SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarter ended June 30, 1996. Commission File Number 0-13627. COMPUTER TELEPHONE CORP. (Exact name of registrant as specified in its charter) Massachusetts 04-2731202 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 360 Second Avenue, Waltham, Massachusetts 02154 (Address of principal executive offices) (Zip Code) (617) 466-8080 (Registrant's telephone number including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark 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 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of Common Stock, as of the latest practicable date: As of July 25, 1996, 9,590,905 shares of Common Stock were outstanding. COMPUTER TELEPHONE CORP. FORM 10-Q INDEX Part I FINANCIAL STATEMENTS PAGE NO. Item 1. Financial Statements Condensed Balance Sheets as of June 30 and March 31, 1996 3 Condensed Statements of Income Three Months Ended June 30, 1996 and 1995 4 Condensed Statements of Cash Flows Three Months Ended June 30, 1996 and 1995 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 SIGNATURES 9 Part II OTHER INFORMATION Item 1. Legal Proceedings Inapplicable Item 2. Changes in Securities Inapplicable Item 3. Default Upon Senior Securities Inapplicable Item 4. Submission of Matters to a Vote of Security Holders Inapplicable Item 5. Other Information Inapplicable Item 6. Exhibits and Reports on Form 8-K The following exhibit is included herein: (11) Statements Regarding Computation of Per Share Earnings Three Months ended June 30, 1995 and 1994 The Company did not file any reports on Form 8-K during the three months ended June 30, 1996. 2 COMPUTER TELEPHONE CORP CONDENSED BALANCE SHEETS June 30, 1996 March 31, 1996 ------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 4,014,819 $ 3,941,876 Accounts receivable, net 8,153,628 6,557,229 Inventories 25,832 25,190 Prepaid expenses and other current assets 421,933 365,699 ------------- ------------- Total Current Assets $ 12,616,212 $ 10,889,994 Furniture, Fixtures and Equipment 6,164,725 6,046,493 Less accumulated depreciation (4,981,755) (4,822,755) ------------- ------------- Total Equipment 1,182,970 1,223,738 Deferred tax asset 277,000 277,000 Other assets 117,285 118,485 ------------- ------------- Total Assets $ 14,193,467 $ 12,509,217 ============= ============= LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Accounts payable and accrued expenses $ 1,268,093 $ 1,176,804 Accrued salaries and related taxes 2,075,307 1,828,288 Accrued income taxes 149,400 0 Deferred revenue 10,829 9,302 ------------- ------------- Total Current Liabilities 3,503,629 3,014,394 Stockholders' Equity Common stock 95,849 95,841 Additional paid in capital 4,645,810 4,644,988 Retained-earnings 6,084,004 4,889,819 ------------- ------------- 10,825,663 9,630,648 Amounts due from stockholders (135,825) (135,825) ------------- ------------- Total Stockholders' Equity 10,689,838 9,494,823 ------------- ------------- Total Liabilities and Stockholders' Equity $ 14,193,467 $ 12,509,217 ============= ============= The accompanying notes are an integral part of these financial statements. 3 COMPUTER TELEPHONE CORP CONDENSED STATEMENTS OF INCOME Three Months Ended June 30, June 30, 1996 1995 ------------- ------------- Revenue Network service commission income $ 6,755,680 $ 5,856,699 Long distance usage income 2,251,781 1,048,576 ------------- ------------- 9,007,461 6,905,275 Costs and expenses Cost of long distance network 1,681,855 827,844 Selling, general and administrative expenses 5,334,803 4,956,847 ------------- ------------- 7,016,658 5,784,691 ------------- ------------- Income from operations 1,990,803 1,120,584 Other Interest income 41,627 32,024 Interest expense (625) 0 Other 2,581 (8) ------------- ------------- 43,583 32,016 ------------- ------------- Income before income taxes 2,034,386 1,152,600 Provision for income taxes 840,200 463,350 ------------- ------------- Net income $ 1,194,186 $ 689,250 ============= ============= Net income per common share Primary $ 0.11 $ 0.07 ============= ============= Fully diluted $ 0.11 $ 0.07 ============= ============= Weighted average number of common shares Primary 10,981,028 10,269,960 ============= ============= Fully diluted 10,981,028 10,344,639 ============= ============= The accompanying notes are an integral part of these financial statements. 4 COMPUTER TELEPHONE CORP CONDENSED STATEMENT OF CASH FLOWS Three Months Ended June 30, June 30, 1996 1995 ------------- ------------- OPERATING ACTIVITIES Net Income $ 1,194,186 $ 689,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 159,000 138,000 Changes in noncash working capital items: Accounts receivable (1,596,399) (971,478) Inventories (642) 4,425 Other current assets (56,234) (57,734) Other assets 1,200 1,200 Accounts payable 91,288 (65,613) Accrued liabilities 247,019 327,520 Deferred revenue 1,527 (4,209) Accrued taxes 149,400 (16,050) ------------- ------------- Net cash provided by operating activities 190,345 45,311 INVESTING ACTIVITIES Additions to equipment (118,232) (99,614) ------------- ------------- Net cash used in investing activities (118,232) (99,614) FINANCING ACTIVITIES Proceeds from the issuance of common stock 830 0 ------------- ------------- Net cash used by financing activities 830 0 Increase (decrease) in cash 72,943 (54,303) Cash at beginning of year 3,941,876 2,390,546 ------------- ------------- Cash and cash equivalents at end of period $ 4,014,819 $ 2,336,243 ============= ============= The accompanying notes are an integral part of these financial statements. 5 COMPUTER TELEPHONE CORP. NOTES TO FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending March 31, 1997. These statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report to Shareholders on Form 10-K for the year ended March 31, 1996. NOTE 2: CASH DIVIDENDS The Company has not paid cash dividends during the period presented. NOTE 3: COMMITMENTS AND CONTINGENCIES The Company is party to suits arising in the normal course of business which either individually or in the aggregate are not material. NOTE 4. COMMON STOCK TRANSACTIONS SUBSEQUENT TO MARCH 31, 1996 On July 8, 1996, the Computer Telephone Corp. Employee Stock Purchase Plan purchased 2,998 shares of Common Stock from the Company at $11.05 for the purchase period ended June 30, 1996. Through July 25, 1996, 3,018 shares of Common Stock were issued as a result of employees exercising outstanding stock options. NOTE 5. NET INCOME PER SHARE Net income per share is computed based on the weighted average number of common stock and, if dilutive, common stock equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of common stock options using the treasury stock method. All income per share and weighted average share information have been restated to reflect the 3-for-2 stock split effective July 25, 1995 and the 2-for-1 stock split effective October 23, 1995. 6 Part I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and Notes set forth elsewhere in this Report. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1995. Total revenues for the first quarter of Fiscal 1997 increased 30% to approximately $9,007,000 as compared to approximately $6,905,000 for the same period of the preceding year (Fiscal 1996). Network service commission income, which represents fees earned by the Company in its capacity as an agent for various local and long distance telephone companies, increased 15% to approximately $6,756,000 as compared to approximately $5,857,000 for the first quarter of Fiscal 1996. Long distance usage income, which represents the gross billings to mid-sized commercial accounts on the Company's long distance network, increased 115% to approximately $2,252,000 as compared to approximately $1,049,000 for the same period of the preceding year. The increase in revenues is primarily attributable to a growing base of business in the Northeast, where the Company is paid a residual fee to actively manage a substantial group of customers on behalf of NYNEX-New England, NYNEX-New York, and Southern New England Telephone. The Company added account executives to secure additional customers under these programs, and continued to leverage these relationships by adding collateral products, such as prepaid debit cards, conference calling, broadcast faxing, and INTERNET access, in addition to our long distance products. Selling, general, and administrative expenses increased approximately 8% to $5,335,000 for the first quarter of Fiscal 1997 as compared to $4,957,000 for the first quarter of Fiscal 1996. This increase is attributable to the increase in variable sales commission and bonus expenses incurred in connection with the substantial increase in revenues. As a percentage of revenues, these S,G & A expenses were approximately 59% for Fiscal 1997, as compared to approximately 72% for Fiscal 1996, reflecting the positive leverage effect of increased sales and the continuing efforts by the Company to control operating expenses. Operating income for the first quarter of Fiscal 1997 increased to approximately $1,991,000, as compared to approximately $1,121,000 for the same period of Fiscal 1996, an increase of 78%. Net income for the quarter increased to approximately $1,194,000, as compared to approximately $689,000, an increase of 73%. The Company will utilize an effective tax rate of approximately 41% for Fiscal 1997. The period ended June 30, 1996 marks the twelfth consecutive quarter of profits for the Company. Management believes that its strategy of building long term relationships and leveraging customer opportunities, combined with continuing efforts to control costs, should result in a continuation of this trend throughout Fiscal 1997. 7 LIQUIDITY AND CAPITAL RESOURCES Working capital at June 30, 1996 amounted to approximately $9,113,000, as compared to $7,876,000 at March 31, 1996, an increase of 16%. Cash balances at June 30, 1996 totaled approximately $4,015,000. On April 28, 1995, the Company amended its revolving line of credit agreement with Fleet Bank, which is available under certain conditions, to provide for an increase in the credit line to $3,000,000 from $1,000,000 and to reduce the interest rate to the prime rate from prime plus one-half percent. This line of credit expires August 29, 1996 and the Company is currently negotiating an updated credit facility. The Company presently has no bank debt and expects that the revolving credit line, together with cash flows from operations, will be sufficient to meet the cash requirements of the Company for the next twelve months. 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. COMPUTER TELEPHONE CORP. Date: August 7, 1996 /S/ ROBERT FABBRICATORE ------------------------- Robert Fabbricatore Chairman and CEO Date: August 7, 1996 /S/ JOHN D. PITTENGER ----------------------- John D. Pittenger Treasurer 9