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 AUGUST 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24426
C-PHONE CORPORATION
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(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
--------------
(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.
5,290,543 shares of common stock as of October 14, 1997.
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Transitional Small Business Disclosure Form Yes [ ] No [X]
<PAGE>
C-PHONE CORPORATION
FORM 10-QSB
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of February 28, 1997
and August 31, 1997 (unaudited) 3
Statements of Operations for the three and six
months ended August 31, 1996 and 1997 (unaudited) 4
Statements of Cash Flows for the six months
ended August 31, 1996 and 1997 (unaudited) 5
Notes to Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-PHONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, 1997 August 31, 1997
----------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,398,049 $ 2,441,829
Accounts receivable, net of allowance for
doubtful accounts of $120,000 and $150,000
at February 28, 1997 and at August 31, 1997 (unaudited) 422,042 399,638
Inventories 1,341,931 1,279,202
Prepaid expenses and other current assets 82,066 116,992
------------ ------------
Total current assets 3,244,088 4,237,661
Property and equipment, net 251,913 235,601
Other assets 154,246 61,092
------------ ------------
Total assets $ 3,650,247 $ 4,534,354
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 587,877 $ 367,771
Accrued expenses 325,938 165,938
Current obligations under capital leases 11,507 --
------------ ------------
Total current liabilities 925,322 533,709
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Shareholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 4,355,393 and 5,203,356
shares issued and outstanding at February
28, 1997 and August 31, 1997 (unaudited) 43,554 52,034
Paid-in capital 13,530,208 17,959,416
Accumulated deficit (10,848,837) (14,010,805)
------------ ------------
Total shareholders' equity 2,724,925 4,000,645
------------ ------------
Total liabilities and shareholders' equity $ 3,650,247 $ 4,534,354
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<TABLE>
<CAPTION>
C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended August 31, Six months ended August 31,
----------------------------- ---------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 667,288 $ 319,789 $ 1,067,528 $ 752,910
Other revenue -- 4,360 -- 8,039
----------- ----------- ----------- -----------
Total revenue 667,288 324,149 1,067,528 760,949
----------- ----------- ----------- -----------
Cost of goods sold 474,727 418,406 863,377 1,319,422
Cost of other revenue -- 1,012 -- 1,012
----------- ----------- ----------- -----------
Total cost of revenue 474,727 419,418 863,377 1,320,434
----------- ----------- ----------- -----------
Gross profit (loss) 192,561 (95,269) 204,151 (559,485)
----------- ----------- ----------- -----------
Operating expenses:
Selling, general
and administrative 506,017 1,003,111 1,167,957 2,165,323
Research, development
and engineering 265,247 240,247 532,968 520,986
----------- ----------- ----------- -----------
Total operating expenses 771,264 1,243,358 1,700,925 2,686,309
----------- ----------- ----------- -----------
Operating loss (578,703) (1,338,627) (1,496,774) (3,245,794)
Interest expense (682) (135) (1,493) (447)
Interest income 35,912 41,862 83,668 84,273
----------- ----------- ----------- -----------
Net loss $ (543,473) $(1,296,900) $(1,414,599) $(3,161,968)
=========== =========== =========== ===========
Per-share data:
Net loss per share $ (0.13) $ (0.25) $ (0.33) $ (0.62)
=========== =========== =========== ===========
Weighted average number of
common shares and
common share equivalents
outstanding 4,347,293 5,203,356 4,347,293 5,061,132
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended August 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,414,599) $(3,161,968)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 67,708 53,527
Provision for doubtful accounts 30,000 30,000
Compensation expense of stock options -- 19,200
Compensation expense of stock issued -- 14,220
Changes in operating assets and liabilities:
Accounts receivable (84,437) (7,596)
Inventories (51,056) 62,729
Prepaid expenses and other current assets 27,841 (34,926)
Other assets (12,145) 93,154
Accounts payable 45,669 (220,106)
Accrued expenses (15,423) (160,000)
----------- -----------
Net cash used in operating activities (1,406,442) (3,311,766)
----------- -----------
Cash flows from investing activities:
Equipment purchases (49,505) (37,215)
Purchase of short term investments (1,282,189) --
Maturities of short investments 3,313,831 --
----------- -----------
Net cash provided by (used in) investing activities 1,982,137 (37,215)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 34,750
Net proceeds from private placement of common stock -- 4,369,518
Payment of capital lease obligations (8,069) (11,507)
----------- -----------
Net cash (used in) provided by financing activities (8,069) 4,392,761
----------- -----------
Net increase in cash and cash equivalents 567,626 1,043,780
Cash and cash equivalents, beginning of period 1,852,820 1,398,049
----------- -----------
Cash and cash equivalents, end of period $ 2,420,446 $ 2,441,829
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 1,493 $ 447
=========== ===========
Income taxes paid -- --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUGUST 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of C-Phone Corporation
(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, such financial
statements include all adjustments necessary to present fairly, in all
material respects, the information set forth therein. Operating results
for the three and six month periods ended August 31, 1997 are not
necessarily indicative of the results that may be expected for the
fiscal year ending February 28, 1998. 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 28, 1997.
2. STOCK OPTIONS
As of August 31, 1997, options for 303,110 shares of common stock were
outstanding under the Company's 1994 Stock Option Plan (the "Plan")
(54,750 of which are non-qualified options exercisable at prices
ranging from $3.00 to $7.00 per share, depending upon the date of
grant, and 248,360 of which are incentive stock options exercisable at
prices ranging from $2.375 to $10.625 per share, depending upon the
date of the grant), and options for 179,234 shares of common stock were
available for future grants. Due to vesting provisions included in the
options, only options representing 140,896 shares of common stock were
exercisable as of August 31, 1997. The following table summarizes
certain information with respect to exercisable options:
Range of Number of
Exercise Price Options Exercisable
-------------------------- ----------------------
$3.00 - $3.99 56,007
$6.00 - $6.99 1,833
$7.00 - $7.99 83,056
-------
140,896
=======
3. WARRANTS AND CONTINGENT VALUE RIGHTS
During the week of March 31, 1997, the Company completed a private
placement (the "1997 Placement"), through a placement agent, pursuant
to which the Company issued an aggregate of 833,667 shares of common
stock (the "Original Shares") to the participants (the "Investors") in
the 1997 Placement and received net proceeds of approximately
$4,370,000 (after payment, or accrual, of fees and expenses of
approximately $632,000). Accompanying each of the Original Shares was
the right, under certain circumstances, to receive additional shares of
common stock in accordance with the terms of a "contingent value right"
(the "Rights"). The Rights, which expire June 25, 1998, are
automatically exercised at the time, and from time to time as, the
Original Shares are first publicly sold through a broker dealer. The
terms of the Rights provide that, upon the first such sale of any
Original Shares at a price of less than $8.00 per share, the seller of
the Original Shares will automatically receive, for each such Original
Share sold, and without the payment of any additional consideration,
such additional number of shares of common stock as equals (i) $8.00
divided by the Adjusted Price, minus (ii) one; where the Adjusted Price
equals the greater of (x) the average closing bid price per share of
common stock on The Nasdaq National Market for the ten trading days
immediately preceding the date of sale of the Original Shares, or (y)
$2.00. As of September 30, 1997, 803,667 Original Shares had been first
sold through a broker-dealer, and, pursuant to the terms of the
6
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C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUGUST 31, 1997
3. WARRANTS AND CONTINGENT VALUE RIGHTS (Continued)
Rights, 136,863 additional shares have been or will be issued as a
result thereof. As of such date, only 30,000 Original Shares continue
to have the ability to exercise the Rights.
In connection with the 1997 Placement, the Company issued to an
affiliate of the placement agent warrants, currently expiring on
December 22, 1997, to acquire an aggregate of 150,000 shares of common
stock at an exercise price of $9.60 per share. In addition to the
foregoing, as of August 31, 1997, the Company had outstanding warrants,
expiring August 18, 1999, to acquire an aggregate of 200,000 shares of
common stock, at an exercise price of $8.40 per share, granted to the
managing underwriter of the Company's 1994 initial public offering.
4. 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. Shares
issuable upon exercise of common stock options and warrants, and
contingent value rights, are not included for the periods presented as
they would be anti-dilutive.
5. NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128") on February 28, 1998. SFAS
No. 128 requires the Company to change its method of computing,
presenting and disclosing earnings per share information. Upon
adoption, all prior period data presented will be restated to conform
to the provisions of SFAS No. 128. If the Company had adopted SFAS No.
128 for the period ended August 31, 1997, the basic income per common
share would be the same as the net loss per share shown in the
Statements of Operations included in Item 1 of Part I of this Quarterly
Report on Form 10-QSB and, as the computation of diluted income per
common share would be anti-dilutive, the diluted income per common
share would be the same as the basic income per common share.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the
reporting and displaying of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 130 requires the disclosure of an amount
that represents total comprehensive income and the components of
comprehensive income in a financial statement. The pronouncement is
effective for fiscal years beginning after December 15, 1997, and is
not expected to have a material impact on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 establishes standards for determining an entity's operating
segments and the type and level of financial information to be
disclosed in both annual and interim financial statements. SFAS No. 131
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The pronouncement is
effective for periods beginning after December 15, 1997, and is not
expected to have a material impact on the Company's financial
statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS, IN ADDITION TO
HISTORICAL INFORMATION, CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
SIGNIFICANT RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS
ARE BASED ON MANAGEMENT'S BELIEF AS WELL AS ASSUMPTIONS MADE BY, AND
INFORMATION CURRENTLY AVAILABLE TO, MANAGEMENT PURSUANT TO THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH
BECAUSE THE CONTEXT OF THE STATEMENT USUALLY WILL INCLUDE WORDS SUCH AS
THE COMPANY "BELIEVES" OR "EXPECTS" OR WORDS OF SIMILAR IMPORT.
SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS,
OBJECTIVES, ESTIMATES OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING CAPITAL
EXPENDITURES, EARNINGS, SALES, LIQUIDITY AND CAPITAL RESOURCES, AND
ACCOUNTING MATTERS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW
AND IN ITEM 1 - "DESCRIPTION OF BUSINESS" AND ELSEWHERE IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28,
1997, AS WELL AS FACTORS SUCH AS FUTURE ECONOMIC CONDITIONS, ACCEPTANCE
BY CUSTOMERS OF THE COMPANY'S PRODUCTS, CHANGES IN CUSTOMER DEMAND,
LEGISLATIVE, REGULATORY AND COMPETITIVE DEVELOPMENTS IN MARKETS IN
WHICH THE COMPANY OPERATES AND OTHER CIRCUMSTANCES AFFECTING
ANTICIPATED REVENUES AND COSTS. THE COMPANY UNDERTAKES NO OBLIGATION TO
RELEASE PUBLICLY THE RESULT OF ANY REVISIONS TO THESE FORWARD LOOKING
STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER
THE DATE OF THIS QUARTERLY REPORT ON FORM 10-QSB OR TO REFLECT THE
OCCURRENCE OF OTHER UNANTICIPATED EVENTS.
OVERVIEW
Since 1993, the Company has been primarily engaged in the engineering,
manufacturing and marketing of C-Phone(R), a line of PC-based video conferencing
systems. During the year ended February 28, 1997 ("Fiscal 1997"), the Company
commenced third-party contractual software development related to its PC-based
video conferencing systems and substantially completed development of C-Phone
Home(TM), a TV-based video phone.
In August 1994, the Company completed its initial public offering of
2,000,000 shares of its common stock (the "1994 Public Offering"), 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.
During the week of March 31, 1997, the Company completed a private
placement (the "1997 Placement") of 833,667 shares of its common stock, subject
to the issuance, for no further consideration, of additional shares of its
common stock, pursuant to which it received net proceeds of approximately
$4,370,000. See Note 3 to Notes to Unaudited Financial Statements. The Company
expects to use such proceeds for sales and marketing of C-Phone Home, the
continued development of additional C-Phone products and features and related
products, for sales and marketing of C-Phone, and working capital, including
funding anticipated increases in inventories and receivables.
The Company commenced operations in 1986 as a manufacturer of
promotional radios and, in 1990, developed data/fax modems under the name
"TWINCOM". 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 and, 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, engineering and marketing activities for C-Phone and
related products, and expects that such investments will continue in the
foreseeable future. The Company began shipping its new C-Phone Home product in
March 1997.
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C-Phone Home may be purchased on a stand-alone basis or, similar to the
method by which most cellular telephones are sold, at a lower price when
purchased with telecommunications services offered by the Company. While, to
date, approximately 90% of C-Phone Home sales have been made under the latter
purchase option, that percentage has been decreasing steadily and, with a
planned expansion into catalog and international sales, the Company believes
that future sales under such purchase option will be at a significantly lesser
percentage of total C-Phone Home sales. However, since a significant amount of
future sales may continue to be made under such purchase option, and since the
current manufactured cost exceeds the net proceeds received by the Company from
the sale of a C-Phone Home unit sold under such purchase option, until such
time, if at all, as (i) the percentage of sales under such purchase option
becomes insignificant, (ii) the Company attains sufficient manufacturing volume
or can utilize less costly components in the manufacture of C-Phone Home to
enable the Company to reduce its manufactured cost, or (iii) profits from the
sale of telecommunications services exceed the difference between the
manufactured cost and the sales price of C-Phone Home under such purchase
option, the Company's sales of C-Phone Home under such purchase option will not
be profitable. As a result of the foregoing, the Company's activities since 1994
and the low volume of sales, the Company has incurred significant losses during
the three fiscal years ended February 28, 1997 and the six months ended August
31, 1997. The Company expects to continue to incur significant losses in the
foreseeable future due to its significant expenditures for product development
and its marketing strategy for C-Phone Home.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1997 ("2ND QUARTER 98") AS COMPARED TO THREE
MONTHS ENDED AUGUST 31, 1996 ("2ND QUARTER 97")
REVENUES. Revenues decreased 51% to $324,149 in 2nd Quarter 98 from
$667,288 in 2nd Quarter 97, as a result of a 52% decrease in net sales to
$319,789 in 2nd Quarter 98 from $667,288 in 2nd Quarter 97. Management believes
that this decrease in net sales reflects an industry-wide slowdown in the
continued acceptance of PC-based desktop video conferencing.
COST OF REVENUE. Cost of revenue consists primarily of cost of goods
sold. Cost of goods sold includes labor, materials and other manufacturing costs
(such as salaries, supplies, leasing costs, depreciation related to production
operations and the write-down of inventory to net realizable value). Cost of
goods sold decreased 12% to $418,406 (131% of net sales) in 2nd Quarter 98 from
$474,727 (71% of net sales) in 2nd Quarter 97. The decrease in cost of goods
sold was primarily related to the decrease in net sales while the increase in
the percentage of cost of goods sold to net sales was primarily related to the
cost of manufacture of C-Phone Home and the write-down of related inventory to
its current net realizable value based upon the historical high percentage of
sale of C-Phone Home units below manufactured cost when sold in conjunction with
telecommunications services. See "Overview."
GROSS PROFIT (LOSS). The gross loss was $95,269 in 2nd Quarter 98, as
compared to a gross profit of $192,561 (29% of revenues) in 2nd Quarter 97. The
gross loss in 2nd Quarter 98 was primarily the result of the decrease in net
sales and the Company's marketing strategy for C-Phone Home.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 98% to $1,003,111 (309% of revenues) in 2nd
Quarter 98 from $506,017 (76% of revenues) in 2nd Quarter 97. The primary reason
for the increase was a 164% increase in selling and marketing expenses to
approximately $475,000 in 2nd Quarter 98 from approximately $180,000 in 2nd
Quarter 97, substantially all of which increase was directly related to the
marketing launch of C-Phone Home. Other increases in expenses directly related
to C-Phone Home were increased personnel costs resulting from additional
customer support and administrative personnel and increased reserve for bad debt
expenses as a result of the historical experience of the retail industry. In
addition, other increases in administrative expenses were increased legal and
audit expenses primarily as a result of the complexities related to the changes
in the Company's business, the reallocation of duties of certain personnel from
research, development and engineering, and increased investor relations and
other shareholder expenses resulting from a significant increase in the number
of holders of
9
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record of the Company's common stock. The Company expects that it will continue
to incur substantial selling, general and administrative expenses during the
fiscal year ending February 28, 1998 ("Fiscal 1998") as a result of the
continued commercialization of C-Phone Home.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 9% to $240,247 (74% of revenues) in 2nd Quarter
98 from $265,247 (40% of revenues) in 2nd Quarter 97. The decrease was primarily
the result of a decrease in personnel costs resulting from a partial change in
duties of certain personnel to selling, general and administrative. 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 increased 131% to $1,338,627 in 2nd Quarter 98 from
$578,703 in 2nd Quarter 97.
INTEREST. Interest income increased 17% to $41,862 in 2nd Quarter 98
from $35,912 in 2nd Quarter 97 as a result of increased investments arising from
the net proceeds obtained from the 1997 Placement.
INCOME TAXES. The Company's losses for 2nd Quarter 97 and 2nd Quarter
98 may be utilized as an offset against future earnings, although there is no
assurance that future operations will produce taxable earnings.
SIX MONTHS ENDED AUGUST 31, 1997 ("SIX MONTHS 98") AS COMPARED TO SIX MONTHS
ENDED AUGUST 31, 1996 ("SIX MONTHS 97")
REVENUES. Revenues decreased 29% to $760,949 in Six Months 98 from
$1,067,528 in Six Months 97, as a result of a 29% decrease in net sales to
$752,910 in Six Months 98 from $1,067,528 in Six Months 97. Management believes
that this decrease in net sales reflects an industry-wide slowdown in the
continued acceptance of PC-based desktop video conferencing.
COST OF REVENUE. Cost of revenue consists primarily of cost of goods
sold. Cost of goods sold includes labor, materials and other manufacturing costs
(such as salaries, supplies, leasing costs, depreciation related to production
operations and the write-down of inventory to net realizable value). Cost of
goods sold increased 53% to $1,319,422 (175% of net sales) in Six Months 98 from
$863,377 (81% of net sales) in Six Months 97. The increase in cost of goods sold
and the increase in the percentage of cost of goods sold to net sales were both
primarily related to the cost of manufacture of C-Phone Home and the write-down
of related inventory to its current net realizable value based upon the
historical high percentage of sales of C-Phone Home units below the manufactured
cost when sold in conjunction with telecommunications services. See "Overview."
GROSS PROFIT (LOSS). The gross loss was $559,485 in Six Months 98, as
compared to a gross profit of $204,151 (19% of revenues) in Six Months 97. The
gross loss in Six Months 98 was primarily the result of the decrease in net
sales of goods and the Company's marketing strategy for C-Phone Home.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 85% to $2,165,323 (285% of revenues) in Six
Months 98 from $1,167,957 (109% of revenues) in Six Months 97. The primary
reason for the increase was a 130% increase in selling and marketing expenses to
approximately $1,194,000 in Six Months 98 from approximately $520,000 in Six
Months 97, substantially all of which increase was directly related to the
marketing launch of C-Phone Home. Other increases in expenses directly related
to C-Phone Home were increased personnel costs resulting from additional
customer support and administrative personnel and increased reserve for bad debt
expenses based upon the historical experience of the retail industry. In
addition, other increases in administrative expenses were increased legal and
audit expenses, primarily as a result of the complexities related to the changes
in the Company's business, the reallocation of duties of certain personnel from
research, development and engineering, and increased investor
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relations and other shareholder expenses resulting from a significant increase
in the number of holders of record of the Company's common stock. The Company
expects that it will continue to incur substantial selling, general and
administrative expenses during the Fiscal 1998 as a result of the continued
commercialization of C-Phone Home.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 2% to $520,986 (68% of revenues) in Six Months 98
from $532,968 (50% of revenues) in Six Months 97. The decrease was primarily the
result of a decrease in personnel costs resulting from a partial change in
duties of certain personnel to selling, general and administrative offset by
development and engineering expenses related to the development of enhancements
to C-Phone Home. 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 increased 117% to $3,245,794 in Six Months 98 from
$1,496,774 in Six Months 97.
INTEREST. Interest income increased 1% to $84,273 in Six Months 98 from
$83,668 in Six Months 97 as a result of increased investment arising from the
net proceeds obtained from the 1997 Placement.
INCOME TAXES. The Company's losses for Six Months 97 and Six Months 98
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 from the
proceeds of the 1994 Public Offering, which raised net proceeds of approximately
$12,288,000, and the 1997 Placement, which raised net proceeds of approximately
$4,370,000.
At August 31, 1997, the Company had working capital of $3,703,952 (an
increase from $2,318,766 at February 28, 1997) and cash and cash equivalents
(including short-term investments) of $2,441,829 (as compared to $1,398,049 at
February 28, 1997). The Company's invested funds consist primarily of United
States Treasury Bills and obligations of United States government agencies.
During Six Months 98, operating activities used $3,311,766 of net cash,
primarily to fund operating activities, investing activities used $37,215 of net
cash for equipment purchases, and financing activities provided $4,392,761 of
net cash primarily from the 1997 Placement. 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
for continued development and engineering as well as selling and marketing
expenses.
The Company believes that its current working capital, which includes
the net proceeds from the 1997 Placement, together with anticipated funds from
operations, will be sufficient to meet the Company's projected operating needs
and capital expenditures, including the initial commercialization of C-Phone
Home, through the end of calendar 1997. The Company has commenced the planning
process to raise additional working capital. The Company anticipates that such
funds should be available through one or more possible sources, including (i) a
private placement of (a) its debt securities, (b) authorized, but unissued,
shares of its common stock or preferred stock, and/or (c) its debt securities
which would be convertible into such shares, (ii) through the receipt of
proceeds from the possible exercise of outstanding warrants to purchase the
Company's common stock, if the market price of the common stock were to exceed
the exercise price of such warrants, of which there can be no assurance, and/or
(iii) a public offering of its authorized, but unissued, shares of common stock.
If C-Phone Home gains market acceptance, of which there can be no assurance, the
Company's pricing strategy and the very substantial investment which would then
be required by the Company for manufacturing, inventory and marketing
expenditures and carrying of accounts receivable related to the
11
<PAGE>
commercialization of C-Phone Home, would require the Company to obtain even more
working capital through a possible offering of its common stock. There can be no
assurance that additional funds needed by the Company will be available when
needed or, if available, that the terms of such fundings will be favorable or
acceptable to the Company.
Assuming acceptance of C-Phone Home by the marketplace, the Company
anticipates that it may take in excess of two years, if at all, to obtain
positive cash flow from the Company's anticipated operations, during which time
the Company may be required to obtain still more financing. If the Company is
unable to timely obtain any of its required funds, its C-Phone Home marketing
strategy may not be attainable and its business could be materially adversely
affected. Unless adequate income relating to sales of C-Phone Home is attained,
the timing or receipt of which cannot be predicted, the Company may require
additional cash resources for the development of alternative products. There can
be no assurance that additional funds needed by the Company will be available
when needed or, if available, that the terms of such fundings will be favorable
or acceptable to the Company.
The development and recent introduction, of C-Phone Home has placed a
significant strain on the Company's limited personnel, management and other
resources. The Company's ability to manage any future growth effectively will
require it to continue to attract, train, motivate and manage its employees
successfully and to continue to improve its operational, financial and
management systems. The Company's failure to effectively manage its growth could
have a material adverse effect on the Company's business and operating results.
The Company leases its facility and owns its manufacturing equipment
free from encumbrances. As of August 31, 1997, the Company had no material
commitments for capital expenditures.
At February 28, 1997, the Company estimates that it had available net
operating loss carryforwards of approximately $10,233,000 for Federal purposes
and net economic loss carryforwards of approximately $10,482,000 for state
purposes, which may be used to reduce future taxable income, if any. The Federal
carryforwards will expire starting in 2009 and the state carryforwards will
expire starting in 1999.
The Company believes that, during the past three years, inflation has
not had a significant impact on the Company's sales or operating results.
Certain of the components and sub-assemblies used by the Company in its
products, such as the CCD color camera presently used in C-Phone, are
manufactured outside of the United States and represents a material portion of
the unit cost of the Company's basic products. Although the Company has not
experienced any significant price increases to date as a result of changes in
foreign currency rates, there can be no assurance that, in the future, changes
in foreign currency rates will not affect the cost of its foreign purchased
components and sub-assemblies.
The Company's foreign sales are denominated in U.S. dollars and the
Company does not incur any foreign currency risks; however, fluctuations in
currency exchange rates could cause the Company's products to become relatively
more expensive to foreign customers, which would result in a reduction in
foreign sales or the profitability of any of such sales.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 8, 1997, the Company held an Annual Meeting of its
shareholders, at which time each of the six incumbent directors of the Company
who had been nominated by the Board of Directors for re-election as a director
of the Company was re-elected as a director. The votes cast were as follows:
FOR WITHHELD
--- --------
Daniel P. Flohr 4,807,971 63,386
Seymour L. Gartenberg 4,804,821 66,536
Tina L. Jacobs 4,807,171 64,186
Donald S. McCoy 4,806,146 65,211
E. Henry Mize 4,805,946 65,411
Stuart E. Ross 4,806,671 64,686
At the Annual Meeting four additional proposals were voted upon as
follows:
(1) Proposal to approve the issuance of up to 2,501,001 shares of
the Company's common stock upon exercise of "contingent value
rights" granted to investors in the Company's March 1997
private placement:
For Against Abstaining
--- ------- ----------
2,737,636 133,410 30,723
(2) Proposal to approve the amendment of the Company's Certificate
of Incorporation to increase the authorized number of shares
of common stock from ten million to twenty million:
For Against Abstaining
--- ------- ----------
4,691,680 154,429 25,248
(3) Proposal to approve the amendment of the Company's Certificate
of Incorporation to authorize the Company to issue up to one
million shares of preferred stock:
For Against Abstaining
--- ------- ----------
2,690,803 181,020 29,946
(4) Proposal to ratify Coopers & Lybrand L.L.P. as the independent
auditors for the Company for the fiscal year ending February
28, 1998:
For Against Abstaining
--- ------- ----------
4,835,502 20,046 15,809
13
<PAGE>
ITEM 5. OTHER INFORMATION
In connection with its 1994 Public Offering, the Company issued
warrants (the "1994 Warrants") to Josephthal Lyon & Ross Incorporated ("JLR")
pursuant to a Representative's Warrant Agreement. As previously disclosed, the
holders of a majority of the 1994 Warrants may have had the right to require the
Company to repurchase the 1994 Warrants for an aggregate of up to $1,370,000 at
any time prior to the sale of a majority of the shares of common stock issuable
upon exercise of the 1994 Warrants. On September 22, 1997, the then holders of a
majority of the 1994 Warrants, most of whom are officers of JLR, waived such
repurchase right for all of such holders and, in consideration therefor, the
Company extended the expiration date of the warrants issued in the 1997
Placement to an affiliate of JLR from September 23, 1997 to December 22, 1997.
See Note 3 to Notes to Unaudited Financial Statements included in Item 1 of Part
I of this Quarterly Report on Form 10-QSB.
On August 12, 1997, the Company filed a Certificate of Amendment to its
Certificate of Incorporation with the Secretary of State of the State of New
York increasing the authorized number of shares of common stock to twenty
million and authorizing the Company to issue up to one million shares of
preferred stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3. Articles of Incorporation and By-laws
(a) Certificate of Amendment to Certificate of
Incorporation, as filed with the Secretary of
State of the State of New York on August 12,
1997.
27. Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K during
the quarter ended August 31, 1997.
14
<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.
<TABLE>
<CAPTION>
C-PHONE CORPORATION
<S> <C>
Date: October 15, 1997 By: /s/ DANIEL P. FLOHR
--------------------
Daniel P. Flohr
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 15, 1997 By: /s/ PAUL H. ALBRITTON
----------------------
Paul H. Albritton
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
</TABLE>
15
EXHIBIT 3(a)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
C-PHONE CORPORATION
---------------------
Under Section 805 of the
New York Business Corporation Law
---------------------
FIRST: The name of the Corporation is C-Phone Corporation.
SECOND: The Certificate of Incorporation of the Corporation was filed
by the Department of State on March 28, 1986, under the original name Target
Tuning, Inc.
THIRD: The amendment to the Certificate of Incorporation effected by
this Certificate of Amendment is to increase the number of shares of common
stock the Corporation is authorized to issue and to authorize the issuance of
preferred stock.
FOURTH: To accomplish the foregoing amendment, Article FOURTH of the
Certificate of Incorporation is hereby stricken out in its entirety and the
following new Article is substituted in lieu thereof:
"FOURTH: (a) The aggregate number of shares which the
Corporation shall have the authority to issue is twenty-one million
(21,000,000) shares, which shall consist of twenty million (20,000,000)
shares of common stock, $.01 par value ("Common Shares"), and one
million (1,000,000) shares of preferred stock, $.01 par value
("Preferred Shares"). Except as otherwise provided in accordance with
this Certificate of Incorporation, the Common Shares shall have
unlimited voting rights, with each Common Share being entitled to one
vote, and the right to receive the net assets of the Corporation upon
dissolution, with each Common Share participating on a pro rata basis.
(b) The Board of Directors is authorized, from
time to time and without shareholder action, to provide for the
issuance of Preferred Shares in one or more series not exceeding in the
aggregate the number of Preferred Shares authorized by this Certificate
of Incorporation, as amended from time to time; and to determine with
respect to each such series the voting powers, if any (which voting
powers, if granted, may be full or limited), designations, preferences
and relative, participating, option or other special rights, and the
qualifications, limitations or restrictions relating thereto, including
without limiting the generality of the foregoing (i) the voting rights,
if any, relating to Preferred Shares of any series (which may be one or
more votes per share or a fraction of a vote per share or no vote per
share, which may vary over time and which may be applicable generally
or only upon the happening and continuance of stated events or
conditions), (ii) the rate of dividend, if any, to which holders of
Preferred Shares of any series may be entitled (which may be cumulative
or noncumulative), (iii) the rights of holders of Preferred Shares of
any series in the event of liquidation, dissolution or winding up of
the affairs of the Corporation, (iv) the rights, if any, of holders of
Preferred Shares of any series to convert or exchange such Preferred
Shares of such series for shares of any other class or series of
capital stock, or for any other securities, property or assets, of the
Corporation or any subsidiary (including the determination of the price
or prices or the rate or rates applicable to such rights to
16
<PAGE>
convert or exchange and the adjustment thereof, and the time or times
during which a particular price or rate shall be applicable), (v)
whether or not the Preferred Shares of any series shall be redeemable
and, if so, the terms and conditions of such redemption, including the
date or dates upon or after which they shall be redeemable, and the
amount per share payable in case of redemptions, which amount may vary
under different conditions and at different dates, and (vi) whether any
Preferred Shares of any series shall be redeemed pursuant to a
retirement or sinking fund or otherwise and the terms and conditions of
such obligation.
(c) Before the Corporation shall issue any
Preferred Shares of any series, a Certificate of Amendment to this
Certificate of Incorporation fixing the voting powers, designations,
preferences, the relative, participating, option or other rights, if
any, and the qualifications, limitations and restrictions, if any,
relating to the Preferred Shares of such series, and the number of
Preferred Shares of such series authorized by the Board of Directors to
be issued shall be filed with the Department of State of the State of
New York in accordance with the New York Business Corporation Law and
shall become effective without any shareholder action. The Board of
Directors is further authorized to increase or decrease (but not below
the number of Preferred Shares of any series then outstanding) the
number of shares of such series subsequent to the issuance of shares of
such series."
FIFTH: The foregoing amendment of the certificate of incorporation was
authorized by the vote at a meeting of the Board of Directors of the Corporation
followed by the vote of the holders of at least a majority of all of the
outstanding shares of the Corporation entitled to vote on such amendment of the
certificate of incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under penalties of perjury, that the
statements contained herein have been examined by us and are true and correct.
Date: August 8, 1997
/s/ DANIEL P. FLOHR
----------------------------
Daniel P. Flohr, President
/s/ TINA L. JACOBS
----------------------------
Tina L. Jacobs, Secretary
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF AUGUST 31, 1997 AND THE
UNAUDITED STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000835585
<NAME> C-Phone Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 2,441,829
<SECURITIES> 0
<RECEIVABLES> 549,638
<ALLOWANCES> 150,000
<INVENTORY> 1,279,202
<CURRENT-ASSETS> 4,237,661
<PP&E> 1,123,904
<DEPRECIATION> 888,303
<TOTAL-ASSETS> 4,534,354
<CURRENT-LIABILITIES> 533,709
<BONDS> 0
0
0
<COMMON> 52,034
<OTHER-SE> 3,948,611
<TOTAL-LIABILITY-AND-EQUITY> 4,534,354
<SALES> 752,910
<TOTAL-REVENUES> 760,949
<CGS> 1,319,422
<TOTAL-COSTS> 1,320,434
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 447
<INCOME-PRETAX> (3,161,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,161,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,161,968)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
