SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24426
TARGET TECHNOLOGIES, INC.
-------------------------
(Exact name of small business issuer as specified in its charter)
New York 06-1170506
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6714 Netherlands Drive
----------------------
Wilmington, North Carolina 28405
---------------------------------
(Address of principal executive offices)
(910) 395-6100
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No .
----------- -----------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of July 12, 1996 - 4,347,293 shares
Transitional Small Business Disclosure Form Yes No x
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<PAGE>
TARGET TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of February 29, 1996 and May 31, 1996
(unaudited) 3
Statements of Operations for the three months ended May 31,
1995 and 1996 (unaudited) 4
Statements of Cash Flows for the three months ended May 31,
1995 and 1996 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TARGET TECHNOLOGIES, INC.
BALANCE SHEETS
ASSETS
<TABLE><CAPTION>
February 29, May 31,
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1996 1996
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,852,820 $ 890,842
Short-term investments 2,426,403 2,346,508
Accounts receivable, net of allowance for
doubtful accounts of $170,000 at February
29, 1996 and $200,000 at May 31, 1996
(unaudited) 398,004 421,044
Inventories 1,061,496 1,236,111
Prepaid expenses and other current assets 123,915 86,694
---------- ----------
Total current assets 5,862,638 4,981,199
Property and equipment, net 308,248 319,034
Other assets 67,320 70,953
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Total assets $ 6,238,206 $ 5,371,186
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 289,362 $ 286,571
Accrued expenses 222,998 234,127
Current obligations under capital leases 16,103 16,075
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Total current liabilities 528,463 536,773
Long-term obligations under capital leases 11,507 7,302
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Total liabilities 539,970 544,075
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Shareholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 4,347,293 shares issued and
outstanding at February 29, 1996 and May 31, 1996
(unaudited) 43,473 43,473
Paid-in capital 13,495,376 13,495,376
Accumulated deficit (7,840,613) (8,711,738)
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Total shareholders' equity 5,698,236 4,827,111
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Total liabilities and shareholders' equity $ 6,238,206 $ 5,371,186
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
TARGET TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended May 31,
-------------------------
1995 1996
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Net sales $ 353,054 $ 400,240
Cost of goods sold 318,532 388,649
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Gross profit 34,522 11,591
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Operating expenses:
Selling, general
and administrative 1,712,573 661,940
Research, development
and engineering 264,915 267,721
---------- ---------
Total operating expenses 1,977,488
929,661
---------- ---------
Operating loss (1,942,966) (918,070)
Interest expense (1,402) (811)
Interest income 130,234 47,756
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Loss before income taxes (1,814,134) (871,125)
Income taxes - -
---------- ----------
Net loss $ (1,814,134) $ (871,125)
=========== ==========
Per-share data:
Net loss per share $ (0.42) $ (0.20)
=========== ==========
Weighted average number of
common shares and common
share equivalents outstanding 4,347,293 4,347,293
=========== ==========
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
TARGET TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended May 31,
-------------------------
1995 1996
---- ----
Cash flows from operating activities:
Net loss
$ (1,814,134) $ (871,125)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 43,529 33,823
Provision for doubtful accounts 15,000 30,000
Changes in operating assets and liabilities:
Accounts receivable (64,321) (53,040)
Inventories (64,436) (174,615)
Prepaid expenses and other current assets (17,916) 37,221
Other assets 1,320 (3,633)
Accounts payable 351,953 (2,791)
Accrued expenses (53,318) 11,129
----------- ---------
Net cash used in operating activities (1,602,323) (993,031)
----------- ---------
Cash flows from investing activities:
Equipment purchases (62,322) (44,609)
Purchase of short term investments (2,991,209) (887,428)
Maturities of short term investments 491,608 967,323
---------- ---------
Net cash provided by (used in)
investing activities (2,561,923) 35,286
----------- ---------
Cash flows from financing activities:
Payment of capital lease obligations (10,074) (4,233)
----------- ---------
Net cash used in financing activities
(10,074) (4,233)
----------- ---------
Net increase (decrease) in cash
and cash equivalents (4,174,320) (961,978)
Cash and cash equivalents, beginning of period 5,261,105 1,852,820
---------- ---------
Cash and cash equivalents, end of period
$ 1,086,785 $ 890,842
========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 1,402 $ 811
======== ========
Income taxes paid $ - $ -
======== ========
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
TARGET TECHNOLOGIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited financial statements of Target Technologies,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB and Item 310(b) of Regulation SB.
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. Operating results
for the three month period ended May 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
February 28, 1997. The unaudited financial statements should be read in
conjunction with the audited financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 29, 1996.
2. STOCK OPTION PLAN
------------------
On March 1, 1996, the Company adopted Statement of Accounting Standards
123, Accounting for Stock Based Compensation ("SFAS 123"). As permitted by
SFAS 123, the Company has chosen to apply APB Opinion 25 and related
Interpretations in accounting for its stock option plan and, accordingly,
no compensation cost has been recognized for its stock option plan. If the
compensation cost for the Company's stock option plan had been recognized
based on the fair value at the grant dates for awards under the plan
consistent with the method promulgated in SFAS 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts
indicated below:
Three months ended May 31,
-------------------------
1996
----
Net loss As reported $ (871,125)
Pro forma $ (892,011)
Loss per share As reported $ (0.20)
Pro forma $ (0.21)
3. NET LOSS PER SHARE
------------------
Per-share data has been computed on the basis of the weighted average
number of shares of common stock outstanding during the periods. Common
Stock options and warrants are not included for the three month periods
ended May 31, 1995 and May 31, 1996 as they would be anti-dilutive.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis
Overview
The Company is engaged in the engineering, manufacturing and marketing of
C-Phone, a line of PC-based video conferencing systems.
In August 1994, the Company completed its initial public offering (the
"Public Offering") of 2,000,000 shares of Common Stock, pursuant to which it
received net proceeds of approximately $12,288,000, of which approximately
$1,947,000 was used for the repayment of indebtedness and accrued interest
thereon. The remainder of the net proceeds was used, and the Company expects
will continue to be used, for sales and marketing of C-Phone, the continued
development of additional C-Phone products and features and working capital,
including funding anticipated increases in inventory.
The Company commenced operations in 1986 as a manufacturer of promotional
radios and, in 1990, developed data/fax modems under the name "TWINCOM." Sales
of modem products accounted for substantially all of the Company's revenues from
1991 through the end of the fiscal quarter ended November 30, 1994. In early
1993, because of continued price pressures, shrinking margins and for
competitive reasons, the Company shifted its primary focus from modems to the
development of C-Phone. During the fiscal year ended February 28, 1995, the
Company phased out its modem product line as it was no longer profitable. Since
1993, the Company has invested significant resources in product development and
engineering activities for C-Phone. In addition, during the three months ended
May 31, 1996, the Company launched a major advertising campaign to expose C-
Phone to the marketplace. As a result of these activities and the low volume of
sales during the initial commercialization of C-Phone, the Company has incurred
significant losses during the last two fiscal years and the three month period
ended May 31, 1996. The Company expects to continue to make significant
expenditures for product development and marketing in the foreseeable future.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to,those discussed in Item 1 - "Description of
Business" and elsewhere in the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 29, 1996.
Results of Operations
Three Months Ended May 31, 1996 as compared to Three Months Ended May 31, 1995
Net sales. Net sales increased 13% to $400,240 in the three months ended
May 31, 1996 from $353,054 in the three months ended May 31, 1995 as a result of
the Company's marketing efforts. All of the sales in the three months ended May
31, 1996 and May 31, 1995 were from the C-Phone product line.
7
<PAGE>
Gross profit. Gross profit equals net sales less cost of goods sold. Cost
of goods sold includes labor, materials and other manufacturing costs (such as
salaries, supplies, leasing costs and depreciation related to production
operations). Cost of goods sold increased 22% to $388,649 in the three months
ended May 31, 1996 from $318,532 in the three months ended May 31, 1995. Gross
profit decreased to $11,591 (3% of net sales) for the three months ended May 31,
1996 from a gross profit of $34,522 (10% of net sales) for the three months
ended May 31, 1995. The decrease in the gross profit is primarily the result of
the increase in the number of products comprising the C-Phone product line
combined with the manufacturing inefficiencies related to the low volume of
production in the early stages of the commercialization of new C-Phone products.
Selling, general and administrative. Selling, general and administrative
expenses decreased 61% to $661,940 (or 165% of net sales) in the three months
ended May 31, 1996 from $1,712,573 (or 485% of net sales) in the three months
ended May 31, 1995. The decrease was primarily the result of a 79% decrease in
selling and marketing expenses to approximately $290,000 for the three months
ended May 31, 1996 from approximately $1,400,000 for the three months ended May
31, 1995, of which approximately $1,200,000 was directly related to a nationwide
advertising and marketing campaign which ran for most of the three months ended
May 31, 1995. The Company expects that it will incur substantial selling,
general and administrative expenses for the remainder of Fiscal 1997 as a result
of the continued commercialization of the C-Phone product line.
Research, development and engineering. Research, development and
engineering expenses increased 1% to $267,721 (or 67% of net sales) in the three
months ended May 31, 1996 from $264,915 (or 75% of net sales) in the three
months ended May 31, 1995. All of these costs were charged to operations as
incurred and were funded by the Company's cash reserves. The Company expects to
continue to invest significant resources during the foreseeable future in new
product development and engineering.
Operating loss. As a result of the factors discussed above, the Company's
operating loss decreased 53% to $918,070 in the three months ended May 31, 1996
from $1,942,966 in the three months ended May 31, 1995.
Interest. Interest income decreased to $47,756 in the three months ended
May 31, 1996 from $130,234 in the three months ended May 31, 1995 as a result of
decreased investments as the Company utilizes the net proceeds of the Public
Offering for the development and commercialization of C-Phone.
Income taxes. The Company's losses for the three months ended May 31, 1996
and 1995 may be utilized as an offset against future earnings, although there is
no assurance that future operations will produce taxable earnings.
Financial Condition
The Company has financed its recent operations primarily through a bridge
financing completed in March 1994, which raised net proceeds of approximately
$1,538,000, and the Public Offering in August 1994, which raised net proceeds of
approximately $12,288,000.
8
<PAGE>
At May 31, 1996, the Company had working capital of $4,444,426 (a decline
from $5,334,175 at February 29, 1996) and cash and cash equivalents (including
short-term investments) of $3,237,350 (as compared to $4,279,223 at February 29,
1996). The Company's invested funds consist primarily of United States Treasury
Bills and obligations of United States government agencies. During the three
months ended May 31, 1996, operating activities used $993,031 of net cash
primarily to fund operating activities and an increase in inventories, investing
activities provided $35,286 of net cash as a result of net maturities of short-
term investments exceeding equipment purchases, and financing activities used
$4,233 of net cash for payments on capital lease obligations. Due to the
technical nature of the Company's business and the anticipated expansion of its
C-Phone technology into new applications, management expects to continue to
expend significant resources during Fiscal 1997 for development and engineering
and marketing expenses to continue the commercialization of C-Phone.
The Company believes that its working capital, together with funds from
operations, will be sufficient to meet the Company's operating needs and capital
expenditures at least into the fiscal year ending February 28, 1998.
Thereafter, if the Company has insufficient funds for its needs, it anticipates
selling its securities and entering into loan relationships with institutional
lenders. However, there can be no assurance that any such additional funds can
be obtained on acceptable terms, if at all. If necessary funds are not
available, the Company's business would be materially adversely affected.
The Company leases its facility and has financed a portion of its
manufacturing equipment expenditures through capital leases. As of May 31,
1996, the Company had no material commitments for capital expenditures.
At February 29, 1996, the Company estimates that it had available net
operating loss carryforwards of approximately $7,345,000 for Federal purposes
and net economic loss carryforwards of approximately $7,597,000 for state
purposes, which may be used to reduce future taxable income, if any. The Federal
carryforwards expire starting in 2009 and the state carryforwards expire
starting in 1999.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended May 31, 1996.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TARGET TECHNOLOGIES, INC.
Date: July 12, 1996 By: c/Daniel P. Flohr
--------------------------------
Daniel P. Flohr
President and Chief
Executive Officer
Date: July 12, 1996 By: c/Paul H. Albritton
--------------------------------
Paul H. Albritton
Vice President and Chief
Financial Officer
(Principal Accounting and
Financial Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF MAY 31, 1996 AND THE UNAUDITED
STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 890,482
<SECURITIES> 2,346,508
<RECEIVABLES> 621,044
<ALLOWANCES> 200,000
<INVENTORY> 1,236,111
<CURRENT-ASSETS> 4,981,199
<PP&E> 970,544
<DEPRECIATION> 651,510
<TOTAL-ASSETS> 5,371,186
<CURRENT-LIABILITIES> 536,773
<BONDS> 7,302
0
0
<COMMON> 43,473
<OTHER-SE> 4,783,638
<TOTAL-LIABILITY-AND-EQUITY> 5,371,186
<SALES> 400,240
<TOTAL-REVENUES> 400,240
<CGS> 388,649
<TOTAL-COSTS> 388,649
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 811
<INCOME-PRETAX> (871,125)
<INCOME-TAX> 0
<INCOME-CONTINUING> (871,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (871,125)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
