales and marketing
expenses in the future as it attempts to increase its market share.
General and Administrative
General and administrative expenses were approximately $2,462,000 and
$410,000 for the three months ended December 31, 1997 and 1996, respectively.
The increase in general and administrative expenses was primarily attributable
to the recognition of warrants issued in exchange for services, fees for
professional services, and legal expenses in connection with the lawsuit against
Color Communication Corporation.
On December 30, 1997, in connection with assistance to be provided with the
Company's management changes and financing needs, the Company granted a member
of the Board of Directors warrants to purchase 700,000 shares of the Company's
Common Stock. The Warrants have an exercise price of $6.25 per share and expire
three years from the date of grant. The fair value of the warrant was determined
at the date of the grant using a Black-Scholes option pricing model with the
following assumptions, risk free interest rate of approximately 6%; no dividend
yield; volatility factor of .7; and a weighted average expected life of 3 years.
The estimated fair value of the warrants of $1,610,000 was recorded as a charge
against general and administrative expenses in the quarter ended December 1997.
Interest Income
Interest income were approximately $13,000 and $62,000 for the three months
ended December 31, 1997 and 1996, respectively. Interest income is primarily
derived from the investment of the Company's proceeds from its initial public
offering of common stock that closed on October 1, 1996 and from the proceeds of
the Company's issuance of convertible subordinated promissory notes during
September 1997.
Liquidity and Capital Resources
Since inception, the Company has primarily relied on sales of its equity
securities and borrowings to fund its operations. Between May 1995 and May 1996
the Company received approximately $1,952,000 in cash from sales of its equity
securities. In September 1996, the Company's initial public offering of common
stock and Redeemable Common Stock Purchase Warrants became effective. The
Company received net proceeds of approximately $5,387,614 from this initial
public offering, less $108,000 for advisory services to be provided over three
years by the Underwriter, Barron Chase Securities, Inc. The Company's
outstanding Redeemable Common Stock Purchase Warrants are exercisable at $6.00
per share and could result in the gross receipt of up to an additional
$6,900,000. However, there can be no assurance that such warrants will be
exercised. Through September 30, 1997, redeemable stock purchase warrants to
purchase 64,752 shares of common stock had been exercised for approximately
$389,000.
During June 1997, the Company borrowed $1,250,000 from a bank payable in
30 days, at an interest rate of 6.6% per annum. The loan was secured by a time
deposit of equal amount. The Company repaid the loan during September 1997.
During September 1997, the Company issued $1,000,000 of convertible
subordinated debentures which bear interest at a rate of 10% per annum, payable
semi-annually, and matures in September 2002. The notes are convertible at the
option of the holder into the Company's Common Stock. The conversion price
shall be determined by dividing the purchase price of the notes by the lesser
of $10.00 per share or the closing price of the Common Stock on the day prior
to conversion, but no lower than $7.00 per share. The notes are redeemable at
the option of the Company at any time on or after the two year anniversary of
the issuance at the original issue price plus accrued interest to the
redemption date, provided that the average trading price of the Common Stock is
greater than or equal to $20 per share, as adjusted for stock splits, stock
dividends and similar events for 30 consecutive trading days prior to the date
of the redemption price.
Cash used in operating activities has increased from approximately $935,000
for the three month period ended December 31, 1996 to approximately $1,845,000
for the three month period ended December 31, 1997, reflecting increased net
losses. The Company's cash requirements may increase for the upcoming fiscal
year due to expected increases in expenses related to further research and
development of its technologies and increased marketing, manufacturing, sales
and distribution and technical support expenses associated with the introduction
of its initial color fax products to the market place. During this time, the
Company may hire additional employees and increase marketing and sales expenses
to execute its sales and marketing plans.
Management believes that the sale of preferred stock and warrants to
purchase common stock in exchange for municipal bonds with an aggregate total
fair value of $3,500,000 secured in February 1998 from Call Now, a related
party, and the $10,000,000 line of credit also obtained from Call Now during
February 1998 will be sufficient to provide the Company with working capital to
support the Company's planned operating activities through the fiscal year ended
September 30, 1998. As part of its business strategy, the Company has
investigated, and will continue to investigate, potential acquisitions of
businesses, products and technologies. Such potential acquisitions may require
substantial capital resources, which may require the Company to seek additional
debt or equity financing.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements
and is required to be adopted by the Company beginning in fiscal 1999. The
Company's management is currently evaluating the impact of this statement on
operations.
Additionally, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which established standards for the
way the public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products, and services,
geographic areas and major customers. SFAS 131 will first be reflected in the
Company's financial statements beginning in fiscal 1999. The Company's
management is currently evaluating the impact of this statement on operations.
In October 1997, the AIPCA issued Statement of Position (SOP) 97-2,
"Software Revenue Recognition," which supersedes SOP 91-1. The Company will be
required to adopt SOP 97-2 prospectively for software transactions entered into
beginning October 1, 1998. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements such as software products,
upgrades, enhancements, postcontract customer support, installation and
training, to be allocated to each element based on the relative fair values of
the elements. The fair value of an element must be based on evidence which is
specific to the vendor. The revenue allocated to software products, including
specified upgrades or enhancements generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support generally is
recognizable ratably over the term of the support and revenue allocated to
service elements generally is recognizable as the services are performed. If a
vendor does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangements is deferred
until such evidence exists or until all elements are delivered. The Company's
management is currently evaluating the impact of this statement on operations.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 10, 1997, the Company and Color Communications Corporation
entered into a settlement agreement which continued the prohibitions of the
preliminary injunction through January 15, 1998 and permanently prohibited the
defendants from using the Company's confidential information. The agreement
further prohibits the defendants from communicating with six specific companies
through April 15, 1998. As part of the settlement, the Company dismissed its
claims against the defendants and received a release of claims from them.
In December 1997, the Board of Directors replaced several members of
management with a new and smaller management team. On February 18, 1998, the
Company received a letter from one member of the former management alleging
wrongful termination and racial discrimination and seeking unspecified damages.
The Company believes the claims are without merit and intends to contest the
matter vigorously. Management does not believe that resolution of the matter
will have a material effect on the Company. However, litigation is inherently
costly and uncertain and there can be no assurance that the matter will be
resolved in the Company's favor or without material cost.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are incorporated by this reference to Registrant's
Registration Statement on Form 10-K for the year ended September 30, 1997.
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------
1(a) Underwriting Agreement
3(a) Amended and Restated Articles of Incorporation of the Registrant
3(b) Bylaws of the Registrant
4.1 Form Warrant Certificate
4.2 Form of Common Stock Certificate
10.1 Financial Advisory Agreement
10.2 Merger and Acquisition Agreement
10.3 Warrant Agreement
10.4 Underwriter's Warrant Agreement
10.5 Incentive Stock Option Plan
10.5(a) Employment Agreement -- Ostrovsky Consulting, Inc.
10.5(b) Employment Agreement -- Wil F. Zarecor
10.5(c) Employment Agreement -- John L. Douglas
10.5(d) Employment Agreement -- Glenn Crepps
10.7(a) 10% Convertible Subordinated Promissory Note
10.7(b) Common Stock Purchase Warrant
10.7(c) Private Equity Line of Credit Agreement
10.7(d) Registration Rights Agreement
10.7(e) Promissory Note
10.7(f) Loan Agreement
10.7(g) Stock Purchase Warrant
10.7(h) Preferred Stock and Warrant Purchase Agreement
10.7(i) Certificate of Designation of Series A Convertible Preferred Stock
of Compressent Corporation
10.7(j) Stock Purchase Warrant
10.7(k) Reorganization Agreement of Purchase and Sale of Stock
10.7(l) Stock Purchase Warrant
The following exhibits are filed herewith:
27 Financial Data Schedule
(b) Form 8-K filed on January 20, 1998 and February 24, 1998 are
incorporated by reference on Form 10-K for the year ended
September 30, 1997.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPRESSENT CORPORATION
Date: February 27, 1998 By: /s/ Won-Gil Choe
--------------------- ------------------------------------
Won-Gil Choe
Chief Executive Officer
Signing on behalf of the registrant
and as principal officer
16
<PAGE> 17
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 74,426
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 102,311
<CURRENT-ASSETS> 247,447
<PP&E> 376,858
<DEPRECIATION> 156,268
<TOTAL-ASSETS> 1,151,878
<CURRENT-LIABILITIES> 1,130,735
<BONDS> 0
0
0
<COMMON> 5,049
<OTHER-SE> (983,906)
<TOTAL-LIABILITY-AND-EQUITY> 1,151,878
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 3,961,251
<OTHER-EXPENSES> (12,438)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,644
<INCOME-PRETAX> (3,982,457)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,982,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,982,457)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
