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 MAY 31, 1999
[ ] 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
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(Address of principal executive offices)
(910) 395-6100
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(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.
7,978,605 shares of common stock as of JULY 14,1999.
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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 May 31, 1999 (unaudited)
and February 28, 1999 3
Statements of Operations for the three
months ended May 31, 1999 and 1998 (unaudited) 4
Statements of Cash Flows for the three months
ended May 31, 1999 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 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-PHONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, 1999 February 28, 1999
------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,600,609 $ 4,602,752
Accounts receivable, net of allowance for doubtful
accounts of $90,305 at May 31, 1999 (unaudited) and $181,347 at 305,195 105,717
February 28, 1999
Inventories 1,124,111 1,177,522
Prepaid expenses and other current assets 104,273 118,893
------------ ------------
Total current assets 5,134,188 6,004,884
Property and equipment, net 97,973 112,607
Other assets 152,611 136,503
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Total assets $ 5,384,772 $ 6,253,994
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 487,365 $ 306,302
Accrued expenses 329,114 393,070
------------ ------------
Total current liabilities 816,479 699,372
Shareholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
7,978,605 shares issued and outstanding at 79,786 79,786
May 31, 1999 (unaudited) and February 28, 1999
Paid-in capital 28,601,398 28,601,398
Accumulated deficit (24,112,891) (23,126,562)
------------ ------------
Total shareholders' equity 4,568,293 5,554,622
------------ ------------
Total liabilities and shareholders' equity $ 5,384,772 $ 6,253,994
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended May 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 385,870 $ 339,150
Other revenue -- 16,388
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Total revenue 385,870 355,538
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Cost of goods sold 377,851 508,073
Cost of other revenue -- 8,202
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Total cost of revenue 377,851 516,275
----------- -----------
Gross profit (loss) 8,019 (160,737)
----------- -----------
Operating expenses:
Selling, general and administrative 845,258 725,584
Research, development and engineering 191,778 209,067
----------- -----------
Total operating expenses 1,037,036 934,651
----------- -----------
Operating loss (1,029,017) (1,095,388)
Interest expense -- --
Interest income 42,688 52,743
----------- -----------
Net loss $ (986,329) $(1,042,645)
=========== ===========
Per-share data:
Basic and diluted net loss per common share $ (0.12) $ (0.19)
=========== ===========
Weighted average number of common shares outstanding 7,978,605 5,807,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended May 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (986,329) $(1,042,645)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 27,999 32,926
Bad debt expense 1,843 79,681
Compensation expense of stock options -- 9,600
Changes in operating assets and liabilities:
Accounts receivable (201,321) (3,611)
Inventories 53,411 (283,310)
Prepaid expenses and other current assets 14,620 (6,839)
Other assets (16,108) 11,212
Accounts payable 181,063 (234,240)
Accrued expenses (63,956) (45,325)
----------- -----------
Net cash used in operating activities (988,778) (1,482,551)
----------- -----------
Cash flows from investing activities:
Equipment purchases (13,365) (6,591)
----------- -----------
Net cash used in investing activities (13,365) (6,591)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 304,937
Proceeds from exercise of warrants, net -- 4,350,945
----------- -----------
Net cash provided by financing activities -- 4,655,882
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,002,143) 3,166,740
----------- -----------
Cash and cash equivalents, beginning of period 4,602,752 4,200,231
----------- -----------
Cash and cash equivalents, end of period $ 3,600,609 $ 7,366,971
=========== ===========
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
MAY 31, 1999
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-month period
ended May 31, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending February 29, 2000. 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, 1999.
2. STOCK OPTIONS
As of May 31, 1999, options for 438,674 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") (122,734 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 315,940 of which are
incentive stock options exercisable at prices ranging from $2.6875 to
$10.375 per share, depending upon the date of the grant). As of May 31,
1999, 83,420 shares of Common Stock had been issued upon exercise of
options granted under the Plan. On December 2, 1998, the Board of Directors
of the Company, subject to shareholder approval, amended the Plan to
increase the number of shares of Common Stock authorized for issuance upon
exercise of options granted under the Plan from 500,000 shares to 875,000
shares. If the amendment to the Plan is approved, 352,906 shares of Common
Stock will be available for the grant of future options. If the amendment
to the Plan is not approved, options to purchase approximately 22,000
shares of Common Stock, which were granted subject to shareholder approval,
will be canceled and, in the absence of forfeitures, the Company will not
have any shares of Common Stock available for the grant of future options
under the Plan. Due to vesting provisions included in the options, only
options representing 207,177 shares of Common Stock were exercisable as of
May 31, 1999. The following table summarizes certain information with
respect to exercisable options:
Number of
Range of Options
Exercise Price Exercisable
-------------- -----------
$2.69 - $3.38 70,443
$5.95 - $6.91 28,849
$7.00 - $7.50 92,810
$8.38 - $10.38 15,075
--------
207,177
3. STOCKHOLDERS EQUITY AND WARRANTS
(a) On December 19, 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 (the "Preferred
Stock"), par value $.01 per share, with an initial stated value of
$1,000 per share (which increased at the rate of 5% per annum) (such
amount, as increased from time to time, the "Stated Value"), (ii)
warrants (the "Class A Warrants") to acquire up to 315,000 shares of
Common Stock, and (iii) warrants (the "Class B Warrants") to acquire
6
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C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MAY 31, 1999
up to 135,000 shares of Common Stock. In connection with the December
Placement, the Company issued to an affiliate of the finder warrants
(upon the same terms as the Class A Warrants) to acquire an aggregate
of 185,000 shares of Common Stock. During May 31, 1998, Class A
Warrants (including the warrants issued to the finder) to purchase
325,000 shares of Common Stock at $8.05 per share and Class B Warrants
to purchase 60,000 shares of Common Stock at $9.10 per share were
exercised. In addition, 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 for 1994 Warrants) and (ii) changing the
expiration date thereof from August 18, 1999 to May 21, 1998. On May
13, 1998, the closing sale price of the Common Stock was $9.75. The
holders of the 1994 Warrants exercised all of the 1994 warrants by May
15, 1998. As a result of these warrant exercises in May 1998, the
Company received net proceeds of $4,350,945. The remaining Class A
Warrants expired unexercised on December 19, 1998. The Class B
Warrants expire on December 19, 2000.
(b) On September 18, 1998, the Company entered into a Private Equity
Credit Agreement (the "Equity Credit Agreement") with Sovereign
Partners, L.P. ("Sovereign Partners"). Pursuant to the Equity Credit
Agreement, Sovereign Partners has agreed to purchase up to $5 million
of the Common Stock during the 18-month period commencing April 1,
1999. From time to time during the term of the Equity Credit
Agreement, but no more frequently than once every 30 days, the Company
can require Sovereign Partners to purchase between $500,000 and $1
million of the Common Stock. The purchase price for each share of
Common Stock to be paid by Sovereign Partners will equal 85% of the
average closing bid price of the Common Stock during the five trading
days immediately preceding the day that the Company notifies Sovereign
Partners of a purchase obligation.
Sovereign Partners' obligation to purchase the Common Stock is subject
to certain conditions, including: (i) the continued effectiveness of
the registration statement under the Securities Act of 1933 (the
"Securities Act") covering the resale by Sovereign Partners of the
Common Stock acquired under the Equity Credit Agreement, (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 delivery to
Sovereign Partners of the Company's notice of purchase; (iii) the
continued trading of the Common Stock on The Nasdaq Stock Market and
(iv) the number of shares to be sold to Sovereign Partners, when
aggregated with all other shares of Common Stock then owned by
Sovereign Partners Stock, not being more than 9.9% of the total Common
Stock then outstanding.
The Company may terminate the Equity Credit Agreement without any
further obligation to Sovereign Partners; provided, that, if the
Equity Credit Agreement expires or is terminated by the Company prior
to the sale of at least $1 million of Common Stock, the Company must
pay Sovereign Partners a penalty of up to $150,000. As of May 31,
1999, the Company had not sold Sovereign Partners any shares of Common
Stock under the Equity Credit Agreement.
Sovereign Partners has agreed not to engage in any short sales of the
Common Stock, except that it may engage in short sales after it
receives a purchase notice from the Company, but only for the number
of shares of Common Stock covered by the Company's purchase notice.
Under a related registration rights agreement, the Company has agreed
to file and maintain effectiveness of a registration statement under
the Securities Act for the resale by Sovereign Partners of the shares
of Common Stock it purchases under the Equity Credit Agreement. If the
Company fails to maintain effectiveness of the registration statement,
Sovereign Partners may require the Company to pay a penalty equal to
1% of the purchase price of the Common Stock then held by it for each
30-day period that the registration statement is not effective.
7
<PAGE>
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MAY 31, 1999
In connection with the Agreement, the Company issued to Cardinal
Capital Management, Inc. ("CCM"), as finder, a two-year warrant (the
"Warrant") to purchase 100,000 shares of Common Stock at an exercise
price of $8.00 per share. If the closing sales price of the Common
Stock exceeds $10.00 for five consecutive trading days, the Company
may give CCM a notice of intention to redeem the Warrant. If CCM does
not exercise the Warrant prior to the redemption date specified in the
redemption notice, the Company may redeem the Warrant for $1,000. The
shares of Common Stock issuable upon exercise of the Warrant have not
been registered for sale under the Securities Act. The Company also
paid CCM a cash fee of $30,000 and has agreed to pay CCM an additional
cash fee equal to 6% of the dollar amount of any sales of Common Stock
to Sovereign Partners under the Equity Credit Agreement, with the
initial $30,000 payment to be credited against such fee.
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 months ended May 31, 1999 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 $45,878 for the three months ended May
31, 1998 increased the net loss attributable to common shareholders to
$1,088,523 for the purposes of the calculation of net loss per share for
the three months ended May 31, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We are engaged in the engineering, manufacturing and marketing of
video conferencing systems. Our products are designed to operate primarily over
either a regular, analog phone line or ISDN, a type of digital phone line. Our
products connect to a standard television set and are available in
configurations for the U.S. market as well as most international markets.
We presently distribute our products primarily to the business market
and for special applications such as health care and security services. We sell
our products primarily to resellers and system integrators.
We have incurred significant losses during each of our last three
fiscal years. Until market acceptance of our products is established, which we
cannot assure you will occur, we expect to continue to incur significant losses
due to our current and anticipated level of expenditures.
RECENT EQUITY OFFERINGS
DECEMBER 1997 PRIVATE PLACEMENT. In December 1997, we completed a
private placement in which we issued an aggregate of (a) 4,500 shares of Series
A Convertible Preferred Stock, (b) Class A Warrants to purchase 315,000 shares
of our common stock, and (c) Class B Warrants to purchase 135,000 shares of our
common stock. We received net proceeds of approximately $4,110,000, after
payment of fees and expenses of approximately $390,000. In connection with this
transaction, we paid a finder's fee of $295,000 and issued to an affiliate of
the finder a warrant, upon the same terms as the Class A Warrants, to acquire an
aggregate of 185,000 shares of our common stock. All of the issued Series A
Preferred Stock has been converted into a total of 1,987,622 shares of our
common stock.
The Class B Warrants have an exercise price of $9.10 per share,
subject to adjustment under certain circumstances, including upon the issuance
of shares of our common stock, or securities convertible or exchangeable into
shares of our common stock, at less than 80% of the then market price. These
warrants expire on December 19, 2000 and are not redeemable. As of July 14,
1999, Class B Warrants to purchase 60,000 shares of our common stock had been
exercised and we had received aggregate proceeds of $546,000.
The Class A Warrants expired on December 19, 1998. Prior to this
date, Class A Warrants to purchase 325,000 shares of our common stock were
exercised at $8.05 per share, including the warrant issued to the finder. We
received aggregate proceeds of $2,616,250 from the exercise of these warrants
during the first quarter of Fiscal 1999. The remaining Class A Warrants expired
unexercised.
1994 WARRANT EXERCISES. In connection with our 1994 initial public
offering, we had issued, to the representative of the underwriters, warrants
expiring August 19, 1999 to purchase 200,000 shares of our common stock at an
exercise price of $8.40 per share payable in cash or by delivering back to us
warrants having an equivalent value. On May 13, 1998, we reduced the exercise
price of these warrants to $6.00 per share, in consideration for (a) requiring
payment of the exercise price for these warrants to be made in cash, rather than
upon surrender of warrants, and (b) changing the expiration date thereof to May
21, 1998. On May 13, 1998, the closing sales price of our common stock was
$9.75. All of these warrants were exercised and we received aggregate proceeds
of $1,200,000.
AGREEMENT WITH SOVEREIGN PARTNERS. On September 18, 1998, we entered
into a private equity credit agreement with Sovereign Partners, L.P. Pursuant to
the agreement, Sovereign Partners has agreed to purchase our common stock during
the 18-month period that began on April 1, 1999. From time to time during the
term of the agreement, but no more frequently than once every 30 days, we can
9
<PAGE>
require Sovereign Partners to purchase between $500,000 and $1,000,000 of our
common stock until all these purchases total $5,000,000. The purchase price for
each share will equal 85% of the average closing bid price of our common stock
during the five trading days immediately preceding the day we notify Sovereign
Partners of a purchase obligation.
Sovereign Partners' obligation to purchase shares of our common stock
is subject to certain conditions, including:
o The average closing bid price of our common stock being at least
$1.00 per share for the 20 trading days preceding the date of our
notice of purchase to Sovereign Partners.
o Our common stock continuing to be traded on The Nasdaq Stock Market.
o The total number of shares of common stock that we may sell to
Sovereign Partners under the agreement cannot exceed 1,543,765
shares, unless we first obtain shareholder approval as required by
the rules of The Nasdaq Stock Market, Inc. We do not presently intend
to sell Sovereign Partners more than 1,500,000 shares.
o The number of shares of common stock we may sell to Sovereign
Partners on any draw date, when aggregated with all other shares then
owned by Sovereign Partners, cannot exceed 9.9% of our total common
stock then outstanding.
o A current prospectus must then be available to permit Sovereign
Partners to publicly resell the shares of common stock that it
acquires from us under the agreement.
We may terminate the agreement without any further obligation to
Sovereign Partners; provided, that, If the agreement expires or is terminated by
us prior to the time we have sold Sovereign Partners at least $1,000,000 of
common stock, we must pay Sovereign Partners a penalty of up to $150,000,
depending upon the amount of the shortfall. As of July 14, 1999, we had not sold
Sovereign Partners any shares of our common stock under the agreement. Sovereign
Partners has agreed not to engage in any short sales of our common stock, except
that it may engage in short sales after it receives a purchase notice from us,
but only for the number of shares of common stock covered by our purchase
notice.
Under a related registration rights agreement, we have agreed to
maintain effectiveness of a registration statement for the resale by Sovereign
Partners of the shares it purchases from us under the agreement. If we fail to
maintain effectiveness of the registration statement, Sovereign Partners may
require us to pay a penalty equal to 1% of the purchase price of the shares of
common stock then held by Sovereign Partners for each 30-day period that the
registration statement is not effective.
In connection with the agreement, we issued to Cardinal Capital
Management, Inc., as finder, a two-year warrant to purchase 100,000 shares of
our common stock at an exercise price of $8.00 per share. If the closing sales
price of our common stock exceeds $10.00 for five consecutive trading days, we
may give Cardinal Capital notice of our intention to redeem the warrant. If
Cardinal Capital does not exercise the warrant prior to the redemption date
specified in our redemption notice, we may redeem the warrant for $1,000. The
shares of our common stock issuable to Cardinal Capital upon exercise of this
warrant have not been registered for sale under the Securities Act although we
may register these shares in the future. We also paid Cardinal Capital a cash
fee of $30,000 and have agreed to pay Cardinal Capital an additional cash fee
equal to 6% of the dollar amount of any sales of common stock to Sovereign
Partners under the agreement, with our initial $30,000 payment to be credited
against this fee.
10
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RESULTS OF OPERATIONS
FISCAL QUARTER ENDED MAY 31, 1999 AS COMPARED TO FISCAL QUARTER ENDED MAY 31,
1998
REVENUES. Net sales increased 14% to $385,870 in the first quarter of
Fiscal 2000 from $339,150 in the first quarter of Fiscal 1999. This increase
reflects our change in marketing emphasis to the business and special
applications markets. These markets require higher priced products with more
features and functionality than the consumer retail market. During the first
quarter of Fiscal 1999, we had other revenue of $16,388, which consisted
primarily of installation and telecommunication service fees. We had no other
revenue during the first quarter of Fiscal 2000. As a result of the foregoing,
our total revenues increased 9% to $385,870 in the first quarter of Fiscal 2000
as compared to $355,538 in the first quarter of Fiscal 1999.
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 inventories 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 this revenue. Cost of goods sold decreased 26% to $377,851, or 98% of
net sales, in the first quarter of Fiscal 2000 from $508,073, or 150% of net
sales, in the first quarter of Fiscal 1999. The high percentage of cost of goods
sold to sales in the first quarter was primarily the result of low production
volumes. The decrease in cost of goods sold was primarily the result of our
decision to more heavily rely on contract manufacturers to manufacture and
assemble most of our products beginning in the first quarter of Fiscal 2000.
This decision has produced a decrease in the overall costs for our products
including substantial decreases in manufacturing inventory variances, which
variances had been due to low production volume and provisions for obsolete
inventory. Cost of other revenue in the first quarter of Fiscal 1999 was $8,202,
or 50% of related revenue.
GROSS PROFIT (LOSS). Our gross profit was $8,019, or 2% of revenues,
in the first quarter of Fiscal 2000, as compared to a gross loss of $160,737 in
the first quarter of Fiscal 1999. The low gross profit for the first quarter of
Fiscal 2000 and the gross loss for the first quarter of Fiscal 1999 were
primarily the result of the low sales volume and related high cost of goods sold
discussed above.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 16% to $845,258, or 219% of revenues, in the
first quarter of Fiscal 2000 from $725,584, or 204% of revenues, in the first
quarter of Fiscal 1999. The primary reason for the increase was a 79% increase
in selling and marketing expenses to $389,000 in the first quarter of Fiscal
2000 from $217,000 in the first quarter of Fiscal 1999. This increase was
primarily the result of the increase in our sales and marketing staff related to
our shift in marketing emphasis for our standalone products from the consumer
retail market to the business and special applications markets. The increase in
selling and marketing expenses were partially offset by a decrease in bad debt
expense to $1,843 in the first quarter of Fiscal 2000 from $79,681 in the first
quarter of Fiscal 1999. The decrease in bad debt expense is a direct result of
our shift in marketing emphasis away from the retail home consumer market. We
expect that selling and marketing expenses will continue to increase in Fiscal
2000 from the Fiscal 1999 level, as we continue to increase our internal sales
staff and marketing efforts to further expose our stand-alone products to the
business and special applications markets.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 8% to $191,778, or 50% of revenues, in the first
quarter of Fiscal 2000 from $209,067, or 59% of revenues, in the first quarter
of Fiscal 1999. The decrease was primarily the result of a reduction in
personnel due to the completion of the initial development of our current
stand-alone products during Fiscal 1999, partially offset by an increased cost
in parts and materials for prototypes of recently introduced products. All of
these costs were charged to operations as incurred and were funded by our cash
reserves. We expect to continue to invest significant resources during the
foreseeable future in new product development and engineering as well as for
enhancements to our existing products.
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OPERATING LOSS. As a result of the factors discussed above, our
operating loss decreased 6% to $1,029,017 in the first quarter of Fiscal 2000
from $1,095,388 in the first quarter of Fiscal 1999.
INTEREST. Interest income decreased 19% to $42,688 in the first
quarter of Fiscal 2000 from $52,743 in the first quarter of Fiscal 1999 as a
result of the continued use of our cash to fund operations.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our recent operations primarily from the proceeds of
private placements of our securities and from the exercise of previously issued
warrants and options. For additional information, see "Recent Equity Offerings."
At May 31, 1999, we had working capital of $4,317,709, as compared to
$5,305,512 at February 28, 1999, a decease of $987,803. Our cash and cash
equivalents were $3,600,609 at May 31, 1999 as compared to $4,602,752 at
February 28, 1999. Our invested funds consisted primarily of overnight
repurchase agreements for discount notes issued by the United States Treasury or
United States government agencies. During the first quarter of Fiscal 2000, our
operating activities used $988,778 of net cash, primarily to fund operating
activities and our investing activities used $13,365 of net cash for equipment
purchases.
We lease our facility and own our manufacturing equipment free from
any liens or other encumbrances. As of May 31, 1999, we had no material
commitments for capital expenditures.
Due to the planned expansion of our marketing efforts aimed at the
business and special applications markets, we expect to expend additional
resources for selling and marketing expenses. We also expect to continue to
expend significant resources for product development and engineering for
enhancements, improvements and new products to maintain our product line.
We believe that our current working capital, together with available
proceeds from our agreement with Sovereign Partners, will be sufficient to meet
our projected operating needs and capital expenditures at least through the end
of the second quarter of Fiscal 2001. If our products gain significant market
acceptance, we expect to make very substantial expenditures for inventory
build-up, marketing and carrying of accounts receivable. This would require us
to obtain even more working capital. We anticipate that these additional funds
should be available through one or more possible sources, including
o the sale of our common stock pursuant to our agreement with Sovereign
Partners;
o a private placement of our common stock, preferred stock or debt
securities;
o the exercise of our outstanding warrants, if the market price of our
common stock were to exceed the exercise price of these warrants; and
o a public offering of our common stock.
We estimate that, as of February 28, 1999, we had available net
operating loss carryforwards of approximately $19,189,000 for Federal purposes
and approximately $19,448,000 for state purposes, which may be used to reduce
future taxable income, if any. The Federal carryforwards expire in 2009 through
2014. The state carryforwards expire in 2002 through 2014.
We do not believe that inflation has had a significant impact on our
sales or operating results, during the past three years.
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. We have addressed this issue in several parts - our products,
our application software for our internal operations and third-party suppliers.
12
<PAGE>
PRODUCTS - As our products do not include date/time mechanisms in
their operating software, our products are Year 2000 compliant. However, some of
our earlier PC-based products use Windows7 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
our involvement and responsibilities.
APPLICATION SOFTWARE - During Fiscal 1998, for operational purposes,
we made the decision to upgrade our internal financial and operational software
system. This upgrade was completed in June 1998 and the system is now Year 2000
compliant. At December 31, 1998, in accordance with our plan, we had completed
the identification of other internal computer-based systems we use, which may
require upgrading to insure operational continuity beyond December 31, 1999. We
completed the upgrading and testing of all necessary applications (except for
our internal voice mail system) by February 28, 1999. We plan to complete any
upgrading and testing of our internal voice mail system by August 31, 1999.
THIRD-PARTY SUPPLIERS - We are assessing the possible effects on our
operations of Year 2000 compliance related to key suppliers and subcontractors.
Our reliance on suppliers and subcontractors means that the failure to address
Year 2000 compliance issues by these parties could have a material impact on our
business. We have identified critical third-party suppliers and have requested
information as to their plans and progress in addressing the Year 2000 problem.
Our plan to complete the evaluation of our third-party suppliers by December 31,
1998 has been delayed due to the lack of responses from many of these suppliers.
We submitted follow up requests for information from these suppliers and are
presently assessing the additional responses. Additional contacts will be made
through July 1999. Alternative sourcing and contingency plans for our
non-compliant or non-responding suppliers will be developed by August 31, 1999.
COSTS - The total cost associated with the Year 2000 issue is not
expected to be material to our financial position. Our current estimated
out-of-pocket cost is not expected to exceed $50,000, of which less than $15,000
has been expended through July 14, 1999. As the upgrade of our application
software was done for operational purposes, the cost of this upgrade has not
been included in our estimates.
RISKS - Due to the uncertainty of the Year 2000 readiness of our
third-party suppliers, we are unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on our results of
operations, liquidity or financial condition. In addition, although our 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 our customers could have a material adverse impact on us. We have not
yet developed a contingency plan in the event of noncompliance by any of our key
suppliers or customers.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this Quarterly Report on Form
10-QSB that are "forward-looking statements" within the meaning of the
Securities Act and the Securities Exchange Act. Sometimes these statements
contain words like "may," "believe," "expect," "continue," "intend,"
"anticipate" or other similar words. These statements could involve known and
unknown risks, uncertainties and other factors that might significantly alter
the actual results suggested by the statements. In other words, our performance
might be quite different from what the forward-looking statements imply. The
following factors, as well as those discussed above in this section and in
"Factors That Could Effect Us" in Item 1. - "Description of Business" of our
13
<PAGE>
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1999, could
cause our performance to differ from the implied results:
o inability to obtain capital for continued development and
commercialization of our products.
o inability to generate market acceptance of our products.
o failure to obtain new customers or retain existing customers.
o inability to manage our growth.
o loss of our key employees.
o changes in general economic and business conditions.
o changes in industry trends.
We have no obligation to release publicly the result of any revisions
to any of our "forward-looking statements" to reflect events or circumstances
that occur after the date of this Quarterly Report or to reflect the occurrence
of other unanticipated events.
14
<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
We did not file a Current Report during the fiscal
quarter ended May 31, 1999.
15
<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.
Date: July 14, 1999 By: /s/ Daniel P. Flohr
------------------------------------------------
Daniel P. Flohr
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 1999 By: /s/ Paul H. Albritton
------------------------------------------------
Paul H. Albritton
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED BALANCE SHEET AS OF MAY 31, 1999 AND THE UNAUDITED
STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000835585
<NAME> C-Phone Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,600,609
<SECURITIES> 0
<RECEIVABLES> 395,500
<ALLOWANCES> (90,305)
<INVENTORY> 1,124,111
<CURRENT-ASSETS> 5,134,188
<PP&E> 967,795
<DEPRECIATION> (869,822)
<TOTAL-ASSETS> 5,384,772
<CURRENT-LIABILITIES> 816,479
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0
0
<COMMON> 79,786
<OTHER-SE> 4,488,507
<TOTAL-LIABILITY-AND-EQUITY> 5,384,772
<SALES> 385,870
<TOTAL-REVENUES> 385,870
<CGS> 377,851
<TOTAL-COSTS> 377,851
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<LOSS-PROVISION> 1,843
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<INCOME-PRETAX> (986,329)
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<INCOME-CONTINUING> (986,329)
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