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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24426
C-PHONE CORPORATION
-------------------------
(Exact name of small business issuer as specified in its charter)
New York 06-1170506
- ------------------------------- -------------
(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.
7,871,734 shares of common stock as of October 14, 1998.
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, 1998
and August 31, 1998 (unaudited) ............................... 3
Statements of Operations for the three and six
months ended August 31, 1997 and 1998 (unaudited) ............. 4
Statements of Cash Flows for the six months
ended August 31, 1997 and 1998 (unaudited) .................... 5
Notes to Unaudited Financial Statements ......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ....... 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................ 17
SIGNATURES ................................................................ 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-PHONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, 1998 August 31, 1998
----------------- ---------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,200,231 $ 6,568,021
Accounts receivable, net of allowance for doubtful accounts
of $173,227 at February 28, 1998 and $174,215 at
August 31, 1998 (unaudited) 346,684 264,735
Inventories 1,641,528 1,687,588
Prepaid expenses and other current assets 73,728 141,867
------------ ------------
Total current assets 6,262,171 8,662,211
Property and equipment, net 164,174 108,884
Other assets 42,686 45,262
------------ ------------
Total assets $ 6,469,031 $ 8,816,357
============ ============
LIABILITIES, PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 796,019 $ 458,979
Accrued expenses 295,647 263,074
------------ ------------
Total current liabilities 1,091,666 722,053
Series A convertible preferred stock, $1,000 stated amount;
5,000 shares designated; 4,500 and 724 shares issued and
outstanding at February 28, 1998 and August 31, 1998 (unaudited),
respectively (Note 3(b)) 4,543,767 749,290
Shareholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized
at February 28, 1998 and August 31, 1998 (unaudited);
5,348,234 and 7,595,666 shares issued and outstanding at
February 28, 1998 and August 31, 1998 (unaudited), respectively 53,482 75,957
Paid-in capital - common stock 18,038,006 27,640,609
Paid-in capital - preferred stock 1,318,350 212,108
Accumulated deficit (18,576,240) (20,583,660)
------------ ------------
Total shareholders' equity 833,598 7,345,014
------------ ------------
Total liabilities, preferred stock and shareholders' equity $ 6,469,031 $ 8,816,357
============ ============
The accompanying notes are an integral part of the financial statements.
3
</TABLE>
<PAGE>
C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31, Six Months Ended August 31,
----------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 319,789 $ 540,765 $ 752,910 $ 879,915
Other revenue 4,360 9,124 8,039 25,512
----------- ----------- ----------- -----------
Total revenue 324,149 549,889 760,949 905,427
----------- ----------- ----------- -----------
Cost of goods sold 418,406 631,548 1,319,422 1,139,621
Cost of other revenue 1,012 1,241 1,012 9,443
----------- ----------- ----------- -----------
Total cost of revenue 419,418 632,789 1,320,434 1,149,064
----------- ----------- ----------- -----------
Gross profit (loss) (95,269) (82,900) (559,485) (243,637)
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 1,003,111 703,284 2,165,323 1,428,868
Research, development and engineering 240,247 197,733 520,986 406,800
----------- ----------- ----------- -----------
Total operating expenses 1,243,358 901,017 2,686,309 1,835,668
----------- ----------- ----------- -----------
Operating loss (1,338,627) (983,917) (3,245,794) (2,079,305)
Interest expense (135) -- (447) --
Interest income 41,862 87,518 84,273 140,261
----------- ----------- ----------- -----------
Net loss $(1,296,900) $ (896,399) $(3,161,968) $(1,939,044)
=========== =========== =========== ===========
Per-share data:
Basic and diluted net loss per common share $ (0.25) $ (0.13) $ (0.62) $ (0.31)
=========== =========== =========== ===========
Shares used in computing net loss per common share 5,203,356 7,114,095 5,061,132 6,460,859
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
4
<PAGE>
C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended August 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,161,968) $(1,939,044)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 53,527 66,817
Bad debt expense 96,258 103,991
Compensation expense of stock options 19,200 12,800
Compensation expense of stock issued 14,220 --
Changes in operating assets and liabilities:
Accounts receivable (73,854) (22,042)
Inventories 62,729 (46,060)
Prepaid expenses and other current assets (34,926) (68,139)
Other assets 93,154 (2,576)
Accounts payable (220,106) (337,040)
Accrued expenses (160,000) (32,573)
----------- -----------
Net cash used in operating activities (3,311,766) (2,263,866)
----------- -----------
Cash flows from investing activities:
Equipment purchases (37,215) (11,527)
----------- -----------
Net cash used in investing activities (37,215) (11,527)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 34,750 304,937
Proceeds from private placement of common stock, net 4,369,518 --
Proceeds from exercise of warrants, net -- 4,338,246
Payment of capital lease obligations (11,507) --
----------- -----------
Net cash provided by financing activities 4,392,761 4,643,183
----------- -----------
Net increase in cash and cash equivalents 1,043,780 2,367,790
----------- -----------
Cash and cash equivalents, beginning of period 1,398,049 4,200,231
----------- -----------
Cash and cash equivalents, end of period $ 2,441,829 $ 6,568,021
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 447 $ 0
=========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
5
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C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUGUST 31, 1998
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, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending February 28, 1999.
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, 1998.
2. STOCK OPTIONS
As of August 31, 1998, options for 261,892 shares of the Company's common
stock, par value $.01 per share (the "Common Stock") were outstanding under
the Company's 1994 Stock Option Plan (the "Plan") (51,750 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 210,142 of which are incentive
stock options exercisable at prices ranging from $3.125 to $10.375 per
share, depending upon the date of the grant), and options for 154,688
shares of Common Stock were available for future grants. Due to vesting
provisions included in the options, only options representing 179,964
shares of Common Stock were exercisable as of August 31, 1998. During the
six month period ended August 31, 1998, options to purchase 57,749 shares
of Common Stock were exercised at an average exercise price of $5.28 per
share. The following table summarizes certain information with respect to
exercisable options:
Number of
Range of Options
Exercise Price Exercisable
------------------------------ --------------------
$3.00 - $3.38 61,391
$5.95 - $6.75 25,517
$7.00 - $7.50 90,724
$10.375 2,332
3. PREFERRED STOCK, WARRANTS AND CONTINGENT VALUE RIGHTS
(a) During the week of March 31, 1997, the Company completed a private
placement (the "March Placement"), through a placement agent, pursuant
to which the Company issued an aggregate of 833,667 shares (the
"Original Shares") of Common Stock to the participants (the
"Investors") in the March 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 expired June
25, 1998, were automatically exercised at the time, and from time to
time, as the Original Shares were first publicly sold through a
broker-dealer. The terms of the Rights provided 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 would 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 equaled (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, and (y) $2.00. All the Original Shares have
been publicly resold and, pursuant to the terms of the Rights, 136,863
additional shares were issued as a result thereof.
6
<PAGE>
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUGUST 31, 1998
In connection with the March Placement, the Company issued to an
affiliate of the placement agent warrants to acquire an aggregate of
150,000 shares of Common Stock at an exercise price of $9.60 per share,
which warrants expired without being exercised.
(b) On December 19, 1997, the Company completed a private placement (the
"December Placement") pursuant to which the Company issued to the
several participants an aggregate of (i) 4,500 shares (the "Preferred
Shares" ) of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock"), par value $.01 per share, with an initial stated
value of $1,000 per share (which increases at the rate of 5% per annum)
(such amount, as increased from time to time, the "Stated Value"), (ii)
warrants (the "One-Year Warrants") to acquire up to 315,000 shares of
Common Stock, and (iii) warrants (the "Three-Year Warrants") to acquire
up to 135,000 shares of Common Stock. The Company received net proceeds
of approximately $4,110,000 (after payment, or accrual, of fees
(including finders fees) and related expenses of approximately
$390,000). Each Preferred Share is convertible, from time to time, at
the option of the holder, into such number of shares of Common Stock as
is determined by dividing the Stated Value by the lesser of (x)
$7.3575, and (y) 85% of the average of the closing bid price during
such three consecutive trading day period as may be selected by the
holder during the 25-day trading period preceding the date of
conversion. Any outstanding Preferred Shares on December 19, 1999
automatically will be converted into Common Stock at the conversion
price then in effect. The Preferred Shares are subject to redemption at
the option of the holder if, among other things, (i) the Company fails
to maintain an effective registration statement with respect to the
shares of Common Stock issuable upon exercise of the Preferred Shares
for more than 30 consecutive days or more than 60 days in any 12-month
period, or (ii) the Company fails to maintain the listing of the Common
Stock on the Nasdaq National Market or another principal securities
exchange or automated quotation system. If any of the foregoing events
occur and the holders of the Preferred Shares elect to exercise their
redemption rights, the Company will be required to redeem the remaining
outstanding Preferred Shares at an amount equal to the greater of (x)
118% of the Stated Value of the Preferred Shares and (y) the market
value of the Common Stock into which the Preferred Shares would have
been converted on the date of redemption. The One-Year Warrants expire
on December 19, 1998, have an exercise price of $8.05 per share and are
redeemable at the option of the Company at a price of $.01 per warrant
if the closing price of the Common Stock is greater than 130% of the
exercise price of the One-Year Warrants for 10 consecutive trading
days. The Three-Year Warrants expire on December 19, 2000, have an
exercise price of $9.10 per share and are not redeemable. In connection
with the December Placement, the Company paid a finder's fee of
$295,000 and issued to an affiliate of the finder warrants (upon the
same terms as the One-Year Warrants) to acquire an aggregate of 185,000
shares of Common Stock.
Regulations promulgated by the Securities and Exchange Commission
require that all issues of mandatorily redeemable stock be excluded
from the shareholders' equity section of the balance sheet and be
presented separately. One of the characteristics of a mandatorily
redeemable stock is that it contains conditions for redemption, even if
remote, which are not solely within the control of the issuer. As set
forth above, the Preferred Shares are subject to redemption at the
option of the holder under certain circumstances. Since there is the
possibility that the occurrence of an event outside the control of the
Company could cause redemption, the Preferred Stock has been classified
separately from shareholders' equity on the balance sheet.
(c) On May 13, 1998, the Company reduced the exercise price of the warrants
to purchase 200,000 shares of Common Stock issued in its 1994 initial
public offering (the "1994 Warrants") from $8.40 to $6.00 per share in
consideration for (i) requiring payment of the exercise price for the
1994 Warrants to be made in cash (rather than upon surrender of 1994
Warrants) and (ii) changing the expiration date thereof from August 18,
1999 to May 21, 1998. On May 13, 1998, the closing sales price of the
Common Stock was $9.75. The holders of the 1994 Warrants exercised all
of the 1994 Warrants by May 15, 1998. In addition, as of August 31,
1998, One-Year Warrants (including the warrants issued to the finder)
to purchase 325,000 shares of Common Stock at $8.05 per share and
Three-Year Warrants to purchase 60,000 shares of Common Stock at $9.10
per share also had been exercised. As a result of such warrant
exercises, during the six months,
7
<PAGE>
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AUGUST 31, 1998
ended August 31, 1998, the Company received net proceeds of $4,350,945.
As of August 31, 1998, 3,776 Preferred Shares had been converted into
an aggregate of 1,604,683 shares of Common Stock.
4. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which established new standards for computation of earnings per
share. SFAS No. 128 requires the presentation on the face of the income
statement of "basic" earnings per share and "diluted" earnings per share.
Basic earnings per share is computed by dividing the net income (loss)
available to common shareholders by the weighted average number of
outstanding common shares. The calculation of diluted earnings per share is
similar to the calculation of basic earnings per share, except that the
denominator includes dilutive common stock equivalents such as stock
options and warrants. Common stock options and warrants are not included
for the three and six months ended August 31, 1997 or 1998 as they would be
anti-dilutive. The accretion of the 5% annual increase in stated value of
the Preferred Stock in the amount of $22,499 and $68,377 for the three and
six months ended August 31, 1998 increased the net loss attributable to
common shareholders to $918,898 and $2,007,421, respectively, for the
purposes of the calculation of net loss per share for the three and six
months ended August 31, 1998.
8
<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,
1998, 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
The Company is primarily engaged in the engineering, manufacturing and
marketing of video conferencing systems. In 1993, the Company introduced
C-Phone(R), its first PC-based video conferencing system which operates over
digital networks. In 1997, the Company introduced C-Phone Home(TM), a TV-based
set-top "video phone" which operates over analog telephone lines using a
standard television set. In early 1998, the Company introduced the DS-324(TM), a
TV-based video conferencing system which operates over either analog or digital
telephone lines. In May 1998, the Company introduced C-Phone ITV(TM), a TV-based
set-top device that provides Internet access using a standard television set and
an analog telephone line.
The Company presently markets several TV-based video conferencing
products, including the DS-324 for business and personal use, the DS-324/Pro(TM)
for business use and special applications, the DS-324/AV(TM) for security and
surveillance applications, the DS-324/TTY(TM) for the hearing disabled, the
DS-324/Multipoint System(TM) for distance learning and training, and C-Phone
Home for individual home use. The Company believes that its TV-based video
conferencing products currently have greater market potential than its PC-based
products and the Company has decided to shift its resources to its TV-based
products. The Company will continue to support its PC-based products and provide
equipment to its existing customer base and to new customers in connection with
specialized applications, if any. The Company's C-Phone ITV internet access
device is currently being marketed to its existing customers for specific
applications such as healthcare and to selected foreign markets. The Company is
continuing to explore other market opportunities for C-Phone ITV.
The Company's products are marketed through a variety of channels
depending upon the product. The Company's TV-based video phone is marketed to
end users, distributors, resellers and original equipment manufacturers ("OEMs")
which integrate the product with other equipment for resale to specific
industries such as health care and security services. During the year ended
February 28, 1998 ("Fiscal 1998"), many retail
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distributors offered the end user the option to purchase C-Phone Home 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. The proceeds to the Company from units sold under the
latter option were less than the Company's cost of the product and, as 36% of
C-Phone Home sales were made under such purchase option in Fiscal 1998, such
sales and the required markdown of related inventory to reflect such sale price
contributed significantly to the gross loss for that period. The Company has
discontinued this purchase option due to the lack of market acceptance.
As a result of the foregoing and the low volume of sales, the Company
has incurred significant losses during the three fiscal years ended February 28,
1998 and the six months ended August 31, 1998. Until market acceptance of the
Company's products is established, of which there can be no assurance, the
Company expects to continue to incur significant losses due to its expenditures
for product development and the commercialization of its products.
RECENT EQUITY OFFERINGS
MARCH 1997 PRIVATE PLACEMENT. During the week of March 31, 1997, the
Company completed a private placement (the "March Placement") pursuant to which
the Company issued an aggregate of 833,667 shares of the Company's common stock,
par value $.01 per share (the "Common Stock"), to the participants in the March
Placement and received net proceeds of approximately $4,370,000 (after payment
of fees and expenses of approximately $632,000). Accompanying each of such
shares was the right, under certain circumstances, to receive additional shares
of Common Stock in accordance with the terms of a "contingent value right."
Pursuant to the terms of such rights, 136,863 additional shares of Common Stock
subsequently were issued. In connection with the March Placement, the Company
issued to an affiliate of the placement agent warrants to acquire an aggregate
of 150,000 shares of Common Stock at an exercise price of $9.60 per share, which
warrants expired without being exercised.
DECEMBER 1997 PRIVATE PLACEMENT. In December 1997, the Company
completed a private placement (the "December Placement") pursuant to which the
Company issued an aggregate of (i) 4,500 shares (the "Preferred Shares") of the
Company's Series A Convertible Preferred Stock, par value $.01 per share (the
"Preferred Stock") with an initial stated value of $1,000 per share (which
increases at the rate of 5% per annum) (such amount, as increased from time to
time, the "Stated Value"), (ii) warrants (the "One-Year Warrants") to acquire up
to 315,000 shares of Common Stock, and (iii) warrants (the "Three-Year Warrants"
and with the One-Year Warrants, collectively, the "1997 Warrants") to acquire up
to 135,000 shares of Common Stock, to the participants in the December Placement
and received aggregate proceeds of approximately $4,110,000 (after payment of
fees and expenses of approximately $390,000). In connection with the December
Placement, the Company paid a finder's fee of $295,000 and issued to an
affiliate of the finder warrants (upon the same terms as the One-Year Warrants)
to acquire an aggregate of 185,000 shares of Common Stock, which warrants have
been exercised.
Each Preferred Share is convertible, from time to time, at the option
of the holder, into such number of shares of Common Stock as is determined by
dividing the Stated Value by the lesser of (i) $7.3575, and (ii) 85% of the
average of the closing bid price during such three consecutive trading day
period as may be selected by the holder during the 25 trading day period
preceding the date of conversion. Any outstanding Preferred Shares on December
19, 1999 automatically will be converted into Common Stock at the conversion
price then in effect. As of October 14, 1998, 4,317 of the Preferred Shares had
been converted into 1,880,751 shares of Common Stock.
The One-Year Warrants expire on December 19, 1998 and have an exercise
price of $8.05 per share (115% of the closing price of the Common Stock on the
Nasdaq National Market ("NNM") on the trading day immediately preceding the
closing date of the December Placement), subject to adjustment under certain
circumstances, including upon the issuance of shares of Common Stock (or
securities convertible or exchangeable into shares of Common Stock) at less than
80% of the then market price on the NNM for the Common Stock. The One-Year
Warrants are redeemable at the option of the Company at a price of $.01 per
warrant if the closing price of the Common Stock on the NNM is greater than 130%
of the exercise price of
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the One-Year Warrants then in effect for 10 consecutive trading days. The
Three-Year Warrants expire on December 19, 2000 and have an exercise price of
$9.10 per share (130% of the closing price of the Common Stock on the NNM on the
trading day immediately preceding the closing date of the December Placement),
subject to adjustment under certain circumstances, including upon the issuance
of shares of Common Stock (or securities convertible or exchangeable into shares
of Common Stock) at less than 80% of the then market price on the NNM for the
Common Stock. The Three-Year Warrants are not redeemable. As of October 14,
1998, 325,000 shares of Common Stock had been issued upon exercise of One-Year
Warrants at $8.05 per share (including the warrants issued to the finder in the
December Placement), 60,000 shares had been issued upon exercise of Three-Year
Warrants at $9.10 per share and the Company received aggregate proceeds of
$3,162,250 from the exercise thereof.
The Preferred Shares are subject to redemption at the option of a
holder if, among other things, (i) the effectiveness of a Registration Statement
for the shares of Common Stock issuable upon conversion of the Preferred Shares
lapses for more than 30 consecutive days or more than 60 days in any 12-month
period, or (ii) the Company fails to maintain the listing of the Common Stock on
the NNM or another principal securities exchange or automated quotation system
and such failure continues for more than 30 days. If any of the foregoing events
occur and the holders of the Preferred Shares elect to exercise their redemption
rights, the Company will be required to redeem the remaining outstanding
Preferred Shares at an amount equal to the greater of (a) 118% of the Stated
Value of the Preferred Shares on the date of redemption and (b) the market value
of the Common Stock into which the Preferred Shares would have been converted on
the date of redemption. There can be no assurance that the Company will have the
financial ability to redeem the Preferred Shares, if required (although the
Company currently has such financial ability), and, even if the Company has such
ability, such payment may materially adversely affect the Company's financial
condition and deplete its cash resources.
1994 WARRANT EXERCISES. In connection with the Company's 1994 initial
public offering, the Company had issued to the representative of the
underwriters, warrants expiring August 19, 1999 to purchase 200,000 shares of
Common Stock at an exercise price of $8.40 per share. On May 13, 1998, the
Company reduced the exercise price of such warrants to $6.00 per share, in
consideration for (i) requiring payment of the exercise price for such warrants
to be made in cash (rather than upon surrender of warrants) and (ii) changing
the expiration date thereof to May 21, 1998. On May 13, 1998, the closing sales
price of the Common Stock was $9.75. All of such warrants were exercised by May
15, 1998 and the Company received aggregate proceeds of $1,200,000.
EQUITY LINE. On September 18, 1998, the Company entered into a Private
Equity Credit Agreement (the "Equity Line") with Sovereign Partners, L.P. (the
"Investor"). Pursuant to the terms of the Equity Line, subject to the
satisfaction of certain conditions, the Company may require the Investor to
purchase shares of Common Stock over a period of 18 months from the effective
date of the Registration Statement (as defined below), for an aggregate purchase
price of up to $5 million (but in no event more than 1,543,765 shares of Common
Stock (which represented 19.99% of the then outstanding shares of Common Stock
). Under the terms of the Equity Line, during any 30-day period following the
effective date of the Registration Statement, the Company, subject to the
satisfaction of certain conditions, can require the Investor to purchase shares
of Common Stock for an aggregate purchase price of between $500,000 and $1
million. The purchase price per share to be paid by the Investor for the shares
of Common Stock acquired under the Equity Line will equal 85% of the average
closing bid price of the Common Stock during the five trading days immediately
preceding the notice of purchase (the "Put Notice") given by the Company to the
Investor.
The Investor's obligation to purchase shares of Common Stock under the
Equity Line is subject to various conditions, including, among other things: (i)
effectiveness of the Registration Statement; (ii) the average closing bid price
of the Common Stock being at least $1.00 per share for the 20 trading days
preceding the date of the Put Notice; (iii) continued trading of the Common
Stock on The Nasdaq Stock Market; and (iv) the percentage of the Common Stock
beneficially owned by the Investor being not more than 9.9% of the then
outstanding Common Stock. The Company may terminate the Equity Line without
further obligation to the Investor at any time after it has sold to the Investor
at least $1 million of Common Stock.
11
<PAGE>
Under a related Registration Rights Agreement, the Company has agreed
to file, and maintain effectiveness (subject to certain penalties for
noncompliance) of, a registration statement (the "Registration Statement") under
the Securities Act of 1933 for the resale by the Investor of the shares of
Common Stock purchased by it under the Equity Line.
In connection with entering into the Equity Line, the Company issued to
Cardinal Capital Management, Inc., as finder, a two-year warrant (the "CCM
Warrant") to purchase 100,000 shares of Common Stock at an exercise price equal
to $8.00 per share. The CCM Warrant is redeemable for $0.01 per warrant at the
option of the Company if the closing sales price of the Common Stock exceeds
$10.00 for five consecutive trading days. The Company also paid the finder a
cash fee of $30,000 upon signing of the Equity Line and has agreed to pay the
finder an additional cash fee equal to 6% of the amount of any sales by the
Company pursuant to the Equity Line; with the $30,000 payment to be credited
against the first sale under the Equity Line.
Further information with respect to the March Placement and the
December Placement is set forth in Item 6 - "Management's Discussion and
Analysis or Plan of Operation - Recent Equity Offerings" of the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1998. Further
information with respect to the Equity Line is set forth in Item 5 - "Other
Events" of the Company's Current Report on Form 8-K, dated September 24, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1998 ("2ND QUARTER 99") AS COMPARED TO THREE
MONTHS ENDED AUGUST 31, 1997 ("2ND QUARTER 98")
REVENUES. Net sales increased 69% to $540,765 in 2nd Quarter 99 from
$319,789 in 2nd Quarter 98, reflecting the Company's change of focus to its
TV-based products from its PC-based products as a result of an industry-wide
slowdown in the continued acceptance of PC-based desktop video conferencing.
Sales of TV-based products represented 92% of net sales during 2nd Quarter 99 as
compared to 26% of net sales during 2nd Quarter 98 while PC-based products
represented 8% of nets sales for 2nd Quarter 99 as compared to 74% of net sales
for 2nd Quarter 98. During 2nd Quarter 99, the Company had other revenue of
$9,124 compared to $4,360 during 2nd Quarter 98. As a result of the foregoing,
revenues increased 70% to $549,889 in 2nd Quarter 99 from $324,149 in 2nd
Quarter 98.
COST OF REVENUE. Cost of revenue consists of cost of goods sold and
cost of other revenue. 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 other revenue consists primarily of the allocation of
salaries and benefits of personnel and the cost of outside services directly
related to such revenue. Cost of goods sold increased 51% to $631,548 (117% of
net sales) in 2nd Quarter 99 from $418,406 (131% of net sales) in 2nd Quarter
98. The increase in cost of goods sold was the result of increased sales volume.
The decrease in the percentage of cost of goods sold to net sales was primarily
the result of the increased sales volume and the decrease in the number of units
sold at less than cost when purchased in conjunction with a telecommunications
agreement with the Company. The Company discontinued selling units at less than
cost when purchased in conjunction with a telecommunications agreement during
2nd Quarter 99 due to lack of acceptance by consumers. Cost of goods sold as a
percentage of net sales during 2nd Quarter 99 remained elevated due to the high
cost of manufacture of the Company's TV-based products in its initial production
stage and the inability to cover fixed manufacturing costs at low production
volumes. Cost of other revenues was $1,241 in 2nd Quarter 99 (or 14% of related
revenue) as compared to cost of revenue of $1,012 (or 23% of related revenue) in
2nd Quarter 98.
GROSS PROFIT (LOSS). The gross loss was $82,900 in 2nd Quarter 99, as
compared to a gross loss of $95,269 in 2nd Quarter 98. The gross loss in 2nd
Quarter 99 was primarily the result of the low sales volume and the related high
cost of goods sold discussed above.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased 30% to $703,284 (128% of revenues) in 2nd
Quarter 99 from $1,003,111 (309% of revenues) in 2nd Quarter 98. The primary
reason for the decrease was a 57% decrease in selling and marketing expenses to
approximately $205,000 in 2nd Quarter 99 from approximately $475,000 in 2nd
Quarter 98, substantially all of which decrease was directly related to the
marketing launch of C-Phone Home in 2nd Quarter 98. The Company expects that it
will continue to incur substantial selling, general and administrative expenses
during Fiscal 1999 as a result of the continued commercialization of the
Company's TV-based products.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 18% to $197,733 (36% of revenues) in 2nd Quarter
99 from $240,247 (74% of revenues) in 2nd Quarter 98. The decrease was primarily
the result of the completion of the initial development of the Company's
TV-based products during Fiscal 1998. All of these costs were charged to
operations as incurred and were funded by the Company's cash reserves. The
Company expects to continue to invest significant resources during the
foreseeable future in new product development and engineering.
OPERATING LOSS. As a result of the factors discussed above, the
Company's operating loss decreased 26% to $983,917 in 2nd Quarter 99 from
$1,338,627 in 2nd Quarter 98.
INTEREST. Interest income increased 109% to $87,518 in 2nd Quarter 99
from $41,862 in 2nd Quarter 98 as a result of interest earned on the higher
average cash and cash equivalents due to the receipt of proceeds from the
December Placement and from the exercise of previously issued warrants and
options in May 1998, partially offset by the continued use of the Company's cash
and cash equivalents to fund operations.
INCOME TAXES. The Company's losses for 2nd Quarter 99 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, 1998 ("SIX MONTHS 99") AS COMPARED TO SIX MONTHS
ENDED AUGUST 31, 1997 ("SIX MONTHS 98")
REVENUES. Net sales increased 17% to $879,915 in Six Months 99 from
$752,910 in Six Months 98, reflecting the Company's change of focus to its
TV-based products from its PC-based products as a result of an industry-wide
slowdown in the continued acceptance of PC-based desktop video conferencing.
Sales of TV-based products represented 88% of net sales during for Six Months 99
as compared to 25% of net sales during Six Months 98 while sales of PC-based
products represented 12% of sales for Six Months 99 as compared to 75% of sales
for Six Months 98. During Six Months 99, the Company had other revenue of
$25,512 compared to $8,039 during Six Months 98. As a result of the foregoing,
revenues increased 19% to $905,427 in Six Months 99 from $760,949 in Six Months
98.
COST OF REVENUE. Cost of revenue consists of cost of goods sold and
cost of other revenue. 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 other revenue consists primarily of the allocation of
salaries and benefits of personnel and the cost of outside services directly
related to such revenue. Cost of goods sold decreased 14% to $1,139,621 (130% of
net sales) in Six Months 99 from $1,319,422 (175% of net sales) in Six Months
98. The decrease in cost of goods sold and the decrease in the percentage of
cost of goods sold to net sales was primarily the result of the decrease in the
number of units sold at less than cost when purchased in conjunction with a
telecommunications agreement with the Company and a decrease in unit costs. The
Company discontinued selling units at less than cost when purchased in
conjunction with a telecommunications agreement during 2nd Quarter 99 due to
lack of acceptance by consumers. Cost of goods sold as a percentage of net sales
during Six Months 99 remained elevated due to the high cost of manufacture of
the Company's TV-based products in its initial production stage and the
inability to cover fixed manufacturing costs at low production volumes. Cost of
other revenues was $9,443 in Six Months 99 (or 37% of related revenue) as
compared to cost of revenue of $1,012 (or 13% of related revenue) in Six Months
98.
13
<PAGE>
GROSS PROFIT (LOSS). The gross loss was $243,637 in Six Months 99, as
compared to a gross loss of $559,485 in Six Months 98. The gross loss in Six
Months 99 was primarily the result of the low sales volume and the related high
cost of goods sold discussed above.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased 34% to $1,428,868 (158% of revenues) in Six
Months 99 from $2,165,323 (285% of revenues) in Six Months 98. The primary
reason for the decrease was a 65% decrease in selling and marketing expenses to
approximately $420,000 in Six Months 99 from approximately $1,194,000 in Six
Months 98, substantially all of which decrease was directly related to the
marketing launch of C-Phone Home in Six Months 98. The decrease in selling and
marketing expenses was partially offset by increased investor relations and
other shareholder expenses resulting from a significant increase in the number
of holders of the Common Stock. The Company expects that it will continue to
incur substantial selling, general and administrative expenses during Fiscal
1999 as a result of the continued commercialization of the Company's TV-based
products.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 22% to $406,800 (45% of revenues) in Six Months
99 from $520,986 (68% of revenues) in Six Months 98. The decrease was primarily
the result of the completion of the initial development of the Company's
TV-based products during Fiscal 1998. All of these costs were charged to
operations as incurred and were funded by the Company's cash reserves. The
Company expects to continue to invest significant resources during the
foreseeable future in new product development and engineering.
OPERATING LOSS. As a result of the factors discussed above, the
Company's operating loss decreased 36% to $2,079,305 in Six Months 99 from
$3,245,794 in Six Months 98.
INTEREST. Interest income increased 66% to $140,261 in Six Months 99
from $84,273 in Six Months 98 as a result of interest earned on the higher
average cash and cash equivalents due to the receipt of proceeds from the
December Placement and from the exercise of previously issued warrants and
options in May 1998, partially offset by the continued use of the Company's cash
and cash equivalents to fund operations.
INCOME TAXES. The Company's losses for Six Months 99 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its recent operations primarily from the
proceeds of the March Placement, which raised net proceeds of approximately
$4,370,000, and the December Placement, which raised net proceeds of
approximately $4,110,000. In addition, during May 1998, the Company received
approximately $4,650,000 from the exercise of previously issued warrants and
options. See "Recent Equity Offerings."
At August 31, 1998, the Company had working capital of $7,940,158 (an
increase of $2,769,353 from $5,170,505 at February 28, 1998) and cash and cash
equivalents of $6,568,021 (as compared to $4,200,231 at February 28, 1998). The
Company's invested funds consisted primarily of overnight repurchase agreements
for discount notes issued by the United States Treasury or United States
government agencies. During Six Months 99, operating activities used $2,263,866
of net cash, primarily to fund operating activities, investing activities used
$11,527 of net cash for equipment purchases, and financing activities provided
$4,643,183 of net cash from the exercise of previously issued warrants and
options. Due to the technical nature of the Company's business and the
anticipated expansion of its video conferencing 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, together with
anticipated funds from operations and proceeds from the Equity Line (discussed
above), will be sufficient to meet the Company's
14
<PAGE>
projected operating needs and capital expenditures, including the continued
development and commercialization of its TV-based products, at least through the
second quarter of fiscal year 2000. However, if any of the Company's TV-based
products gain significant market acceptance, of which there can be no assurance,
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 commercialization of such products, would require the
Company to obtain even more working capital. The Company anticipates that such
additional funds should be available through one or more possible sources,
including through (i) the sale of common stock pursuant to the Equity Line, (ii)
a private placement of (a) its debt securities, including debt securities
convertible into Common Stock, and/or (b) its Common Stock or preferred stock,
(iii) the exercise of the Company's outstanding warrants, 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 (iv) a public offering of Common Stock. Unless
adequate income relating to sales of TV-based products 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 TV-based products have
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, 1998, the Company had no material
commitments for capital expenditures.
At February 28, 1998, the Company estimates that it had available net
operating loss carryforwards of approximately $15,125,000 for Federal purposes
and net economic loss carryforwards of approximately $15,337,000 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 Company's products, and components and subassemblies used by the
Company in its products, are manufactured outside of the United States and
represent 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 subassemblies. 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.
IMPACT OF YEAR 2000 ISSUE
Computer systems may experience problems handling dates beyond the year
1999 because many computer programs use only two digits to identify a year in a
date field. The Company has addressed this issue in several parts - the
Company's products, the Company's application software for its internal
operations and third-party suppliers.
PRODUCTS - As the Company's products do not include date/time
mechanisms in their operating software, the Company's products are Year 2000
compliant. However, some of the Company's earlier PC-based products use Windows
for Workgroups as their operating system and there may exist Year 2000 issues
with the specific user installed LAN interface employed by any certain customer
which issues are beyond the scope of the Company's involvement.
15
<PAGE>
APPLICATION SOFTWARE - During Fiscal 1998, for operational purposes,
the Company made the decision to upgrade its internal financial and operational
software system. This upgrade was completed in June 1998 and the system is now
Year 2000 compliant. The Company has substantially completed the identification
of other internal computer-based systems it uses which may require upgrading to
insure operational continuity beyond December 31, 1999. The Company plans to
complete such identification, the upgrading of necessary applications and the
testing of all application software for Year 2000 compliance by December 31,
1998.
THIRD-PARTY SUPPLIERS - The Company is assessing the possible effects
on the Company's operations of Year 2000 compliance related to key suppliers and
subcontractors. The Company's reliance on suppliers and subcontractors means
that the failure to address Year 2000 compliance issues by these parties could
have a material impact on the Company's business. The Company has identified
critical third-party suppliers and has requested information as to their plans
and progress in addressing the Year 2000 problem. The Company expects to
complete its evaluation of its third-party suppliers by December 31, 1998. Based
upon its evaluations, the Company will develop alternative sourcing or other
contingency plans by mid-1999.
COSTS - The total cost associated with the Year 2000 issue is not
expected to be material to the Company's financial position. The Company's
current estimated out-of-pocket cost is not expected to exceed $50,000, of which
only an immaterial amount has been expended to date.. As the upgrade of the
Company's application software was done for operational purposes, the cost of
such upgrade has not been included in the Company's estimates.
RISKS - Due to the uncertainty of the Year 2000 readiness of
third-party suppliers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. In addition,
although the Company's business is not dependent on any single or small number
of customers, Year 2000 problems which significantly interrupt the normal
business operations of a significant number of the Company's customers could
have material adverse impact on the Company. The Company has not yet developed a
contingency plan in the event of unsuccessful implementation of its Year 2000
project or as a result of the noncompliance by any of the Company's key
suppliers or customers. However, the Company believes that its Year 2000 plan
will significantly reduce the Company's exposure from the problems associated
with the Year 2000 issues.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 31, 1998 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 6,544,153 56,532
Seymour L. Gartenberg 6,543,628 57,057
Tina L. Jacobs 6,544,153 56,532
Donald S. McCoy 6,544,228 56,457
E. Henry Mize 6,543,428 57,257
Stuart E. Ross 6,543,228 57,457
At the Annual Meeting two additional proposals were voted upon as
follows:
(1) Proposal to approve the issuance of any shares of Common Stock in
excess of 1,068,513 shares of Common Stock issuable upon
conversion of the Series A Preferred Shares:
For Against Abstaining
--- ------- ----------
1,957,764 167,930 32,991
(2) Proposal to ratify PricewaterhouseCoopers LLP (formerly Cooper &
Lybrand L.L.P.) as the independent auditors for the Company for
the fiscal year ending February 28, 1999:
For Against Abstaining
--- ------- ----------
6,554,353 24,394 21,938
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K during the
quarter ended August 31, 1997; however, the Company did file a
Current Report on Form 8-K (responding to Item 5 - "Other Events")
on September 25, 1998.
17
<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.
C-PHONE CORPORATION
Date: October 14, 1998 By: /s/ Daniel P. Flohr
-------------------------------------------------
Daniel P. Flohr
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 14, 1998 By: /s/ Paul H. Albritton
-------------------------------------------------
Paul H. Albritton
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF AUGUST 31, 1998 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
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
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<CASH> 6,568,021
<SECURITIES> 0
<RECEIVABLES> 438,950
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749,290
0
<COMMON> 75,957
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