-----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, SMPnIIfD+2s2NfSVLdpoBrODhqivLv/k4I4fxGu9NIuCIRoUuFB+gKeUng/swXO7 PfmZ5A7C4D6JxGHA5zcf0g== 0001019056-00-000022.txt : 20000202 0001019056-00-000022.hdr.sgml : 20000202 ACCESSION NUMBER: 0001019056-00-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-24426 FILM NUMBER: 507979 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 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-24426 C-PHONE CORPORATION ----------------------------------------------------------------- (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. 8,980,092 shares of common stock as of January 14, 2000. 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 November 30, 1999 (unaudited) and February 28, 1999 3 Statements of Operations for the three and nine months ended November 30, 1999 and 1998 (unaudited) 4 Statements of Cash Flows for the nine months ended November 30, 1999 and 1998 (unaudited) 5 Notes to Unaudited Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS C-PHONE CORPORATION BALANCE SHEETS November 30, 1999 February 28, 1999 ----------------- ----------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,073,425 $ 4,602,752 Restricted cash 150,000 -- Accounts receivable, net of allowance for doubtful accounts of $91,832 at November 30, 1999 (unaudited) and $181,347 at February 28, 1999 273,589 105,717 Inventories 1,096,721 1,177,522 Prepaid expenses and other current assets 84,238 118,893 ------------ ------------ Total current assets 4,677,973 6,004,884 Property and equipment, net 128,064 112,607 Other assets 5,560 136,503 ------------ ------------ Total assets $ 4,811,597 $ 6,253,994 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 303,817 $ 306,302 Accrued expenses 296,499 393,070 ------------ ------------ Total current liabilities 600,316 699,372 Shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized; 8,980,092 and 7,978,605 shares, respectively, issued and outstanding at November 30, 1999 (unaudited) and February 28, 1999 89,801 79,786 Paid-in capital 29,878,836 28,601,398 Accumulated deficit (25,757,356) (23,126,562) ------------ ------------ Total shareholders' equity 4,211,281 5,554,622 ------------ ------------ Total liabilities and shareholders' equity $ 4,811,597 $ 6,253,994 ============ ============ The accompanying notes are an integral part of the financial statements. 3
C-PHONE CORPORATION STATEMENTS OF OPERATIONS (unaudited) Three Months Ended November 30, Nine Months Ended November 30, ------------------------------- ------------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net sales $ 371,429 $ 438,041 $ 1,127,798 $ 1,317,956 Other revenue 45,000 3,308 55,000 28,820 ----------- ----------- ----------- ----------- Total revenue 416,429 441,349 1,182,798 1,346,776 ----------- ----------- ----------- ----------- Cost of goods sold 320,508 589,410 998,410 1,729,031 Cost of other revenue -- 231 3,000 9,674 ----------- ----------- ----------- ----------- Total cost of revenue 320,508 589,641 1,001,410 1,738,705 ----------- ----------- ----------- ----------- Gross profit (loss) 95,921 (148,292) 181,388 (391,929) ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative 726,951 767,247 2,412,835 2,196,115 Research, development and engineering 145,939 192,529 508,687 599,329 ----------- ----------- ----------- ----------- Total operating expenses 872,890 959,776 2,921,522 2,795,444 ----------- ----------- ----------- ----------- Operating loss (776,969) (1,108,068) (2,740,134) (3,187,373) Interest income 32,119 71,356 109,340 211,617 ----------- ----------- ----------- ----------- Net loss $ (744,850) $(1,036,712) $(2,630,794) $(2,975,756) =========== =========== =========== =========== Per-share data: Basic and diluted net loss per common share $ (0.09) $ (0.13) $ (0.32) $ (0.44) =========== =========== =========== =========== Weighted average number of common shares outstanding 8,400,967 7,831,988 8,130,731 6,917,902 =========== =========== =========== =========== The accompanying notes are an integral part of the financial statements. 4
C-PHONE CORPORATION STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended November 30, ------------------------------ 1999 1998 ----------- ----------- Cash flows from operating activities: Net loss $(2,630,794) $(2,975,756) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 80,176 98,675 Bad debt expense 13,268 134,697 Provision for inventory obsolescence 17,596 70,176 Compensation expense of stock options -- 12,800 Changes in operating assets and liabilities: Accounts receivable (181,140) (70,555) Inventories 63,205 (77,440) Prepaid expenses and other current assets 34,655 (43,026) Other assets 130,943 (65,636) Accounts payable (2,485) (274,782) Accrued expenses (96,571) 39,622 ----------- ----------- Net cash used in operating activities (2,571,147) (3,151,225) ----------- ----------- Cash flows from investing activities: Purchase of restricted certificate of deposit (150,000) -- Equipment purchases (95,633) (55,590) ----------- ----------- Net cash used in investing activities (245,633) (55,590) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 1,287,453 -- Proceeds from exercise of stock options -- 304,937 Proceeds from exercise of warrants, net -- 4,338,246 ----------- ----------- Net cash provided by financing activities 1,287,453 4,643,183 ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,529,327) 1,436,368 ----------- ----------- Cash and cash equivalents, beginning of period 4,602,752 4,200,231 ----------- ----------- Cash and cash equivalents, end of period $ 3,073,425 $ 5,636,599 =========== =========== The accompanying notes are an integral part of the financial statements. 5
C-PHONE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS NOVEMBER 30, 1999 1. BASIS OF PRESENTATION The accompanying unaudited financial statements of C-Phone Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such financial statements include all adjustments necessary to present fairly, in all material respects, the information set forth therein. Operating results for the three and nine-month periods ended November 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 2000. The unaudited financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended February 28, 1999. 2. RESTRICTED CASH Restricted cash consists of a certificate of deposit which is pledged to a bank to secure a letter of credit issued by the bank for the benefit of the Company's contract manufacturer. The letter of credit may be drawn upon if the Company fails to meet its obligations to the contract manufacturer. The letter of credit expires in August 2000. 3. STOCK OPTIONS On August 6, 1999, the shareholders of the Company approved an amendment to the Company's 1994 Stock Option Plan (the "Plan") increasing the number of shares of the Company's common stock, par value $.01 per share (the "Common Stock") authorized for issuance upon exercise of options granted under the Plan from 500,000 shares to 875,000 shares. As of November 30, 1999, options for 396,017 shares of Common Stock were outstanding under the Plan. Of such options, 95,234 are non-qualified options exercisable at prices ranging from $1.688 to $7.00 per share, depending upon the date of grant, and 300,783 are incentive stock options exercisable at prices ranging from $0.8438 to $10.375 per share, depending upon the date of the grant. As of November 30, 1999, 83,420 shares of Common Stock had been issued upon exercise of options granted under the Plan. Due to vesting provisions included in the options, only options representing 191,777 shares of Common Stock were exercisable as of November 30, 1999. The following table summarizes certain information with respect to exercisable options as of such date: Range of Number of Exercise Price Exercisable Options -------------- ------------------- $ 2.69 - $4.50 104,950 $ 5.95 - $6.91 28,066 $ 7.00 - $7.50 39,000 $8.38 - $10.38 19,761 ------------- 191,777 4. STOCKHOLDERS EQUITY AND WARRANTS (a) On September 18, 1998, the Company entered into a Private Equity Credit Agreement (the "Equity Credit Agreement") with Sovereign Partners, L.P. ("Sovereign Partners"). Pursuant to the Equity Credit Agreement, Sovereign Partners has agreed to purchase up to $5 million of the Common Stock during the 18-month period 6 C-PHONE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS NOVEMBER 30, 1999 commencing April 1, 1999. From time to time during the term of the Equity Credit Agreement, but no more frequently than once every 30 days, the Company can require Sovereign Partners to purchase between $500,000 and $1 million of the Common Stock. The purchase price for each share of Common Stock to be paid by Sovereign Partners will equal 85% of the average closing bid price of the Common Stock during the five trading days immediately preceding the day that the Company notifies Sovereign Partners of a purchase obligation. Sovereign Partners' obligation to purchase the Common Stock is subject to certain conditions, including: (i) the continued effectiveness of the registration statement under the Securities Act of 1933 (the "Securities Act") covering the resale by Sovereign Partners of the Common Stock acquired under the Equity Credit Agreement, (ii) the average closing bid price of the Common Stock being at least $1.00 per share for the 20 trading days preceding the date of delivery to Sovereign Partners of the Company's notice of purchase; (iii) the continued trading of the Common Stock on The Nasdaq Stock Market and (iv) the number of shares to be sold to Sovereign Partners, when aggregated with all other shares of Common Stock then owned by Sovereign Partners, not being more than 9.9% of the total Common Stock then outstanding. The Company may terminate the Equity Credit Agreement without any further obligation to Sovereign Partners; provided, that, if the Equity Credit Agreement expires or is terminated by the Company prior to the sale of at least $1 million of Common Stock, the Company must pay Sovereign Partners a penalty of up to $150,000. Sovereign Partners has agreed not to engage in any short sales of the Common Stock, except that it may engage in short sales after it receives a purchase notice from the Company, but only for the number of shares of Common Stock covered by the Company's purchase notice. Under a related registration rights agreement, the Company has agreed to file and maintain effectiveness of a registration statement under the Securities Act for the resale by Sovereign Partners of the shares of Common Stock it purchases under the Equity Credit Agreement. If the Company fails to maintain effectiveness of the registration statement, Sovereign Partners may require the Company to pay a penalty equal to 1% of the purchase price of the Common Stock then held by it for each 30-day period that the registration statement is not effective. In connection with the Agreement, the Company issued to Cardinal Capital Management, Inc. ("CCM"), as finder, a two-year warrant (the "Warrant") to purchase 100,000 shares of Common Stock at an exercise price of $8.00 per share. If the closing sales price of the Common Stock exceeds $10.00 for five consecutive trading days, the Company may give CCM a notice of intention to redeem the Warrant. If CCM does not exercise the Warrant prior to the redemption date specified in the redemption notice, the Company may redeem the Warrant for $1,000. The shares of Common Stock issuable upon exercise of the Warrant have not been registered for sale under the Securities Act. The Company also paid CCM a cash fee of $30,000 and agreed to pay CCM an additional cash fee equal to 6% of the dollar amount of any sales of Common Stock to Sovereign Partners under the Equity Credit Agreement, with the initial $30,000 payment to be credited against such fee. During August 1999, the Company sold Sovereign Partners 395,426 shares of Common Stock under the Equity Credit Agreement and received gross proceeds of $500,000 (before expenses and finders fees of $91,274). During November 1999, the Company sold Sovereign Partners 606,061 shares of Common Stock under the Equity Credit Agreement and received gross proceeds of $1,000,000 (before expenses and finders fees of $121,273). In connection with the November 1999 sale, Sovereign Partners waived the average closing bid price condition and agreed to a purchase price per share of $1.65. 7 C-PHONE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS NOVEMBER 30, 1999 (b) On December 19, 1997, the Company completed a private placement (the "December Placement"), pursuant to which the Company issued an aggregate of (i) 4,500 shares (the "Preferred Shares" ) of the Company's Series A Convertible Preferred Stock (the "Preferred Stock"), par value $.01 per share, with an initial stated value of $1,000 per share (which increased at the rate of 5% per annum) (such amount, as increased from time to time, the "Stated Value"), (ii) warrants (the "Class A Warrants") to acquire up to 315,000 shares of Common Stock, and (iii) warrants (the "Class B Warrants") to acquire up to 135,000 shares of Common Stock. In connection with the December Placement, the Company issued to an affiliate of the finder warrants (upon the same terms as the Class A Warrants) to acquire an aggregate of 185,000 shares of Common Stock. During May 1998, Class A Warrants (including the warrants issued to the finder) to purchase 325,000 shares of Common Stock at $8.05 per share and Class B Warrants to purchase 60,000 shares of Common Stock at $9.10 per share were exercised. In addition, on May 13, 1998, the Company reduced the exercise price of the warrants to purchase 200,000 shares of Common Stock issued in its 1994 initial public offering (the "1994 Warrants') from $8.40 to $6.00 per share in consideration for (i) requiring payment of the exercise price for the 1994 Warrants to be made in cash (rather than upon surrender for 1994 Warrants) and (ii) changing the expiration date thereof from August 18, 1999 to May 21, 1998. On May 13, 1998, the closing sale price of the Common Stock was $9.75. The holders of the 1994 Warrants exercised all of the 1994 warrants by May 15, 1998. As a result of these warrant exercises in May 1998, the Company received net proceeds of $4,338,246. The remaining Class A Warrants expired unexercised on December 19, 1998. The Class B Warrants expire on December 19, 2000. 5. NET LOSS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which established new standards for computation of earnings per share. SFAS No. 128 requires the presentation on the face of the income statement of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing the net income (loss) available to common shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to the calculation of basic earnings per share, except that the denominator includes dilutive common stock equivalents such as stock options and warrants. Common stock options and warrants are not included for the nine months ended November 30, 1999 or 1998 as they would be anti-dilutive. The accretion of the 5% annual increase in stated value of the Preferred Stock in the amount of $3,220 and $71,597 for the three and nine months ended November 30, 1998 increased the net loss attributable to common shareholders to $1,039,932 and $3,047,353, respectively, for the purposes of the calculation of net loss per share for the three and nine months ended November 30, 1998. All the Preferred Stock was converted into Common Stock during fiscal 1998 and is no longer outstanding. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW We are engaged in the engineering, manufacturing and marketing of video conferencing systems. Our products are designed to operate primarily over either a regular, analog phone line or ISDN, a type of digital phone line. Our products connect to a standard television set and are available in configurations for the U.S. market as well as most international markets. We presently distribute our products primarily to the business market and for special applications such as health care and security services. We sell our products primarily to resellers and system integrators. We have incurred significant losses during each of our last three fiscal years. Until market acceptance of our products is established, which we cannot assure you will occur, we expect to continue to incur significant losses due to our current and anticipated level of expenditures. RECENT EQUITY OFFERINGS DECEMBER 1997 PRIVATE PLACEMENT. In December 1997, we completed a private placement in which we issued an aggregate of (a) 4,500 shares of Series A Convertible Preferred Stock, (b) Class A Warrants to purchase 315,000 shares of our common stock, and (c) Class B Warrants to purchase 135,000 shares of our common stock. We received net proceeds of approximately $4,110,000, after payment of fees and expenses of approximately $390,000. In connection with this transaction, we paid a finder's fee of $295,000 and issued to an affiliate of the finder a warrant, upon the same terms as the Class A Warrants, to acquire an aggregate of 185,000 shares of our common stock. All of the issued Series A Preferred Stock has been converted into a total of 1,987,622 shares of our common stock. The Class B Warrants have an exercise price of $9.10 per share, subject to adjustment under certain circumstances, including upon the issuance of shares of our common stock, or securities convertible or exchangeable into shares of our common stock, at less than 80% of the then market price. These warrants expire on December 19, 2000 and are not redeemable. 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. The Class A Warrants expired on December 19, 1998. Prior to this date, Class A Warrants to purchase 325,000 shares of our common stock were exercised at $8.05 per share, including the warrant issued to the finder. We received aggregate proceeds of $2,616,250 from the exercise of these warrants during the first quarter of Fiscal 1999. The remaining Class A Warrants expired unexercised. 1994 WARRANT EXERCISES. In connection with our 1994 initial public offering, we had issued, to the representative of the underwriters, warrants expiring August 19, 1999 to purchase 200,000 shares of our common stock at an exercise price of $8.40 per share payable in cash or by delivering back to us warrants having an equivalent value. On May 13, 1998, we reduced the exercise price of these warrants to $6.00 per share, in consideration for (a) requiring payment of the exercise price for these warrants to be made in cash, rather than upon surrender of warrants, and (b) changing the expiration date thereof to May 21, 1998. On May 13, 1998, the closing sales price of our common stock was $9.75. All of these warrants were exercised and we received aggregate proceeds of $1,200,000. AGREEMENT WITH SOVEREIGN PARTNERS. On September 18, 1998, we entered into a private equity credit agreement with Sovereign Partners, L.P. Pursuant to the agreement, Sovereign Partners has agreed to purchase our common stock during the 18-month period that began on April 1, 1999. From time to time during the term of the agreement, but no more frequently than once every 30 days, we can 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 9 each share will equal 85% of the average closing bid price of our common stock during the five trading days immediately preceding the day we notify Sovereign Partners of a purchase obligation. Sovereign Partners' obligation to purchase shares of our common stock is subject to certain conditions, including: o The average closing bid price of our common stock being at least $1.00 per share for the 20 trading days preceding the date of our notice of purchase to Sovereign Partners. o Our common stock continuing to be traded on The Nasdaq Stock Market. o The total number of shares of common stock that we may sell to Sovereign Partners under the agreement cannot exceed 1,543,765 shares, unless we first obtain shareholder approval as required by the rules of The Nasdaq Stock Market, Inc. We do not presently intend to sell Sovereign Partners more than 1,500,000 shares. o The number of shares of common stock we may sell to Sovereign Partners on any draw date, when aggregated with all other shares then owned by Sovereign Partners, cannot exceed 9.9% of our total common stock then outstanding. o A current prospectus must then be available to permit Sovereign Partners to publicly resell the shares of common stock that it acquires from us under the agreement. 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 November 1999, we sold Sovereign Partners 606,061 shares of our common stock under the agreement and received gross proceeds of $1,000,000, or $1.65 per share, or $878,727 after related fees and expenses of $121,273. In negotiating the 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 that it may engage in short sales after it receives a purchase notice from us, but only for the number of shares of common stock covered by our purchase notice. Under a related registration rights agreement, we have agreed to maintain effectiveness of a registration statement for the resale by Sovereign Partners of the shares it purchases from us under the agreement. If we fail to maintain effectiveness of the registration statement, Sovereign Partners may require us to pay a penalty equal to 1% of the purchase price of the shares of common stock then held by Sovereign Partners for each 30-day period that the registration statement is not effective. In connection with the agreement, we issued to Cardinal Capital Management, Inc., as finder, a two-year warrant to purchase 100,000 shares of our common stock at an exercise price of $8.00 per share. If the closing sales price of our common stock exceeds $10.00 for five consecutive trading days, we may give Cardinal Capital notice of our intention to redeem the warrant. If Cardinal Capital does not exercise the warrant prior to the redemption date specified in our redemption notice, we may redeem the warrant for $1,000. The shares of our common stock issuable to Cardinal Capital upon exercise of this warrant have not been registered for sale under the Securities Act, although we may register these shares in the future. We also paid Cardinal Capital a cash fee of $30,000 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 of cash fees. 10 RESULTS OF OPERATIONS FISCAL QUARTER ENDED NOVEMBER 30, 1999 AS COMPARED TO FISCAL QUARTER ENDED NOVEMBER 30, 1998 REVENUES. Net sales decreased 15% to $371,429 in the third quarter of Fiscal 2000 from $438,041 in the third quarter of Fiscal 1999. Net sales for the third quarter of Fiscal 2000 included sales of excess inventory in the amount of $132,009. There was no sale of excess inventory in the third quarter of 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 our higher priced products is longer for our existing and new resellers. Other revenue during the third quarter of Fiscal 2000, which consisted of a license fee and a software development fee, was $45,000 while other revenue during the third quarter of Fiscal 1999, which consisted primarily of installation and telecommunication service fees, was $3,308. As a result of the foregoing, our total revenues decreased 6% to $416,429 in the third quarter of Fiscal 2000 as compared to $441,349 in the third quarter of Fiscal 1999. COST OF REVENUE. Cost of revenue consists of cost of goods sold and cost of other revenue. Cost of goods sold includes labor, materials and other manufacturing costs, such as salaries, supplies, leasing costs, depreciation related to production operations and the write-down of inventories to net realizable value. Cost of other revenue consists primarily of the allocation of salaries and benefits of personnel and the cost of outside services directly related to this revenue. Cost of goods sold decreased 46% to $320,508 or 86% of net sales in the third quarter of Fiscal 2000 from $589,410 or 135% of net sales in the third quarter of Fiscal 1999. The decrease in cost of goods sold was primarily 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. 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. There was no cost associated with other revenue in the third quarter of Fiscal 2000 as all related costs were properly expensed in prior periods. GROSS PROFIT (LOSS). Our gross profit was $95,921, or 23% of revenues, in the third quarter of Fiscal 2000, as compared to a gross loss of $148,292 in the third quarter of Fiscal 1999. The gross loss for the third quarter of 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 decreased 5% to $726,951, or 175% of revenues, in the third quarter of Fiscal 2000 from $767,247, or 174% of revenues, in the third quarter of Fiscal 1999. The decrease was primarily related to a $22,706 reduction in bad debt expense as 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 for the remainder of Fiscal 2000 will be less than the comparable Fiscal 1999 levels. RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses decreased 24% to $145,939, or 35% of revenues, in the third quarter of Fiscal 2000 from $192,529, or 44% of revenues, in the third quarter of Fiscal 1999. The decrease was primarily the result of a reduction in personnel and related development expenses due to the completion of the initial development of our current stand-alone 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 the remainder of Fiscal 2000 will be less than the comparable Fiscal 1999 levels. 11 OPERATING LOSS. As a result of the factors discussed above, our operating loss decreased 30% to $776,969 in the third quarter of Fiscal 2000 from $1,108,068 in the third quarter of Fiscal 1999. INTEREST. Interest income decreased 55% to $32,119 in the third quarter of Fiscal 2000 from $71,356 in the third quarter of Fiscal 1999, as a result of the continued use of our cash to fund operations. NINE MONTHS ENDED NOVEMBER 30, 1999 AS COMPARED TO NINE MONTHS ENDED NOVEMBER 30, 1998 REVENUES. Net sales decreased 14% to $1,127,798 in the first nine months of Fiscal 2000 from $1,317,956 in the first nine months of Fiscal 1999. As discussed above, this decrease is a result of our change in marketing emphasis to the business and special applications markets. During the first quarter of Fiscal 2000, we were still selling our older lower priced products developed for the consumer retail market, while we were introducing our newer, higher priced products. Other revenue for the first nine months of Fiscal 2000, which consisted of a licensing fee and software development fees, was $55,000 while other revenue for the first nine months of Fiscal 1999, which consisted primarily of installation and telecommunication service fees, was $28,820. As a result of the foregoing, our total revenues decreased 12% to $1,182,798 in the first nine months of Fiscal 2000, as compared to $1,346,776 in the first nine months of Fiscal 1999. COST OF REVENUE. Cost of revenue consists of cost of goods sold and cost of other revenue. Cost of goods sold includes labor, materials and other manufacturing costs, such as salaries, supplies, leasing costs, depreciation related to production operations and the write-down of inventories to net realizable value. Cost of other revenue consists primarily of the allocation of salaries and benefits of personnel and the cost of outside services directly related to this revenue. Cost of goods sold decreased 42% to $998,410, or 89% of net sales, in the first nine months of Fiscal 2000 from $1,729,031, or 131% of net sales, in the first nine months of Fiscal 1999. The decrease in cost of goods sold was primarily 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 beginning in the first quarter of Fiscal 2000. 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 the first nine months of Fiscal 2000 was $3,000, or 5% of related revenue as compared to $9,674, or 34% of related revenue for the first nine months of Fiscal 1999. There was no cost associated with license fees and certain software income included in other revenue in the first nine months of Fiscal 2000 as all related costs were properly expensed in prior periods. GROSS PROFIT (LOSS). Our gross profit was $181,388, or 15% of revenues, in the first nine months of Fiscal 2000, as compared to a gross loss of $391,929 in the first nine months of Fiscal 1999. The gross loss for the first nine months of 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 10% to $2,412,835, or 204% of revenues, in the first nine months of Fiscal 2000 from $2,196,115, or 163% of revenues, in the first nine months of Fiscal 1999. The primary reason for the increase was a 38% increase in selling and marketing expenses to $1,060,372 in the first nine months of Fiscal 2000 from $768,837 in the first nine months of Fiscal 1999. This increase was primarily the result of the increase 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 partially offset by a decrease in bad debt expense to $13,268 in the first nine months of Fiscal 2000 from $134,697 in the first nine months of Fiscal 1999. The decrease in bad debt expense is a direct result of our shift in marketing emphasis away from the retail home consumer market. As we increase our focus on attempting to develop major OEM, distribution and licensing relationships, we expect that selling and marketing expenses for the remainder of Fiscal 2000 will be less than the comparable Fiscal 1999 levels. 12 RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses decreased 15% to $508,687, or 43% of revenues, in the first nine months of Fiscal 2000 from $599,329, or 45% of revenues, in the first nine months of Fiscal 1999. The decrease was primarily the result of a reduction in personnel and related development expenses due to the completion of the initial development of our current stand-alone 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 the remainder of Fiscal 2000 will be less than the comparable Fiscal 1999 levels. OPERATING LOSS. As a result of the factors discussed above, our operating loss decreased 14% to $2,740,134 in the first nine months of Fiscal 2000 from $3,187,373 in the first nine months of Fiscal 1999. INTEREST. Interest income decreased 48% to $109,340 in the first nine months of Fiscal 2000 from $211,617 in the first nine months of Fiscal 1999, as a result of the continued use of our cash to fund operations. LIQUIDITY AND CAPITAL RESOURCES We have financed our recent operations primarily from the proceeds of private placements of our securities and from the exercise of previously issued warrants and options. For additional information, see "Recent Equity Offerings." At November 30, 1999, we had working capital of $4,077,657, as compared to $5,305,512 at February 28, 1999, a decease of $1,227,855. Our cash and cash equivalents were $3,073,425 at November 30, 1999 as compared to $4,602,752 at February 28, 1999. Our invested funds consisted primarily of overnight repurchase agreements for discount notes issued by the United States Treasury or United States government agencies. 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 2 to Notes to Unaudited Financial Statements). During the first nine months of Fiscal 2000, our operating activities used $2,571,147 of net cash, our investing activities used $245,633 of net cash ($95,633 for equipment purchases and $150,000 to purchase a certificate of deposit), and our financing activities provided $1,287,453 of net cash (after related fees and expenses) from the sale 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 November 30, 1999, 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 do not anticipate these expenditures to increase from the levels incurred in Fiscal 1999. 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 the third fiscal quarter of 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. 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; 13 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. As we previously announced, due to concerns about our ability to sustain compliance with the $4 million net tangible asset requirement for continued listing, we were advised by The Nasdaq Stock Market of its intention to delist our common stock from the Nasdaq National Market effective with the close of business on January 7, 2000. We have appealed this action, and a hearing has been scheduled for February 17, 2000. During the appeal process, our common stock will continue to be listed on the Nasdaq National Market. We cannot assure that you that our appeal will be successful. We also are considering an application to list our common stock on the Nasdaq SmallCap Market as an alternative to National Market listing. We cannot assure you that we will meet the requirements for listing on 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 a shareholder to dispose of, or to obtain accurate 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 estimate that, as of February 28, 1999, we had available net operating loss carryforwards of approximately $19,189,000 for Federal purposes and approximately $19,448,000 for state purposes, which may be used to reduce future taxable income, if any. The Federal carryforwards expire in 2009 through 2014. The state carryforwards expire in 2002 through 2014. We do not believe that inflation has had a significant impact on our sales or operating results, during the past three years. IMPACT OF YEAR 2000 ISSUE Computer systems may experience problems handling dates beyond the year 1999 because many computer programs use only two digits to identify a year in a date field. We have addressed this issue in several parts - our products, our application software for our internal operations and with respect to third-party suppliers. PRODUCTS - As our products do not include date/time mechanisms in their operating software, our products are Year 2000 compliant. However, some of our earlier PC-based products use Windows(R) for Workgroups as their operating system and there may exist Year 2000 issues with the specific user installed LAN interface employed by any certain customer, which issues are beyond the scope of our involvement and responsibilities. As of the date of this report, we have received no responses from customers complaining of any problem with any of our products. APPLICATION SOFTWARE - All of our current application software made the transition to the year 2000 without incident. THIRD-PARTY SUPPLIERS - We are not aware of any possible effects of Year 2000 compliance issues related to our key suppliers and subcontractors. COSTS - Our total out-of-pocket cost associated with the Year 2000 issue was less than $20,000. RISKS - We are unable to determine at this time whether any of our suppliers or vendors will have any future difficulties with the Year 2000 issues. We do have a contingency plan in the event of noncompliance by our suppliers or vendors but cannot assure you that our contingency plan would be successful, if implemented. 14 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS We have made statements in this Quarterly Report on Form 10-QSB that are "forward-looking statements" within the meaning of the Securities Act and the Securities Exchange Act. Sometimes these statements contain words like "may," "believe," "expect," "continue," "intend," "anticipate" or other similar words. These statements could involve known and unknown risks, uncertainties and other factors that might significantly alter the actual results suggested by the statements. In other words, our performance might be quite different from what the forward-looking statements imply. The following factors, as well as those discussed above in this section and in "Factors That Could Effect Us" in Item 1. - "Description of Business" of our Annual Report on Form 10-KSB for the fiscal year ended February 28, 1999, could cause our performance to differ from the implied results: o inability to obtain capital for continued development and commercialization of our products. o inability to generate market acceptance of our products. o failure to obtain new customers or retain existing customers. o inability to manage our growth. o loss of our key employees. o changes in general economic and business conditions. o changes in industry trends. o impact of the Year 2000 issue. We have no obligation to release publicly the result of any revisions to any of our "forward-looking statements" to reflect events or circumstances that occur after the date of this Quarterly Report or to reflect the occurrence of other unanticipated events. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS None (B) REPORTS ON FORM 8-K On November 24, 1999, we filed a Current Report on Form 8-K responding to Item 5 - "Other Events." 15 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. C-PHONE CORPORATION Date: January 14, 2000 By: /s/ DANIEL P. FLOHR ------------------------------------------------ Daniel P. Flohr President and Chief Executive Officer (Principal Executive Officer) Date: January 14, 2000 By: /s/ PAUL H. ALBRITTON ------------------------------------------------ Paul H. Albritton Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 16 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED BALANCE SHEET AS OF NOVEMBER 30, 1999 AND THE UNAUDITED STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000835585 C-Phone Corporation 1 USD 9-MOS FEB-29-2000 MAR-01-1999 NOV-30-1999 1 3,223,425 0 365,421 (91,832) 1,096,721 84,238 1,050,063 (921,999) 4,811,597 600,316 0 0 0 89,801 4,121,480 4,811,597 1,127,798 1,182,798 998,410 1,001,410 0 13,268 0 (2,630,794) 0 (2,630,794) 0 0 0 (2,630,794) (0.32) (0.32)
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