<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: MARCH 31, 1998
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, 5,178,869 shares of common stock, as
of March 31, 1998.
<PAGE> 2
COMPRESSENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. Financial Statements
Condensed Statements of Operations -
three and six months ended March 31, 1997 and 1998,
and for the period from inception (August 26, 1994)
to March 31, 1998 ..................................... 1
Condensed Balance Sheets -
March 31, 1997 and March 31, 1998 ..................... 2
Condensed Statements of Cash Flows -
six months ended March 31, 1998 and 1998,
and for the period from inception (August 26, 1994)
to March 31, 1998 ..................................... 3
Notes to Condensed Financial Statements ............... 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................... 15
ITEM 6. Exhibits and Reports on Form 8-K ................ 16
SIGNATURES ............................................ 17
</TABLE>
i
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS.
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED PERIOD FROM
------------ ------------ ------------ ------------ INCEPTION
MARCH 31, MARCH 31, MARCH 31, MARCH 31, (AUG 26, 1994
1997 1998 1997 1998 TO MAR 31, 1998)
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Sales, net ................................. $ 0 $ 57,602 $ 0 $ 57,602 $ 57,602
Cost of goods sold ......................... 0 5,365 0 53,501 53,501
------------ ------------ ------------ ------------ ---------------
Gross profit on sales ...................... 0 52,237 0 4,101 4,101
0
Operating costs and expenses: 0
Research and development ................ 322,517 342,663 723,331 769,334 3,178,177
Sales and marketing ..................... 273,525 429,013 838,404 1,453,302 3,320,154
General and administrative .............. 525,072 707,263 935,345 3,169,418 6,400,243
------------ ------------ ------------ ------------ ---------------
Total operating costs and expenses.... 1,121,114 1,478,939 2,497,080 5,392,054 12,898,574
------------ ------------ ------------ ------------ ---------------
Loss from operations ....................... (1,121,114) (1,426,702) (2,497,080) (5,387,953) (12,894,473)
Interest income and other, net .......... 54,041 (49,804) 115,741 (71,010) 112,773
------------ ------------ ------------ ------------ ---------------
Net loss ............................. (1,067,073) (1,476,506) (2,381,339) (5,458,963) (12,781,700)
Less: Accretion on preferred stock ......... 0 0 0 0 0
Accrued dividend on preferred stock ........ 0 32,000 0 32,000 32,000
------------ ------------ ------------ ------------ ---------------
Net loss applicable to common
shareholders ............................ $ (1,067,073) $ (1,508,506) $ (2,381,339) $ (5,490,963) $ (12,813,700)
============ ============ ============ ============ ===============
Net loss per share applicable to
common shareholders:
Basic ................................... $ (0.21) $ (0.29) $ (0.48) $ (1.06)
Diluted ................................. $ (0.21) $ (0.29) $ (0.48) $ (1.06)
Shares used in computing net loss per share
applicable to common shareholders:
Basic ................................... 4,988,684 5,178,869 4,988,684 5,178,869
Diluted ................................. 4,988,684 5,178,869 4,988,684 5,178,869
</TABLE>
See accompanying notes
1
<PAGE> 4
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash ......................................................................... $ 1,900,171 $ 868,714
Short-Term Investments ($2,000,000 used as collateral against short term loan) 0 3,500,500
Inventory .................................................................... 55,620 75,876
Other receivable from underwriter in connection with IPO ..................... 0 0
Other current assets ......................................................... 114,709 207,077
------------ ------------
Total current assets .................................................. 2,070,500 4,652,167
Property, Plant and Equipment, net .............................................. 217,656 198,104
Other Assets .................................................................... 576,989 538,115
------------ ------------
Total assets .......................................................... $ 2,865,145 $ 5,388,386
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and other accrued liabilities ............................... $ 474,292 $ 1,356,480
Loans ........................................................................ 0 2,000,000
Other Current Liabilities .................................................... 105,742 3,774
------------ ------------
Total current liabilities ............................................. 580,034 3,360,254
Long-Term Debt .................................................................. 1,000,000 1,000,000
Shareholders' equity
Preferred stock ............................................................. 0 2,240,500
Common stock and additional paid in capital .................................. 8,655,848 11,617,332
Deficit accumulated during development stage ................................. (7,322,737) (12,813,700)
Deferred Compensation ........................................................ (48,000) (16,000)
------------ ------------
Total shareholders' equity ............................................ 1,285,111 1,028,132
------------ ------------
Total liabilities and shareholders' equity ............................ $ 2,865,145 $ 5,388,386
============ ============
</TABLE>
See accompanying notes
2
<PAGE> 5
COMPRESSENT CORPORATION
(A DEVELOPMENT STATGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED INCEPTION
---------------------------- (AUGUST 26, 1994)
MARCH 31, MARCH 31, TO MARCH 31,
1997 1998 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net cash used in operating activities ............... $ (2,011,790) $ (4,270,812) $ (10,272,750)
------------ ------------ ----------------
Cash flow from investing activities
Investment in joint venture ................................... 0 (80,000) (80,000)
Purchase of available-for-sale investments .................... (4,808,710) 0.00 (4,868,029)
Maturities of available-for-sale investments .................. 1,796,753 1,300,000.00 6,168,029
Purchase of property and equipment ............................ (113,279) (37,007) (415,289)
Capitalized software development costs ........................ 0 0 (369,324)
------------ ------------ ----------------
Net cash used in investing activities ......................... (3,125,236) 1,182,993 515,387
------------ ------------ ----------------
Cash flow from financing
Sale of common stock .......................................... 0 0 1,952,263
Receipt of preceeds from underwriter .......................... 5,549,573 0 5,549,573
IPO registration costs paid ................................... 0 0 (269,968)
Loans from shareholders ....................................... 0 0 75,000
Repayment of full coarse note payable ......................... 0 0 90,000
Sale of redeemable preferred stock ............................ 0 0 450,000
Redemption of preferred warrant ............................... (450,000) 0 (450,000)
Exercise of redeemable stock purchase warrants for
common stock ............................................... 0 32,700 412,174
Proceeds from issuance of loans and notes payable ............. 0 2,000,000 3,250,000
Principal payment of loans and notes payable .................. 0 0 (1,250,000)
Debt offering registration costs paid ......................... 0 0 (135,665)
Proceeds from issuance of subordinated long-term debt ......... 0 0 1,000,000
Exercise of stock options ..................................... 0 23,662 23,662
Conversion of redeemable stock warrant ........................ 300,312 0 0
------------ ------------ ----------------
Net cash provided from financing activities .................. 5,399,885 2,056,362 10,697,039
------------ ------------ ----------------
Net increase (decrease) in cash ............................... 262,859 (1,031,457) 939,676
Cash at beginning of period ....................................... 155,533 1,900,171 0
------------ ------------ ----------------
Cash at end of period ............................................. $ 418,392 $ 868,714 $ 939,676
============ ============ ================
Supplemental schedule of noncash investing and financing activities
Common stock to be issued in redemption of preferred stock ........ $ 0 $ 0 $ 900,000
Conversion of loan and advance from shareholder to common
stock ......................................................... 0 0 75,000
Issuance of common stock in exchange for full recourse note
payable ....................................................... 0 0 90,000
Issuance of preferred stock in exchange for full recourse note
payable ....................................................... 0 2,240,500 2,240,500
Issuance of warrant in exchange for full recourse note
payable ....................................................... 0 1,260,000 1,260,000
Fair value of warrants issued in exchange for services ............ 1,610,000 0 1,610,000
</TABLE>
See accompanying notes
3
<PAGE> 6
COMPRESSENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
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. It is engaged in the development of digital image coding and data
compression software products which will enable the facsimile transmission of
color images from computers equipped with the Company's software program.
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 Security and Exchange Commission. The results of operations for
the six months ended March 31, 1998, are not necessarily indicative of the
results that may be expected for the year ended March 31, 1998.
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.
See accompanying notes
4
<PAGE> 7
2. INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ------------
<S> <C> <C>
Raw Materials $ 102,311 $ 75,876
Finished goods
------------ ------------
Total Inventories $ 102,311 $ 75,876
============ ============
</TABLE>
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 the investor 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 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 Small-Cap Market, 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 18, 1998, no funds were available under the equity-based
line of credit as the Company has not filed a registration statement on Form S-3
to register the shares that may be sold pursuant to the line and the average
daily trading volume requirement has not been met. 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. LINE OF CREDIT
On February 3, 1998, the Company secured a $10,000,000 line of credit to
Call Now, Inc. 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
See accompanying notes
5
<PAGE> 8
funds drawn against the line of credit. The Company is required to pay Call Now,
Inc. 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 expires 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 following quarter.
5. 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 promissory note has been paid on March 16, 1998. 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 Balck-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 amount of $32,937.50 was recorded as a
component of interest expense in the quarter ended March 31, 1998.
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 $2,012,000 for the six month period ended March 31, 1997
to approximately $4,271,000 for the six month period ended March 31,
1998, 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.
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 may not 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.
See accompanying notes
6
<PAGE> 9
6. WARRANT ISSUED TO MEMBER OF BOARD 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 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 has been
recorded as a change against general and administrative expenses in the quarter
ended December 31, 1997.
7. 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, Inc.,
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 utilized the 1997 Series A Bonds as collateral to raise
$2,000,000 cash to provide the short term working capital requirements.
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 $3.72 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, Inc., for nominal proceeds of $500, the Company sold a warrant to Call Now,
Inc. to purchase 500,000 shares of the Company's common stock with an exercise
price of $6.25 per share. After one year, the exercise price is reduced to the
lower 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 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 warrant is estimated to be $1,260,000. Total proceeds from the offering of
the Series A Preferred Stock and the sale of the warrant amount to $3,500,000.
Proceeds allocated to the estimated fair value market value of the warrants will
be allocated to Paid-in Capital; with the remaining balance, net offering costs,
allocated to Series A Preferred.
8. SHORT TERM LOAN BORROWED AGAINST SERIES A BONDS
On March 10, 1998, the Company signed the loan agreement with HOWE,
SOLOMON & HALL, Inc. a New Jersey corporation with a business address of
International Place, 100 S. E. 2nd Street, 42nd Floor, Miami, Florida 33131 for
$2,000,000 principal with 6% per annum. The loan will provide the partial short
term working capital requirements to support operating activities through the
fiscal year ending September 30, 1998. The loan secured by the $3,500,000 Retama
Development Corporation Special Facilities Revenue Refunding Bonds Series 1997 A
(the "Bonds") assigned by the Company to the Lender. The principal on the Loan
is due in full on September 5, 1998. No other principal
See accompanying notes
7
<PAGE> 10
payments are required hereunder unless there is an event of default. The loan
may be prepaid at the option of the Company in full only at any date provided
that the Company also pays the accrued but unpaid interest on the Bonds.
9. 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.
10. AGREEMENT TO ACQUIRE SOFTLINK, INC.
On December 31, 1997, the Company entered into a definitive 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 was (Refer note 12) subject to certain conditions and the approval by
Softlink's shareholders. Subsequent to March 31, 1998, the Company terminated
this agreement.
11. 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
President resigned from the Company's Board of Directors. In addition, on
December 30, 1997, two other members of the Company's Board of Directors also
resigned and the Company appointed a new Chief Executive Officer and 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.
12. The Company entered the joint venture agreement with Vela Partners,
Inc. on March 16, 1998. The purpose of this agreement is to establish a joint
venture to be known as ComCore Systems between the parties for the purposes on
developing an all-purpose, multi-mode, multimedia advanced telecommunications
system. The ownership and equity of the joint venture will be 50% owned by each
party. The initial payment of $80,000 has been made by the Company to Vela
Partners, Inc.
SUBSEQUENT EVENTS
13. TERMINATION OF AGREEMENT WITH SOFTLINK
On April 28, 1998, the Company terminated the agreement previously
announced with Softlink, Inc. The original agreement was made on December 31,
1997 between the Company and Softlink whereby the Company would acquire 100% of
the issued and outstanding shares of Softlink from the shareholders of Softlink
in exchange for 450,000 common shares of Compressent. The termination of this
agreement has been made by mutual consent and no shares have been exchanged at
this time. The payment of $100,000 the Company made to Softlink based on the
Promissory Note signed on April 14, 1998 will be due to the Company on December
31, 1998 with an interest rate of 8% per annum from December 18, 1997.
See accompanying notes
8
<PAGE> 11
14. CHANGES IN BOARD OF DIRECTORS AND MANAGEMENT
On April 28, 1998, changes of the Company's Board of Directors were
made. Mr. Edward T. Kalinoski a Director of the Company resigned and Mr. Joseph
S. Kastrup was elected as the Chairman of the Board.
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 may not be sufficient to support planned operating activities through
September 30, 1998. Call Now is a publicly held real estate investmnet 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 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 March 31, 1998, the Company has had no significant revenue from sales. 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
See accompanying notes
9
<PAGE> 12
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
("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, subject to
certain conditions. The line of credit will remain available for a period of
eighteen months. As of May 15, 1998, no funds are available under this line of
credit as the Company does not satisfy all the conditions for borrowing under
the agreement.
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 borrow up to $10,000,000 on or before
September 30, 1998. Borrowings from Call Now may be provided to the Company in
the form of Retama Track municipal bonds. To obtain cash, the Company may have
to sell the bonds or borrow cash using the bonds as collateral. 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 believes that the funds under the line of credit with Call
Now Inc. may not be sufficient to finance the Company's planned activities
during fiscal 1998.
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
See accompanying notes
10
<PAGE> 13
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 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.
See accompanying notes
11
<PAGE> 14
Results of Operations
Three and Six Months Ended March 31, 1997 and 1998.
Research and Development
From inception through March 31, 1998, a substantial part of the
Company's activities related to research and development. The Company's research
and development expenses were approximately $343,000 and $769,000 for the three
and six months ended March 31, 1998, respectively, compared to $323,000 and
$723,000, respectively in the corresponding periods in fiscal 1997. 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.
Sales and Marketing
Sales and marketing expenses were approximately $434,000 and $1,507,000
for the three and six months ended March 31, 1998, respectively, compared to
$274,000 and $838,000 respectively in the corresponding periods in fiscal 1997.
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.
Achieving significant market acceptance and commercialization of the
Company's initial color fax 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 $707,000 and
$3,169,000 for the three months and six ended March 31, 1998, respectively,
compared to $525,000 and $935,000, respectively in the corresponding periods in
fiscal 1997. 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 financial 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
determined at the date of the grant using a Black-Scholes option pricing
See accompanying notes
12
<PAGE> 15
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 for the quarter
ended December 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
$2,012,000 for the six month period ended March 31, 1997 to approximately
$4,271,000 for the six month period ended March 31, 1998, 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.
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 may not be sufficient to support 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.
See accompanying notes
13
<PAGE> 16
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. In March 1998,
the AICPA issued Statement of Position 98-4 ("SOP 98-4"), which amends certain
provisions of SOP 97-2. The Company's management is currently evaluating the
impact of this statement on operations. Detailed implementation guidelines for
this standard have not been issued. Once issued, such guidance could lead to
unanticipated changes in the Company's current revenue recognition practices,
and such changes could be material to the Company's results of operations.
See accompanying notes
14
<PAGE> 17
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.
See accompanying notes
15
<PAGE> 18
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.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
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) Common Stock Purchase Warrant
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 Computation of Net Loss Per Share
</TABLE>
The following exhibits are filed herewith:
27 Financial Data Schedule
(b) FORM 8-K FILED ON JANUARY 20, 1998, FEBRUARY 24, 1998, AND FEBRUARY 28,
1998 ARE INCORPORATED BY REFERENCE ON FORM 10-K FOR THE YEAR ENDED
SEPTEMBER 30, 1997, FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1997 AND
THE FORM 10-Q QUARTER ENDED MARCH 31, 1998.
See accompanying notes
16
<PAGE> 19
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: May 15, 1998 By: /s/ Won-Gil Choe
--------------------- ------------------------------------
Won-Gil Choe
Chief Executive Officer
Signing on behalf of the registrant
and as principal officer
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
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) Common Stock Purchase Warrant
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 Computation of Net Loss Per Share
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 868,714
<SECURITIES> 3,500,500
<RECEIVABLES> 470,121
<ALLOWANCES> (313,341)
<INVENTORY> 75,876
<CURRENT-ASSETS> 587,412
<PP&E> 383,347
<DEPRECIATION> (185,243)
<TOTAL-ASSETS> 5,388,386
<CURRENT-LIABILITIES> 3,360,254
<BONDS> 0
0
2,240,500
<COMMON> 11,617,332
<OTHER-SE> (11,829,700)
<TOTAL-LIABILITY-AND-EQUITY> 5,388,386
<SALES> 57,501
<TOTAL-REVENUES> 0
<CGS> 53,501
<TOTAL-COSTS> 5,392,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (103,010)
<INCOME-PRETAX> (5,490,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,490,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,490,963)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
