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 NOVEMBER 30, 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.
5,342,568 shares of common stock as of January 12, 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 November 30, 1997 (unaudited) 3
Statements of Operations for the three and nine
months ended November 30, 1996 and 1997 (unaudited) 4
Statements of Cash Flows for the nine months
ended November 30, 1996 and 1997 (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 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
C-PHONE CORPORATION
BALANCE SHEETS
February 28, 1997 November 30, 1997
----------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,398,049 $ 1,369,118
Accounts receivable, net of allowance for
doubtful accounts of $120,000 and $160,124
at February 28, 1997 and at November 30, 1997 (unaudited) 422,042 384,427
Inventories 1,341,931 1,651,123
Prepaid expenses and other current assets 82,066 89,696
------------ ------------
Total current assets 3,244,088 3,494,364
Property and equipment, net 251,913 199,151
Other assets 154,246 52,632
------------ ------------
Total assets $ 3,650,247 $ 3,746,147
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 587,877 $ 760,400
Accrued expenses 325,938 248,645
Current obligations under capital leases 11,507 --
------------ ------------
Total current liabilities 925,322 1,009,045
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Shareholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
4,355,393 and 5,342,268 shares issued and outstanding at February
28, 1997 and November 30, 1997 (unaudited), respectively, 43,554 53,423
Paid-in capital 13,530,208 17,978,280
Accumulated deficit (10,848,837) (15,294,601)
------------ ------------
Total shareholders' equity 2,724,925 2,737,102
------------ ------------
Total liabilities and shareholders' equity $ 3,650,247 $ 3,746,147
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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<TABLE>
<CAPTION>
C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended November 30, Nine months ended November 30,
------------------------------------ ------------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 332,955 $ 449,514 $ 1,400,483 $ 1,202,424
Other revenue 149,485 12,968 149,485 21,007
----------- ----------- ----------- -----------
Total revenue 482,440 462,482 1,549,968 1,223,431
----------- ----------- ----------- -----------
Cost of goods sold 299,921 662,925 1,163,298 1,982,347
Cost of other revenue 74,429 7,647 74,429 8,659
----------- ----------- ----------- -----------
Total cost of revenue 374,350 670,572 1,237,727 1,991,006
----------- ----------- ----------- -----------
Gross profit (loss) 108,090 (208,090) 312,241 (767,575)
----------- ----------- ----------- -----------
Operating expenses:
Selling, general
and administrative 512,696 861,752 1,680,653 3,027,075
Research, development
and engineering 235,155 234,394 768,123 755,380
----------- ----------- ----------- -----------
Total operating expenses 747,851 1,096,146 2,448,776 3,782,455
----------- ----------- ----------- -----------
Operating loss (639,761) (1,304,236) (2,136,535) (4,550,030)
Interest expense (566) 0 (2,059) (447)
Interest income 29,458 20,440 113,126 104,713
----------- ----------- ----------- -----------
Net loss $ (610,869) $(1,283,796) $(2,025,468) $(4,445,764)
=========== =========== =========== ===========
Per-share data:
Net loss per share $ (0.14) $ (0.24) $ (0.47) $ (0.86)
=========== =========== =========== ===========
Weighted average number of
common shares and
common share equivalents
outstanding 4,347,293 5,342,046 4,347,293 5,154,770
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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<TABLE>
<CAPTION>
C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended November 30,
-----------------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,025,468) $(4,445,764)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 99,158 90,730
Provision for doubtful accounts 41,941 40,124
Compensation expense of stock options -- 32,800
Compensation expense of stock issued -- 14,220
Changes in operating assets and liabilities:
Accounts receivable 12,554 (2,509)
Inventories (140,182) (309,192)
Prepaid expenses and other current assets 58,079 (7,630)
Other assets (11,585) 101,614
Accounts payable (2,203) 172,523
Accrued expenses 949 (77,293)
----------- -----------
Net cash used in operating activities (1,966,757) (4,390,377)
----------- -----------
Cash flows from investing activities:
Equipment purchases (65,587) (37,968)
Purchase of short term investments (1,647,371) --
Maturities of short investments 3,708,591 --
----------- -----------
Net cash provided by (used in) investing activities 1,995,633 (37,968)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 41,403
Net proceeds from private placement of common stock -- 4,369,518
Payment of capital lease obligations (12,024) (11,507)
----------- -----------
Net cash (used in) provided by financing activities (12,024) 4,399,414
----------- -----------
Net increase (decrease) in cash and cash equivalents 16,852 (28,931)
Cash and cash equivalents, beginning of period 1,852,820 1,398,049
----------- -----------
Cash and cash equivalents, end of period $ 1,869,672 $ 1,369,118
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 2,059 $ 447
=========== ===========
Income taxes paid -- --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOVEMBER 30, 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 nine
month periods ended November 30, 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 November 30, 1997, options for 353,427 shares of common stock were
outstanding under the Company's 1994 Stock Option Plan (the "Plan") (72,417
of which are non-qualified options exercisable at prices ranging from $3.00
to $7.8125 per share, depending upon the date of grant, and 281,010 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 126,868 shares of common stock were available for future grants. Due to
vesting provisions included in the options, only options representing
175,534 shares of common stock were exercisable as of November 30, 1997.
The following table summarizes certain information with respect to
exercisable options:
Range of Number of
Exercise Price Options Exercisable
-------------------------- ----------------------
$2.375- $3.99 87,308
$6.00 - $6.99 2,167
$7.00 - $7.99 86,059
------
175,534
3. WARRANTS AND CONTINGENT VALUE RIGHTS
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 of common stock
(the "Original Shares") 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 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 November 30, 1997, 803,667 Original Shares had been first sold
through a broker-dealer, and, pursuant to the terms of the Rights, 136,863
additional shares have been issued as a result thereof. As of such date,
only 30,000 Original Shares continue to have the ability to exercise the
Rights.
6
<PAGE>
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
3. WARRANTS AND CONTINGENT VALUE RIGHTS (Continued)
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. The Company has
agreed to extend the expiration date of the warrants to February 28, 1998,
conditioned upon receipt from certain of the current holders of such
warrants of the waiver of certain "cashless" exercise rights they have with
respect to the warrants expiring August 18, 1999. In addition to the
foregoing, the Company has 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 November
30, 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.
6. SUBSEQUENT EVENT
On December 19, 1997, the Company completed a private placement (the
"December Placement") pursuant to which the Company issued to several
investors an aggregate of (a) 4,500 shares (the "Preferred Shares") of the
Company's Series A Convertible Preferred Stock (the "Preferred Stock") with
an initial stated value of $1,000 per shares (which increases at the rate
of 5% per annum) (such amount, as increased from time to time, the "Stated
Value"), (b) warrants to acquire up to an aggregate of 315,000 shares of
common stock of the Company (the "Common Stock") at an exercise price of
$8.05 per share (the "One-Year Warrants") and (c) warrants to acquire up to
an aggregate of 135,000 shares of Common Stock at $9.10 per share (the
"Three-Year Warrants"). The Company received net proceeds of approximately
$4,130,000 (after payment, or accrual, of fees (including finders fees) and
related expenses of approximately $370,000).
7
<PAGE>
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
6. SUBSEQUENT EVENT (continued)
Each Preferred Share is convertible, from time to time in whole or in part
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 (a) $7.3575 and
(b) 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, 1998 automatically will be converted into
Common Stock at the conversion price then in effect. The One-Year Warrants
expire on December 19, 1998 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 for 10 consecutive trading days.
The Three-Year Warrants expire on December 19, 2000 and are not redeemable.
In connection with the December Placement, the Company paid a finders fee
of $295,000 and issued to an affiliate of the finder One-Year Warrants to
acquire an aggregate of 185,000 shares of Common Stock.
The Company has agreed, at its expense, to prepare and file a registration
statement on Form S-3 under the Securities Act of 1933 with respect to the
shares of Common Stock issuable upon conversion of the Preferred Stock and
the exercise of the One-Year Warrants and Three-Year Warrants.
The pro forma balances as of November 30, 1997, assuming the December
Placement had been completed as of such date, would have reflected cash and
cash equivalents of $5,499,118 and would have reflected total shareholders'
equity of $6,867,102.
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,
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 and, since 1996, the development and commercialization 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 "March 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. On December
19, 1997, the Company completed a private placement (the "December Placement")
of 4,500 shares of its Series A Convertible Preferred Stock pursuant to which it
received net proceeds of approximately $4,130,000. See Note 6 to Notes to
Unaudited Financial Statements. The Company has used and 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.
9
<PAGE>
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 50% of C-Phone Home sales have been made under the latter
purchase option, that percentage has been decreasing steadily with the expansion
into catalog and international sales and the Company believes that, with planned
sales of co-branded units, future sales under such purchase option will be at an
even significantly lesser percentage of total C-Phone Home sales. However, since
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 Company is able to significantly reduce its
manufactured cost, or (ii) 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 nine months ended November 30, 1997. The Company expects to
continue to incur significant losses in the foreseeable future due to its
significant expenditures for product development and the commercialization of
C-Phone Home.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1997 ("3RD QUARTER 98") AS COMPARED TO THREE
MONTHS ENDED NOVEMBER 30, 1996 ("3RD QUARTER 97")
REVENUES. Net sales increased 35% to $449,514 in 3rd Quarter 98
from $332,955 in 3rd Quarter 97 as a result of increased sales of C-Phone Home.
Other revenue decreased 91% to $12,968 in 3rd Quarter 98 from $149,485 in 3rd
Quarter 97 as a result of decreased revenue from software development. As a
result, revenues decreased 4% to $462,482 in 3rd Quarter 98 from $482,440 in 3rd
Quarter 97.
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 121% to
$662,925 (147% of net sales) in 3rd Quarter 98 from $299,921 (90% of net sales)
in 3rd Quarter 97. The increase in both the cost of goods sold and the
percentage of cost of goods to net sales was primarily related to an increase in
net sales of C-Phone Home, the cost of manufacture of C-Phone Home at low volume
levels, and the write-down of related inventory to its current net realizable
value based upon the historical percentage of sales of C-Phone Home units below
manufactured cost when sold in conjunction with telecommunications services. See
"Overview." The cost of other revenues ($7,647) in 3rd Quarter 98 was 59% of
related revenue while similar costs ($74,429) in 3rd Quarter 97 was 50% of
related revenue.
GROSS PROFIT (LOSS). The gross loss was $208,090 in 3rd Quarter
98, as compared to a gross profit of $108,090 (22% of revenues) in 3rd Quarter
97. The gross loss in 3rd Quarter 98 was primarily the result of the decrease in
other revenue and the Company's marketing strategy for C-Phone Home.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 68% to $861,752 (186% of revenues) in 3rd
Quarter 98 from $512,696 (106% of revenues) in 3rd Quarter 97. The primary
reason for the increase was a 88% increase in selling and marketing expenses to
approximately $375,000 in 3rd Quarter 98 from approximately $200,000 in 3rd
Quarter 97, substantially all of which increase was directly related to the
marketing 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 accounting
expenses primarily as a result of the complexities related to the addition of
the C-Phone Home product line, 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 record of the Company's common stock. The Company
10
<PAGE>
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 were $234,394 (51% of revenues) in 3rd Quarter 98 as
compared to $235,155 (49% of revenues) in 3rd Quarter 97. A decrease in
personnel costs resulting from a partial change in duties of certain personnel
to selling, general and administrative was offset by increased costs primarily
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 103% to $1,304,236 in 3rd Quarter 98 from
$639,761 in 3rd Quarter 97.
INTEREST. Interest income decreased 31% to $20,440 in 3rd Quarter
98 from $29,458 in 3rd Quarter 97 as a result of the continued use of the
Company's cash and cash equivalents to fund operations.
INCOME TAXES. The Company's losses for 3rd Quarter 97 and 3rd
Quarter 98 may be utilized as an offset against future earnings, although there
is no assurance that future operations will produce taxable earnings.
NINE MONTHS ENDED NOVEMBER 30, 1997 ("NINE MONTHS 98") AS COMPARED TO NINE
MONTHS ENDED NOVEMBER 30, 1996 ("NINE MONTHS 97")
REVENUES. Net sales decreased 14% to $1,202,424 in Nine Months 98
from $1,400,483 in Nine Months 97 reflecting an industry-wide slowdown in the
continued acceptance of PC-based desktop video conferencing partially offset by
a increase in net sales of C-Phone Home in 3rd Quarter 98. Other revenue
decreased 86% to $21,007 in Nine Months 98 from $149,485 in Nine Months 97 as a
result of decreased revenue from software development. As a result, revenues
decreased 21% to $1,223,431 in Nine Months 98 from $1,549,968 in Nine Months 97.
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 70% to
$1,982,347 (165% of net sales) in Nine Months 98 from $1,163,298 (83% of net
sales) in Nine 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 percentage of
sales of C-Phone Home units below the manufactured cost when sold in conjunction
with telecommunications services. See "Overview." The cost of other revenues
($8,659) in Nine Months 98 was 41% of related revenue while similar costs
($74,429) in Nine Months 97 was 50% of related revenue.
GROSS PROFIT (LOSS). The gross loss was $767,575 in Nine Months
98, as compared to a gross profit of $312,241 (20% of revenues) in Nine Months
97. The gross loss in Nine Months 98 was primarily the result of the decrease in
net sales, the decrease in other revenue and the Company's marketing strategy
for C-Phone Home.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 80% to $3,027,075 (247% of revenues) in Nine
Months 98 from $1,680,653 (108% of revenues) in Nine Months 97. The primary
reason for the increase was a 136% increase in selling and marketing expenses to
approximately $1,572,000 in Nine Months 98 from approximately $666,000 in Nine
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
11
<PAGE>
in administrative expenses were increased legal and accounting expenses,
primarily as a result of the complexities related to the addition of the C-Phone
Home product line, 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 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 $755,380 (62% of revenues) in Nine Months
98 from $768,123 (50% of revenues) in Nine 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 partially
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 113% to $4,550,030 in Nine Months 98 from
$2,136,535 in Nine Months 97.
INTEREST. Interest income decreased 7% to $104,713 in Nine Months
98 from $113,126 in Nine Months 97 as a result of the continued use of the
Company's cash and cash equivalents to fund operations partially offset by the
net proceeds obtained from the March Placement.
INCOME TAXES. The Company's losses for Nine Months 97 and Nine
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, the March Placement, which raised net proceeds of approximately
$4,370,000, and the December Placement, which raised net proceeds of
approximately $4,130,000 on December 19, 1997.
At November 30, 1997, the Company had working capital of
$2,485,319 (an increase from $2,318,766 at February 28, 1997) and cash and cash
equivalents (including short-term investments) of $1,369,118 (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 Nine Months 98, operating activities used $4,390,377 of net
cash, primarily to fund operating activities, investing activities used $37,968
of net cash for equipment purchases, and financing activities provided
$4,399,414 of net cash primarily from the March 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 March Placement and the December Placement,
together with anticipated funds from operations, will be sufficient to meet the
Company's projected operating needs and capital expenditures, including the
continued development and commercialization of C-Phone Home, through the end of
the third quarter of calendar 1998. However, if C-Phone Home gains 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 C-Phone Home, 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)
a private placement of (a) its debt securities, including debt securities
convertible into common stock, and/or (b) its common or preferred stock, (ii)
the exercise of the Company's outstanding common stock purchase 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 (iii) a public offering of
common stock. Unless
12
<PAGE>
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 November 30, 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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K
during the quarter ended November 30, 1997; although a
report on Form 8-K (responding to Item 5 - "Other Events")
was filed by the Company on December 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.
C-PHONE CORPORATION
Date: January 14, 1998 By: /s/ DANIEL P. FLOHR
--------------------------------------------
Daniel P. Flohr
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 14, 1998 By: /s/ PAUL H. ALBRITTON
--------------------------------------------
Paul H. Albritton
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF NOVEMBER 30, 1997 AND THE
UNAUDITED STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE
NINE 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> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 1,369,118
<SECURITIES> 0
<RECEIVABLES> 544,551
<ALLOWANCES> 160,124
<INVENTORY> 1,651,123
<CURRENT-ASSETS> 3,494,364
<PP&E> 1,124,658
<DEPRECIATION> 925,507
<TOTAL-ASSETS> 3,746,147
<CURRENT-LIABILITIES> 1,009,045
<BONDS> 0
0
0
<COMMON> 53,423
<OTHER-SE> 2,683,679
<TOTAL-LIABILITY-AND-EQUITY> 3,746,147
<SALES> 1,202,424
<TOTAL-REVENUES> 1,223,431
<CGS> 1,982,347
<TOTAL-COSTS> 1,991,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40,124
<INTEREST-EXPENSE> 447
<INCOME-PRETAX> (4,445,764)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,445,764)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,445,764)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
