===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number 0001-22563
PC411, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-4463937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9800 S. LaCienega Blvd.
Inglewood, CA 90301
(Address of principal executive offices) (Zip Code)
(310) 645-1114
(Issuer's telephone number, including area code)
Check whether the issuer (1) has 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
--- ---
As of August 14, 1998, there were outstanding 3,120,000 shares of the
issuer's Common Stock, $.01 par value.
===============================================================================
PC411, INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997......................................... 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 1998 and
1997.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997....................... 5
Condensed Notes to the Quarterly Consolidated Financial
Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities and Use of Proceeds......................... 16
Item 6. Exhibits and Reports on Form 8-K.................................. 18
SIGNATURE........................................................................... 19
2
PC411, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30. December 31,
----------------- -----------------
1998 1997
----------------- -----------------
ASSETS:
Current assets:
Cash and cash equivalents..................................... $ 2,915,231 $ 949,157
Investments................................................... -- 3,498,116
Restricted assets............................................. 567,000 100,000
Accounts receivable........................................... 5,815 8,963
Accrued interest receivable................................... 5,965 70,233
Prepaid expenses and other current assets..................... 45,427 103,232
----------- -----------
Total current assets..................................... 3,539,438 4,729,701
Machines held for lease........................................... 41,508 --
Property and equipment, net....................................... 160,105 128,959
Intangible assets, net............................................ 442,413 --
----------- ------------
Total assets............................................. $ 4,183,464 $ 4,858,660
=========== ===========
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................. $ 190,038 $ 178,789
Deferred revenue.................................................. 51,643 54,035
----------- -----------
Total current liabilities................................ 241,681 232,824
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, Series A $.01 par value. Authorized
5,000,000 shares; no shares issued and outstanding......... -- --
Common Stock, $.01 par value. Authorized 25,000,000
shares; 3,120,000 and 2,972,500 shares issued and
outstanding, respectively.................................. 29,725 29,725
Additional paid-in capital.................................... 7,749,059 7,409,809
Deficit accumulated during the development stage.............. (3,837,001) (2,813,698)
----------- -----------
Total stockholders' equity............................... 3,941,783 4,625,836
----------- -----------
Total liabilities and stockholders' equity............... $ 4,183,464 $ 4,858,660
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
3
PC411, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended Period From
----------------------- ---------------------- December 29, 1993
June 30, June 30, June 30, June 30, (Date of Inception)
1998 1997 1998 1997 to June 30, 1998
-------- -------- -------- -------- -------------------
Revenues ............................. $ 24,362 $ 50,491 $ 47,511 $ 92,041 $ 259,054
Cost and expenses:
Cost of revenues ................ 89,868 40,865 183,440 71,524 500,739
Research and development ........ 48,188 16,796 117,673 24,639 832,765
Sales and marketing ............. 108,711 50,321 320,254 66,176 655,909
General and administrative ...... 302,476 156,788 541,767 286,646 2,147,947
----------- ----------- ----------- ----------- -----------
549,243 264,770 1,163,134 448,985 4,137,360
----------- ----------- ----------- ----------- -----------
Operating loss ....................... (524,881) (214,279) (1,115,623) (356,944) (3,878,306)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ....... 34,021 35,473 92,320 35,473 312,566
Interest expense ................ -- (36,256) -- (94,002) (268,861)
----------- ----------- ----------- ----------- -----------
34,021 (783) 92,320 (58,529) 43,705
----------- ----------- ----------- ----------- -----------
Loss before income taxes ............. (490,860) (215,062) (1,023,303) (415,473) (3,834,601)
Income taxes ......................... -- -- -- 800 2,400
----------- ----------- ----------- ----------- -----------
Net loss ............................. (490,860) (215,062) (1,023,303) (416,273) (3,837,001)
Dividends on preferred shares ........ -- (28,429) -- (132,679)
----------- ----------- ----------- -----------
Net loss applicable to common stock .. $ (490,860) $ (243,491) $(1,023,303) $ (548,952)
=========== =========== =========== ===========
Net loss per share (basic and diluted) $ (.16) $ (.10) $ (.34) $ (.26)
=========== =========== =========== ===========
Shares used in computing net loss per
share ........................... 3,058,145 2,472,427 3,015,323 2,099,075
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
4
PC411, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Period From
----------------- ----------------- December 29, 1993
June 30, June 30, (Date of Inception)
1998 1997 to June 30, 1998
----------------- ----------------- -------------------
Cash flows from operating activities:
Net loss........................................................ $(1,023,303) $ (416,273) $ (3,837,001)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................. 35,114 19,919 141,905
Interest component of stock options granted................... -- 70,000 70,000
Amortization of discount on loan payable...................... -- -- 160,940
Changes in assets and liabilities:
Accounts receivable........................................ 3,148 10,947 (5,815)
Purchase of machines held for lease........................ (41,508) -- (41,508)
Prepaid expenses and other current assets.................. 122,073 149,870 (51,392)
Accrued expenses........................................... 11,249 126,708 190,038
Deferred revenues.......................................... (2,392) 27,743 51,643
----------- ---------- -----------
Net cash used in operating activities.............................. (895,619) (11,086) (3,321,190)
---------- ---------- ---------
Cash flows from (used in) investing activities:
Increase in restricted assets................................... (467,000) (100,000) (567,000)
Purchase of investments......................................... -- (4,747,779) (6,116,584)
Sale of short-term investments.................................. 3,498,116 -- 6,116,584
Acquisition of business......................................... (104,250) -- (104,250)
Acquisition of property and equipment........................... (55,173) (5,978) (290,923)
---------- ----------- -----------
Net cash flows from (used in) investing activities.................. 2,871,693 (4,853,757) (962,173)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from loan payable...................................... -- 369,998 697,063
Repayment of loan to related party, net......................... -- (619,016) (619,016)
Shareholder cash contribution................................... -- -- 92,047
Issuance of common stock........................................ -- 5,885,000 6,037,500
Deferred finance charges......................................... (10,000) -- (10,000)
Issuance of preferred stock...................................... -- -- 1,001,000
---------- ----------- -----------
Net cash flows provided from financing activities.................. (10,000) 5,635,982 7,198,594
---------- ----------- -----------
Net increase in cash............................................... 1,966,074 771,139 2,915,231
Cash and cash equivalents at beginning of period................... 949,157 8,605 --
---------- ----------- -----------
Cash and cash equivalents at end of period......................... $2,915,231 $ 779,744 $ 2,915,231
========== =========== ===========
Detail of acquisition:
Fair value of assets acquired................................... $ 339,750 $ -- $ 485,000
Liabilities assumed............................................. 61,500 -- 61,500
See accompanying Notes to Condensed Consolidated Financial Statements
5
PC411, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Business and Organization
PC411, Inc. (the "Company") was incorporated in Delaware on December 29,
1993. Prior to May 8, 1998, the Company's principal business was an
on-line service that transmits name, address, telephone number and other
related information digitally to users of personal computers. On May 8,
1998, the Company acquired Controlled Distribution Systems, Inc. ("CDS",
formerly known as Coinexx Corporation).
Initial Public Offering
On May 21, 1997, the Company completed an initial public offering ("IPO")
of 1,322,500 units (including 172,500 units from the exercise of the
Underwriter's over-allotment option), each unit consisting of one share
of Common Stock and one Redeemable Class A Warrant to purchase a share of
Common Stock. The units were sold for $5.75 each and the Company
received, after expenses of the IPO, approximately $5.9 million in net
proceeds. In connection with the IPO, the Company effected a
172.7336-for-1 stock split of the Company's Common Stock. All shares and
share amounts have been restated to reflect the stock split.
CDS Acquisition
On May 8, 1998, the Company acquired CDS, a development stage company
engaged in the marketing and leasing of an inventory control system for
tobacco products. Under the terms of the acquisition, the CDS
stockholders received 147,500 shares of the Company's Common Stock at
closing. In addition, the Company will issue an additional 147,500 shares
to CDS stockholders on each of the first, second and third anniversaries
of the closing provided that on each such delivery date CDS is actively
engaged in the business it is now engaged. The schedule for the deferred
deliveries of stock is subject to a delay of 12 months if the President
of CDS (the "Executive") is not employed by CDS on any of the three
anniversary dates and is subject to acceleration if the Company's Common
Stock trades at $15 per share for 60 consecutive trading days. In
connection with this acquisition, the Company entered into a three-year
employment agreement, subject to certain termination provisions, with the
Executive. The Executive was also granted options to purchase 110,000
shares of Common Stock of the Company at $1.50 per share. CDS did not
have any significant tangible assets at the time of acquisition and to
date has not recognized material revenues. The aggregate of the fair
value of the shares issued and issuable to the CDS stockholders as
consideration for the acquisition of $339,250 and legal and other costs
incurred in the acquisition of $104,250 have been capitalized and will be
amortized over an estimated useful life of five years.
6
PC411, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(2) Principles of Reporting
The consolidated financial statements of the Company as of June 30, 1998
presented herein include the accounts of PC411 and CDS and have been
prepared by the Company without an audit. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position as of June 30, 1998
and the results of operations and cash flows for all periods presented
have been made. Results for the interim periods are not necessarily
indicative of the results for the entire year.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31,
1997 included in the Company's Form 10-KSB (Commission File No.
0001-22563).
Certain reclassifications have been made to prior year financial
information to conform with current year presentation.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock Options
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock options. In 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which, if fully adopted, changes the methods of
recognition of cost on certain stock options. The Company has elected to
apply the "disclosure only" provisions of SFAS No. 123. Such disclosures
are not required in interim financial statements.
Restricted Assets
Restricted assets consist of cash pledged as collateral for a letter of
credit collateralizing a contract to purchase equipment ($467,000) and
for a credit card facility ($100,000).
New Accounting Pronouncements
For transactions entered into in fiscal years beginning after December
15, 1997, the Company adopted and is reporting in accordance with SOP
97-2, "Software Revenue Recognition". The adoption of SOP 97-2 did not
have a material impact on the Company's financial statements. In March
1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance that the carrying value of
7
PC411, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
software developed or obtained for internal use is assessed based upon an
analysis of estimated future cash flows on an undiscounted basis and
before interest charges. SOP 98-1 is effective for transactions entered
into in fiscal years beginning after December 15, 1998. The Company
believes that adoption of SOP 98-1 will not have a material impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards
for the way that public business enterprises report information about
operating segments. SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. The Company is
currently reviewing its operating segment disclosures and will adopt SFAS
No. 131 in the fourth quarter of 1998.
(3) Restatement
Unaudited quarterly financial data for the three months ended March 31,
1998 have been restated due to a mischaracterization of deferred revenues
as revenues. The unaudited quarterly financial data for the three and six
months ended June 30, 1998 have been prepared based on the restated
financial data presented below. The effect of such restatement, as
discussed above, is presented in the following table.
Three Months Ended
March 31, 1998
---------------------------
Previously
As restated reported
----------- -----------
Revenues............................................ $ 23,148 $ 48,469
Operating expenses.................................. 613,891 613,891
---------- ----------
Operating loss...................................... (590,743) (565,422)
---------- ----------
Other income........................................ 58,299 58,299
---------- ----------
Net loss........................................... (532,444) (507,123)
---------- ----------
Net loss per share (basic and diluted)............. $ (0.18) $ (0.17)
========== ==========
Shares used in computing net loss per share......... 2,972,500 2,972,500
========== ==========
(4) Related Party Transactions
Certain accounting and related finance functions are performed on behalf
of the Company by employees of New Valley Corporation ("NVC"), the
Company's principal stockholder. Expenses incurred relating to these
functions are allocated to the Company and paid as incurred to NVC based
on management's best estimate of the cost involved. The amounts allocated
were immaterial for all periods presented herein.
(5) Net Loss Per Share
Basic loss per share of common stock is computed by dividing net loss
applicable to common shareholders by the weighted average shares of
common stock outstanding during the period. Diluted per share results
reflect the potential dilution from the exercise or conversion of
securities into common stock.
Stock options, warrants and contingent shares (both vested and
non-vested) totaling 3,819,515 and 904,000 shares at June 30, 1998 and
1997, respectively, were excluded from the calculation of diluted per
share results presented because their effect was accretive. Accordingly,
diluted net loss per common share is the same as basic net loss per
common share.
(6) Contingencies
The Company is a defendant in a lawsuit asserted by a former employee
seeking a severance payment of $150,000. The Company believes the claim
is without merit; however, no assurance can be given that the Company
will prevail in its defense of the claim.
8
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Financial Condition and Results of
Operations of the Company should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and the notes thereto included in the
Company's Form 10-KSB (Commission File No. 0001-22563) relating to the year
ended December 31, 1997.
Overview
The Company presently has two lines of business: the delivery of an on-line
electronic directory information service (the "PC411 Service") and the marketing
of an inventory control system for tobacco products through its subsidiary,
Controlled Distribution Systems, Inc. ("CDS").
PC411 Service - The Company has conducted the PC411 Service since 1994. The
PC411 Service licenses a database with more than 110 million U.S. and Canadian
residence and business telephone numbers, addresses and ZIP codes. A customer
can access the PC411 Service using a computer by either dialing directly into
the Company's server, in which the database is housed, or indirectly via the
Internet. Either method requires the use of the Company's copyrighted,
Windows-based, software program, PC411 for Windows 3.0, which was introduced in
November 1997. Designed to operate in a Windows 95 environment, PC411 for
Windows 3.0 is Internet compatible and has been enhanced to provide a quicker,
easier to use search tool. In addition, a limited version of the PC411 Service
is available at no charge via the Internet at the address http://www.pc411.com.
Although the Company's expenditures for marketing were significant in the six
months ended June 30, 1998, the Company has not developed any significant
customer base or revenue.
To date, the PC411 Service has experienced limited revenue and significant
operating losses. In view of the PC411 Service's operating results, the Company
is reevaluating its commitment to the PC411 Service business. In connection with
such reevaluation, the Company is exploring a number of possible alternatives
for the PC411 Service business including, but not limited to, a sale of such
business, the contribution of the assets of such business to a new entity in
exchange for an equity interest in such entity or a termination of the PC411
Service business. If the PC411 Service business is terminated, the Company
currently estimates that shut-down costs will be approximately $650,000.
In September 1997, the Company entered into a license agreement with Acxiom,
Inc. ("Acxiom") pursuant to which it licenses the database consisting of the
residential and business listings which are part of the PC411 Service. This
license agreement supersedes a previous license agreement between the Company
and Pro CD, Inc. ("Pro CD") which was acquired by Acxiom. Under the license
agreement, Acxiom is entitled to a royalty payment equal to 12% of the Company's
revenue generated from the PC411 Service. The minimum royalty payments for the
first, second and third years under this agreement are $75,000, $125,000 and
$175,000, respectively, and are payable upon the commencement of the first year
and at the end of each such subsequent year. In addition, the Company paid
Acxiom $15,000 in the first quarter of 1998 as a final payment due under the
prior license agreement with Pro CD. Further, the parties agreed that the
minimum royalty payments and terms of payment for the second and third years of
the agreement will be reviewed during the ninth month of the initial year of the
agreement.
The Company generates revenue by charging its customers an annual subscription
fee. To become a subscriber, a user must install PC411 for Windows 3.0 on his
computer's hard drive. PC411 for Windows 3.0 can either be downloaded from the
Company's Web site or can be obtained by purchasing equipment or software from
one of the Company's bundling partners. The Company has entered into
distribution agreements with Multimedia Labs (representing 3Com), The Media Farm
(representing Hayes modems), 3Com/US Robotics and Silicom Multimedia
(representing AST). Pursuant to these distribution agreements, PC411 for Windows
3.0 is preinstalled on a computer's hard drive or a copy of PC411 for Windows
3.0 is included with the purchase of a modem. The Company pays distribution fees
to these equipment manufacturers for the distribution of PC411 for Windows 3.0
either based upon the number of new customers that subscribe to the PC411
Service or the revenue that such new customers generate. The distribution
agreement with IBM (Aptiva) expired on June 1, 1998 and has not been renewed.
9
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
CDS - In May, 1998, the Company acquired the stock of CDS, a development stage
company engaged in the marketing and leasing of an inventory control system for
tobacco products. Under the terms of the acquisition, the former CDS
stockholders received 147,500 shares of the Company's Common Stock at closing.
In addition, the Company will issue an additional 147,500 shares in the
aggregate to the former CDS stockholders on each of the first, second and third
anniversaries of the closing provided that on each such delivery date CDS was
actively engaged in the business it is now engaged. The schedule for the
deferred deliveries of stock is subject to a delay of 12 months if the current
President of CDS (the "Executive") is not employed by CDS on any of the three
anniversary dates and is subject to acceleration if the Company's Common Stock
trades at $15 per share for 60 consecutive trading days. In connection with this
acquisition, the Company entered into a three-year employment agreement, subject
to certain termination provisions, with the Executive. The Executive was also
granted options to purchase 110,000 shares of Common Stock of the Company at
$1.50 per share. CDS did not have any significant tangible assets at the time of
acquisition and to date has not recognized material revenues. The aggregate of
the fair value of the shares issued and issuable to the CDS stockholders as
consideration for the acquisition of $339,250 and legal and other costs incurred
in the acquisition of $104,250 have been capitalized and will be amortized over
an estimated useful life of five years.
CDS markets a dispensing machine for cigarettes, which is controlled by a
remote-control device. The dispensing machine is designed to replace the current
money-operated cigarette vending machine. The Company's product is
differentiated from the current money-operated vending machine by a
remote-control transmitter, which may only be activated by an authorized
individual. Thus, the operation of the machine requires a face-to-face
transaction between the operator (typically a cashier) and the customer wishing
to purchase cigarettes. CDS' management believes that this method for dispensing
cigarettes would be permitted under the final Food and Drug Administration
regulations issued August 28, 1996 and various bills proposed before Congress
this year which would restrict the sale and distribution of cigarettes. CDS
believes that the principal market for its equipment consists of restaurants,
bars and taverns. The Company intends to lease its equipment to these entities
for a 36-month term and intends to derive additional revenues by selling
advertising space on the machine's panels. CDS will depreciate the equipment
over five years. The Company believes that depreciation will be the principal
component of costs of sales related to the leases. As of August 14, 1998, CDS
had entered into 13 leases and had commitments to purchase machines for
approximately $475,000 from a foreign manufacturer with which CDS has an
exclusive contract. As of June 30, 1998, the Company classified $467,000 pledged
as collateral for a letter of credit, which collateralized the purchase, as a
restricted asset. CDS has recently employed two additional executives, including
a Vice President of Sales.
The Company may also seek to acquire other businesses and/or properties, which
may or may not be related to its existing businesses. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations and
products or services of the acquired companies, the expenses incurred in
connection with the acquisition and subsequent assimilation of operations and
products or services, the diversion of management's attention from other
business concerns and the potential loss of key employees of the acquired
company. The Company may also face increased competition for acquisition
opportunities which may inhibit its ability to consummate suitable acquisitions
on terms favorable to the Company. There can be no assurance that the Company
will successfully identify,
10
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
complete or integrate any future acquisitions, or that acquisitions, if
completed, will contribute favorably to the Company's operations and future
financial condition.
The limited operating history of the Company makes the prediction of future
results of operations difficult or impossible. The Company believes that period
to period comparisons of its operating results for any period should not be
relied upon as an indication of future performance. The continued development of
the PC411 Service and CDS businesses will require the Company to significantly
increase its operating expenses in order to build its sales and marketing staff,
increase product development spending, and invest in infrastructure. As a
result, the Company expects to continue to incur significant losses for the
foreseeable future.
The Company's operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside the Company's control.
In addition, the Company does not have historical financial data for any
significant period of time on which to base planned operating expenses. The
Company's expense levels are based in part on its expectations concerning future
revenue and to a large extent are fixed. Quarterly revenue and operating results
depend substantially upon signing up new customers and retaining such customers
which are difficult to forecast accurately. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall,
and any significant shortfall in revenue in relation to the Company's
expectations would have an immediate adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company
currently expects CDS to increase significantly its operating expenses as it
builds its sales and marketing staff, increases product development spending and
invests in infrastructure. To the extent that such expenses precede or are not
subsequently followed by increased revenue, the Company's business, results of
operations and financial condition will be materially and adversely affected.
11
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Recent Accounting Developments. For transactions entered into in fiscal years
beginning after December 15, 1997, the Company adopted and is reporting in
accordance with SOP 97-2, "Software Revenue Recognition". The adoption of SOP
97-2 did not have a material impact on the Company's financial statements. In
March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance
that the carrying value of software developed or obtained for internal use is
assessed based upon an analysis of estimated future cash flows on an
undiscounted basis and before interest charges. SOP 98-1 is effective for
transactions entered into in fiscal years beginning after December 15, 1998. The
Company believes that adoption of SOP 98-1 will not have a material impact on
the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information about operating segments.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The Company is currently reviewing its operating
segment disclosures and will adopt SFAS No.
131 in the fourth quarter of 1998.
Year 2000 Costs. The Company has evaluated the costs to implement century date
change compliant systems conversions and is in the process of executing a
planned conversion of its systems prior to the year 2000. Although such costs
may be a factor in describing changes in operating profit for given reporting
period, the Company currently does not believe that the anticipated costs of
year 2000 systems conversions will have a material impact on its future
condensed results of operations. However, due to the interdependent nature of
computer systems, the Company may be adversely impacted in the year 2000
depending on whether it or entities not affiliated with the Company have
addressed this issue successfully.
Results of Operations
Revenues. The Company's revenues have been derived from registration fees and
usage charges for the modem dial-up PC411 service. Revenues are recognized over
the period in which the related services are to be provided. Revenues for the
PC411 Service for the three months and six months ended June 30, 1998 were
$24,362 and $47,511, respectively, compared to $50,491 and $92,041 for the same
periods in the prior year. The decrease in revenues was due primarily to lower
sales due to the cancellation of a bundling agreement with an OEM partner. This
downward trend began during the three-month period ended September 30, 1997. CDS
had no revenues for the three and six months ended June 30, 1998.
12
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cost of Revenues. Cost of revenues consists primarily of the cost of data and
the distribution fees payable to OEM partners in 1997 and 1998. Cost of revenues
in 1998 also includes employee compensation and depreciation associated with the
maintenance of the PC411 Service. The Company's contract for the listing data
provides for payment based on a specified percentage of revenues that the
Company generates from the distributing the data, with minimum annual payments.
To date, the Company has been only required to pay the minimum quarterly
payments. Cost of revenues for the three months and six months ended June 30,
1998 were $89,868 and $183,440, respectively, as compared to $40,865 and $71,524
for the same periods in the prior year. The increase is due primarily to the
increased costs in the maintenance of the PC411 Service.
Research and Development. Research and development expenses consist primarily of
employee compensation associated with the design, programming, and testing of
the PC411 service. Research and development expenses for the three months and
six months ended June 30, 1998 were $48,188 and $117,673, respectively, as
compared to $16,796 and $24,639 for the same periods in the prior year. The
increase in research and development was primarily attributable the
re-engineering of the PC411 for Windows version 3.0.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
direct mail, public relations, print advertising, and trade shows. Sales and
marketing expenses for the three months and six months ended June 30, 1998 were
$108,711 and $320,254, respectively, as compared to $50,321 and $66,176 for the
same periods in the prior year. The increase in sales and marketing expenses is
due to the Company's efforts to expand distribution of PC411 for Windows version
3.0 and initiation of a renewal program for current subscribers to the PC411
Service.
General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for administration, office operations, and general
management activities, including legal, accounting, and other professional fees.
General and administrative expenses for the PC411 Service were $216,503 and
$455,794 for the three months and six months ended June 30, 1998, respectively,
as compared to $156,788 and $286,646 for the same periods in the prior year. The
increase in general and administrative expenses is due to an increase in payroll
and costs associated with a public company. General and administrative expenses
for CDS were $85,973 for the three and six months ended June 30, 1998. The CDS
expenses consisted principally of payroll and consulting expenses.
Other Income (Expense). Interest expense was $36,256 and $94,002 for the three
months and six months ended June 30, 1997, respectively. The interest expense
was attributed entirely to the loan from New Valley Corporation ("NVC"), the
principal shareholder of the Company. Included in interest expense was $35,000
and $70,000 for each respective period in imputed interest attributable to stock
options granted to Direct Assist Holding Inc. ("DAH"), a wholly-owned subsidiary
of NVC, on January 29, 1997. Interest and other income was $34,021 and $92,320
for the three months and six months ended June 30, 1998, compared to $35,473 for
the three and six months ended June 30, 1997. The increase is principally
related to interest on the funds received on May 22, 1997 from the Company's
initial public offering ("IPO").
13
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The Company has not been able to generate sufficient cash from operations and,
as a consequence, financing has been required to fund ongoing operations. The
Company has financed its operations to date primarily through the sale of its
Preferred Stock to DAH, secured short-term borrowings from NVC and the proceeds
of the IPO. Two of the Company's directors and its Chief Financial Officer are
or have been executive officers of NVC.
On May 21, 1997, the Company sold 1,322,500 units (including 172,500 units from
the exercise of the underwriter's over-allotment option) in the IPO, each unit
consisting of one share of Common Stock and one Redeemable Class A Common Stock
Purchase Warrant to purchase one share of Common Stock. The units were sold for
$5.75 each and the Company received, after expenses of the IPO, approximately
$5.9 million in net proceeds. After the repayment of the indebtedness to NVC,
cumulative Preferred Stock dividends in the amount of $171,953 and an $80,000
consulting fee to the underwriter of the IPO, approximately $5.4 million
remained for the completion of the introduction of the PC411 Service over the
Internet, to expand marketing, sales and advertising, to develop or acquire new
services or databases, and for general corporate purposes. Cash used in
operations for the six months ended June 30, 1998 and 1997 was $895,619 and
$11,086, respectively.
Cash provided from investing activities for the six months ended June 30, 1998
was $2,871,693, compared with cash used in investing activities of $4,853,757
during the six months ended June 30, 1997. The primary source of cash provided
from investing activities in 1998 was the maturity of certain short-term
investments and subsequent conversion to cash-investment accounts in the second
quarter of 1998. Cash used in investing activities for the 1997 period resulted
primarily from the investment of proceeds from the IPO into the aforementioned
short-term investments. Capital expenditures for the six months ended June 30,
1998 and 1997 were $55,173 and $5,978, respectively. The expenditures in 1998
were primarily for CDS' office furniture and computers. The expenditures for
1997 were primarily for computer equipment. The Company also incurred $104,250
of costs, principally legal and other fees, in connection with the CDS
acquisition. The Company will amortize these costs over an estimated useful life
of five years.
Cash provided from financing activities for the six months ended June 30, 1997
consisted of $5,635,982, which was primarily associated with the Company's IPO.
On May 22, 1997, the Company issued to NVC warrants in satisfaction of $250,000
of indebtedness owed to NVC. The balance of the indebtedness to NVC, $447,064,
including accrued interest, was paid from the net proceeds from the IPO. The
Company also paid preferred stock dividends in arrears of $171,953 to NVC.
The Company expects that cash used in operating activities could increase in
the future. The timing of the Company's future capital requirements, however,
cannot be accurately predicted. The Company's capital requirements depend upon
numerous factors, principally the acceptance and use of CDS's product and the
PC411 Service and the Company's ability to generate revenue. If capital
requirements vary materially from those currently planned, the Company may
require additional financing, including, but not limited to the sale of equity
or debt securities. The Company has no commitments for any additional financing,
and there can be no assurance that any such commitments can be obtained. Any
additional equity financing may be dilutive to the Company's existing
14
PC411, INC.
(A Development Stage Company)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
stockholders, and debt financing, if available, may involve pledging some or all
of the Company's assets and may contain restrictive covenants with respect to
raising future capital and other financial and operational matters.
The Company believes that the net proceeds from the IPO will be sufficient to
meet the Company's operations and capital requirements for the next 12 months,
although there can be no assurance in this regard. Although there can be no
assurance, management believes that the Company will be able to continue as a
going concern for the next 12 months.
The Company or its affiliates, including NVC, may, from time to time, based upon
present market conditions, purchase shares of the Company's Common Stock in the
open market or in privately negotiated transactions.
Special Note Regarding Forward-Looking Statements
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995 (the "Reform Act"), including any statements that may be contained
in the foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations", in this report and in other filings with the
Securities and Exchange Commission and in its reports to stockholders, which
represent the Company's expectations or beliefs with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the Company.
The Company's plans and objectives are based, in part, on assumptions involving
the market acceptance of its services, the continued growth and expansion of the
Internet, the Company's ability to market successfully the CDS product as a more
convenient and reliable alternative to current comparable and widely used
inventory control systems and that there will be no unanticipated material
adverse change in the Company's business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company.
Results actually achieved may differ materially from expected results included
in these statements as a result of these or other factors particularly in light
of the Company's early stage operations. Due to such uncertainties and risks,
readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date on which such statements are made.
The Company does not undertake to update any forward-looking statement that may
be made from time to time on behalf of the Company.
15
PC411, INC.
(A Development Stage Company)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information entitled "Contingencies" in Note 6 to
the Financial Statements of PC411, Inc. included elsewhere in this
report on Form 10-QSB.
Item 2. Changes in Securities and Use of Proceeds
On May 21, 1997, the Company completed an initial public offering
("IPO") of 1,322,500 units (including 172,500 units from the exercise
of the underwriter's over-allotment option), each unit consisting of
one share of Common Stock and one Warrant. The units were sold for
$5.75 each and the Company received, after expenses of the IPO,
approximately $5.9 million in net proceeds.
On August 14, 1997, the Company filed its initial report of sales of
securities and use of proceeds therefrom on Form SR. Form SR has been
discontinued and the Company will continue to report the following
information in the Company's quarterly and annual filings until the
proceeds have been fully used.
1. The offering commenced May 14, 1997 and all registered securities
were sold.
2. The managing underwriter was Biltmore Securities, Inc.
3. Title of Securities:
a. Units - Each Unit consists of one share of Common
Stock and one Warrant.
b. Common Stock - Common Stock included in Units, par
value $.01.
c. Warrants - Each Warrant is convertible into one share
of Common Stock at an exercise price of $6.10.
d. Common stock issuable upon conversion of the Warrants
("Other Common Stock").
e. Underwriter's Options - The Underwriter's Options
are convertible into Units at an exercise price of
$9.49 per Unit.
16
PC411, INC.
(A Development Stage Company)
PART II. OTHER INFORMATION
4. The Amount and Aggregate Offering Price of Securities Registered
and Sold to Date For the Account of the Issuer:
AGGREGATE PRICE OF
AMOUNT OFFERING AMOUNT AMOUNT
TITLE OF SECURITY REGISTERED REGISTERED SOLD
----------------- ---------- ------------------- -------
Units 1,322,500 $ 7,604,375 1,322,000
Common Stock 1,322,500 -- --
Warrants 1,322,500 -- --
Other Common Stock 1,322,500 $ 8,067,250 --
Underwriter's Options 73,600 $ 1,147,424 --
5. Expenses Incurred in Connection with Issuance of Securities:
Underwriting discounts and commissions $760,438
Expenses paid to underwriters $228,131
Other expenses (estimated) $730,880
(All expenses were direct or indirect to others)
6. Net offering proceeds after the total expenses above were
$5,885,000.
7. Amount of net offering proceeds used for each of the purposes listed
below:
Amounts paid to affiliates of the Company:
Repayment of Indebtedness; preferred stock dividends $ 619,016
Amounts paid to others:
Temporary investments:
Money-market cash accounts $ 2,665,861
Commercial paper $ 100,000
Letters of credit $ 567,000
Purchase of equipment $ 90,072
Employee compensation - estimated $ 763,254
Other working capital - estimated $ 1,079,797
17
PC411, INC.
(A Development Stage Company)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger, dated as of May 6, 1998, among
Coinexx Corporation, R. Mark Elmore, PC411, Inc. and PC411
Acquisition Corp.
10.2 Employment Agreement, dated as of May 6, 1998, between Coinexx
Corporation and R. Mark Elmore.
10.3 Stock Option Agreement, dated as of May 6, 1998, between PC411,
Inc. and R. Mark Elmore. 27 Financial Data Schedule (for SEC use
only).
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
None.
18
PC411, INC.
(A Development Stage Company)
SIGNATURE
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.
PC411, INC.
(Registrant)
Date: August 14, 1998 By: /s/ J. Bryant Kirkland III
-------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
19