SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: For the fiscal year ended FEBRUARY 29, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the transition period from __________ to __________
Commission file number 0-24426
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C-PHONE CORPORATION
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(Name of small business issuer in its charter)
New York 06-1170506
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
6714 Netherlands Drive, Wilmington, North Carolina 28405
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (910) 395-6100
Securities registered under Section 12(b) of the Exchange Act: NONE
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
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(Title of class)
Check whether the issuer: (1) has 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $1,401,150
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days:
Approximately $7,882,869 based on the closing sale price ($1.00)
on The Nasdaq SmallCap Market on May 25, 2000.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
As of May 25, 2000 - 8,990,092 shares.
Documents Incorporated by Reference: Portions of the issuer's
definitive proxy statement to be mailed to shareholders in connection with the
issuer's 2000 Annual Meeting are incorporated by reference into Part III of this
Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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TABLE OF CONTENTS
Item 1. Description of Business............................................ 2
Item 2. Description of Property............................................ 10
Item 3. Legal Proceedings.................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders................ 11
Item 5. Market for Common Equity and Related Stockholder Matters........... 11
Item 6. Management's Discussion and Analysis or Plan of Operations......... 12
Item 7. Financial Statements............................................... 18
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................... 19
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................. 19
Item 10. Executive Compensation............................................. 19
Item 11. Security Ownership of Certain Beneficial Owners and Management..... 19
Item 12. Certain Relationships and Related Transactions..................... 19
Item 13. Exhibits and Reports on Form 8-K................................... 19
Signatures................................................................... 23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We are engaged primarily in the engineering, manufacturing and marketing
of video conferencing systems. Our video conferencing products are designed to
principally operate over either a regular, analog telephone line or ISDN, a type
of digital telephone line, and are available in configurations for the U.S.
market as well as for 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 principally to resellers and system integrators.
In January 2000, we restructured our operations to reduce our ongoing
operating expenses, and announced that we were exploring certain strategic
initiatives and increasing our focus on developing major OEM, distribution and
licensing relationships. We also are exploring the utilization of our
engineering resources to assist others in the development of related products to
be provided on an OEM basis.
COMPANY HISTORY
We were incorporated in New York in 1986 under the name Target Tuning,
Inc., as a manufacturer of promotional radios. In 1990, we developed data/fax
modems under the name "TWINCOM" and changed our name to Target Technologies,
Inc. In early 1993, we shifted our primary focus to the development of video
conferencing products and, in late 1993, we introduced C-Phone, our first
PC-based video conferencing system, which operated over digital networks. During
1995, we phased out our modem product line and, in August 1996, we changed our
name to "C-Phone Corporation" in order to more closely identify our corporate
name with our C-Phone product line and to eliminate confusion among investors.
The market for PC-based systems did not grow as we and others expected
and, in 1996, we shifted our development emphasis to a stand-alone product. In
1997, we introduced C-Phone Home(TM), a stand-alone set-top "video phone," which
operated over analog phone lines using a standard television set. C-Phone Home
was aimed at the U.S. consumer market and sold through retailers and catalogs.
However, the consumer market did not generally accept C-Phone Home or similar
products offered by others. We believe that the limited amount of data that
generally can be transmitted in a given amount of time over a analog phone line
did not provide a product which was acceptable to consumers. Accordingly, we
began shifting our resources to develop stand-alone video conferencing products
for the business and special application markets. In early 1998, we introduced
the DS-324(TM), a stand-alone video conferencing system, which operates over
either an analog or ISDN phone line. In 1999, we introduced the C-Station(TM)
and Sentinel(TM) product lines. The C-Station product line is aimed at the
general business market while the Sentinel product line is aimed at the special
application markets, such as surveillance and health care. These new products
operate over either an analog or ISDN phone line and support the two video
conferencing standards currently in use, which allows our products to
communicate with products from most suppliers.
When used with an ISDN phone line, our current products offer comparable
picture quality to PC-based systems while being substantially easier to use and
less expensive. We believe that our new stand-alone products have greater market
potential, particularly in the business market and special applications, such as
health care and security services.
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INDUSTRY BACKGROUND
Video conferencing permits remote individuals or groups to communicate
visually and was introduced in the late 1970's. These first systems required
expensive video conferencing equipment, trained operators and special leased
digital phone lines. The adoption of an industry standard by most manufacturers
after 1990 provided the ability for systems from different manufacturers to
communicate with each other thereby making inter-company video conferencing
easier. However, the overall operating costs and the complexity of use have
limited the market for these video conferencing systems.
Following the adoption in 1996 of industry standards which incorporated
technology that improved the quality of video transmission over phone lines, a
few companies, including us, introduced stand-alone "set-top" video phones which
allowed a user to make video calls, without the need for a PC, using a
television set and an analog phone line. These systems were designed to appeal
to non-commercial home users and small businesses, but did not receive
widespread market acceptance in those markets. At around the same time, a number
of companies introduced products primarily marketed to the home user, which,
when connected to a PC, allow video phone calls to be made over the Internet.
In the last several years, several companies, including us, have
introduced stand-alone "set-top" video conferencing systems which use ISDN phone
lines. These systems are generally easy to operate, are less expensive than the
older PC-based systems and offer a degree of portability. Competitive systems
typically cost between $3,000 and $19,000, depending upon features.
In addition, many companies offer a desktop or personal system, which is
typically PC-based with a hardware and software component. These systems
typically range in price from $500 to $1,500, excluding the cost of the PC.
OUR PRODUCTS
General
The basic components of our products consist of a "set-top" box, a
hand-held remote and a power adapter. We also sell an integrated camera module
with a built-in microphone and an electronic pan/tilt/zoom feature. All of our
products are designed to maximize the ease of use in both initial set-up and
day-to-day operations. The set-top box, which weighs less than five pounds,
connects to the television and includes a built-in modem and proprietary
software. The remote control is used to operate and configure the system, with
easy-to-use, on-screen instructions and text menus, as well as to dial, answer
or end a call, by pushing one or two buttons. Audio output is provided by using
the speakers in the television set.
We have designed our products to allow for current as well as future
telecommunication connections. Our current product line includes interfaces for
connecting to analog and ISDN phone lines, as well for certain Internet and
local area network connections. As they become more widely deployed, we plan to
provide interfaces for DSL, satellite and cable connections. This design feature
allows our products to be upgraded to future higher bandwidth connections by
upgrading the software and changing the interface connector.
Special Features
We offer optional external, higher quality, pan, tilt and zoom cameras
with far-end control as well as tabletop and lapel microphones. We also have
products which contain a built-in color camera and built-in microphone and
products primarily targeted for security applications which have separate inputs
for up to seven cameras. Most of our current products, in addition to operating
over an analog phone line, also can operate over an ISDN phone line utilizing a
separate terminal adaptor which can be purchased from us. We believe that we are
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the only company currently marketing a product capable of using either an analog
or ISDN phone lines.
We have products that support both the most recent telecommunications
standards as well as the older standards which are used by many existing
systems, including PC-based systems, video conferencing rooms and other
stand-alone video conferencing systems. We recently have finished development of
a top-of-the line product which will operate over three ISDN lines using a
terminal adaptor developed by us. We also have developed a feature which will
allow a connection through the Internet when using an ISDN phone line and an
Internet service provider which support a specific protocol. As only a limited
number of Internet service providers support this protocol, we are in the
process of expanding the capability of these products to use other current
protocols supported by most Internet service providers. Depending on features,
interface connectors and optional equipment, the list price of our current
products range from $1,200 to $7,200.
MARKETING AND SALES
General
We believe that a market for our products exists for business
videoconferencing and for special applications such as video surveillance,
recruiting, distance learning and training, tele-maintenance and tele-health.
Our current products are sold under several names including C-Station(TM),
Sentinel(TM), and DS-324(TM).
Our products are primarily marketed by our internal sales and marketing
staff, with the assistance of one independent manufacturer's representative. Our
marketing efforts are primarily targeted toward resellers, system integrators
and service providers who may use our products in providing their service. To
reach these customers, we use a combination of targeted direct mail advertising,
demonstration at trade shows and direct contact. In addition, we have
established relationships in several countries, principally Spain, South Africa,
Mexico, Canada, Korea, The Netherlands and Japan, for the foreign distribution
of our products. Our international partners are responsible for establishing a
local presence for our products, creating market awareness, handling local
government import and certification requirements, arranging local technical
support and distribution, demonstrating at trade shows, implementing local
advertising and marketing programs, and translating the manual and related
materials into the local language.
In January 2000, we restructured our operations to reduce our ongoing
operating expenses, and announced that we were exploring certain strategic
initiatives and increasing our focus on developing major OEM, distribution and
licensing relationships. Part of this initiative included a shift in our
marketing focus to larger companies with established sales channels. We also are
exploring the utilization of our engineering resources to assist others in the
development of related products to be provided on an OEM basis.
Significant Customers
Historically, a significant portion of our sales have been to a limited
number of customers. During fiscal 2000, sales to Help Innovations, Inc. and
Videonet Corporation accounted for 13.3% and 8.9%, respectively, of our total
revenues, while our ten largest customers accounted for 59.7% of our total
revenues. During fiscal 1999, sales to Alternative Options, LLC and Fotron S.A.
(PTTY) Ltd. accounted for 16.1% and 10.5%, respectively, of our total revenues,
while our ten largest customers accounted for 62.7% of our total revenues.
Foreign Sales
During fiscal 2000, our foreign revenue accounted for 23.5% of our total
revenue and came from resellers primarily located in Spain, South Africa,
Mexico, Canada, Korea, The Netherlands and Japan. During fiscal 1999, our
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foreign revenue accounted for 50.1% of our total revenue and came from resellers
primarily located in Turkey, South Africa, Slovenia, Spain, Japan, Mexico,
Korea, Canada, France and Israel. We generally make our foreign sales on a
prepaid basis or against letters of credit due to the difficulty in collecting
foreign accounts receivable. Foreign sales are denominated in U.S. dollars and
we do not incur any foreign currency risks. See "Factors That Could Effect Us -
Our Results Of Operations May Suffer If Foreign Trade is Restricted" for further
information.
MANUFACTURING
Our products are comprised primarily of components manufactured on a
batch basis for us, subassemblies and parts manufactured to our specifications
by third parties and certain other "off the shelf" electronic components
purchased from third parties. Historically, a substantial portion of our
manufacturing, as well as the final assembly, testing and packaging of our
products have been performed at our facility in Wilmington, North Carolina.
Given our change in focus to the business and special applications markets,
during fiscal 2000, we decided to more heavily rely on contract manufacturers to
manufacture and assemble most of our products. Our current primary contract
manufacturers are located in the U.S. See "Factors That Could Effect Us - Our
Results Of Operations Could Suffer If We Lost Any Of Our Contract Manufacturers"
and "- Use Of Contract Manufacturers May Require Increased Inventory" for
further information.
SOURCES OF SUPPLY
Our products contain a significant number of off-the-shelf semiconductor
integrated circuit chips, most of which are available from a number of different
manufacturers. However, we do rely on a single source of supply for certain
components and specialized subassemblies, some of which are manufactured outside
of the United States and only to customer order or are inventoried by the
manufacturers in limited quantities. We believe that all these components could
be obtained elsewhere if needed and that our products could be redesigned to use
alternative components. Certain of our manufacturers, sub-assemblers and
suppliers, including suppliers of components made outside the United States, may
require us to make firm scheduling and delivery commitments and deliver secure
financing arrangements, such as letters of credit, as a condition to fulfillment
of their contractual obligations to us. We anticipate that, if we are successful
in the commercialization of our products, so that larger quantities of our
products can be sold, we will become even more dependent on a timely supply of
purchased inventory, and will be required to devote significant capital to
inventory. See "Factors That Could Effect Us - Our Results Of Operations Could
Suffer If We Lost Any Of Our Sole Source Suppliers " and Item 6 - "Management's
Discussion and Analysis or Plan of Operations - Liquidity and Capital Resources"
for further information.
RESEARCH AND DEVELOPMENT
The technology underlying video conferencing products is subject to
rapid change, including potential introduction of new products and technologies
which could significantly and adversely impact our ability to sell our products.
Our success will depend, in great part, on our ability to maintain an ongoing
research, development and engineering program capable of responding quickly to
technological advances and developing and introducing new features. In addition,
even though the open architecture of our products allow components to be
replaced as new technologies develop, development of technologies and products
by competitors could render our products noncompetitive or obsolete. See
"Factors That Could Effect Us - We Face Substantial Competition In The Video
Conferencing Market And May Not Be Able to Successfully Compete" and "- Our
Products May Be Rendered Obsolete By Rapid Introduction of Competitive Products
And Technological Changes" for further information.
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COMPETITION
Our major competitors are Polycom, PictureTel, Tandberg, Sony, VCON and
VTEL. Most of these companies have significantly greater financial resources and
capabilities than our company. In addition, with advances in telecommunications
standards, connectivity and video processing technology, other established or
new companies may develop or market products that compete with our products.
Netergy Networks (formerly known as 8x8), a previous competitor in the video
conferencing market, has exited the business of manufacturing video phones to
focus on telephony products and technology based on Internet protocols, but
continues to sell its video conferencing integrated chips to other
manufacturers.
We believe that the principal competitive factors in the stand-alone
video conferencing product market are quality of video and audio, price,
compatibility with standard communication protocols, ease of use, strength of
distribution channels, ability to timely fulfill order requests, customer
support, reliability and brand-name recognition. Our marketing efforts emphasize
the ease of use, flexibility and affordability of our products. See "Factors
That Could Effect Us - We Face Substantial Competition In The Video Conferencing
Market And May Not Be Able to Successfully Compete" and "Our Products May Be
Rendered Obsolete By Rapid Introduction of Competitive Products And
Technological Changes" for further information.
PATENTS AND OTHER INTELLECTUAL PROPERTY
Although we have several United States patents, none are directly
related to our current product line. The inventions which are the subject of
these patents were created jointly by Daniel Flohr and certain of our other
employees or consultants. In each case, all rights to these inventions have been
assigned to us. We have licensed to two third parties non-exclusive rights to
utilize our patented camera display configuration, which we had used in our
previously marketed PC-based desktop video conferencing product.
We seek to protect our intellectual property rights through a
combination of trade secret, nondisclosure and other contractual arrangements,
and patent, copyright and trademark laws. We generally enter into
confidentiality agreements with our employees, consultants, sales
representatives and certain potential customers and attempt to limit access to
and distribution of our proprietary information.
GOVERNMENT REGULATION
Our products must comply with FCC requirements and specifications
regulating electromagnetic radiation and the connection of terminal equipment to
the public switched telephone network. Our products also must be in compliance
with these regulations as a prerequisite to marketing them. We are required to
comply with similar requirements of various foreign government agencies to sell
our product in foreign countries. Our foreign distributors, as part of their
distribution agreements, are responsible for ensuring compliance with, and
obtaining any necessary permits from, foreign government agencies. See "Factors
That Could Effect Us - New And Redesigned Products Require Compliance With
Government Regulations, Which We May Not Be Able To Afford" for further
information.
EMPLOYEES
As of May 24, 2000, we had 32 employees, three of whom were part-time.
Of these employees, seven work in manufacturing and distribution, nine work in
product development and engineering, five work in sales and marketing, three
work in customer support and eight work in management, accounting and
administrative. In comparison, at May 25, 1999, we had 40 employees, three of
whom were part-time. The decrease in the number of our employees reflected our
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decision to restructure our operations and reduce operating expenses. We
consider that our relationship with our employees is good.
FACTORS THAT COULD EFFECT US
Our Business May Not Become Profitable. During each of our last three
fiscal years, we incurred significant losses. We expect to continue to incur
significant losses due to our expenditures for product development and the
commercialization of our products. The following table summarizes our total
revenues and net losses since March 1, 1997.
Year Ended,
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February 29, 2000 February 28, 1999 February 28, 1998
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Total revenues $1,401,150 $1,621,196 $1,890,666
Net loss $3,363,628 $4,478,725 $5,974,828
We Will Require Significant Additional Capital To Become Profitable,
Which Capital May Not Be Readily Available. In order to become profitable, we
will need to sell significant quantities of our products. While we have
sufficient inventory and working capital to support a certain level of increased
sales, in order to sell significant quantities of our products, we will need to
substantially increase the amount we spend on manufacturing, inventory and
marketing and we will incur increased costs associated with the carrying of
anticipated increased accounts receivable. This will require us to raise
substantial additional capital. We are unable to assure you that additional
capital will be available when needed or, if available, that the terms of any
available financing will be favorable or will be acceptable to us.
We May Not Be Able To Successfully Sell Our Current Products. To date,
we have not sold a significant amount of our currently offered video
conferencing products. In addition, we have no reliable data to assure us that
there will be adequate market acceptance of these products. As a result, we
cannot assure you that our currently offered products will gain sufficient
market acceptance to generate significant revenues.
Our Results Of Operations May Suffer If We Lost Any Of Our Key Employees
. As a small, technology driven company, we are heavily dependent upon the
efforts and talents of a limited number of people. If any of our key employees
left us, we believe that it would be difficult to replace them in a timely
manner, if at all. If we were unable to quickly replace key employees, our
operations would be significantly and adversely affected.
Our Results Of Operations May Suffer If Foreign Trade is Restricted.
During fiscal 2000, approximately 23% of our total revenue was from foreign
sales. A reduction in the volume of foreign trade, material restrictions on
foreign trade or fluctuations in foreign exchange rates could significantly
reduce our foreign distributors' orders. We generally do not have written
agreements with any of our foreign distributors which require minimum levels of
purchases. Therefore, our foreign distributors could reduce or curtail their
purchases at any time without financial penalty.
Our Results Of Operations Could Suffer If We Lost Any Of Our Sole Source
Suppliers. We rely on sole sources of supply for some of our components and
specialized subassemblies, some of which are manufactured outside of the United
States and only to customer order or are inventoried by the manufacturer in
limited quantities. If our sources of supply were to become unavailable, other
sources of supply may not be available without significant delay or increased
cost, and the use of alternative available components could require us to
undertake costly re-engineering of portions of our products.
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Our Results Of Operations Could Suffer If We Lost Any Of Our Contract
Manufacturers. We rely on contract manufacturers to manufacture or assemble a
substantial amount of our products and their components and subassemblies. If
any of our contract manufacturers were to become unavailable, we may not be able
to arrange for substitute manufacturers in a timely manner or at the same cost.
Use Of Contract Manufacturers May Require Increased Inventory. To be
economical, we place our purchase orders with our contract manufacturers based
on our forecasted demand for our products. Until we can accurately predict our
product sales, we will need to commit for production volumes that may exceed
current order rates, which may increase our inventory costs.
We Face Substantial Competition In The Video Conferencing Market And May
Not Be Able to Successfully Compete. Many of our competitors are more
established, benefit from greater market recognition and have significantly
greater financial, technological, manufacturing and marketing resources than us.
Potential competitors include well-known established suppliers of consumer
electronic products. These potential competitors sell television and/or
telephone products into which they may integrate video conferencing, thereby
eliminating the need to purchase a separate video conferencing product.
Our Products May Be Rendered Obsolete By Rapid Introduction of
Competitive Products And Technological Changes. We expect that the technology
underlying video conferencing will continue to undergo rapid change as new
products are introduced and different standards are developed. With our limited
resources, we may not be able to timely and adequately respond to new product
developments and technological advances by developing and introducing new
products or features. As a result, technological developments and new products
introduced by competitors could render our existing products and features
noncompetitive or obsolete.
Our Products May Infringe Third Party Intellectual Property Rights. The
technology applicable to our products is developing rapidly. A number of
companies have filed applications for, or have been issued, patents relating to
products or technology that are similar to some of the products or technology
developed or used by us. Since we do not have the resources to maintain a staff
whose primary function is to investigate the level of protection afforded to
third parties on devices and components which we use in our products, it is
possible that a third party could successfully claim that our products infringe
on their intellectual property rights. If this were to occur, we may be subject
to substantial damages, we may not be able to obtain appropriate licenses at a
cost we could afford and we may not have the ability to timely redesign our
products.
We Do Not Have The Financial Resources To Enforce And Defend All Of Our
Intellectual Property Rights. The actions we take to protect our intellectual
property may not be adequate to deter misappropriation of our proprietary
information. We do not have adequate financial resources to finance the high
cost required to enforce, through litigation, all of our intellectual property
rights. In addition, litigation could result in a substantial diversion of
managerial time and resources, which could be better and more fruitfully
utilized on other activities.
New And Redesigned Products Require Compliance With Government
Regulations, Which We May Not Be Able To Afford. If we redesign or otherwise
modify any of our products, or if current government regulations are revised, we
may be required to have our products recertified by the FCC or otherwise brought
into compliance to continue selling our products. We cannot assure you as to
when, if ever, that our redesigned or modified products would continue to be in
compliance with applicable governmental regulations. In addition, we must comply
with similar requirements of various foreign government agencies to effect our
foreign sales. While our foreign distributors, as part of their distribution
agreements, are responsible for ensuring compliance with foreign government
regulations, we cannot assure you that they will do so. If our foreign
distributors fail to ensure compliance with these regulations, they may be
unable to make sales in their respective countries, as we do not have the
necessary resources to ensure governmental compliance outside of the United
States.
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We May Be Unable To Continue To Use The CPhone Name. A proceeding
brought by the former owner of the C-Phone trademark to cancel registration of
our "C-Phone"(R) trademark is pending before the U.S. Patent and Trademark
Office's Trial and Appeal Board. If we are not successful in this proceeding, we
may need to change the identifying name on some of our products. We also would
need to consider whether we should change our corporate name. In addition, we
could be required to pay damages to the former owner of the mark, if it could
show that we had infringed its common law rights. Any change in our use of the
C-Phone name would result in a loss of good will and identification which we
have been promoting since 1993, and could have a temporary adverse impact on our
marketing plans.
We May Not Receive All Of The Proceeds That We Anticipate From Our
Agreement with Sovereign Partners. In September 1998, we entered into an
agreement with Sovereign Partners pursuant to which Sovereign Partners has
agreed to purchase up to $5,000,000 of our common stock, as we elect from time
to time, over an 18-month period which ends on September 30, 2000, subject to
extension by mutual agreement. As of May 24, 2000, we had sold 1,001,487 shares
of our common stock to Sovereign Partners for gross proceeds of $1,500,000 and
only 498,513 shares remain available for sale. Unless the average market price
for our common stock were to exceed $8.25, which is highly unlikely, we will not
receive the full $5,000,000 of gross proceeds from Sovereign Partners. For
additional information concerning our agreement with Sovereign Partners, see
"Recent Equity Offerings" in Item 6. - "Management's Discussion and Analysis or
Plan of Operations."
We May Not Be Able To Obtain Payment From Sovereign Partners. As
discussed under "Recent Equity Offerings" in Item 6. - "Management's Discussion
and Analysis or Plan of Operations," Sovereign Partners' obligation to purchase
our shares is dependent upon various conditions being satisfied. If these
conditions are not satisfied, we cannot require Sovereign Partners to purchase
our shares.
Resale Of Our Shares Held By Our Directors And Officers May Lower The
Market Price Of Our Shares. As of May 24, 2000, we had a total of 8,990,092
shares of common stock outstanding, 1,107,223 of which were held by our
directors and executive officers. These shares may only be resold in limited
quantities and only within the limitations imposed by Rule 144 under the
Securities Act. The mere prospect that these shares may be publicly resold could
lower the market price for our common stock.
Our Stock Price Has Been Highly Volatile. The market price for our
common stock has been, and is likely to continue to be, highly volatile. Factors
which could significantly affect the market price of our shares include:
o actual or anticipated fluctuations in our operating results,
o changes in alliances or relationships with our customers,
o new products or technical innovations by us or by our existing or
potential competitors,
o trading activity and strategies occurring in the marketplace with
respect to our common stock,
o general market conditions and other factors unrelated to us or outside
of our control.
Potential Loss Of Our Nasdaq SmallCap Listing Could Adversely Affect The
Price of Our Shares. Our common stock is quoted on the Nasdaq SmallCap Market.
If the bid price of our common stock were to fall below $1.00 per share, if we
were to have less than $2,000,000 in net tangible assets or if the value of our
common stock held by our shareholders (other than our officers and directors)
were to be less than $1,000,000, our common stock could be delisted from the
Nasdaq SmallCap Market. If our common stock is delisted from Nasdaq, any trading
of our shares then would be conducted in the over-the-counter market. This would
make it more difficult for an investor to dispose of, or to obtain accurate
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quotations for, our common stock. In addition, delisting would make it more
difficult for us to raise funds through the sale of our securities.
We Do Not Expect To Pay Dividends. We never have paid any dividends.
For the foreseeable future, we expect that our earnings, if any, will be
retained to finance the expansion and development of our business. Any payment
of dividends is within the discretion of our Board of Directors and will depend,
among other factors, on our earnings (if any), capital requirements, and
operating and financial condition.
Special Note Regarding Forward-looking Statements. We have made
statements in this Annual Report on Form 10-KSB 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, could cause our performance to differ from the
implied results:
o inability to obtain capital for continued operations and the development
and commercialization of our products.
o inability to generate significant market acceptance of our products.
o failure to obtain new customers or retain existing large 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 Annual Report or to reflect the occurrence of other
unanticipated events.
ITEM 2.DESCRIPTION OF PROPERTY
We conduct all of our operations from our 15,000 square foot Wilmington,
North Carolina facility, which we use as follows:
Function Percentage of Space
-------- -------------------
Marketing, sales and customer support 12%
Engineering 16%
Administration 25%
Production, inventory, shipping and 47%
receiving
10
<PAGE>
Our facility was built in 1993 to our specifications and presently is
being about 80% utilized. We lease our facility from Daniel Flohr and Tina
Jacobs, who are directors and principal shareholders of our company, under a
triple net lease pursuant to which we are responsible for all costs and
expenses, including applicable taxes, relating to the facility. Our lease
expires on April 30, 2002. The current annual rent is $75,360, subject to
increase on May 1, 2001. We believe that the terms and conditions of our lease
are no less favorable to us than those available from unaffiliated third
parties. Mr. Flohr and Ms. Jacobs allow us to use approximately 9,000 square
feet of a 1.4 acre adjacent parcel of land owned by them as a parking area for
our employees and customers. In consideration for use of this parcel, we provide
minimal maintenance of the parking area and pay $504 per year of real estate
taxes on this parcel. See Note 10 of Notes to Financial Statements included in
Item 7. - "Financial Statements."
ITEM 3. LEGAL PROCEEDINGS
In 1995, the U.S. Patent and Trademark Office registered the "C-Phone"
trademark to us. In 1996, in order to more closely identify us with our
products, all of which then used the C-Phone name, and in an attempt to
eliminate confusion among investors, we changed our name to C-Phone Corporation.
In August 1996, we were advised by the Patent and Trademark Office that the
former owner of the registered C-Phone trademark had filed a petition to cancel
our registration, alleging that there was a likelihood of confusion and that its
failure to file a required affidavit was inadvertent. The former owner has
continued to use the C-Phone name for marine telephone products, and may have
certain "common law" rights to continued use of the name and to prevent others
from using the name. A proceeding concerning this matter is pending before the
Patent and Trademark Office's Trademark Trial and Appeal Board, who will
determine whether the conflicting use by us is so confusingly similar that a
registration should not have been granted to us. If we are unable to
satisfactorily resolve this matter with the former owner or we are not
successful in the current Patent and Trademark Office proceeding, we may need to
change the identifying name on some of our products. In addition, we may
determine that it is appropriate to change our corporate name. We also may be
subject to damages if it can be shown that we had infringed the former owner's
common law rights. See "Factors That Could Effect Us - We May Be Unable To
Continue To Use The C-Phone Name" in Item 1. - "Description of Business."
In addition, we are involved in various legal proceedings which are
incidental to the conduct of our business. We do not expect that any of these
proceedings will have a significant adverse effect on our financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our securities holders during the
fiscal quarter ended February 29, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock currently is traded on the Nasdaq SmallCap Market under
the symbol "CFON." Prior to March 13, 2000, our common stock was traded on the
Nasdaq National Market. The following table sets forth the high and low sales
price for each quarterly period since March 1, 1998 for our common stock, as
reported by The Nasdaq Stock Market, Inc.
Fiscal 1999 High Low
----------- ---- ---
1st Fiscal Quarter (ended May 31, 1998) $15.500 $2.625
2nd Fiscal Quarter (ended August 31, 1998) $ 6.688 $2.063
3rd Fiscal Quarter (ended November 30, 1998) $ 4.344 $2.000
4th Fiscal Quarter (ended February 28, 1999) $ 5.375 $2.531
11
<PAGE>
Fiscal 2000
-----------
1st Fiscal Quarter (ended May 31, 1999) $3.438 $1.813
2nd Fiscal Quarter (ended August 31, 1999) $2.750 $1.250
3rd Fiscal Quarter (ended November 30, 1999) $4.500 $0.750
4th Fiscal Quarter (ended February 29, 2000) $3.625 $0.840
On May 24, 2000, the closing sale price of our common stock was $0.875.
As of May 24, 2000, we had 306 holders of record of our common stock, including
broker-nominees who held an aggregate of 7,704,000 shares of our common stock
for an undisclosed number of beneficial holders. We estimate that we have in
excess of 2,000 beneficial holders of our common stock.
In addition to the transactions discussed in "Recent Equity Offerings"
in Item 6 - "Management's Discussion and Analysis or Plan of Operations, " on
March 3, 2000, we sold 10,000 shares to Mr. Albritton at a price of $2.4375 per
share (the closing sales price on that day) in a private sale exempt from
registration under Section 4(2) under the Securities Act.
For information concerning our dividend policy, see "Factors That Could
Effect Us - We Do Not Expect To Pay Dividends" in Item 1. - "Description of
Business."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
We are engaged primarily in the engineering, manufacturing and marketing
of video conferencing systems. Our video conferencing products are designed to
operate primarily over either a regular, analog telephone line or ISDN, a type
of digital telephone line, and are available in configurations for the U.S.
market as well as most international markets.
We 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.
In January 2000, we restructured our operations to reduce our ongoing
operating expenses, and announced that we were exploring certain strategic
initiatives and increasing our focus on developing major OEM, distribution and
licensing relationships.
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 operating 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 was converted during fiscal 1999 into a total of 1,987,622
shares of our common stock.
12
<PAGE>
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 Class B Warrants expire on December 19, 2000, are not redeemable and
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. We received aggregate proceeds of $546,000
from the exercise of Class B Warrants to purchase 60,000 shares of our common
stock during the first quarter of fiscal 1999.
1994 Warrant Exercises. In connection with our 1994 initial public
offering, we had issued, to the representative of the underwriters, warrants
expiring August 18, 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 of these
warrants 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 agreed to purchase our common stock during the
18-month period ending on September 30, 2000, subject to extension by mutual
agreement. From time to time during the term of the agreement, but no more
frequently than once every 30 days, we can 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. As of May 24, 2000, we had sold 1,001,487 shares of our common stock
to Sovereign Partners for gross proceeds of $1,500,000 and 498,513 shares remain
available for sale.
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 has been 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 continues 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.
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. As we have registered only 1,500,000 shares for
resale by Sovereign Partners, we cannot sell them more than this amount
without registering additional shares.
13
<PAGE>
As we have sold Sovereign Partners in excess of $1,000,000 of our common
stock under the agreement, we have the right to terminate the agreement without
any further obligation to Sovereign Partners.
During August 1999, we sold Sovereign Partners 395,426 shares of our
common stock under the agreement and received gross proceeds of $500,000 ($1.26
per share) or $408,726 after related fees and expenses of $91,274. During
November 1999, we sold Sovereign Partners 606,061 shares of our common stock
under the agreement and received gross proceeds of $1,000,000 ($1.65 per share)
or $878,727 after related fees and expenses of $121,273. In negotiating the
November 1999 sale, Sovereign Partners waived the average closing bid price
condition and agreed to a purchase price per share of $1.65.
Sovereign Partners has agreed not to engage in any short sales of our
common stock, except after it receives a purchase notice from us, and then 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 expiring September 18, 2000 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 when we entered into the agreement
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. To
date, we have paid Cardinal Capital a total of $90,000 in cash fees.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 29, 2000 AS COMPARED TO FISCAL YEAR ENDED FEBRUARY
28, 1999
Revenues. Net sales decreased 15% to $1,346,114 in fiscal 2000 from
$1,590,748 in fiscal 1999. Net sales for fiscal 2000 included sales of excess
inventory of approximately $190,000. There was no sale of excess inventory in
fiscal 1999. This decrease in product sales reflects our change in marketing
emphasis to the business and special applications markets. These markets require
products with more features and functionality than the consumer retail market
and different marketing techniques and staffing. Some resellers are no longer
marketing our newer, higher-priced products, as their marketing focus was toward
lower-priced products. The sales cycle for the business and special applications
is longer than for the consumer retail market. Other revenue during fiscal 2000,
which consisted of a license fee and a software development fee, was $55,036,
while other revenue during fiscal 1999, which consisted primarily of
installation and telecommunication service fees, was $30,448. As a result of the
foregoing, our total revenues decreased 14% to $1,401,150 in fiscal 2000 from
$1,621,196 in 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
14
<PAGE>
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 52% to $1,227,927, or to
91% of net sales, in fiscal 2000 from $2,541,145, or 160% of net sales, in
fiscal 1999. The decrease in cost of goods sold was the result of higher margins
on our newer products and our decision to more heavily rely on contract
manufacturers to manufacture and assemble most of our products. Also, in fiscal
2000 the provision for inventory obsolescence was $78,147 as compared to
$608,657 in fiscal 1999. The decision to more heavily rely on contract
manufacturers has produced a decrease in the overall costs for our products,
including substantial decreases in manufacturing inventory variances which were
primarily caused by low production volume. Cost of other revenue in fiscal 2000
was $3,000, or 5% of related revenue as compared to cost of other revenue of
$9,750, or 32% of related revenue, in fiscal 1999. There was no cost associated
with license fees and certain software income included in other revenue in
fiscal 2000 as all related costs were properly expensed in prior periods.
Gross profit. Our gross profit was $170,223 in fiscal 2000, as compared
to a gross loss of $929,699 in fiscal 1999. The gross loss for fiscal 1999 was
primarily the result of the related high cost of goods sold, which is discussed
above.
Selling, general and administrative. Selling, general and administrative
expenses increased 1% to $3,017,773, or 215% of revenues, in fiscal 2000 from
$3,000,128, or 185% of revenues, in fiscal 1999. Selling and marketing expenses
increased 16% to $1,262,489 in fiscal 2000 from $1,085,908 in fiscal 1999
largely as the result of the change in our sales and marketing staff
necessitated by our shift in marketing emphasis to the business and special
applications markets from the consumer retail market. The increase in selling
and marketing expenses was mostly offset by a decrease in bad debt expense to
$8,119 in fiscal 2000 from $165,760 in fiscal 1999. The decrease in bad debt
expense was a direct result of our shift in marketing emphasis away from the
retail home consumer market. As we increase our focus on attempting to develop
major OEM, distribution and licensing relationships, we expect that selling and
marketing expenses will decrease from 2000 levels.
Research, development and engineering. Research, development and
engineering expenses decreased 19% to $658,879, or 47% of revenues, in fiscal
2000 from $814,366, or 50% of revenues, in fiscal 1999. The decrease was
primarily the result of a reduction in personnel and related development
expenses due to the completion of the development of our current products during
fiscal 1999. All of these costs were charged to operations as incurred and were
funded by our cash reserves. While we expect to continue to invest significant
resources during the foreseeable future in engineering and the development of
enhancements to our existing products, we anticipate that these expenses for
fiscal 2001 will be less than the comparable fiscal 2000 levels.
Operating loss. As a result of the factors discussed above, our
operating loss decreased 26 % to $3,506,429 in fiscal 2000 from $4,744,193 in
fiscal 1999.
Interest. Interest income decreased 46% to $142,801 in fiscal 2000 from
$265,468 in fiscal 1999 as a result of the continued use of cash to fund
operations.
FISCAL YEAR ENDED FEBRUARY 28, 1999 AS COMPARED TO FISCAL YEAR ENDED FEBRUARY
28, 1998
Revenues. Net sales decreased 13% to $1,590,748 in fiscal 1999 from
$1,818,663 in fiscal 1998, reflecting the discontinuance of our PC-based
products during the first quarter of fiscal 1999 and the shift in marketing
emphasis from our stand-alone products for the consumer market to the business
market and special applications. Sales of stand-alone products represented 94%
of net sales during fiscal 1999, as compared to 45% of net sales during fiscal
1998. During fiscal 1999, we had other revenue of $30,448 compared to $72,003
during fiscal 1998. As a result of the foregoing, our total revenues decreased
14% to $1,621,196 in fiscal 1999 from $1,890,666 in fiscal 1998.
15
<PAGE>
Cost of revenue. Cost of goods sold decreased 21% to $2,541,145, or 160%
of net sales, in fiscal 1999 from $3,209,875, or 176% of net sales, in fiscal
1998. The decrease in cost of goods sold was primarily the result of a decrease
in stand-alone unit costs and the decrease in sales. However, the decrease in
cost of goods sold was offset in part by a $608,657 provision for inventory
obsolescence, of which $142,691 related to discontinued PC-based product
inventory not sold during fiscal 1999 and $465,966 related to stand-alone
product inventory, primarily the result of product changes as we shifted from
the consumer market to the business and special applications markets. During
fiscal 1998, cost of goods sold included a $696,248 provision for inventory
obsolescence of which $475,824 was related to PC-based product inventory. In
addition, the low production volume of our stand-alone units did not allow us to
cover all fixed manufacturing costs. Cost of other revenue was $9,750 in fiscal
1999, or 32% of related revenue, as compared to cost of other revenue of
$22,506, or 31% of related revenue, in fiscal 1998.
Gross loss. Our gross loss was $929,699 in fiscal 1999, as compared to a
gross loss of $1,341,715 in fiscal 1998, a decrease of 31%. The gross loss in
fiscal 1999 was primarily the result of the low sales volume, the provision for
inventory obsolescence and the high cost of goods sold, which is discussed
above.
Selling, general and administrative. Selling, general and administrative
expenses decreased 21% to $3,000,128, or 185% of revenues, in fiscal 1999 from
$3,816,806, or 202% of revenues, in fiscal 1998. The primary reason for the
decrease was a 44% decrease in selling and marketing expenses to $1,085,908 in
fiscal 1999 from $1,943,345 in fiscal 1998. This decrease was the result of
several factors including advertising and display material expenses related to
the launch of our home consumer product in early fiscal 1998 and the shift in
marketing emphasis for our standalone products from home consumer use to
business and special applications during fiscal 1999. This shift reduced our
expenses related to salaries, travel expenses and outside consulting services.
Research, development and engineering. Research, development and
engineering expenses decreased 16% to $814,366, or 50% of revenues, in fiscal
1999 from $973,210, or 51% of revenues, in fiscal 1998. The decrease was
primarily the result of the completion of the initial development of our current
stand-alone products during our fiscal 1998. All of these costs were charged to
operations as incurred and were funded by our cash reserves.
Operating loss. As a result of the factors discussed above, our
operating loss decreased 23% to $4,744,193 in fiscal 1999 from $6,131,731 in
fiscal 1998.
Interest. Interest income increased 69% to $265,468 in fiscal 1999 from
$157,350 in fiscal 1998 as a result of interest earned on the higher average
balance of cash and cash equivalents we had during fiscal 1999 due to the
receipt of proceeds from our December 1997 private placement and from the
exercise in May 1998 of previously issued warrants and options.
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 February 29, 2000, we had working capital of $3,373,331, as compared
to $5,305,512, at February 28, 1999, a decrease of $1,932,181. Our cash and cash
equivalents were $2,367,633 at February 29, 2000, 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. Our restricted cash consisted of a $150,000
certificate of deposit pledged by us to a bank to secure a letter of credit
which expires in August 2000 (See Note 3 to Notes to Financial Statements).
During fiscal 2000, our operating activities used $3,269,781 of net cash,
primarily to fund operating activities, our investing activities used $252,791
16
<PAGE>
of net cash (of which $102,791 was for net equipment purchases and $150,000 was
to purchase a certificate of deposit), and our financing activities provided
$1,287,453 of net cash (after related fees and expenses) from sales of a total
of 1,001,487 shares of our common stock under our agreement with Sovereign
Partners.
We lease our facility and own our manufacturing equipment free from any
liens or other encumbrances. As of February 29, 2000, we had no material
commitments for capital expenditures.
Due to the restructuring of our operations to reduce ongoing operating
expenses and increasing our focus on attempting to develop major OEM,
distribution and licensing relationships, we plan to decrease our expenditures
for selling and marketing expenses. While we expect to continue to expend
resources for product development and engineering, we anticipate these
expenditures to decrease from the levels incurred in fiscal 2000. We also are
actively exploring certain strategic initiatives.
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 fiscal 2001. However, if our products gain significant market acceptance, we
may need to obtain additional working capital for the carrying of accounts
receivable and inventory. See "Factors That Could Effect Us - We Will Require
Significant Additional Capital To Become Profitable, Which Capital May Not Be
Readily Available" in Item 1. - "Description of Business." 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.
At February 29, 2000, we estimate that we had available net operating
loss carryforwards of approximately $23,000,000 for Federal and state purposes,
which may be used to reduce future taxable income, if any. The Federal
carryforwards begin to expire in 2009 and the state carryforwards begin to
expire in 2001.
We do not believe that inflation has had a significant impact on our
sales or operating results, during the past three years.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 1999. In June
1999, FASB issued Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the FASB Statement No. 133, which stipulates
the required adoption date to be all fiscal years beginning after June 15, 2000.
We do not anticipate that the adoption of the new statement will have a
significant effect on our earnings or financial position.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Page
----
Table of Contents
- -----------------
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Balance Sheets as of February 29, 2000 and February 28, 1999 F-3
Statements of Operations for the years ended February 29, 2000,
February 28, 1999 and February 28, 1998 F-4
Statements of Shareholders' Equity for the years ended February 29, 2000,
February 28, 1999 and February 28, 1998 F-5
Statements of Cash Flows for the years ended February 29, 2000, February 28,
1999 and February 28, 1998 F-6
Notes to Financial Statements F-7
18
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REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
C-Phone Corporation
We have audited the accompanying balance sheet of C-Phone Corporation as of
February 29, 2000, and the related statements of income, shareholders' equity,
and cash flows for the year ended February 29, 2000. These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits. The financial statements of C-Phone Corporation
as of and for each of the two years in the period ended February 28, 1999 were
audited by other auditors whose report dated April 15, 1999 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts of disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of C-Phone Corporation at February
29, 2000, and the results of its operations and its cash flows for the year
ended February 29, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
- -----------------------
Raleigh, North Carolina
April 20, 2000
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of C-Phone Corporation:
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of C-Phone Corporation (the "Company") at
February 28, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended February 28, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Raleigh, North Carolina
April 15, 1999
F-2
<PAGE>
C-PHONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, February 28,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,367,633 $ 4,602,752
Restricted cash 150,000 --
Accounts receivable, net of allowance for doubtful accounts
of $83,086 and $181,347 at February 29, 2000 and
February 28, 1999, respectively 210,497 105,717
Inventories, net 1,051,804 1,177,522
Prepaid expenses and other current assets 89,689 118,893
------------ ------------
Total current assets 3,869,623 6,004,884
Property and equipment, net 105,116 112,607
Other assets -- 136,503
------------ ------------
Total assets $ 3,974,739 $ 6,253,994
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 255,551 $ 306,302
Accrued expenses 240,741 393,070
------------ ------------
Total current liabilities 496,292 699,372
Commitments and Contingencies (Notes 10 and 12)
Shareholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
8,980,092 and 7,978,605 shares issued and outstanding at
February 29, 2000 and February 28, 1999, respectively 89,801 79,786
Paid-in capital 29,878,836 28,601,398
Accumulated deficit (26,490,190) (23,126,562)
------------ ------------
Total shareholders' equity 3,478,447 5,554,622
------------ ------------
Total liabilities and shareholders' equity $ 3,974,739 $ 6,253,994
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
February 29, February 28, February 28,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,346,114 $ 1,590,748 $ 1,818,663
Other revenue 55,036 30,448 72,003
----------- ----------- -----------
Total revenue 1,401,150 1,621,196 1,890,666
----------- ----------- -----------
Cost of goods sold 1,227,927 2,541,145 3,209,875
Cost of other revenue 3,000 9,750 22,506
----------- ----------- -----------
Total cost of revenue 1,230,927 2,550,895 3,232,381
----------- ----------- -----------
Gross profit (loss) 170,223 (929,699) (1,341,715)
----------- ----------- -----------
Operating expenses:
Selling, general and administrative 3,017,773 3,000,128 3,816,806
Research, development and engineering 658,879 814,366 973,210
----------- ----------- -----------
Total operating expenses 3,676,652 3,814,494 4,790,016
----------- ----------- -----------
Operating loss (3,506,429) (4,744,193) (6,131,731)
Interest expense -- -- (447)
Interest income 142,801 265,468 157,350
----------- ----------- -----------
Net loss $(3,363,628) $(4,478,725) $(5,974,828)
=========== =========== ===========
Per-share data:
Basic and diluted net loss per common share $ (0.40) $ (0.63) $ (1.49)
=========== =========== ===========
Weighted average number of common
shares outstanding 8,341,192 7,183,078 5,202,608
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
C-PHONE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
for the Years Ended February 29, 2000, February 28, 1999 and February 28, 1998
Common Stock Paid-in Capital Total
------------ Paid-in Capital Preferred Accumulated Shareholders'
Shares Amount Common Stock Stock Deficit Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1997 4,355,393 $ 43,554 $ 13,530,208 $ -- $(10,848,837) $ 2,724,925
Exercise of employee stock
options 17,571 176 59,412 -- -- 59,588
Expense for stock options
granted to consultant 74,400 -- -- 74,400
Stock issued to consultant 4,740 47 14,173 -- -- 14,220
Issuance of common stock in
March 1997 private
placement 833,667 8,336 4,361,182 -- -- 4,369,518
Issuance of common stock
pursuant to contingent
value rights issued in
March 1997 private placement 136,863 1,369 (1,369) -- -- --
Issuance of preferred stock
in December 1997 private
placement -- -- -- (390,458) -- (390,458)
To reflect beneficial
conversion
feature of preferred stock -- -- -- 1,708,808 (1,708,808) --
Accretion of preferred stock -- -- -- -- (43,767) (43,767)
Net loss -- -- -- -- (5,974,828) (5,974,828)
------------ ------------ ------------ ------------ ------------ ------------
Balance, February 28, 1998 5,348,234 53,482 18,038,006 1,318,350 (18,576,240) 833,598
Exercise of stock options 57,749 578 304,359 -- -- 304,937
Expense for stock options
granted to consultant -- -- 12,800 -- -- 12,800
Common stock issued upon
exercise of warrants 585,000 5,850 4,332,395 -- -- 4,338,245
Accretion of preferred stock -- -- -- -- (71,597) (71,597)
Common stock issued upon
conversion of preferred
stock 1,987,622 19,876 5,913,838 (1,318,350) -- 4,615,364
Net loss -- -- -- -- (4,478,725) (4,478,725)
------------ ------------ ------------ ------------ ------------ ------------
Balance, February 28, 1999 7,978,605 79,786 28,601,398 -- (23,126,562) 5,554,622
------------ ------------ ------------ ------------ ------------ ------------
Common stock issued to
Sovereign Partners 1,001,487 10,015 1,277,438 -- -- 1,287,453
Net loss -- -- -- -- (3,363,628) (3,363,628)
------------ ------------ ------------ ------------ ------------ ------------
Balance, February 29, 2000 8,980,092 $ 89,801 $ 29,878,836 $ -- $(26,490,190) $ 3,478,447
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
February 29, February 28, February 28,
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(3,363,628) $(4,478,725) $(5,974,828)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 110,282 136,444 131,231
Provision for inventory write-down and obsolescence 78,147 608,657 696,248
Bad debt expense 8,119 165,760 178,773
Compensation expense of stock options -- 12,800 74,400
Compensation expense of stock issued to consultant -- -- 14,220
Changes in operating assets and liabilities:
Accounts receivable (112,899) 75,207 (103,415)
Inventories 47,571 (144,651) (995,845)
Prepaid expenses and other current assets 29,204 (45,165) 8,338
Other assets 136,503 (93,817) 111,560
Accounts payable (50,751) (489,717) 208,142
Accrued expenses (152,329) 97,423 (30,291)
----------- ----------- -----------
Net cash used in operating activities (3,269,781) (4,155,784) (5,681,467)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of restricted certificate of deposit (150,000) -- --
Equipment purchases, net of disposals (102,791) (84,877) (43,492)
----------- ----------- -----------
Net cash used in investing activities (252,791) (84,877) (43,492)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,287,453 -- --
Proceeds from exercise of stock options -- 304,937 59,588
Proceeds from private placement of common stock, net -- -- 4,369,518
Proceeds from private placement of preferred stock, net -- -- 4,109,542
Proceeds from exercise of warrants, net -- 4,338,245 --
Payment of capital lease obligations -- -- (11,507)
----------- ----------- -----------
Net cash provided by financing activities 1,287,453 4,643,182 8,527,141
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (2,235,119) 402,521 2,802,182
Cash and cash equivalents, beginning of year 4,602,752 4,200,231 1,398,049
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,367,633 $ 4,602,752 $ 4,200,231
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
C-Phone was incorporated in the State of New York on March 28, 1986. We
engineer, manufacture and market video conferencing systems. Our
stand-alone video conferencing system line consists of several models,
some of which operate over either analog or digital phone lines and some
of which operate only over analog phone lines. We market our products
primarily to business and special applications markets in the United
States and internationally.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The financial statements are prepared in conformity with generally
accepted accounting principles which requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes all cash balances and highly liquid
investments with a maturity of three months or less at the date of
purchase.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject us to concentrations of
credit risk consist of trade receivables and cash deposits.
Significant customers and concentrations of credit risk are discussed in
Note 11. As discussed in Note 2, we maintain our cash in bank deposit
accounts which, at times, may exceed federally insured limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of our financial instruments, which consist of cash
and cash equivalents, approximates the fair value because of the short
maturities of these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out "FIFO "
basis) or market. Inventories are presented net of valuation allowances
necessary to reduce inventories to their net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated by the
double-declining-balance method over the estimated useful life of the
assets, which range from three to seven years. Leasehold improvements
are amortized over the remaining term of the lease or the useful life,
if shorter. Major tooling costs are capitalized and amortized over the
expected life of the tooling or the expected life of the related
product, whichever is less. Expenditures for minor tooling, maintenance
and repairs are charged to expense as incurred.
Significant expenditures for betterments and renewals are capitalized.
The cost and related accumulated depreciation of property and equipment
are removed from the accounts upon retirement or other disposition, and
any gain or loss is reflected in operations.
F-7
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)
We assess the impairment of our long-lived assets, including property,
plant and equipment, whenever economic events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Long-lived assets are considered to be impaired when the
sum of the expected future operating cash flows, undiscounted and
without interest charges, is less than the carrying values of the
related assets.
INCOME TAXES
We provide for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which
requires that all deferred tax asset and liability balances be
determined by application to temporary differences of the tax rate
expected to be in effect when taxes will become payable or receivable.
Temporary differences are differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years. Our
temporary differences consist primarily of net operating losses,
depreciation, allowance for doubtful accounts receivable and inventory
valuation reserves.
REVENUE RECOGNITION
Product revenues are recognized when the product is shipped, collection
of the purchase price is probable and we have no significant further
obligation to the customer. Costs of remaining insignificant
obligations, if any, are accrued as costs of revenue at the time of
revenue recognition.
WARRANTY
We generally provide a one-year warranty on our products. Estimated
warranty expenses are accrued and charged to cost of goods sold when the
related revenues are recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenditures are charged to expense as
incurred.
PREFERRED STOCK
In December 1997, we issued 4,500 shares of the our Series A Convertible
Preferred Stock, with an initial stated value of $1,000 per share which
increased at the rate of 5% per annum. Each preferred share was
convertible, from time to time, at the option of the holder, into a
number of shares of our common stock as was determined by dividing the
stated value of the preferred stock 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 selected by the holder during the 25-day
trading period preceding the date of conversion. During the fiscal year
ended February 28, 1999, all of these preferred shares were converted
into 1,987,622 shares of our common stock.
In its November 7,1997 Current Issues and Rulemaking Projects, the
Securities and Exchange Commission addressed the issue of a "beneficial
conversion feature", where securities may be convertible into common
stock at the lower of a conversion rate fixed at the date of issue or a
fixed discount to the common stock's market price at the date of
conversion. The beneficial conversion feature of the preferred stock is
recognized and measured by allocating a portion of the proceeds equal to
the intrinsic value of the feature to additional paid-in-capital. The
beneficial conversion feature of $1,708,808 was calculated at the date
of issue as the difference between the conversion price and the fair
value of our common stock. This amount is recognized as a return to the
preferred shareholders over the minimum period in which the shareholders
F-8
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
can realize the return. As there are no time restraints on the
conversion, the full amount of the feature was amortized on the date of
issuance.
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET LOSS PER SHARE
We calculate our earnings or loss per share in accordance with Statement
of Financial Accounting Standards No. 128, Earnings Per Share, which
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
years ended February 29, 2000, February 28, 1999 and February 28, 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 $71,597 for fiscal 1999 increased the net loss
attributable to common shareholders from $4,478,725 to $4,550,322,
thereby increasing the net loss per share for fiscal 1999 from $0.62 to
$0.63.
The amortization of the beneficial conversion feature and the accretion
of the 5% annual increase in stated value of the preferred stock in the
total amount of $1,752,575 for fiscal 1998 increased the net loss
attributable to common shareholders from $5,974,828 to $7,727,403 which
increased the net loss per share for fiscal 1998 from $1.15 to $1.49.
ACCOUNTING FOR STOCK OPTIONS
We adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation, which permits us to continue to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations. As we have decided to continue to apply APB
Opinion No. 25, we have not recognized any compensation cost for options
granted under our Amended and Restated 1994 Stock Option Plan except for
$12,800 for fiscal 1999 and $74,400 for fiscal 1998 related to the fair
value of services rendered in exchange for options granted to
consultants. However, we have disclosed in Note 6 the pro forma impact
on net loss had compensation cost been determined based on the fair
value of the options at the grant date.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and
displaying of comprehensive income and its components including
revenues, expenses, gains and losses in a full set of general purpose
financial statements, became effective for us in fiscal 1999. This
statement requires the disclosure of an amount that represents total
comprehensive income and the components of comprehensive income in a
financial statement. We had no items of other comprehensive income or
loss during fiscal 2000, fiscal 1999 or fiscal 1998.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
F-9
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after
June 15, 1999. In June 1999, FASB issued Statement No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the FASB
Statement No. 133, which stipulates the required adoption date to be all
fiscal years beginning after June 15, 2000. We do not anticipate that
the adoption of the new statement will have a significant effect on our
earnings or financial position.
2. CASH AND CASH EQUIVALENTS
We place our cash and cash equivalents with various financial
institutions. At times, the amount of cash and cash equivalents in any
one financial institution may be in excess of the FDIC insurance limits.
At February 29, 2000 and February 28, 1999, our cash equivalents were
primarily overnight repurchase agreements for discount notes issued by
the United States Treasury or United States government agencies. The
aggregate fair value of these investments approximated the amortized
cost at February 29, 2000 and February 28, 1999.
3. RESTRICTED CASH
Our restricted cash consists of a certificate of deposit in a bank which
is collateral for a letter of credit in the amount of $150,000. The
letter of credit expires September 2, 2000, and was issued to our
contract manufacturer to secure our obligations under our agreement with
it. See Note 10.
4. INVENTORIES
Inventories consist of the following at February 29, 2000 and February
28, 1999:
2000 1999
-------------- -------------
Raw materials $ 378,866 $ 382,789
Work in process 193,665 282,771
Finished goods 479,273 511,962
-------------- -------------
$ 1,051,804 $ 1,177,522
============== =============
We wrote down obsolete inventory in the amount of $78,147 in fiscal 2000
and $276,520 in fiscal 1999. Other inventory reserves were $471,581 and
$621,736 at February 29, 2000 and February 28, 1999, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at February 29, 2000 and
February 28, 1999:
2000 1999
------------- -------------
Machinery and equipment $ 919,553 $ 819,656
Furniture and fixtures 33,308 32,992
Leasehold improvements 101,782 101,782
------------- -------------
1,054,643 954,430
Less accumulated depreciation 949,527 841,823
and amortization ------------- -------------
$ 105,116 $ 112,607
============= =============
F-10
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
6. SHAREHOLDERS' EQUITY
(a) In connection with our initial public offering in August 1994, we
granted to the managing underwriter warrants to purchase 200,000
shares of our common stock at $8.40 per share. On May 13, 1998, we
reduced the exercise price of the warrants to $6.00 per share in
consideration for (1) requiring payment of the exercise price for
the warrants to be made in cash as opposed to the surrender of
warrants and (2) changing the expiration date thereof from August
18, 1999 to May 21, 1998. On May 13, 1998, the closing sales price
of our common stock was $9.75. The holders of the warrants exercised
all of the warrants by May 15, 1998 and we received aggregate
proceeds of $1,200,000.
(b) During fiscal 1997, in conjunction with a one-year consulting
agreement, we granted to a consultant a five-year option to purchase
25,000 shares of our common stock at a price of $3.375 per share,
which was the market price of our common stock on the date of grant.
During fiscal 1998, we granted this consultant another five-year
option to purchase 24,000 shares at a price of $5.95 per share when
we extended our agreement with the consultant for another year. The
agreement was terminated in May 1998 and options to purchase 10,000
shares of our common stock under the second option were forfeited
pursuant to the terms of the option. The options were granted in
partial payment for services to be rendered by the consultant under
the agreement, which services we valued at $12,800 for fiscal 1999
and $38,400 for fiscal 1998. Also during fiscal 1998, we granted to
another consultant a five-year option to purchase 18,000 shares of
our common stock at $7.8125 per share which was the market price of
the stock on the date of grant. The relationship with the second
consultant was terminated prior to the end of its six-months term
and the right to exercise one-third of the option was forfeited
pursuant to the terms of the option. The option was granted in
partial payment for services to be rendered by the consultant, which
services we valued at $36,000 for fiscal 1998. All of these amounts
were expensed and, as a result, paid-in capital was increased by
such amounts.
(c) During the week of March 31, 1997, we completed a private placement,
through a placement agent, of 833,667 shares of our common stock
pursuant to which we received net proceeds of approximately
$4,370,000, after payment of fees and expenses of approximately
$632,000. Each of the shares issued was accompanied by the right,
under certain circumstances, to receive additional shares of our
common stock if the first sale of the shares through a broker-dealer
were less than $8.00 per share. We issued 136,863 additional shares
pursuant to these rights.
(d) In December 1997, we completed a private placement in which we
issued (a) 4,500 shares of a new Series A Convertible Preferred
Stock, (b) Class A Warrants to purchase 315,000 shares of our common
stock at an exercise price of $8.05 per share, and (c) Class B
Warrants to purchase 135,000 shares of our common stock at an
exercise price of $9.10 per share. 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 was converted during fiscal 1999
into a total of 1,987,622 shares of our common stock. During fiscal
1999, Class A Warrants and the warrants issued to the affiliate of
the finder to purchase 325,000 shares of our common stock were
exercised and we received aggregate proceeds of $2,616,250. The
remaining Class A Warrants expired unexercised on December 19, 1998.
Also during fiscal 1999, Class B Warrants to purchase 60,000 shares
of our common stock were exercised and we received aggregate
proceeds of $546,000. The remaining Class B Warrants will expire on
December 19, 2000, if not exercised before then.
F-11
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
6. SHAREHOLDERS' EQUITY (Continued)
(e) On September 18, 1998, we entered into a private equity credit
agreement with Sovereign Partners, L.P. Pursuant to this agreement,
Sovereign Partners agreed to purchase up to $5 million of our common
stock during the 18-month period ending on September 30, 2000,
subject to extension by mutual agreement. From time to time during
the term of the agreement, but no more frequently than once every 30
days, we can require Sovereign Partners to purchase between $500,000
and $1 million of our 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 we notify Sovereign
Partners of a purchase obligation.
Sovereign Partners's obligation to purchase our common stock is
subject to certain conditions, including: (1) the average closing
bid price of our common stock has been at least $1.00 per share for
the 20 trading days preceding the date of our notice of purchase to
Sovereign Partners; (2) our common stock continues to be traded on
The Nasdaq Stock Market; (3) 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.
(4) 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; and (5) 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. As we have registered only 1,500,000 shares for resale by
Sovereign Partners, we cannot sell them more than this amount
without registering additional shares.
We have sold Sovereign Partners in excess of $1 million of our
common stock under the agreement. As a result, we have the right to
terminate the agreement without any further obligation to Sovereign
Partners.
During August 1999, we sold Sovereign Partners 395,426 shares of
common stock under the agreement and received gross proceeds of
$500,000, or $1.26 per share. Our net proceeds were $408,726 after
related fees and expenses of $91,274. During November 1999, we sold
Sovereign Partners 606,061 shares of common stock under the
agreement and received gross proceeds of $1,000,000, or $1.65 per
share. Our net proceeds were $878,727 after related fees and
expenses of $121,273. In negotiating the November 1999 sale,
Sovereign Partners waived the average closing bid price condition
and agreed to a purchase price per share of $1.65.
Sovereign Partners has agreed not to engage in any short sales of
our common stock, except after it receives a purchase notice from
us, and then 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 under the
Securities Act for the resale by Sovereign Partners of the shares of
common stock it purchases 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 common stock then held by it for each 30-day period
that the registration statement is not effective.
F-12
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
6. SHAREHOLDERS' EQUITY (Continued)
In connection with our agreement with Sovereign Partners, we issued to
Cardinal Capital Management, Inc., as finder, a two-year warrant
expiring September 18, 2000 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. We also paid Cardinal Capital a cash fee of
$30,000 when we entered into the agreement 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.
7. COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At February 29, 2000, we had reserved a total of 1,508,858 of our
authorized 20,000,000 shares of common stock for future issuance as
follows:
Outstanding warrants 175,000
Stock option plan 791,580
Possible issuance under private equity credit agreement 542,278
-----------
1,508,858
===========
8. STOCK OPTION PLAN
Our stock option plan provides for the grant of options to officers,
directors, employees and consultants. Options may be either incentive
stock options or non-qualified stock options, except that only employees
may be granted incentive stock options. Options generally vest over a
period of three years. The maximum term of an option is ten years. The
plan will terminate in August 2004, though options granted prior to
termination may expire after that date.
Had compensation cost for the plan been determined based on the fair
value at the grant dates for awards under the plan, excluding the grants
to consultants discussed in Note 6, consistent with the method of
Statement of Financial Accounting Standards No. 123 (see Note 2), our
net loss and net loss per share would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999 Fiscal 1998
------------------- --------------------- -----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net loss (in thousands) $3,364 $3,403 $4,479 $4,787 $5,975 $6,247
Net loss per share $0.40 $0.41 $0.63 $0.68 $1.49 $1.54
</TABLE>
F-13
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
8. STOCK OPTION PLAN (Continued)
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing method with the following
weighted average assumptions used for grants.
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 99.0% 83.5% 81.4%
Risk-free interest rate 5.17% to 6.24% 4.93% 6.25%
Expected lives, in years 5 to 10 5 5
</TABLE>
The weighted average fair value of options granted during fiscal 2000,
fiscal 1999 and fiscal 1998 was $1.17, $2.03 and $4.16 per share,
respectively.
A summary of the status of our stock option plan at February 29, 2000,
February 28, 1999 and February 28, 1998 and the changes during the years
then ended is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Price Options Price Options Price
------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 407,277 $5.81 337,727 $6.07 275,200 $4.66
Granted 152,700 $1.55 167,150 $2.92 134,650 $8.11
Exercised -- -- (57,749) $5.21 (17,571) $3.39
Forfeited (168,627) $4.61 (39,851) $6.89 (54,552) $4.86
----------- ----------- ----------
391,350 $3.63 407,277 $4.67 337,727 $6.07
Outstanding at end of year
=========== =========== ==========
Exercisable at end of year 206,161 $4.92 203,844 $5.81 188,401 $5.47
=========== =========== ==========
The following table summarizes information about stock options under the plan at February 29, 2000:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------------
Weighted
Average Weighted
Remaining Average Weighted
Range of Number Contractual Exercise Number Average
Exercise Price Outstanding Life Price Exercisable Exercise Price
------------------ ---------------- ------------------ -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.84 - $1.69 110,700 4.93 $1.17 -- --
$2.59 - $3.38 170,100 3.20 $3.00 110,001 $3.10
$4.38 - $4.50 11,500 6.68 $4.46 8,833 $4.48
$5.95 - $6.91 30,900 3.71 $6.30 28,899 $6.26
$7.00 - $7.50 39,000 2.08 $7.31 39,000 $7.31
$8.38 25,650 2.71 $8.38 17,096 $8.38
$10.38 3,500 2.19 $10.38 2,332 $10.38
------------ ----------
391,350 206,161
============ ==========
</TABLE>
Subsequent to February 29, 2000, we granted options to officers of our company
and other employees to purchase a total of 136,500 shares of our common stock.
F-14
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
9. RETIREMENT PLAN
Effective November 15, 1999, any of our full-time employees who has
completed three months of service is eligible to participate in a
company sponsored 401(k) plan. Contributions to the plan, which are
determined at the discretion of our Board of Directors, were $3,090 for
the year ended February 29, 2000.
10. COMMITMENTS
We lease office, manufacturing and warehouse space, totaling
approximately 15,000 square feet, from two of our directors who also are
our founders and principal shareholders. The lease currently expires on
April 30, 2002 with monthly rental payments of $6,280; subject to
increase on May 1, 2001. Under the lease, we pay all real estate taxes
and maintenance costs, and maintain property and liability insurance on
the leased property.
The future minimum aggregate lease payments under this operating lease
are as follows at February 29, 2000:
Fiscal year ending February 28,
-------------------------------
2001 $ 75,360
2002 75,360
2003 12,560
-------------
$ 163,280
=============
Rent expense was $75,360, $75,360 and $75,360 in fiscal 2000, fiscal
1999 and fiscal 1998, respectively.
We have an agreement with our contract manufacturer that requires it to
purchase certain raw materials based upon our forecast of expected
delivery needs for our products. If our actual delivery needs are less
than our forecasted amounts, we may be required to reimburse it for
restocking fees and/or inventory holding costs as well as potentially
purchasing certain excess stock of raw materials from it. At February
29, 2000, the amount of raw material inventory held by the outside
manufacturer was $154,000 and our cost of undelivered product at the
manufacturer's location was $42,000. Neither of these amount are
included in inventory at February 29, 2000.
11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
We monitor the granting of credit to all our customers and, generally,
no collateral is required. In fiscal 2000, net revenues from one major
customer exceeded 10% of total net revenues and, in fiscal 1999, net
revenues from two major customers exceeded 10% of total net revenues.
For fiscal 1998, we did not have any revenues from any single customer
that exceeded 10% of total net revenues. Net revenues from these major
customers were as follows:
2000 1999 1998
----------- ----------- -----------
Customer A $ 186,858 $ 117,637 $ 36,443
Customer B 7,652 261,328 1,100
Customer C 61,883 170,658 71,991
----------- ----------- -----------
$ 256,393 $ 549,623 $ 109,534
=========== =========== ===========
F-15
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Continued)
Accounts receivable from these customers were as follows at February 29,
2000 and February 28, 1999
2000 1999
------------ -----------
Customer A $ 71,668 $ 49,886
Customer B -- 3,860
Customer C 58,283 4,208
------------ -----------
$ 129,951 $ 57,954
============ ===========
We had net revenues from customers located outside of the United States
of $329,062, $812,203 and $314,000 during fiscal 2000, fiscal 1999 and
fiscal 1998, respectively. All of our foreign sales are denominated in
U.S. dollars and generally are made either on a prepaid basis or against
letters of credit.
12. CONTINGENCIES
An action by the former owner of the "C-Phone" trademark seeking to
cancel our registration of the "C-Phone" trademark is pending before the
U.S. Patent and Trademark Office's Trial and Appeals Board. If we are
unable to satisfactorily resolve this matter with the former owner or
are not successful in the current Patent and Trademark Office
proceeding, we may need to change the identifying name on some of our
products. In addition, we may determine that it is appropriate to change
our corporate name. We also may be subject to damages, if it can be
shown that we have infringed the former owner's common law rights.
We also are involved in various legal proceedings which are incidental
to the conduct of our business. Although the final resolution of these
matters cannot be determined, our management's opinion is that the final
outcome of these matters will not have a material adverse effect on our
financial position or results of operations.
13. INCOME TAXES
The significant components of the deferred tax were as follows at
February 29, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 9,225,635 $ 7,518,939
Alternative minimum tax credit carryforwards -- 5,924
Allowance for doubtful accounts 196,361 83,927
Research and development tax credit -- 201,211
Inventory reserve 247,213 602,593
Fixed assets 76,157 67,732
Unicap 46,273 --
Other 32,798 31,708
----------- -----------
Deferred tax assets 9,824,437 8,512,034
Valuation allowance (9,824,437) (8,512,034)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
We provide a valuation allowance for deferred tax assets that are not
expected to be realized. Due to the recent net losses incurred by us, a
valuation allowance has been established for all deferred tax assets.
F-16
<PAGE>
C-PHONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
13. INCOME TAXES (Continued)
Reconciliation of differences between the statutory U.S. Federal income
tax rate and our effective tax rate are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- ---------- ---------
<S> <C> <C> <C>
Federal statutory income tax rate (34)% (34)% (34)%
State income taxes, net of federal benefit (5) (5) (5)
Valuation allowance increase 39 39 39
--------- ---------- ---------
0% 0% 0%
========= ========== =========
</TABLE>
At February 29, 2000, we estimate that we had available net operating loss
carryforwards of approximately $23,000,000 for Federal and state purposes, which
may be used to reduce future taxable income, if any. The Federal carryforwards
begin to expire in 2009 and the state carryforwards begin to expire in 2001. The
Federal net operating loss carryforward may be subject to limitation under the
rules regarding changes in stock ownership as determined under the Internal
Revenue Code.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 7, 2000, we dismissed PricewaterhouseCoopers LLP as our
independent accountants, and appointed the accounting firm of Ernst & Young,
LLP. Our Audit Committee and Board of Directors participated and approved the
decision to change independent accountants. The reports of
PricewaterhouseCoopers LLP on the financial statements for the past two years
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
In connection with its audits of the two most recent fiscal years and
through March 7, 2000, there have been no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
financial statements for such years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item 9 is incorporated by reference
from our definitive proxy statement which we will file with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 on or before June 29, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item 10 is incorporated by reference
from our definitive proxy statement which we will file with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 on or before June 29, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 is incorporated by reference
from our definitive proxy statement which we will file with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 on or before June 29, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 9 is incorporated by reference
from our definitive proxy statement which we will file with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 on or before June 29, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
3. Articles of incorporation and by-laws.
3(i)(a) Restated Certificate of Incorporation, as filed with the
Secretary of State of the State of New York on February 24,
1994(1)
(b) Certificate of Amendment to Certificate of Incorporation, as
filed with the Secretary of State of the State of New York on
August 9, 1996(2)
19
<PAGE>
(c) Certificate of Amendment to Certificate
of Incorporation, as filed with the Secretary of State of the
State of New York on August 12, 1997(3)
(d) Certificate of Amendment to Certificate of Incorporation,
as filed with the Secretary of State of the State of New York
on December 18, 1997(4)
3(ii) By-laws, as currently in effect(1)
4. Instruments defining the rights of security holders, including
indentures.
4.1 Form of certificate representing shares of the Common Stock(5)
4.2 Form of Class A Warrant, dated December 19, 1997, of C-Phone
Corporation(4)
4.3 Form of Class B Warrant, dated December 19, 1997, of C-Phone
Corporation(4)
4.4 Common Stock Purchase Warrant, dated as of September 18, 1998,
of C-Phone Corporation issued to Cardinal Capital Management,
Inc.(6)
9. Voting trust agreement and amendments - None.
10. Material contracts.
10.1 (a) Lease, dated May 1, 1993, between C-Phone Corporation
and Daniel Flohr and Tina Jacobs(1)
(b) Addendum, dated as of May 1, 1996, to Indenture of Lease,
between C-Phone Corporation and Daniel Flohr and Tina
Jacobs(7)
(c) Addendum, dated as of May 1, 1999, to Indenture of Lease,
between C-Phone Corporation and Daniel Flohr and Tina
Jacobs(10)
10.2 (a) Employment Agreement, dated as of March 1, 1994, between
C-Phone Corporation and Daniel Flohr, as amended(8)
(b) Amendment No. 2 to Employment Agreement, dated as of March
1, 1996, between C-Phone Corporation and Daniel Flohr(7)
10.3 (a) Employment Agreement, dated as of March 1, 1994, between
C-Phone Corporation and Tina Jacobs, as amended(8)
(b) Amendment No. 2 to Employment Agreement, dated as of March
1, 1996, between C-Phone Corporation and Tina Jacobs(7)
10.4 Employment Agreement, dated as of December 3, 1998, between
C-Phone Corporation and Stuart Ross(10)
10.5 C-Phone Corporation Amended and Restated 1994 Stock Option
Plan and form of Option Agreement(9)
10.6 (a) Form of Securities Purchase Agreement, dated as of
December 17, 1997, between C-Phone Corporation and each
purchaser party thereto(4)
(b) Form of Registration Rights Agreement, dated December 19,
1997, between C-Phone Corporation and each purchaser party
thereto(4)
20
<PAGE>
10.7 (a) Private Equity Credit Agreement, dated as of September 18,
1998, between C-Phone Corporation and Sovereign Partners,
L.P.(6)
(b) Registration Rights Agreement, dated as of September 18,
1998, between C-Phone Corporation and Sovereign Partners,
L.P.(6)
11. Statement re computation of per share earnings - Not required since this
computation can be clearly determined from the material contained in
this report on Form 10-KSB.
13. Annual report to security holders for the last fiscal year, Form 10-Q or
10-QSB or quarterly report to security holders, if incorporated by
reference in the filing - Not applicable.
16. Letter on change in certifying accountant - Letter, dated March 6, 2000,
from PricewaterhouseCoopers, LLP. (11)
18. Letter on change in accounting principles - Not applicable.
21. Subsidiaries of the small business issuer - None.
22. Published report regarding matters submitted to vote of security holders
- Not applicable.
23. Consent of experts and counsel
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
24. Power of attorney - Not applicable.
27. Financial Data Schedule
28. Information from reports furnished to state regulatory authorities - Not
applicable.
99. Additional Exhibits - Not applicable.
- -------------------
(1) Incorporated by reference to an Exhibit filed as part of our
Registration Statement on Form S-1 (the "S-1 Registration Statement")
(Registration No. 33-80280), filed on June 14, 1994.
(2) Incorporated by reference to an Exhibit filed as part of our Quarterly
Report on Form 10-QSB for the fiscal quarter ended August 30, 1996.
(3) Incorporated by reference to an Exhibit filed as part of our Quarterly
Report on Form 10-QSB for the fiscal quarter ended August 30, 1997.
(4) Incorporated by reference to an Exhibit filed as part of our Current
Report on Form 8-K, dated December 31, 1997.
(5) Incorporated by reference to an Exhibit filed as part of Amendment No. 2
to our Registration Statement on Form S-1 (Registration No. 33-80280),
filed on August 11, 1994.
(6) Incorporated by reference to an Exhibit filed as part of our Current
Report on Form 8-K, dated September 24, 1998.
21
<PAGE>
(7) Incorporated by reference to an Exhibit filed as part of our Annual
Report on Form 10-KSB for the fiscal year ended February 29, 1996.
(8) Incorporated by reference to an Exhibit filed as part of Amendment No. 1
to our Registration Statement on Form S-1 (Registration No. 33-80280),
filed on July 21, 1994.
(9) Incorporated by reference to an Exhibit filed as part of our
Registration Statement on Form S-8 File No. 333-87865), filed on
September 27, 1999.
(10) Incorporated by reference to an Exhibit filed as part of our Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1999.
(11) Incorporated by reference to an Exhibit filed as part of our Current
Report on Form 8-K, dated March 7, 2000.
(b) REPORTS ON FORM 8-K. We did not file a Current Report on Form 8-K during the
quarter ended February 29, 2000; however, we did file a Current Report on
Form 8-K on March 10, 2000, responding to Item 4 - "Changes in Registrant's
Accountant" and Item 6 - "Other Events."
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 26, 2000
C-PHONE CORPORATION
By: /s/ PAUL H. ALBRITTON
--------------------------------
Paul H. Albritton, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
Dated:
May 26, 2000 /s/ PAUL H. ALBRITTON
------------------------------------
Paul H. Albritton President,
Chief Executive Officer and Director
(Principal Executive Officer)
May 26, 2000 /s/ DANIEL P. FLOHR
------------------------------------
Daniel P. Flohr
Director
May 26, 2000 /s/ TINA L. JACOBS
------------------------------------
Tina L. Jacobs
Director
May 26, 2000 /s/ SEYMOUR L. GARTENBERG
------------------------------------
Seymour L. Gartenberg
Director
May 26, 2000 /s/ E. HENRY MIZE
------------------------------------
E. Henry Mize
Director
May 26, 2000 /s/ DONALD S. MCCOY
------------------------------------
Donald S. McCoy
Director
May 26, 2000 /s/ STUART E. ROSS
------------------------------------
Stuart E. Ross
Director
May 26, 2000 /s/ KURT SVENDSON
------------------------------------
Kurt Svendson
Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
24
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-95306) and Form S-3 (No. 333-46309) of C-Phone Corporation of
our report dated April 20, 2000, with respect to the financial statements of
C-Phone Corporation included in the Annual Report (Form 10-KSB) for the year
ended February 29, 2000.
/s/ ERNST & YOUNG LLP
- -------------------------
Raleigh, North Carolina
May 25, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-95306) and Form S-3 (No. 333-46309) of C-Phone
Corporation of our report dated April 15, 1999, relating to the financial
statements, which appears in this Form 10-KSB.
/s/ PRICEWATERHOUSECOOPERS LLP
- -------------------------------
Raleigh, North Carolina
May 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF FEBRUARY 29, 2000 AND THE STATEMENTS OF
OPERATION AND STATEMENTS OF CASH FLOW FOR THE YEAR THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THESE FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000835585
<NAME> C-Phone Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1
<CASH> 2,517,633
<SECURITIES> 0
<RECEIVABLES> 293,583
<ALLOWANCES> (83,086)
<INVENTORY> 1,051,804
<CURRENT-ASSETS> 3,869,623
<PP&E> 1,054,643
<DEPRECIATION> (949,527)
<TOTAL-ASSETS> 3,974,739
<CURRENT-LIABILITIES> 496,292
<BONDS> 0
0
0
<COMMON> 89,801
<OTHER-SE> 3,388,646
<TOTAL-LIABILITY-AND-EQUITY> 3,974,739
<SALES> 1,346,114
<TOTAL-REVENUES> 1,401,150
<CGS> 1,227,927
<TOTAL-COSTS> 1,230,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (8,119)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,363,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,363,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,363,628)
<EPS-BASIC> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
