-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYHFlQwMQEtCMULgHef6toz3AvxAuGdrX6PP922sC4Z6l2IvcC7hfd/IOyzb68NG kJhj2OKfSG9hEuL4W73q1w== 0001019056-97-000260.txt : 19971016 0001019056-97-000260.hdr.sgml : 19971016 ACCESSION NUMBER: 0001019056-97-000260 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: C-PHONE CORP CENTRAL INDEX KEY: 0000835585 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 061170506 STATE OF INCORPORATION: NY FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24426 FILM NUMBER: 97696141 BUSINESS ADDRESS: STREET 1: 6714 NETHERLANDS DRIVE CITY: WILMINGTON STATE: NC ZIP: 28405 BUSINESS PHONE: 9103956100 MAIL ADDRESS: STREET 1: 6714 NETHERLANDS DR CITY: WILMINGTON STATE: NC ZIP: 28405 FORMER COMPANY: FORMER CONFORMED NAME: TARGET TECHNOLOGIES INC DATE OF NAME CHANGE: 19940615 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-24426 C-PHONE CORPORATION ------------------- (Exact name of small business issuer as specified in its charter) NEW YORK 06-1170506 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6714 NETHERLANDS DRIVE WILMINGTON, NORTH CAROLINA 28405 -------------------------------- (Address of principal executive offices) (910) 395-6100 -------------- (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 5,290,543 shares of common stock as of October 14, 1997. --------- ---------------- Transitional Small Business Disclosure Form Yes [ ] No [X] C-PHONE CORPORATION FORM 10-QSB INDEX PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Balance Sheets as of February 28, 1997 and August 31, 1997 (unaudited) 3 Statements of Operations for the three and six months ended August 31, 1996 and 1997 (unaudited) 4 Statements of Cash Flows for the six months ended August 31, 1996 and 1997 (unaudited) 5 Notes to Unaudited Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 5. OTHER INFORMATION 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 SIGNATURES 15 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS C-PHONE CORPORATION BALANCE SHEETS
February 28, 1997 August 31, 1997 ----------------- --------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 1,398,049 $ 2,441,829 Accounts receivable, net of allowance for doubtful accounts of $120,000 and $150,000 at February 28, 1997 and at August 31, 1997 (unaudited) 422,042 399,638 Inventories 1,341,931 1,279,202 Prepaid expenses and other current assets 82,066 116,992 ------------ ------------ Total current assets 3,244,088 4,237,661 Property and equipment, net 251,913 235,601 Other assets 154,246 61,092 ------------ ------------ Total assets $ 3,650,247 $ 4,534,354 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 587,877 $ 367,771 Accrued expenses 325,938 165,938 Current obligations under capital leases 11,507 -- ------------ ------------ Total current liabilities 925,322 533,709 ------------ ------------ Shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized; 4,355,393 and 5,203,356 shares issued and outstanding at February 28, 1997 and August 31, 1997 (unaudited) 43,554 52,034 Paid-in capital 13,530,208 17,959,416 Accumulated deficit (10,848,837) (14,010,805) ------------ ------------ Total shareholders' equity 2,724,925 4,000,645 ------------ ------------ Total liabilities and shareholders' equity $ 3,650,247 $ 4,534,354 ============ ============
The accompanying notes are an integral part of the financial statements. 3
C-PHONE CORPORATION STATEMENTS OF OPERATIONS (unaudited) Three months ended August 31, Six months ended August 31, ----------------------------- --------------------------- 1996 1997 1996 1997 ----------- ----------- ----------- ----------- Net sales $ 667,288 $ 319,789 $ 1,067,528 $ 752,910 Other revenue -- 4,360 -- 8,039 ----------- ----------- ----------- ----------- Total revenue 667,288 324,149 1,067,528 760,949 ----------- ----------- ----------- ----------- Cost of goods sold 474,727 418,406 863,377 1,319,422 Cost of other revenue -- 1,012 -- 1,012 ----------- ----------- ----------- ----------- Total cost of revenue 474,727 419,418 863,377 1,320,434 ----------- ----------- ----------- ----------- Gross profit (loss) 192,561 (95,269) 204,151 (559,485) ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative 506,017 1,003,111 1,167,957 2,165,323 Research, development and engineering 265,247 240,247 532,968 520,986 ----------- ----------- ----------- ----------- Total operating expenses 771,264 1,243,358 1,700,925 2,686,309 ----------- ----------- ----------- ----------- Operating loss (578,703) (1,338,627) (1,496,774) (3,245,794) Interest expense (682) (135) (1,493) (447) Interest income 35,912 41,862 83,668 84,273 ----------- ----------- ----------- ----------- Net loss $ (543,473) $(1,296,900) $(1,414,599) $(3,161,968) =========== =========== =========== =========== Per-share data: Net loss per share $ (0.13) $ (0.25) $ (0.33) $ (0.62) =========== =========== =========== =========== Weighted average number of common shares and common share equivalents outstanding 4,347,293 5,203,356 4,347,293 5,061,132 =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements. 4 C-PHONE CORPORATION STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended August 31, --------------------------- 1996 1997 ----------- ------------ Cash flows from operating activities: Net loss $(1,414,599) $(3,161,968) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 67,708 53,527 Provision for doubtful accounts 30,000 30,000 Compensation expense of stock options -- 19,200 Compensation expense of stock issued -- 14,220 Changes in operating assets and liabilities: Accounts receivable (84,437) (7,596) Inventories (51,056) 62,729 Prepaid expenses and other current assets 27,841 (34,926) Other assets (12,145) 93,154 Accounts payable 45,669 (220,106) Accrued expenses (15,423) (160,000) ----------- ----------- Net cash used in operating activities (1,406,442) (3,311,766) ----------- ----------- Cash flows from investing activities: Equipment purchases (49,505) (37,215) Purchase of short term investments (1,282,189) -- Maturities of short investments 3,313,831 -- ----------- ----------- Net cash provided by (used in) investing activities 1,982,137 (37,215) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options -- 34,750 Net proceeds from private placement of common stock -- 4,369,518 Payment of capital lease obligations (8,069) (11,507) ----------- ----------- Net cash (used in) provided by financing activities (8,069) 4,392,761 ----------- ----------- Net increase in cash and cash equivalents 567,626 1,043,780 Cash and cash equivalents, beginning of period 1,852,820 1,398,049 ----------- ----------- Cash and cash equivalents, end of period $ 2,420,446 $ 2,441,829 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 1,493 $ 447 =========== =========== Income taxes paid -- -- =========== ===========
The accompanying notes are an integral part of the financial statements. 5 C-PHONE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS AUGUST 31, 1997 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of C-Phone Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such financial statements include all adjustments necessary to present fairly, in all material respects, the information set forth therein. Operating results for the three and six month periods ended August 31, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 1998. The unaudited financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended February 28, 1997. 2. STOCK OPTIONS As of August 31, 1997, options for 303,110 shares of common stock were outstanding under the Company's 1994 Stock Option Plan (the "Plan") (54,750 of which are non-qualified options exercisable at prices ranging from $3.00 to $7.00 per share, depending upon the date of grant, and 248,360 of which are incentive stock options exercisable at prices ranging from $2.375 to $10.625 per share, depending upon the date of the grant), and options for 179,234 shares of common stock were available for future grants. Due to vesting provisions included in the options, only options representing 140,896 shares of common stock were exercisable as of August 31, 1997. The following table summarizes certain information with respect to exercisable options: Range of Number of Exercise Price Options Exercisable -------------------------- ---------------------- $3.00 - $3.99 56,007 $6.00 - $6.99 1,833 $7.00 - $7.99 83,056 ------- 140,896 ======= 3. WARRANTS AND CONTINGENT VALUE RIGHTS During the week of March 31, 1997, the Company completed a private placement (the "1997 Placement"), through a placement agent, pursuant to which the Company issued an aggregate of 833,667 shares of common stock (the "Original Shares") to the participants (the "Investors") in the 1997 Placement and received net proceeds of approximately $4,370,000 (after payment, or accrual, of fees and expenses of approximately $632,000). Accompanying each of the Original Shares was the right, under certain circumstances, to receive additional shares of common stock in accordance with the terms of a "contingent value right" (the "Rights"). The Rights, which expire June 25, 1998, are automatically exercised at the time, and from time to time as, the Original Shares are first publicly sold through a broker dealer. The terms of the Rights provide that, upon the first such sale of any Original Shares at a price of less than $8.00 per share, the seller of the Original Shares will automatically receive, for each such Original Share sold, and without the payment of any additional consideration, such additional number of shares of common stock as equals (i) $8.00 divided by the Adjusted Price, minus (ii) one; where the Adjusted Price equals the greater of (x) the average closing bid price per share of common stock on The Nasdaq National Market for the ten trading days immediately preceding the date of sale of the Original Shares, or (y) $2.00. As of September 30, 1997, 803,667 Original Shares had been first sold through a broker-dealer, and, pursuant to the terms of the 6 C-PHONE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS AUGUST 31, 1997 3. WARRANTS AND CONTINGENT VALUE RIGHTS (Continued) Rights, 136,863 additional shares have been or will be issued as a result thereof. As of such date, only 30,000 Original Shares continue to have the ability to exercise the Rights. In connection with the 1997 Placement, the Company issued to an affiliate of the placement agent warrants, currently expiring on December 22, 1997, to acquire an aggregate of 150,000 shares of common stock at an exercise price of $9.60 per share. In addition to the foregoing, as of August 31, 1997, the Company had outstanding warrants, expiring August 18, 1999, to acquire an aggregate of 200,000 shares of common stock, at an exercise price of $8.40 per share, granted to the managing underwriter of the Company's 1994 initial public offering. 4. NET LOSS PER SHARE Per-share data has been computed on the basis of the weighted average number of shares of common stock outstanding during the periods. Shares issuable upon exercise of common stock options and warrants, and contingent value rights, are not included for the periods presented as they would be anti-dilutive. 5. NEW ACCOUNTING PRONOUNCEMENTS The Company will adopt Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") on February 28, 1998. SFAS No. 128 requires the Company to change its method of computing, presenting and disclosing earnings per share information. Upon adoption, all prior period data presented will be restated to conform to the provisions of SFAS No. 128. If the Company had adopted SFAS No. 128 for the period ended August 31, 1997, the basic income per common share would be the same as the net loss per share shown in the Statements of Operations included in Item 1 of Part I of this Quarterly Report on Form 10-QSB and, as the computation of diluted income per common share would be anti-dilutive, the diluted income per common share would be the same as the basic income per common share. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting and displaying of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 requires the disclosure of an amount that represents total comprehensive income and the components of comprehensive income in a financial statement. The pronouncement is effective for fiscal years beginning after December 15, 1997, and is not expected to have a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for determining an entity's operating segments and the type and level of financial information to be disclosed in both annual and interim financial statements. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The pronouncement is effective for periods beginning after December 15, 1997, and is not expected to have a material impact on the Company's financial statements. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S BELIEF AS WELL AS ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO, MANAGEMENT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT USUALLY WILL INCLUDE WORDS SUCH AS THE COMPANY "BELIEVES" OR "EXPECTS" OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING CAPITAL EXPENDITURES, EARNINGS, SALES, LIQUIDITY AND CAPITAL RESOURCES, AND ACCOUNTING MATTERS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN ITEM 1 - "DESCRIPTION OF BUSINESS" AND ELSEWHERE IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED FEBRUARY 28, 1997, AS WELL AS FACTORS SUCH AS FUTURE ECONOMIC CONDITIONS, ACCEPTANCE BY CUSTOMERS OF THE COMPANY'S PRODUCTS, CHANGES IN CUSTOMER DEMAND, LEGISLATIVE, REGULATORY AND COMPETITIVE DEVELOPMENTS IN MARKETS IN WHICH THE COMPANY OPERATES AND OTHER CIRCUMSTANCES AFFECTING ANTICIPATED REVENUES AND COSTS. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULT OF ANY REVISIONS TO THESE FORWARD LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS QUARTERLY REPORT ON FORM 10-QSB OR TO REFLECT THE OCCURRENCE OF OTHER UNANTICIPATED EVENTS. OVERVIEW Since 1993, the Company has been primarily engaged in the engineering, manufacturing and marketing of C-Phone(R), a line of PC-based video conferencing systems. During the year ended February 28, 1997 ("Fiscal 1997"), the Company commenced third-party contractual software development related to its PC-based video conferencing systems and substantially completed development of C-Phone Home(TM), a TV-based video phone. In August 1994, the Company completed its initial public offering of 2,000,000 shares of its common stock (the "1994 Public Offering"), pursuant to which it received net proceeds of approximately $12,288,000, of which approximately $1,947,000 was used for the repayment of indebtedness and accrued interest thereon. During the week of March 31, 1997, the Company completed a private placement (the "1997 Placement") of 833,667 shares of its common stock, subject to the issuance, for no further consideration, of additional shares of its common stock, pursuant to which it received net proceeds of approximately $4,370,000. See Note 3 to Notes to Unaudited Financial Statements. The Company expects to use such proceeds for sales and marketing of C-Phone Home, the continued development of additional C-Phone products and features and related products, for sales and marketing of C-Phone, and working capital, including funding anticipated increases in inventories and receivables. The Company commenced operations in 1986 as a manufacturer of promotional radios and, in 1990, developed data/fax modems under the name "TWINCOM". In early 1993, because of continued price pressures, shrinking margins and for competitive reasons, the Company shifted its primary focus from modems to the development of C-Phone and, during the fiscal year ended February 28, 1995, the Company phased out its modem product line as it was no longer profitable. Since 1993, the Company has invested significant resources in product development, engineering and marketing activities for C-Phone and related products, and expects that such investments will continue in the foreseeable future. The Company began shipping its new C-Phone Home product in March 1997. 8 C-Phone Home may be purchased on a stand-alone basis or, similar to the method by which most cellular telephones are sold, at a lower price when purchased with telecommunications services offered by the Company. While, to date, approximately 90% of C-Phone Home sales have been made under the latter purchase option, that percentage has been decreasing steadily and, with a planned expansion into catalog and international sales, the Company believes that future sales under such purchase option will be at a significantly lesser percentage of total C-Phone Home sales. However, since a significant amount of future sales may continue to be made under such purchase option, and since the current manufactured cost exceeds the net proceeds received by the Company from the sale of a C-Phone Home unit sold under such purchase option, until such time, if at all, as (i) the percentage of sales under such purchase option becomes insignificant, (ii) the Company attains sufficient manufacturing volume or can utilize less costly components in the manufacture of C-Phone Home to enable the Company to reduce its manufactured cost, or (iii) profits from the sale of telecommunications services exceed the difference between the manufactured cost and the sales price of C-Phone Home under such purchase option, the Company's sales of C-Phone Home under such purchase option will not be profitable. As a result of the foregoing, the Company's activities since 1994 and the low volume of sales, the Company has incurred significant losses during the three fiscal years ended February 28, 1997 and the six months ended August 31, 1997. The Company expects to continue to incur significant losses in the foreseeable future due to its significant expenditures for product development and its marketing strategy for C-Phone Home. RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1997 ("2ND QUARTER 98") AS COMPARED TO THREE MONTHS ENDED AUGUST 31, 1996 ("2ND QUARTER 97") REVENUES. Revenues decreased 51% to $324,149 in 2nd Quarter 98 from $667,288 in 2nd Quarter 97, as a result of a 52% decrease in net sales to $319,789 in 2nd Quarter 98 from $667,288 in 2nd Quarter 97. Management believes that this decrease in net sales reflects an industry-wide slowdown in the continued acceptance of PC-based desktop video conferencing. COST OF REVENUE. Cost of revenue consists primarily of cost of goods sold. Cost of goods sold includes labor, materials and other manufacturing costs (such as salaries, supplies, leasing costs, depreciation related to production operations and the write-down of inventory to net realizable value). Cost of goods sold decreased 12% to $418,406 (131% of net sales) in 2nd Quarter 98 from $474,727 (71% of net sales) in 2nd Quarter 97. The decrease in cost of goods sold was primarily related to the decrease in net sales while the increase in the percentage of cost of goods sold to net sales was primarily related to the cost of manufacture of C-Phone Home and the write-down of related inventory to its current net realizable value based upon the historical high percentage of sale of C-Phone Home units below manufactured cost when sold in conjunction with telecommunications services. See "Overview." GROSS PROFIT (LOSS). The gross loss was $95,269 in 2nd Quarter 98, as compared to a gross profit of $192,561 (29% of revenues) in 2nd Quarter 97. The gross loss in 2nd Quarter 98 was primarily the result of the decrease in net sales and the Company's marketing strategy for C-Phone Home. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 98% to $1,003,111 (309% of revenues) in 2nd Quarter 98 from $506,017 (76% of revenues) in 2nd Quarter 97. The primary reason for the increase was a 164% increase in selling and marketing expenses to approximately $475,000 in 2nd Quarter 98 from approximately $180,000 in 2nd Quarter 97, substantially all of which increase was directly related to the marketing launch of C-Phone Home. Other increases in expenses directly related to C-Phone Home were increased personnel costs resulting from additional customer support and administrative personnel and increased reserve for bad debt expenses as a result of the historical experience of the retail industry. In addition, other increases in administrative expenses were increased legal and audit expenses primarily as a result of the complexities related to the changes in the Company's business, the reallocation of duties of certain personnel from research, development and engineering, and increased investor relations and other shareholder expenses resulting from a significant increase in the number of holders of 9 record of the Company's common stock. The Company expects that it will continue to incur substantial selling, general and administrative expenses during the fiscal year ending February 28, 1998 ("Fiscal 1998") as a result of the continued commercialization of C-Phone Home. RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses decreased 9% to $240,247 (74% of revenues) in 2nd Quarter 98 from $265,247 (40% of revenues) in 2nd Quarter 97. The decrease was primarily the result of a decrease in personnel costs resulting from a partial change in duties of certain personnel to selling, general and administrative. All of these costs were charged to operations as incurred and were funded by the Company's cash reserves. The Company expects to continue to invest significant resources during the foreseeable future in new product development and engineering. OPERATING LOSS. As a result of the factors discussed above, the Company's operating loss increased 131% to $1,338,627 in 2nd Quarter 98 from $578,703 in 2nd Quarter 97. INTEREST. Interest income increased 17% to $41,862 in 2nd Quarter 98 from $35,912 in 2nd Quarter 97 as a result of increased investments arising from the net proceeds obtained from the 1997 Placement. INCOME TAXES. The Company's losses for 2nd Quarter 97 and 2nd Quarter 98 may be utilized as an offset against future earnings, although there is no assurance that future operations will produce taxable earnings. SIX MONTHS ENDED AUGUST 31, 1997 ("SIX MONTHS 98") AS COMPARED TO SIX MONTHS ENDED AUGUST 31, 1996 ("SIX MONTHS 97") REVENUES. Revenues decreased 29% to $760,949 in Six Months 98 from $1,067,528 in Six Months 97, as a result of a 29% decrease in net sales to $752,910 in Six Months 98 from $1,067,528 in Six Months 97. Management believes that this decrease in net sales reflects an industry-wide slowdown in the continued acceptance of PC-based desktop video conferencing. COST OF REVENUE. Cost of revenue consists primarily of cost of goods sold. Cost of goods sold includes labor, materials and other manufacturing costs (such as salaries, supplies, leasing costs, depreciation related to production operations and the write-down of inventory to net realizable value). Cost of goods sold increased 53% to $1,319,422 (175% of net sales) in Six Months 98 from $863,377 (81% of net sales) in Six Months 97. The increase in cost of goods sold and the increase in the percentage of cost of goods sold to net sales were both primarily related to the cost of manufacture of C-Phone Home and the write-down of related inventory to its current net realizable value based upon the historical high percentage of sales of C-Phone Home units below the manufactured cost when sold in conjunction with telecommunications services. See "Overview." GROSS PROFIT (LOSS). The gross loss was $559,485 in Six Months 98, as compared to a gross profit of $204,151 (19% of revenues) in Six Months 97. The gross loss in Six Months 98 was primarily the result of the decrease in net sales of goods and the Company's marketing strategy for C-Phone Home. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 85% to $2,165,323 (285% of revenues) in Six Months 98 from $1,167,957 (109% of revenues) in Six Months 97. The primary reason for the increase was a 130% increase in selling and marketing expenses to approximately $1,194,000 in Six Months 98 from approximately $520,000 in Six Months 97, substantially all of which increase was directly related to the marketing launch of C-Phone Home. Other increases in expenses directly related to C-Phone Home were increased personnel costs resulting from additional customer support and administrative personnel and increased reserve for bad debt expenses based upon the historical experience of the retail industry. In addition, other increases in administrative expenses were increased legal and audit expenses, primarily as a result of the complexities related to the changes in the Company's business, the reallocation of duties of certain personnel from research, development and engineering, and increased investor 10 relations and other shareholder expenses resulting from a significant increase in the number of holders of record of the Company's common stock. The Company expects that it will continue to incur substantial selling, general and administrative expenses during the Fiscal 1998 as a result of the continued commercialization of C-Phone Home. RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses decreased 2% to $520,986 (68% of revenues) in Six Months 98 from $532,968 (50% of revenues) in Six Months 97. The decrease was primarily the result of a decrease in personnel costs resulting from a partial change in duties of certain personnel to selling, general and administrative offset by development and engineering expenses related to the development of enhancements to C-Phone Home. All of these costs were charged to operations as incurred and were funded by the Company's cash reserves. The Company expects to continue to invest significant resources during the foreseeable future in new product development and engineering. OPERATING LOSS. As a result of the factors discussed above, the Company's operating loss increased 117% to $3,245,794 in Six Months 98 from $1,496,774 in Six Months 97. INTEREST. Interest income increased 1% to $84,273 in Six Months 98 from $83,668 in Six Months 97 as a result of increased investment arising from the net proceeds obtained from the 1997 Placement. INCOME TAXES. The Company's losses for Six Months 97 and Six Months 98 may be utilized as an offset against future earnings, although there is no assurance that future operations will produce taxable earnings. FINANCIAL CONDITION The Company has financed its recent operations primarily from the proceeds of the 1994 Public Offering, which raised net proceeds of approximately $12,288,000, and the 1997 Placement, which raised net proceeds of approximately $4,370,000. At August 31, 1997, the Company had working capital of $3,703,952 (an increase from $2,318,766 at February 28, 1997) and cash and cash equivalents (including short-term investments) of $2,441,829 (as compared to $1,398,049 at February 28, 1997). The Company's invested funds consist primarily of United States Treasury Bills and obligations of United States government agencies. During Six Months 98, operating activities used $3,311,766 of net cash, primarily to fund operating activities, investing activities used $37,215 of net cash for equipment purchases, and financing activities provided $4,392,761 of net cash primarily from the 1997 Placement. Due to the technical nature of the Company's business and the anticipated expansion of its C-Phone technology into new applications, management expects to continue to expend significant resources for continued development and engineering as well as selling and marketing expenses. The Company believes that its current working capital, which includes the net proceeds from the 1997 Placement, together with anticipated funds from operations, will be sufficient to meet the Company's projected operating needs and capital expenditures, including the initial commercialization of C-Phone Home, through the end of calendar 1997. The Company has commenced the planning process to raise additional working capital. The Company anticipates that such funds should be available through one or more possible sources, including (i) a private placement of (a) its debt securities, (b) authorized, but unissued, shares of its common stock or preferred stock, and/or (c) its debt securities which would be convertible into such shares, (ii) through the receipt of proceeds from the possible exercise of outstanding warrants to purchase the Company's common stock, if the market price of the common stock were to exceed the exercise price of such warrants, of which there can be no assurance, and/or (iii) a public offering of its authorized, but unissued, shares of common stock. If C-Phone Home gains market acceptance, of which there can be no assurance, the Company's pricing strategy and the very substantial investment which would then be required by the Company for manufacturing, inventory and marketing expenditures and carrying of accounts receivable related to the 11 commercialization of C-Phone Home, would require the Company to obtain even more working capital through a possible offering of its common stock. There can be no assurance that additional funds needed by the Company will be available when needed or, if available, that the terms of such fundings will be favorable or acceptable to the Company. Assuming acceptance of C-Phone Home by the marketplace, the Company anticipates that it may take in excess of two years, if at all, to obtain positive cash flow from the Company's anticipated operations, during which time the Company may be required to obtain still more financing. If the Company is unable to timely obtain any of its required funds, its C-Phone Home marketing strategy may not be attainable and its business could be materially adversely affected. Unless adequate income relating to sales of C-Phone Home is attained, the timing or receipt of which cannot be predicted, the Company may require additional cash resources for the development of alternative products. There can be no assurance that additional funds needed by the Company will be available when needed or, if available, that the terms of such fundings will be favorable or acceptable to the Company. The development and recent introduction, of C-Phone Home has placed a significant strain on the Company's limited personnel, management and other resources. The Company's ability to manage any future growth effectively will require it to continue to attract, train, motivate and manage its employees successfully and to continue to improve its operational, financial and management systems. The Company's failure to effectively manage its growth could have a material adverse effect on the Company's business and operating results. The Company leases its facility and owns its manufacturing equipment free from encumbrances. As of August 31, 1997, the Company had no material commitments for capital expenditures. At February 28, 1997, the Company estimates that it had available net operating loss carryforwards of approximately $10,233,000 for Federal purposes and net economic loss carryforwards of approximately $10,482,000 for state purposes, which may be used to reduce future taxable income, if any. The Federal carryforwards will expire starting in 2009 and the state carryforwards will expire starting in 1999. The Company believes that, during the past three years, inflation has not had a significant impact on the Company's sales or operating results. Certain of the components and sub-assemblies used by the Company in its products, such as the CCD color camera presently used in C-Phone, are manufactured outside of the United States and represents a material portion of the unit cost of the Company's basic products. Although the Company has not experienced any significant price increases to date as a result of changes in foreign currency rates, there can be no assurance that, in the future, changes in foreign currency rates will not affect the cost of its foreign purchased components and sub-assemblies. The Company's foreign sales are denominated in U.S. dollars and the Company does not incur any foreign currency risks; however, fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to foreign customers, which would result in a reduction in foreign sales or the profitability of any of such sales. 12 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 8, 1997, the Company held an Annual Meeting of its shareholders, at which time each of the six incumbent directors of the Company who had been nominated by the Board of Directors for re-election as a director of the Company was re-elected as a director. The votes cast were as follows: FOR WITHHELD --- -------- Daniel P. Flohr 4,807,971 63,386 Seymour L. Gartenberg 4,804,821 66,536 Tina L. Jacobs 4,807,171 64,186 Donald S. McCoy 4,806,146 65,211 E. Henry Mize 4,805,946 65,411 Stuart E. Ross 4,806,671 64,686 At the Annual Meeting four additional proposals were voted upon as follows: (1) Proposal to approve the issuance of up to 2,501,001 shares of the Company's common stock upon exercise of "contingent value rights" granted to investors in the Company's March 1997 private placement: For Against Abstaining --- ------- ---------- 2,737,636 133,410 30,723 (2) Proposal to approve the amendment of the Company's Certificate of Incorporation to increase the authorized number of shares of common stock from ten million to twenty million: For Against Abstaining --- ------- ---------- 4,691,680 154,429 25,248 (3) Proposal to approve the amendment of the Company's Certificate of Incorporation to authorize the Company to issue up to one million shares of preferred stock: For Against Abstaining --- ------- ---------- 2,690,803 181,020 29,946 (4) Proposal to ratify Coopers & Lybrand L.L.P. as the independent auditors for the Company for the fiscal year ending February 28, 1998: For Against Abstaining --- ------- ---------- 4,835,502 20,046 15,809 13 ITEM 5. OTHER INFORMATION In connection with its 1994 Public Offering, the Company issued warrants (the "1994 Warrants") to Josephthal Lyon & Ross Incorporated ("JLR") pursuant to a Representative's Warrant Agreement. As previously disclosed, the holders of a majority of the 1994 Warrants may have had the right to require the Company to repurchase the 1994 Warrants for an aggregate of up to $1,370,000 at any time prior to the sale of a majority of the shares of common stock issuable upon exercise of the 1994 Warrants. On September 22, 1997, the then holders of a majority of the 1994 Warrants, most of whom are officers of JLR, waived such repurchase right for all of such holders and, in consideration therefor, the Company extended the expiration date of the warrants issued in the 1997 Placement to an affiliate of JLR from September 23, 1997 to December 22, 1997. See Note 3 to Notes to Unaudited Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-QSB. On August 12, 1997, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of New York increasing the authorized number of shares of common stock to twenty million and authorizing the Company to issue up to one million shares of preferred stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 3. Articles of Incorporation and By-laws (a) Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of New York on August 12, 1997. 27. Financial Data Schedule (B) REPORTS ON FORM 8-K The Company did not file a Current Report on Form 8-K during the quarter ended August 31, 1997. 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
C-PHONE CORPORATION Date: October 15, 1997 By: /s/ DANIEL P. FLOHR -------------------- Daniel P. Flohr President and Chief Executive Officer (Principal Executive Officer) Date: October 15, 1997 By: /s/ PAUL H. ALBRITTON ---------------------- Paul H. Albritton Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)
15 EX-3.A 2 EXHIBIT 3(A) EXHIBIT 3(a) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF C-PHONE CORPORATION --------------------- Under Section 805 of the New York Business Corporation Law --------------------- FIRST: The name of the Corporation is C-Phone Corporation. SECOND: The Certificate of Incorporation of the Corporation was filed by the Department of State on March 28, 1986, under the original name Target Tuning, Inc. THIRD: The amendment to the Certificate of Incorporation effected by this Certificate of Amendment is to increase the number of shares of common stock the Corporation is authorized to issue and to authorize the issuance of preferred stock. FOURTH: To accomplish the foregoing amendment, Article FOURTH of the Certificate of Incorporation is hereby stricken out in its entirety and the following new Article is substituted in lieu thereof: "FOURTH: (a) The aggregate number of shares which the Corporation shall have the authority to issue is twenty-one million (21,000,000) shares, which shall consist of twenty million (20,000,000) shares of common stock, $.01 par value ("Common Shares"), and one million (1,000,000) shares of preferred stock, $.01 par value ("Preferred Shares"). Except as otherwise provided in accordance with this Certificate of Incorporation, the Common Shares shall have unlimited voting rights, with each Common Share being entitled to one vote, and the right to receive the net assets of the Corporation upon dissolution, with each Common Share participating on a pro rata basis. (b) The Board of Directors is authorized, from time to time and without shareholder action, to provide for the issuance of Preferred Shares in one or more series not exceeding in the aggregate the number of Preferred Shares authorized by this Certificate of Incorporation, as amended from time to time; and to determine with respect to each such series the voting powers, if any (which voting powers, if granted, may be full or limited), designations, preferences and relative, participating, option or other special rights, and the qualifications, limitations or restrictions relating thereto, including without limiting the generality of the foregoing (i) the voting rights, if any, relating to Preferred Shares of any series (which may be one or more votes per share or a fraction of a vote per share or no vote per share, which may vary over time and which may be applicable generally or only upon the happening and continuance of stated events or conditions), (ii) the rate of dividend, if any, to which holders of Preferred Shares of any series may be entitled (which may be cumulative or noncumulative), (iii) the rights of holders of Preferred Shares of any series in the event of liquidation, dissolution or winding up of the affairs of the Corporation, (iv) the rights, if any, of holders of Preferred Shares of any series to convert or exchange such Preferred Shares of such series for shares of any other class or series of capital stock, or for any other securities, property or assets, of the Corporation or any subsidiary (including the determination of the price or prices or the rate or rates applicable to such rights to 16 convert or exchange and the adjustment thereof, and the time or times during which a particular price or rate shall be applicable), (v) whether or not the Preferred Shares of any series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemptions, which amount may vary under different conditions and at different dates, and (vi) whether any Preferred Shares of any series shall be redeemed pursuant to a retirement or sinking fund or otherwise and the terms and conditions of such obligation. (c) Before the Corporation shall issue any Preferred Shares of any series, a Certificate of Amendment to this Certificate of Incorporation fixing the voting powers, designations, preferences, the relative, participating, option or other rights, if any, and the qualifications, limitations and restrictions, if any, relating to the Preferred Shares of such series, and the number of Preferred Shares of such series authorized by the Board of Directors to be issued shall be filed with the Department of State of the State of New York in accordance with the New York Business Corporation Law and shall become effective without any shareholder action. The Board of Directors is further authorized to increase or decrease (but not below the number of Preferred Shares of any series then outstanding) the number of shares of such series subsequent to the issuance of shares of such series." FIFTH: The foregoing amendment of the certificate of incorporation was authorized by the vote at a meeting of the Board of Directors of the Corporation followed by the vote of the holders of at least a majority of all of the outstanding shares of the Corporation entitled to vote on such amendment of the certificate of incorporation. IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under penalties of perjury, that the statements contained herein have been examined by us and are true and correct. Date: August 8, 1997 /s/ DANIEL P. FLOHR ---------------------------- Daniel P. Flohr, President /s/ TINA L. JACOBS ---------------------------- Tina L. Jacobs, Secretary 17 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED BALANCE SHEET AS OF AUGUST 31, 1997 AND THE UNAUDITED STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000835585 C-Phone Corporation 1 6-MOS FEB-28-1998 MAR-01-1997 AUG-31-1997 2,441,829 0 549,638 150,000 1,279,202 4,237,661 1,123,904 888,303 4,534,354 533,709 0 0 0 52,034 3,948,611 4,534,354 752,910 760,949 1,319,422 1,320,434 0 30,000 447 (3,161,968) 0 (3,161,968) 0 0 0 (3,161,968) (0.62) (0.62)
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