-----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, WBv+A4QaQlx4S+ysNlqGS9pElbkzvjLrZV1ViZZEq3hPJRo6NSvMT/MuKCvce4gh 6xi2br4OlvA6t0nc3+pXEQ== /in/edgar/work/20000526/0001019056-00-000330/0001019056-00-000330.txt : 20000919 0001019056-00-000330.hdr.sgml : 20000919 ACCESSION NUMBER: 0001019056-00-000330 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: C-PHONE CORP CENTRAL INDEX KEY: 0000835585 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 061170506 STATE OF INCORPORATION: NY FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24426 FILM NUMBER: 644961 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 10KSB 1 FORM 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended FEBRUARY 29, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the transition period from __________ to __________ Commission file number 0-24426 -------- C-PHONE CORPORATION ------------------------------------------------ (Name of small business issuer in its charter) New York 06-1170506 - ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 6714 Netherlands Drive, Wilmington, North Carolina 28405 - -------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Issuer's telephone number: (910) 395-6100 Securities registered under Section 12(b) of the Exchange Act: NONE ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 Par Value ---------------------------- (Title of class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $1,401,150 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: Approximately $7,882,869 based on the closing sale price ($1.00) on The Nasdaq SmallCap Market on May 25, 2000. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 25, 2000 - 8,990,092 shares. Documents Incorporated by Reference: Portions of the issuer's definitive proxy statement to be mailed to shareholders in connection with the issuer's 2000 Annual Meeting are incorporated by reference into Part III of this Annual Report on Form 10-KSB. Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] TABLE OF CONTENTS Item 1. Description of Business............................................ 2 Item 2. Description of Property............................................ 10 Item 3. Legal Proceedings.................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders................ 11 Item 5. Market for Common Equity and Related Stockholder Matters........... 11 Item 6. Management's Discussion and Analysis or Plan of Operations......... 12 Item 7. Financial Statements............................................... 18 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................... 19 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act................. 19 Item 10. Executive Compensation............................................. 19 Item 11. Security Ownership of Certain Beneficial Owners and Management..... 19 Item 12. Certain Relationships and Related Transactions..................... 19 Item 13. Exhibits and Reports on Form 8-K................................... 19 Signatures................................................................... 23 i PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL We are engaged primarily in the engineering, manufacturing and marketing of video conferencing systems. Our video conferencing products are designed to principally operate over either a regular, analog telephone line or ISDN, a type of digital telephone line, and are available in configurations for the U.S. market as well as for most international markets. We presently distribute our products primarily to the business market and for special applications such as health care and security services. We sell our products principally to resellers and system integrators. In January 2000, we restructured our operations to reduce our ongoing operating expenses, and announced that we were exploring certain strategic initiatives and increasing our focus on developing major OEM, distribution and licensing relationships. We also are exploring the utilization of our engineering resources to assist others in the development of related products to be provided on an OEM basis. COMPANY HISTORY We were incorporated in New York in 1986 under the name Target Tuning, Inc., as a manufacturer of promotional radios. In 1990, we developed data/fax modems under the name "TWINCOM" and changed our name to Target Technologies, Inc. In early 1993, we shifted our primary focus to the development of video conferencing products and, in late 1993, we introduced C-Phone, our first PC-based video conferencing system, which operated over digital networks. During 1995, we phased out our modem product line and, in August 1996, we changed our name to "C-Phone Corporation" in order to more closely identify our corporate name with our C-Phone product line and to eliminate confusion among investors. The market for PC-based systems did not grow as we and others expected and, in 1996, we shifted our development emphasis to a stand-alone product. In 1997, we introduced C-Phone Home(TM), a stand-alone set-top "video phone," which operated over analog phone lines using a standard television set. C-Phone Home was aimed at the U.S. consumer market and sold through retailers and catalogs. However, the consumer market did not generally accept C-Phone Home or similar products offered by others. We believe that the limited amount of data that generally can be transmitted in a given amount of time over a analog phone line did not provide a product which was acceptable to consumers. Accordingly, we began shifting our resources to develop stand-alone video conferencing products for the business and special application markets. In early 1998, we introduced the DS-324(TM), a stand-alone video conferencing system, which operates over either an analog or ISDN phone line. In 1999, we introduced the C-Station(TM) and Sentinel(TM) product lines. The C-Station product line is aimed at the general business market while the Sentinel product line is aimed at the special application markets, such as surveillance and health care. These new products operate over either an analog or ISDN phone line and support the two video conferencing standards currently in use, which allows our products to communicate with products from most suppliers. When used with an ISDN phone line, our current products offer comparable picture quality to PC-based systems while being substantially easier to use and less expensive. We believe that our new stand-alone products have greater market potential, particularly in the business market and special applications, such as health care and security services. 2 INDUSTRY BACKGROUND Video conferencing permits remote individuals or groups to communicate visually and was introduced in the late 1970's. These first systems required expensive video conferencing equipment, trained operators and special leased digital phone lines. The adoption of an industry standard by most manufacturers after 1990 provided the ability for systems from different manufacturers to communicate with each other thereby making inter-company video conferencing easier. However, the overall operating costs and the complexity of use have limited the market for these video conferencing systems. Following the adoption in 1996 of industry standards which incorporated technology that improved the quality of video transmission over phone lines, a few companies, including us, introduced stand-alone "set-top" video phones which allowed a user to make video calls, without the need for a PC, using a television set and an analog phone line. These systems were designed to appeal to non-commercial home users and small businesses, but did not receive widespread market acceptance in those markets. At around the same time, a number of companies introduced products primarily marketed to the home user, which, when connected to a PC, allow video phone calls to be made over the Internet. In the last several years, several companies, including us, have introduced stand-alone "set-top" video conferencing systems which use ISDN phone lines. These systems are generally easy to operate, are less expensive than the older PC-based systems and offer a degree of portability. Competitive systems typically cost between $3,000 and $19,000, depending upon features. In addition, many companies offer a desktop or personal system, which is typically PC-based with a hardware and software component. These systems typically range in price from $500 to $1,500, excluding the cost of the PC. OUR PRODUCTS General The basic components of our products consist of a "set-top" box, a hand-held remote and a power adapter. We also sell an integrated camera module with a built-in microphone and an electronic pan/tilt/zoom feature. All of our products are designed to maximize the ease of use in both initial set-up and day-to-day operations. The set-top box, which weighs less than five pounds, connects to the television and includes a built-in modem and proprietary software. The remote control is used to operate and configure the system, with easy-to-use, on-screen instructions and text menus, as well as to dial, answer or end a call, by pushing one or two buttons. Audio output is provided by using the speakers in the television set. We have designed our products to allow for current as well as future telecommunication connections. Our current product line includes interfaces for connecting to analog and ISDN phone lines, as well for certain Internet and local area network connections. As they become more widely deployed, we plan to provide interfaces for DSL, satellite and cable connections. This design feature allows our products to be upgraded to future higher bandwidth connections by upgrading the software and changing the interface connector. Special Features We offer optional external, higher quality, pan, tilt and zoom cameras with far-end control as well as tabletop and lapel microphones. We also have products which contain a built-in color camera and built-in microphone and products primarily targeted for security applications which have separate inputs for up to seven cameras. Most of our current products, in addition to operating over an analog phone line, also can operate over an ISDN phone line utilizing a separate terminal adaptor which can be purchased from us. We believe that we are 3 the only company currently marketing a product capable of using either an analog or ISDN phone lines. We have products that support both the most recent telecommunications standards as well as the older standards which are used by many existing systems, including PC-based systems, video conferencing rooms and other stand-alone video conferencing systems. We recently have finished development of a top-of-the line product which will operate over three ISDN lines using a terminal adaptor developed by us. We also have developed a feature which will allow a connection through the Internet when using an ISDN phone line and an Internet service provider which support a specific protocol. As only a limited number of Internet service providers support this protocol, we are in the process of expanding the capability of these products to use other current protocols supported by most Internet service providers. Depending on features, interface connectors and optional equipment, the list price of our current products range from $1,200 to $7,200. MARKETING AND SALES General We believe that a market for our products exists for business videoconferencing and for special applications such as video surveillance, recruiting, distance learning and training, tele-maintenance and tele-health. Our current products are sold under several names including C-Station(TM), Sentinel(TM), and DS-324(TM). Our products are primarily marketed by our internal sales and marketing staff, with the assistance of one independent manufacturer's representative. Our marketing efforts are primarily targeted toward resellers, system integrators and service providers who may use our products in providing their service. To reach these customers, we use a combination of targeted direct mail advertising, demonstration at trade shows and direct contact. In addition, we have established relationships in several countries, principally Spain, South Africa, Mexico, Canada, Korea, The Netherlands and Japan, for the foreign distribution of our products. Our international partners are responsible for establishing a local presence for our products, creating market awareness, handling local government import and certification requirements, arranging local technical support and distribution, demonstrating at trade shows, implementing local advertising and marketing programs, and translating the manual and related materials into the local language. In January 2000, we restructured our operations to reduce our ongoing operating expenses, and announced that we were exploring certain strategic initiatives and increasing our focus on developing major OEM, distribution and licensing relationships. Part of this initiative included a shift in our marketing focus to larger companies with established sales channels. We also are exploring the utilization of our engineering resources to assist others in the development of related products to be provided on an OEM basis. Significant Customers Historically, a significant portion of our sales have been to a limited number of customers. During fiscal 2000, sales to Help Innovations, Inc. and Videonet Corporation accounted for 13.3% and 8.9%, respectively, of our total revenues, while our ten largest customers accounted for 59.7% of our total revenues. During fiscal 1999, sales to Alternative Options, LLC and Fotron S.A. (PTTY) Ltd. accounted for 16.1% and 10.5%, respectively, of our total revenues, while our ten largest customers accounted for 62.7% of our total revenues. Foreign Sales During fiscal 2000, our foreign revenue accounted for 23.5% of our total revenue and came from resellers primarily located in Spain, South Africa, Mexico, Canada, Korea, The Netherlands and Japan. During fiscal 1999, our 4 foreign revenue accounted for 50.1% of our total revenue and came from resellers primarily located in Turkey, South Africa, Slovenia, Spain, Japan, Mexico, Korea, Canada, France and Israel. We generally make our foreign sales on a prepaid basis or against letters of credit due to the difficulty in collecting foreign accounts receivable. Foreign sales are denominated in U.S. dollars and we do not incur any foreign currency risks. See "Factors That Could Effect Us - Our Results Of Operations May Suffer If Foreign Trade is Restricted" for further information. MANUFACTURING Our products are comprised primarily of components manufactured on a batch basis for us, subassemblies and parts manufactured to our specifications by third parties and certain other "off the shelf" electronic components purchased from third parties. Historically, a substantial portion of our manufacturing, as well as the final assembly, testing and packaging of our products have been performed at our facility in Wilmington, North Carolina. Given our change in focus to the business and special applications markets, during fiscal 2000, we decided to more heavily rely on contract manufacturers to manufacture and assemble most of our products. Our current primary contract manufacturers are located in the U.S. See "Factors That Could Effect Us - Our Results Of Operations Could Suffer If We Lost Any Of Our Contract Manufacturers" and "- Use Of Contract Manufacturers May Require Increased Inventory" for further information. SOURCES OF SUPPLY Our products contain a significant number of off-the-shelf semiconductor integrated circuit chips, most of which are available from a number of different manufacturers. However, we do rely on a single source of supply for certain components and specialized subassemblies, some of which are manufactured outside of the United States and only to customer order or are inventoried by the manufacturers in limited quantities. We believe that all these components could be obtained elsewhere if needed and that our products could be redesigned to use alternative components. Certain of our manufacturers, sub-assemblers and suppliers, including suppliers of components made outside the United States, may require us to make firm scheduling and delivery commitments and deliver secure financing arrangements, such as letters of credit, as a condition to fulfillment of their contractual obligations to us. We anticipate that, if we are successful in the commercialization of our products, so that larger quantities of our products can be sold, we will become even more dependent on a timely supply of purchased inventory, and will be required to devote significant capital to inventory. See "Factors That Could Effect Us - Our Results Of Operations Could Suffer If We Lost Any Of Our Sole Source Suppliers " and Item 6 - "Management's Discussion and Analysis or Plan of Operations - Liquidity and Capital Resources" for further information. RESEARCH AND DEVELOPMENT The technology underlying video conferencing products is subject to rapid change, including potential introduction of new products and technologies which could significantly and adversely impact our ability to sell our products. Our success will depend, in great part, on our ability to maintain an ongoing research, development and engineering program capable of responding quickly to technological advances and developing and introducing new features. In addition, even though the open architecture of our products allow components to be replaced as new technologies develop, development of technologies and products by competitors could render our products noncompetitive or obsolete. See "Factors That Could Effect Us - We Face Substantial Competition In The Video Conferencing Market And May Not Be Able to Successfully Compete" and "- Our Products May Be Rendered Obsolete By Rapid Introduction of Competitive Products And Technological Changes" for further information. 5 COMPETITION Our major competitors are Polycom, PictureTel, Tandberg, Sony, VCON and VTEL. Most of these companies have significantly greater financial resources and capabilities than our company. In addition, with advances in telecommunications standards, connectivity and video processing technology, other established or new companies may develop or market products that compete with our products. Netergy Networks (formerly known as 8x8), a previous competitor in the video conferencing market, has exited the business of manufacturing video phones to focus on telephony products and technology based on Internet protocols, but continues to sell its video conferencing integrated chips to other manufacturers. We believe that the principal competitive factors in the stand-alone video conferencing product market are quality of video and audio, price, compatibility with standard communication protocols, ease of use, strength of distribution channels, ability to timely fulfill order requests, customer support, reliability and brand-name recognition. Our marketing efforts emphasize the ease of use, flexibility and affordability of our products. See "Factors That Could Effect Us - We Face Substantial Competition In The Video Conferencing Market And May Not Be Able to Successfully Compete" and "Our Products May Be Rendered Obsolete By Rapid Introduction of Competitive Products And Technological Changes" for further information. PATENTS AND OTHER INTELLECTUAL PROPERTY Although we have several United States patents, none are directly related to our current product line. The inventions which are the subject of these patents were created jointly by Daniel Flohr and certain of our other employees or consultants. In each case, all rights to these inventions have been assigned to us. We have licensed to two third parties non-exclusive rights to utilize our patented camera display configuration, which we had used in our previously marketed PC-based desktop video conferencing product. We seek to protect our intellectual property rights through a combination of trade secret, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws. We generally enter into confidentiality agreements with our employees, consultants, sales representatives and certain potential customers and attempt to limit access to and distribution of our proprietary information. GOVERNMENT REGULATION Our products must comply with FCC requirements and specifications regulating electromagnetic radiation and the connection of terminal equipment to the public switched telephone network. Our products also must be in compliance with these regulations as a prerequisite to marketing them. We are required to comply with similar requirements of various foreign government agencies to sell our product in foreign countries. Our foreign distributors, as part of their distribution agreements, are responsible for ensuring compliance with, and obtaining any necessary permits from, foreign government agencies. See "Factors That Could Effect Us - New And Redesigned Products Require Compliance With Government Regulations, Which We May Not Be Able To Afford" for further information. EMPLOYEES As of May 24, 2000, we had 32 employees, three of whom were part-time. Of these employees, seven work in manufacturing and distribution, nine work in product development and engineering, five work in sales and marketing, three work in customer support and eight work in management, accounting and administrative. In comparison, at May 25, 1999, we had 40 employees, three of whom were part-time. The decrease in the number of our employees reflected our 6 decision to restructure our operations and reduce operating expenses. We consider that our relationship with our employees is good. FACTORS THAT COULD EFFECT US Our Business May Not Become Profitable. During each of our last three fiscal years, we incurred significant losses. We expect to continue to incur significant losses due to our expenditures for product development and the commercialization of our products. The following table summarizes our total revenues and net losses since March 1, 1997. Year Ended, --------------------------------------------------------- February 29, 2000 February 28, 1999 February 28, 1998 ----------------- ----------------- ----------------- Total revenues $1,401,150 $1,621,196 $1,890,666 Net loss $3,363,628 $4,478,725 $5,974,828 We Will Require Significant Additional Capital To Become Profitable, Which Capital May Not Be Readily Available. In order to become profitable, we will need to sell significant quantities of our products. While we have sufficient inventory and working capital to support a certain level of increased sales, in order to sell significant quantities of our products, we will need to substantially increase the amount we spend on manufacturing, inventory and marketing and we will incur increased costs associated with the carrying of anticipated increased accounts receivable. This will require us to raise substantial additional capital. We are unable to assure you that additional capital will be available when needed or, if available, that the terms of any available financing will be favorable or will be acceptable to us. We May Not Be Able To Successfully Sell Our Current Products. To date, we have not sold a significant amount of our currently offered video conferencing products. In addition, we have no reliable data to assure us that there will be adequate market acceptance of these products. As a result, we cannot assure you that our currently offered products will gain sufficient market acceptance to generate significant revenues. Our Results Of Operations May Suffer If We Lost Any Of Our Key Employees . As a small, technology driven company, we are heavily dependent upon the efforts and talents of a limited number of people. If any of our key employees left us, we believe that it would be difficult to replace them in a timely manner, if at all. If we were unable to quickly replace key employees, our operations would be significantly and adversely affected. Our Results Of Operations May Suffer If Foreign Trade is Restricted. During fiscal 2000, approximately 23% of our total revenue was from foreign sales. A reduction in the volume of foreign trade, material restrictions on foreign trade or fluctuations in foreign exchange rates could significantly reduce our foreign distributors' orders. We generally do not have written agreements with any of our foreign distributors which require minimum levels of purchases. Therefore, our foreign distributors could reduce or curtail their purchases at any time without financial penalty. Our Results Of Operations Could Suffer If We Lost Any Of Our Sole Source Suppliers. We rely on sole sources of supply for some of our components and specialized subassemblies, some of which are manufactured outside of the United States and only to customer order or are inventoried by the manufacturer in limited quantities. If our sources of supply were to become unavailable, other sources of supply may not be available without significant delay or increased cost, and the use of alternative available components could require us to undertake costly re-engineering of portions of our products. 7 Our Results Of Operations Could Suffer If We Lost Any Of Our Contract Manufacturers. We rely on contract manufacturers to manufacture or assemble a substantial amount of our products and their components and subassemblies. If any of our contract manufacturers were to become unavailable, we may not be able to arrange for substitute manufacturers in a timely manner or at the same cost. Use Of Contract Manufacturers May Require Increased Inventory. To be economical, we place our purchase orders with our contract manufacturers based on our forecasted demand for our products. Until we can accurately predict our product sales, we will need to commit for production volumes that may exceed current order rates, which may increase our inventory costs. We Face Substantial Competition In The Video Conferencing Market And May Not Be Able to Successfully Compete. Many of our competitors are more established, benefit from greater market recognition and have significantly greater financial, technological, manufacturing and marketing resources than us. Potential competitors include well-known established suppliers of consumer electronic products. These potential competitors sell television and/or telephone products into which they may integrate video conferencing, thereby eliminating the need to purchase a separate video conferencing product. Our Products May Be Rendered Obsolete By Rapid Introduction of Competitive Products And Technological Changes. We expect that the technology underlying video conferencing will continue to undergo rapid change as new products are introduced and different standards are developed. With our limited resources, we may not be able to timely and adequately respond to new product developments and technological advances by developing and introducing new products or features. As a result, technological developments and new products introduced by competitors could render our existing products and features noncompetitive or obsolete. Our Products May Infringe Third Party Intellectual Property Rights. The technology applicable to our products is developing rapidly. A number of companies have filed applications for, or have been issued, patents relating to products or technology that are similar to some of the products or technology developed or used by us. Since we do not have the resources to maintain a staff whose primary function is to investigate the level of protection afforded to third parties on devices and components which we use in our products, it is possible that a third party could successfully claim that our products infringe on their intellectual property rights. If this were to occur, we may be subject to substantial damages, we may not be able to obtain appropriate licenses at a cost we could afford and we may not have the ability to timely redesign our products. We Do Not Have The Financial Resources To Enforce And Defend All Of Our Intellectual Property Rights. The actions we take to protect our intellectual property may not be adequate to deter misappropriation of our proprietary information. We do not have adequate financial resources to finance the high cost required to enforce, through litigation, all of our intellectual property rights. In addition, litigation could result in a substantial diversion of managerial time and resources, which could be better and more fruitfully utilized on other activities. New And Redesigned Products Require Compliance With Government Regulations, Which We May Not Be Able To Afford. If we redesign or otherwise modify any of our products, or if current government regulations are revised, we may be required to have our products recertified by the FCC or otherwise brought into compliance to continue selling our products. We cannot assure you as to when, if ever, that our redesigned or modified products would continue to be in compliance with applicable governmental regulations. In addition, we must comply with similar requirements of various foreign government agencies to effect our foreign sales. While our foreign distributors, as part of their distribution agreements, are responsible for ensuring compliance with foreign government regulations, we cannot assure you that they will do so. If our foreign distributors fail to ensure compliance with these regulations, they may be unable to make sales in their respective countries, as we do not have the necessary resources to ensure governmental compliance outside of the United States. 8 We May Be Unable To Continue To Use The CPhone Name. A proceeding brought by the former owner of the C-Phone trademark to cancel registration of our "C-Phone"(R) trademark is pending before the U.S. Patent and Trademark Office's Trial and Appeal Board. If we are not successful in this proceeding, we may need to change the identifying name on some of our products. We also would need to consider whether we should change our corporate name. In addition, we could be required to pay damages to the former owner of the mark, if it could show that we had infringed its common law rights. Any change in our use of the C-Phone name would result in a loss of good will and identification which we have been promoting since 1993, and could have a temporary adverse impact on our marketing plans. We May Not Receive All Of The Proceeds That We Anticipate From Our Agreement with Sovereign Partners. In September 1998, we entered into an agreement with Sovereign Partners pursuant to which Sovereign Partners has agreed to purchase up to $5,000,000 of our common stock, as we elect from time to time, over an 18-month period which ends on September 30, 2000, subject to extension by mutual agreement. As of May 24, 2000, we had sold 1,001,487 shares of our common stock to Sovereign Partners for gross proceeds of $1,500,000 and only 498,513 shares remain available for sale. Unless the average market price for our common stock were to exceed $8.25, which is highly unlikely, we will not receive the full $5,000,000 of gross proceeds from Sovereign Partners. For additional information concerning our agreement with Sovereign Partners, see "Recent Equity Offerings" in Item 6. - "Management's Discussion and Analysis or Plan of Operations." We May Not Be Able To Obtain Payment From Sovereign Partners. As discussed under "Recent Equity Offerings" in Item 6. - "Management's Discussion and Analysis or Plan of Operations," Sovereign Partners' obligation to purchase our shares is dependent upon various conditions being satisfied. If these conditions are not satisfied, we cannot require Sovereign Partners to purchase our shares. Resale Of Our Shares Held By Our Directors And Officers May Lower The Market Price Of Our Shares. As of May 24, 2000, we had a total of 8,990,092 shares of common stock outstanding, 1,107,223 of which were held by our directors and executive officers. These shares may only be resold in limited quantities and only within the limitations imposed by Rule 144 under the Securities Act. The mere prospect that these shares may be publicly resold could lower the market price for our common stock. Our Stock Price Has Been Highly Volatile. The market price for our common stock has been, and is likely to continue to be, highly volatile. Factors which could significantly affect the market price of our shares include: o actual or anticipated fluctuations in our operating results, o changes in alliances or relationships with our customers, o new products or technical innovations by us or by our existing or potential competitors, o trading activity and strategies occurring in the marketplace with respect to our common stock, o general market conditions and other factors unrelated to us or outside of our control. Potential Loss Of Our Nasdaq SmallCap Listing Could Adversely Affect The Price of Our Shares. Our common stock is quoted on the Nasdaq SmallCap Market. If the bid price of our common stock were to fall below $1.00 per share, if we were to have less than $2,000,000 in net tangible assets or if the value of our common stock held by our shareholders (other than our officers and directors) were to be less than $1,000,000, our common stock could be delisted from the Nasdaq SmallCap Market. If our common stock is delisted from Nasdaq, any trading of our shares then would be conducted in the over-the-counter market. This would make it more difficult for an investor to dispose of, or to obtain accurate 9 quotations for, our common stock. In addition, delisting would make it more difficult for us to raise funds through the sale of our securities. We Do Not Expect To Pay Dividends. We never have paid any dividends. For the foreseeable future, we expect that our earnings, if any, will be retained to finance the expansion and development of our business. Any payment of dividends is within the discretion of our Board of Directors and will depend, among other factors, on our earnings (if any), capital requirements, and operating and financial condition. Special Note Regarding Forward-looking Statements. We have made statements in this Annual Report on Form 10-KSB that are "forward-looking statements" within the meaning of the Securities Act and the Securities Exchange Act. Sometimes these statements contain words like "may," "believe," "expect," "continue," "intend," "anticipate" or other similar words. These statements could involve known and unknown risks, uncertainties and other factors that might significantly alter the actual results suggested by the statements. In other words, our performance might be quite different from what the forward-looking statements imply. The following factors, as well as those discussed above in this section, could cause our performance to differ from the implied results: o inability to obtain capital for continued operations and the development and commercialization of our products. o inability to generate significant market acceptance of our products. o failure to obtain new customers or retain existing large customers. o inability to manage our growth. o loss of our key employees. o changes in general economic and business conditions. o changes in industry trends. We have no obligation to release publicly the result of any revisions to any of our "forward-looking statements" to reflect events or circumstances that occur after the date of this Annual Report or to reflect the occurrence of other unanticipated events. ITEM 2.DESCRIPTION OF PROPERTY We conduct all of our operations from our 15,000 square foot Wilmington, North Carolina facility, which we use as follows: Function Percentage of Space -------- ------------------- Marketing, sales and customer support 12% Engineering 16% Administration 25% Production, inventory, shipping and 47% receiving 10 Our facility was built in 1993 to our specifications and presently is being about 80% utilized. We lease our facility from Daniel Flohr and Tina Jacobs, who are directors and principal shareholders of our company, under a triple net lease pursuant to which we are responsible for all costs and expenses, including applicable taxes, relating to the facility. Our lease expires on April 30, 2002. The current annual rent is $75,360, subject to increase on May 1, 2001. We believe that the terms and conditions of our lease are no less favorable to us than those available from unaffiliated third parties. Mr. Flohr and Ms. Jacobs allow us to use approximately 9,000 square feet of a 1.4 acre adjacent parcel of land owned by them as a parking area for our employees and customers. In consideration for use of this parcel, we provide minimal maintenance of the parking area and pay $504 per year of real estate taxes on this parcel. See Note 10 of Notes to Financial Statements included in Item 7. - "Financial Statements." ITEM 3. LEGAL PROCEEDINGS In 1995, the U.S. Patent and Trademark Office registered the "C-Phone" trademark to us. In 1996, in order to more closely identify us with our products, all of which then used the C-Phone name, and in an attempt to eliminate confusion among investors, we changed our name to C-Phone Corporation. In August 1996, we were advised by the Patent and Trademark Office that the former owner of the registered C-Phone trademark had filed a petition to cancel our registration, alleging that there was a likelihood of confusion and that its failure to file a required affidavit was inadvertent. The former owner has continued to use the C-Phone name for marine telephone products, and may have certain "common law" rights to continued use of the name and to prevent others from using the name. A proceeding concerning this matter is pending before the Patent and Trademark Office's Trademark Trial and Appeal Board, who will determine whether the conflicting use by us is so confusingly similar that a registration should not have been granted to us. If we are unable to satisfactorily resolve this matter with the former owner or we are not successful in the current Patent and Trademark Office proceeding, we may need to change the identifying name on some of our products. In addition, we may determine that it is appropriate to change our corporate name. We also may be subject to damages if it can be shown that we had infringed the former owner's common law rights. See "Factors That Could Effect Us - We May Be Unable To Continue To Use The C-Phone Name" in Item 1. - "Description of Business." In addition, we are involved in various legal proceedings which are incidental to the conduct of our business. We do not expect that any of these proceedings will have a significant adverse effect on our financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our securities holders during the fiscal quarter ended February 29, 2000. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock currently is traded on the Nasdaq SmallCap Market under the symbol "CFON." Prior to March 13, 2000, our common stock was traded on the Nasdaq National Market. The following table sets forth the high and low sales price for each quarterly period since March 1, 1998 for our common stock, as reported by The Nasdaq Stock Market, Inc. Fiscal 1999 High Low ----------- ---- --- 1st Fiscal Quarter (ended May 31, 1998) $15.500 $2.625 2nd Fiscal Quarter (ended August 31, 1998) $ 6.688 $2.063 3rd Fiscal Quarter (ended November 30, 1998) $ 4.344 $2.000 4th Fiscal Quarter (ended February 28, 1999) $ 5.375 $2.531 11 Fiscal 2000 ----------- 1st Fiscal Quarter (ended May 31, 1999) $3.438 $1.813 2nd Fiscal Quarter (ended August 31, 1999) $2.750 $1.250 3rd Fiscal Quarter (ended November 30, 1999) $4.500 $0.750 4th Fiscal Quarter (ended February 29, 2000) $3.625 $0.840 On May 24, 2000, the closing sale price of our common stock was $0.875. As of May 24, 2000, we had 306 holders of record of our common stock, including broker-nominees who held an aggregate of 7,704,000 shares of our common stock for an undisclosed number of beneficial holders. We estimate that we have in excess of 2,000 beneficial holders of our common stock. In addition to the transactions discussed in "Recent Equity Offerings" in Item 6 - "Management's Discussion and Analysis or Plan of Operations, " on March 3, 2000, we sold 10,000 shares to Mr. Albritton at a price of $2.4375 per share (the closing sales price on that day) in a private sale exempt from registration under Section 4(2) under the Securities Act. For information concerning our dividend policy, see "Factors That Could Effect Us - We Do Not Expect To Pay Dividends" in Item 1. - "Description of Business." ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS OVERVIEW We are engaged primarily in the engineering, manufacturing and marketing of video conferencing systems. Our video conferencing products are designed to operate primarily over either a regular, analog telephone line or ISDN, a type of digital telephone line, and are available in configurations for the U.S. market as well as most international markets. We distribute our products primarily to the business market and for special applications such as health care and security services. We sell our products primarily to resellers and system integrators. In January 2000, we restructured our operations to reduce our ongoing operating expenses, and announced that we were exploring certain strategic initiatives and increasing our focus on developing major OEM, distribution and licensing relationships. We have incurred significant losses during each of our last three fiscal years. Until market acceptance of our products is established, which we cannot assure you will occur, we expect to continue to incur significant losses due to our current and anticipated level of operating expenditures. RECENT EQUITY OFFERINGS December 1997 Private Placement. In December 1997, we completed a private placement in which we issued an aggregate of (a) 4,500 shares of Series A Convertible Preferred Stock, (b) Class A Warrants to purchase 315,000 shares of our common stock, and (c) Class B Warrants to purchase 135,000 shares of our common stock. We received net proceeds of approximately $4,110,000, after payment of fees and expenses of approximately $390,000. In connection with this transaction, we paid a finder's fee of $295,000 and issued to an affiliate of the finder a warrant, upon the same terms as the Class A Warrants, to acquire an aggregate of 185,000 shares of our common stock. All of the issued Series A Preferred Stock was converted during fiscal 1999 into a total of 1,987,622 shares of our common stock. 12 The Class A Warrants expired on December 19, 1998. Prior to this date, Class A Warrants to purchase 325,000 shares of our common stock were exercised at $8.05 per share, including the warrant issued to the finder. We received aggregate proceeds of $2,616,250 from the exercise of these warrants during the first quarter of fiscal 1999. The Class B Warrants expire on December 19, 2000, are not redeemable and have an exercise price of $9.10 per share, subject to adjustment under certain circumstances, including upon the issuance of shares of our common stock, or securities convertible or exchangeable into shares of our common stock, at less than 80% of the then market price. We received aggregate proceeds of $546,000 from the exercise of Class B Warrants to purchase 60,000 shares of our common stock during the first quarter of fiscal 1999. 1994 Warrant Exercises. In connection with our 1994 initial public offering, we had issued, to the representative of the underwriters, warrants expiring August 18, 1999 to purchase 200,000 shares of our common stock at an exercise price of $8.40 per share payable in cash or by delivering back to us warrants having an equivalent value. On May 13, 1998, we reduced the exercise price of these warrants to $6.00 per share, in consideration for (a) requiring payment of the exercise price for these warrants to be made in cash, rather than upon surrender of warrants, and (b) changing the expiration date of these warrants to May 21, 1998. On May 13, 1998, the closing sales price of our common stock was $9.75. All of these warrants were exercised and we received aggregate proceeds of $1,200,000. Agreement with Sovereign Partners. On September 18, 1998, we entered into a private equity credit agreement with Sovereign Partners, L.P. Pursuant to the agreement, Sovereign Partners agreed to purchase our common stock during the 18-month period ending on September 30, 2000, subject to extension by mutual agreement. From time to time during the term of the agreement, but no more frequently than once every 30 days, we can require Sovereign Partners to purchase between $500,000 and $1,000,000 of our common stock until all these purchases total $5,000,000. The purchase price for each share will equal 85% of the average closing bid price of our common stock during the five trading days immediately preceding the day we notify Sovereign Partners of a purchase obligation. As of May 24, 2000, we had sold 1,001,487 shares of our common stock to Sovereign Partners for gross proceeds of $1,500,000 and 498,513 shares remain available for sale. Sovereign Partners' obligation to purchase shares of our common stock is subject to certain conditions, including: o The average closing bid price of our common stock has been at least $1.00 per share for the 20 trading days preceding the date of our notice of purchase to Sovereign Partners. o Our common stock continues to be traded on The Nasdaq Stock Market. o The total number of shares of common stock that we may sell to Sovereign Partners under the agreement cannot exceed 1,543,765 shares, unless we first obtain shareholder approval as required by the rules of The Nasdaq Stock Market, Inc. o The number of shares of common stock we may sell to Sovereign Partners on any draw date, when aggregated with all other shares then owned by Sovereign Partners, cannot exceed 9.9% of our total common stock then outstanding. o A current prospectus must then be available to permit Sovereign Partners to publicly resell the shares of common stock that it acquires from us under the agreement. As we have registered only 1,500,000 shares for resale by Sovereign Partners, we cannot sell them more than this amount without registering additional shares. 13 As we have sold Sovereign Partners in excess of $1,000,000 of our common stock under the agreement, we have the right to terminate the agreement without any further obligation to Sovereign Partners. During August 1999, we sold Sovereign Partners 395,426 shares of our common stock under the agreement and received gross proceeds of $500,000 ($1.26 per share) or $408,726 after related fees and expenses of $91,274. During November 1999, we sold Sovereign Partners 606,061 shares of our common stock under the agreement and received gross proceeds of $1,000,000 ($1.65 per share) or $878,727 after related fees and expenses of $121,273. In negotiating the November 1999 sale, Sovereign Partners waived the average closing bid price condition and agreed to a purchase price per share of $1.65. Sovereign Partners has agreed not to engage in any short sales of our common stock, except after it receives a purchase notice from us, and then only for the number of shares of common stock covered by our purchase notice. Under a related registration rights agreement, we have agreed to maintain effectiveness of a registration statement for the resale by Sovereign Partners of the shares it purchases from us under the agreement. If we fail to maintain effectiveness of the registration statement, Sovereign Partners may require us to pay a penalty equal to 1% of the purchase price of the shares of common stock then held by Sovereign Partners for each 30-day period that the registration statement is not effective. In connection with the agreement, we issued to Cardinal Capital Management, Inc., as finder, a two-year warrant expiring September 18, 2000 to purchase 100,000 shares of our common stock at an exercise price of $8.00 per share. If the closing sales price of our common stock exceeds $10.00 for five consecutive trading days, we may give Cardinal Capital notice of our intention to redeem the warrant. If Cardinal Capital does not exercise the warrant prior to the redemption date specified in our redemption notice, we may redeem the warrant for $1,000. The shares of our common stock issuable to Cardinal Capital upon exercise of this warrant have not been registered for sale under the Securities Act, although we may register these shares in the future. We also paid Cardinal Capital a cash fee of $30,000 when we entered into the agreement and have agreed to pay Cardinal Capital an additional cash fee equal to 6% of the dollar amount of any sales of common stock to Sovereign Partners under the agreement, with our initial $30,000 payment to be credited against this fee. To date, we have paid Cardinal Capital a total of $90,000 in cash fees. RESULTS OF OPERATIONS FISCAL YEAR ENDED FEBRUARY 29, 2000 AS COMPARED TO FISCAL YEAR ENDED FEBRUARY 28, 1999 Revenues. Net sales decreased 15% to $1,346,114 in fiscal 2000 from $1,590,748 in fiscal 1999. Net sales for fiscal 2000 included sales of excess inventory of approximately $190,000. There was no sale of excess inventory in fiscal 1999. This decrease in product sales reflects our change in marketing emphasis to the business and special applications markets. These markets require products with more features and functionality than the consumer retail market and different marketing techniques and staffing. Some resellers are no longer marketing our newer, higher-priced products, as their marketing focus was toward lower-priced products. The sales cycle for the business and special applications is longer than for the consumer retail market. Other revenue during fiscal 2000, which consisted of a license fee and a software development fee, was $55,036, while other revenue during fiscal 1999, which consisted primarily of installation and telecommunication service fees, was $30,448. As a result of the foregoing, our total revenues decreased 14% to $1,401,150 in fiscal 2000 from $1,621,196 in fiscal 1999. Cost of revenue. Cost of revenue consists of cost of goods sold and cost of other revenue. Cost of goods sold includes labor, materials and other manufacturing costs, such as salaries, supplies, leasing costs, depreciation related to production operations and the write-down of inventories to net 14 realizable value. Cost of other revenue consists primarily of the allocation of salaries and benefits of personnel and the cost of outside services directly related to this revenue. Cost of goods sold decreased 52% to $1,227,927, or to 91% of net sales, in fiscal 2000 from $2,541,145, or 160% of net sales, in fiscal 1999. The decrease in cost of goods sold was the result of higher margins on our newer products and our decision to more heavily rely on contract manufacturers to manufacture and assemble most of our products. Also, in fiscal 2000 the provision for inventory obsolescence was $78,147 as compared to $608,657 in fiscal 1999. The decision to more heavily rely on contract manufacturers has produced a decrease in the overall costs for our products, including substantial decreases in manufacturing inventory variances which were primarily caused by low production volume. Cost of other revenue in fiscal 2000 was $3,000, or 5% of related revenue as compared to cost of other revenue of $9,750, or 32% of related revenue, in fiscal 1999. There was no cost associated with license fees and certain software income included in other revenue in fiscal 2000 as all related costs were properly expensed in prior periods. Gross profit. Our gross profit was $170,223 in fiscal 2000, as compared to a gross loss of $929,699 in fiscal 1999. The gross loss for fiscal 1999 was primarily the result of the related high cost of goods sold, which is discussed above. Selling, general and administrative. Selling, general and administrative expenses increased 1% to $3,017,773, or 215% of revenues, in fiscal 2000 from $3,000,128, or 185% of revenues, in fiscal 1999. Selling and marketing expenses increased 16% to $1,262,489 in fiscal 2000 from $1,085,908 in fiscal 1999 largely as the result of the change in our sales and marketing staff necessitated by our shift in marketing emphasis to the business and special applications markets from the consumer retail market. The increase in selling and marketing expenses was mostly offset by a decrease in bad debt expense to $8,119 in fiscal 2000 from $165,760 in fiscal 1999. The decrease in bad debt expense was a direct result of our shift in marketing emphasis away from the retail home consumer market. As we increase our focus on attempting to develop major OEM, distribution and licensing relationships, we expect that selling and marketing expenses will decrease from 2000 levels. Research, development and engineering. Research, development and engineering expenses decreased 19% to $658,879, or 47% of revenues, in fiscal 2000 from $814,366, or 50% of revenues, in fiscal 1999. The decrease was primarily the result of a reduction in personnel and related development expenses due to the completion of the development of our current products during fiscal 1999. All of these costs were charged to operations as incurred and were funded by our cash reserves. While we expect to continue to invest significant resources during the foreseeable future in engineering and the development of enhancements to our existing products, we anticipate that these expenses for fiscal 2001 will be less than the comparable fiscal 2000 levels. Operating loss. As a result of the factors discussed above, our operating loss decreased 26 % to $3,506,429 in fiscal 2000 from $4,744,193 in fiscal 1999. Interest. Interest income decreased 46% to $142,801 in fiscal 2000 from $265,468 in fiscal 1999 as a result of the continued use of cash to fund operations. FISCAL YEAR ENDED FEBRUARY 28, 1999 AS COMPARED TO FISCAL YEAR ENDED FEBRUARY 28, 1998 Revenues. Net sales decreased 13% to $1,590,748 in fiscal 1999 from $1,818,663 in fiscal 1998, reflecting the discontinuance of our PC-based products during the first quarter of fiscal 1999 and the shift in marketing emphasis from our stand-alone products for the consumer market to the business market and special applications. Sales of stand-alone products represented 94% of net sales during fiscal 1999, as compared to 45% of net sales during fiscal 1998. During fiscal 1999, we had other revenue of $30,448 compared to $72,003 during fiscal 1998. As a result of the foregoing, our total revenues decreased 14% to $1,621,196 in fiscal 1999 from $1,890,666 in fiscal 1998. 15 Cost of revenue. Cost of goods sold decreased 21% to $2,541,145, or 160% of net sales, in fiscal 1999 from $3,209,875, or 176% of net sales, in fiscal 1998. The decrease in cost of goods sold was primarily the result of a decrease in stand-alone unit costs and the decrease in sales. However, the decrease in cost of goods sold was offset in part by a $608,657 provision for inventory obsolescence, of which $142,691 related to discontinued PC-based product inventory not sold during fiscal 1999 and $465,966 related to stand-alone product inventory, primarily the result of product changes as we shifted from the consumer market to the business and special applications markets. During fiscal 1998, cost of goods sold included a $696,248 provision for inventory obsolescence of which $475,824 was related to PC-based product inventory. In addition, the low production volume of our stand-alone units did not allow us to cover all fixed manufacturing costs. Cost of other revenue was $9,750 in fiscal 1999, or 32% of related revenue, as compared to cost of other revenue of $22,506, or 31% of related revenue, in fiscal 1998. Gross loss. Our gross loss was $929,699 in fiscal 1999, as compared to a gross loss of $1,341,715 in fiscal 1998, a decrease of 31%. The gross loss in fiscal 1999 was primarily the result of the low sales volume, the provision for inventory obsolescence and the high cost of goods sold, which is discussed above. Selling, general and administrative. Selling, general and administrative expenses decreased 21% to $3,000,128, or 185% of revenues, in fiscal 1999 from $3,816,806, or 202% of revenues, in fiscal 1998. The primary reason for the decrease was a 44% decrease in selling and marketing expenses to $1,085,908 in fiscal 1999 from $1,943,345 in fiscal 1998. This decrease was the result of several factors including advertising and display material expenses related to the launch of our home consumer product in early fiscal 1998 and the shift in marketing emphasis for our standalone products from home consumer use to business and special applications during fiscal 1999. This shift reduced our expenses related to salaries, travel expenses and outside consulting services. Research, development and engineering. Research, development and engineering expenses decreased 16% to $814,366, or 50% of revenues, in fiscal 1999 from $973,210, or 51% of revenues, in fiscal 1998. The decrease was primarily the result of the completion of the initial development of our current stand-alone products during our fiscal 1998. All of these costs were charged to operations as incurred and were funded by our cash reserves. Operating loss. As a result of the factors discussed above, our operating loss decreased 23% to $4,744,193 in fiscal 1999 from $6,131,731 in fiscal 1998. Interest. Interest income increased 69% to $265,468 in fiscal 1999 from $157,350 in fiscal 1998 as a result of interest earned on the higher average balance of cash and cash equivalents we had during fiscal 1999 due to the receipt of proceeds from our December 1997 private placement and from the exercise in May 1998 of previously issued warrants and options. LIQUIDITY AND CAPITAL RESOURCES We have financed our recent operations primarily from the proceeds of private placements of our securities and from the exercise of previously issued warrants and options. For additional information, see "Recent Equity Offerings." At February 29, 2000, we had working capital of $3,373,331, as compared to $5,305,512, at February 28, 1999, a decrease of $1,932,181. Our cash and cash equivalents were $2,367,633 at February 29, 2000, as compared to $4,602,752 at February 28, 1999. Our invested funds consisted primarily of overnight repurchase agreements for discount notes issued by the United States Treasury or United States government agencies. Our restricted cash consisted of a $150,000 certificate of deposit pledged by us to a bank to secure a letter of credit which expires in August 2000 (See Note 3 to Notes to Financial Statements). During fiscal 2000, our operating activities used $3,269,781 of net cash, primarily to fund operating activities, our investing activities used $252,791 16 of net cash (of which $102,791 was for net equipment purchases and $150,000 was to purchase a certificate of deposit), and our financing activities provided $1,287,453 of net cash (after related fees and expenses) from sales of a total of 1,001,487 shares of our common stock under our agreement with Sovereign Partners. We lease our facility and own our manufacturing equipment free from any liens or other encumbrances. As of February 29, 2000, we had no material commitments for capital expenditures. Due to the restructuring of our operations to reduce ongoing operating expenses and increasing our focus on attempting to develop major OEM, distribution and licensing relationships, we plan to decrease our expenditures for selling and marketing expenses. While we expect to continue to expend resources for product development and engineering, we anticipate these expenditures to decrease from the levels incurred in fiscal 2000. We also are actively exploring certain strategic initiatives. We believe that our current working capital, together with available proceeds from our agreement with Sovereign Partners, will be sufficient to meet our projected operating needs and capital expenditures, at least through the end of fiscal 2001. However, if our products gain significant market acceptance, we may need to obtain additional working capital for the carrying of accounts receivable and inventory. See "Factors That Could Effect Us - We Will Require Significant Additional Capital To Become Profitable, Which Capital May Not Be Readily Available" in Item 1. - "Description of Business." This would require us to obtain even more working capital. We anticipate that these additional funds should be available through one or more possible sources, including: o the sale of our common stock pursuant to our agreement with Sovereign Partners; o a private placement of our common stock, preferred stock or debt securities; o the exercise of our outstanding warrants, if the market price of our common stock were to exceed the exercise price of these warrants; and o a public offering of our common stock. At February 29, 2000, we estimate that we had available net operating loss carryforwards of approximately $23,000,000 for Federal and state purposes, which may be used to reduce future taxable income, if any. The Federal carryforwards begin to expire in 2009 and the state carryforwards begin to expire in 2001. We do not believe that inflation has had a significant impact on our sales or operating results, during the past three years. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. In June 1999, FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the FASB Statement No. 133, which stipulates the required adoption date to be all fiscal years beginning after June 15, 2000. We do not anticipate that the adoption of the new statement will have a significant effect on our earnings or financial position. 17 ITEM 7. FINANCIAL STATEMENTS Page ---- Table of Contents - ----------------- Report of Independent Auditors F-1 Report of Independent Accountants F-2 Balance Sheets as of February 29, 2000 and February 28, 1999 F-3 Statements of Operations for the years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-4 Statements of Shareholders' Equity for the years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-5 Statements of Cash Flows for the years ended February 29, 2000, February 28, 1999 and February 28, 1998 F-6 Notes to Financial Statements F-7 18 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of C-Phone Corporation We have audited the accompanying balance sheet of C-Phone Corporation as of February 29, 2000, and the related statements of income, shareholders' equity, and cash flows for the year ended February 29, 2000. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. The financial statements of C-Phone Corporation as of and for each of the two years in the period ended February 28, 1999 were audited by other auditors whose report dated April 15, 1999 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts of disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C-Phone Corporation at February 29, 2000, and the results of its operations and its cash flows for the year ended February 29, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP - ----------------------- Raleigh, North Carolina April 20, 2000 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of C-Phone Corporation: In our opinion, the accompanying balance sheets and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of C-Phone Corporation (the "Company") at February 28, 1999, and the results of its operations and its cash flows for each of the two years in the period ended February 28, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------ Raleigh, North Carolina April 15, 1999 F-2 C-PHONE CORPORATION BALANCE SHEETS
February 29, February 28, ASSETS 2000 1999 ------------ ------------ Current assets: Cash and cash equivalents $ 2,367,633 $ 4,602,752 Restricted cash 150,000 -- Accounts receivable, net of allowance for doubtful accounts of $83,086 and $181,347 at February 29, 2000 and February 28, 1999, respectively 210,497 105,717 Inventories, net 1,051,804 1,177,522 Prepaid expenses and other current assets 89,689 118,893 ------------ ------------ Total current assets 3,869,623 6,004,884 Property and equipment, net 105,116 112,607 Other assets -- 136,503 ------------ ------------ Total assets $ 3,974,739 $ 6,253,994 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 255,551 $ 306,302 Accrued expenses 240,741 393,070 ------------ ------------ Total current liabilities 496,292 699,372 Commitments and Contingencies (Notes 10 and 12) Shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized; 8,980,092 and 7,978,605 shares issued and outstanding at February 29, 2000 and February 28, 1999, respectively 89,801 79,786 Paid-in capital 29,878,836 28,601,398 Accumulated deficit (26,490,190) (23,126,562) ------------ ------------ Total shareholders' equity 3,478,447 5,554,622 ------------ ------------ Total liabilities and shareholders' equity $ 3,974,739 $ 6,253,994 ============ ============
The accompanying notes are an integral part of the financial statements. F-3 C-PHONE CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
February 29, February 28, February 28, 2000 1999 1998 ----------- ----------- ----------- Net sales $ 1,346,114 $ 1,590,748 $ 1,818,663 Other revenue 55,036 30,448 72,003 ----------- ----------- ----------- Total revenue 1,401,150 1,621,196 1,890,666 ----------- ----------- ----------- Cost of goods sold 1,227,927 2,541,145 3,209,875 Cost of other revenue 3,000 9,750 22,506 ----------- ----------- ----------- Total cost of revenue 1,230,927 2,550,895 3,232,381 ----------- ----------- ----------- Gross profit (loss) 170,223 (929,699) (1,341,715) ----------- ----------- ----------- Operating expenses: Selling, general and administrative 3,017,773 3,000,128 3,816,806 Research, development and engineering 658,879 814,366 973,210 ----------- ----------- ----------- Total operating expenses 3,676,652 3,814,494 4,790,016 ----------- ----------- ----------- Operating loss (3,506,429) (4,744,193) (6,131,731) Interest expense -- -- (447) Interest income 142,801 265,468 157,350 ----------- ----------- ----------- Net loss $(3,363,628) $(4,478,725) $(5,974,828) =========== =========== =========== Per-share data: Basic and diluted net loss per common share $ (0.40) $ (0.63) $ (1.49) =========== =========== =========== Weighted average number of common shares outstanding 8,341,192 7,183,078 5,202,608 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-4
C-PHONE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY for the Years Ended February 29, 2000, February 28, 1999 and February 28, 1998 Common Stock Paid-in Capital Total ------------ Paid-in Capital Preferred Accumulated Shareholders' Shares Amount Common Stock Stock Deficit Equity ------------ ------------ ------------ ------------ ------------ ------------ Balance, February 28, 1997 4,355,393 $ 43,554 $ 13,530,208 $ -- $(10,848,837) $ 2,724,925 Exercise of employee stock options 17,571 176 59,412 -- -- 59,588 Expense for stock options granted to consultant 74,400 -- -- 74,400 Stock issued to consultant 4,740 47 14,173 -- -- 14,220 Issuance of common stock in March 1997 private placement 833,667 8,336 4,361,182 -- -- 4,369,518 Issuance of common stock pursuant to contingent value rights issued in March 1997 private placement 136,863 1,369 (1,369) -- -- -- Issuance of preferred stock in December 1997 private placement -- -- -- (390,458) -- (390,458) To reflect beneficial conversion feature of preferred stock -- -- -- 1,708,808 (1,708,808) -- Accretion of preferred stock -- -- -- -- (43,767) (43,767) Net loss -- -- -- -- (5,974,828) (5,974,828) ------------ ------------ ------------ ------------ ------------ ------------ Balance, February 28, 1998 5,348,234 53,482 18,038,006 1,318,350 (18,576,240) 833,598 Exercise of stock options 57,749 578 304,359 -- -- 304,937 Expense for stock options granted to consultant -- -- 12,800 -- -- 12,800 Common stock issued upon exercise of warrants 585,000 5,850 4,332,395 -- -- 4,338,245 Accretion of preferred stock -- -- -- -- (71,597) (71,597) Common stock issued upon conversion of preferred stock 1,987,622 19,876 5,913,838 (1,318,350) -- 4,615,364 Net loss -- -- -- -- (4,478,725) (4,478,725) ------------ ------------ ------------ ------------ ------------ ------------ Balance, February 28, 1999 7,978,605 79,786 28,601,398 -- (23,126,562) 5,554,622 ------------ ------------ ------------ ------------ ------------ ------------ Common stock issued to Sovereign Partners 1,001,487 10,015 1,277,438 -- -- 1,287,453 Net loss -- -- -- -- (3,363,628) (3,363,628) ------------ ------------ ------------ ------------ ------------ ------------ Balance, February 29, 2000 8,980,092 $ 89,801 $ 29,878,836 $ -- $(26,490,190) $ 3,478,447 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements. F-5 C-PHONE CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
February 29, February 28, February 28, 2000 1999 1998 ----------- ----------- ----------- Cash flows from operating activities: Net loss $(3,363,628) $(4,478,725) $(5,974,828) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 110,282 136,444 131,231 Provision for inventory write-down and obsolescence 78,147 608,657 696,248 Bad debt expense 8,119 165,760 178,773 Compensation expense of stock options -- 12,800 74,400 Compensation expense of stock issued to consultant -- -- 14,220 Changes in operating assets and liabilities: Accounts receivable (112,899) 75,207 (103,415) Inventories 47,571 (144,651) (995,845) Prepaid expenses and other current assets 29,204 (45,165) 8,338 Other assets 136,503 (93,817) 111,560 Accounts payable (50,751) (489,717) 208,142 Accrued expenses (152,329) 97,423 (30,291) ----------- ----------- ----------- Net cash used in operating activities (3,269,781) (4,155,784) (5,681,467) ----------- ----------- ----------- Cash flows from investing activities: Purchase of restricted certificate of deposit (150,000) -- -- Equipment purchases, net of disposals (102,791) (84,877) (43,492) ----------- ----------- ----------- Net cash used in investing activities (252,791) (84,877) (43,492) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock, net 1,287,453 -- -- Proceeds from exercise of stock options -- 304,937 59,588 Proceeds from private placement of common stock, net -- -- 4,369,518 Proceeds from private placement of preferred stock, net -- -- 4,109,542 Proceeds from exercise of warrants, net -- 4,338,245 -- Payment of capital lease obligations -- -- (11,507) ----------- ----------- ----------- Net cash provided by financing activities 1,287,453 4,643,182 8,527,141 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (2,235,119) 402,521 2,802,182 Cash and cash equivalents, beginning of year 4,602,752 4,200,231 1,398,049 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 2,367,633 $ 4,602,752 $ 4,200,231 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-6 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES C-Phone was incorporated in the State of New York on March 28, 1986. We engineer, manufacture and market video conferencing systems. Our stand-alone video conferencing system line consists of several models, some of which operate over either analog or digital phone lines and some of which operate only over analog phone lines. We market our products primarily to business and special applications markets in the United States and internationally. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The financial statements are prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes all cash balances and highly liquid investments with a maturity of three months or less at the date of purchase. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject us to concentrations of credit risk consist of trade receivables and cash deposits. Significant customers and concentrations of credit risk are discussed in Note 11. As discussed in Note 2, we maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of our financial instruments, which consist of cash and cash equivalents, approximates the fair value because of the short maturities of these investments. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out "FIFO " basis) or market. Inventories are presented net of valuation allowances necessary to reduce inventories to their net realizable value. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and is depreciated by the double-declining-balance method over the estimated useful life of the assets, which range from three to seven years. Leasehold improvements are amortized over the remaining term of the lease or the useful life, if shorter. Major tooling costs are capitalized and amortized over the expected life of the tooling or the expected life of the related product, whichever is less. Expenditures for minor tooling, maintenance and repairs are charged to expense as incurred. Significant expenditures for betterments and renewals are capitalized. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition, and any gain or loss is reflected in operations. F-7 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued) We assess the impairment of our long-lived assets, including property, plant and equipment, whenever economic events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Long-lived assets are considered to be impaired when the sum of the expected future operating cash flows, undiscounted and without interest charges, is less than the carrying values of the related assets. INCOME TAXES We provide for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires that all deferred tax asset and liability balances be determined by application to temporary differences of the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Our temporary differences consist primarily of net operating losses, depreciation, allowance for doubtful accounts receivable and inventory valuation reserves. REVENUE RECOGNITION Product revenues are recognized when the product is shipped, collection of the purchase price is probable and we have no significant further obligation to the customer. Costs of remaining insignificant obligations, if any, are accrued as costs of revenue at the time of revenue recognition. WARRANTY We generally provide a one-year warranty on our products. Estimated warranty expenses are accrued and charged to cost of goods sold when the related revenues are recognized. RESEARCH AND DEVELOPMENT COSTS Research and development expenditures are charged to expense as incurred. PREFERRED STOCK In December 1997, we issued 4,500 shares of the our Series A Convertible Preferred Stock, with an initial stated value of $1,000 per share which increased at the rate of 5% per annum. Each preferred share was convertible, from time to time, at the option of the holder, into a number of shares of our common stock as was determined by dividing the stated value of the preferred stock by the lesser of (x) $7.3575, and (y) 85% of the average of the closing bid price during such three consecutive trading day period selected by the holder during the 25-day trading period preceding the date of conversion. During the fiscal year ended February 28, 1999, all of these preferred shares were converted into 1,987,622 shares of our common stock. In its November 7,1997 Current Issues and Rulemaking Projects, the Securities and Exchange Commission addressed the issue of a "beneficial conversion feature", where securities may be convertible into common stock at the lower of a conversion rate fixed at the date of issue or a fixed discount to the common stock's market price at the date of conversion. The beneficial conversion feature of the preferred stock is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The beneficial conversion feature of $1,708,808 was calculated at the date of issue as the difference between the conversion price and the fair value of our common stock. This amount is recognized as a return to the preferred shareholders over the minimum period in which the shareholders F-8 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- can realize the return. As there are no time restraints on the conversion, the full amount of the feature was amortized on the date of issuance. 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued) NET LOSS PER SHARE We calculate our earnings or loss per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share, which requires the presentation on the face of the income statement of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing the net income (loss) available to common shareholders by the weighted average number of outstanding common shares. The calculation of diluted earnings per share is similar to the calculation of basic earnings per share, except that the denominator includes dilutive common stock equivalents such as stock options and warrants. Common stock options and warrants are not included for the years ended February 29, 2000, February 28, 1999 and February 28, 1998, as they would be anti-dilutive. The accretion of the 5% annual increase in stated value of the preferred stock in the amount of $71,597 for fiscal 1999 increased the net loss attributable to common shareholders from $4,478,725 to $4,550,322, thereby increasing the net loss per share for fiscal 1999 from $0.62 to $0.63. The amortization of the beneficial conversion feature and the accretion of the 5% annual increase in stated value of the preferred stock in the total amount of $1,752,575 for fiscal 1998 increased the net loss attributable to common shareholders from $5,974,828 to $7,727,403 which increased the net loss per share for fiscal 1998 from $1.15 to $1.49. ACCOUNTING FOR STOCK OPTIONS We adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, which permits us to continue to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. As we have decided to continue to apply APB Opinion No. 25, we have not recognized any compensation cost for options granted under our Amended and Restated 1994 Stock Option Plan except for $12,800 for fiscal 1999 and $74,400 for fiscal 1998 related to the fair value of services rendered in exchange for options granted to consultants. However, we have disclosed in Note 6 the pro forma impact on net loss had compensation cost been determined based on the fair value of the options at the grant date. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and displaying of comprehensive income and its components including revenues, expenses, gains and losses in a full set of general purpose financial statements, became effective for us in fiscal 1999. This statement requires the disclosure of an amount that represents total comprehensive income and the components of comprehensive income in a financial statement. We had no items of other comprehensive income or loss during fiscal 2000, fiscal 1999 or fiscal 1998. ADVERTISING COSTS Advertising costs are expensed as incurred. F-9 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. In June 1999, FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the FASB Statement No. 133, which stipulates the required adoption date to be all fiscal years beginning after June 15, 2000. We do not anticipate that the adoption of the new statement will have a significant effect on our earnings or financial position. 2. CASH AND CASH EQUIVALENTS We place our cash and cash equivalents with various financial institutions. At times, the amount of cash and cash equivalents in any one financial institution may be in excess of the FDIC insurance limits. At February 29, 2000 and February 28, 1999, our cash equivalents were primarily overnight repurchase agreements for discount notes issued by the United States Treasury or United States government agencies. The aggregate fair value of these investments approximated the amortized cost at February 29, 2000 and February 28, 1999. 3. RESTRICTED CASH Our restricted cash consists of a certificate of deposit in a bank which is collateral for a letter of credit in the amount of $150,000. The letter of credit expires September 2, 2000, and was issued to our contract manufacturer to secure our obligations under our agreement with it. See Note 10. 4. INVENTORIES Inventories consist of the following at February 29, 2000 and February 28, 1999: 2000 1999 -------------- ------------- Raw materials $ 378,866 $ 382,789 Work in process 193,665 282,771 Finished goods 479,273 511,962 -------------- ------------- $ 1,051,804 $ 1,177,522 ============== ============= We wrote down obsolete inventory in the amount of $78,147 in fiscal 2000 and $276,520 in fiscal 1999. Other inventory reserves were $471,581 and $621,736 at February 29, 2000 and February 28, 1999, respectively. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at February 29, 2000 and February 28, 1999: 2000 1999 ------------- ------------- Machinery and equipment $ 919,553 $ 819,656 Furniture and fixtures 33,308 32,992 Leasehold improvements 101,782 101,782 ------------- ------------- 1,054,643 954,430 Less accumulated depreciation 949,527 841,823 and amortization ------------- ------------- $ 105,116 $ 112,607 ============= ============= F-10 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 6. SHAREHOLDERS' EQUITY (a) In connection with our initial public offering in August 1994, we granted to the managing underwriter warrants to purchase 200,000 shares of our common stock at $8.40 per share. On May 13, 1998, we reduced the exercise price of the warrants to $6.00 per share in consideration for (1) requiring payment of the exercise price for the warrants to be made in cash as opposed to the surrender of warrants and (2) changing the expiration date thereof from August 18, 1999 to May 21, 1998. On May 13, 1998, the closing sales price of our common stock was $9.75. The holders of the warrants exercised all of the warrants by May 15, 1998 and we received aggregate proceeds of $1,200,000. (b) During fiscal 1997, in conjunction with a one-year consulting agreement, we granted to a consultant a five-year option to purchase 25,000 shares of our common stock at a price of $3.375 per share, which was the market price of our common stock on the date of grant. During fiscal 1998, we granted this consultant another five-year option to purchase 24,000 shares at a price of $5.95 per share when we extended our agreement with the consultant for another year. The agreement was terminated in May 1998 and options to purchase 10,000 shares of our common stock under the second option were forfeited pursuant to the terms of the option. The options were granted in partial payment for services to be rendered by the consultant under the agreement, which services we valued at $12,800 for fiscal 1999 and $38,400 for fiscal 1998. Also during fiscal 1998, we granted to another consultant a five-year option to purchase 18,000 shares of our common stock at $7.8125 per share which was the market price of the stock on the date of grant. The relationship with the second consultant was terminated prior to the end of its six-months term and the right to exercise one-third of the option was forfeited pursuant to the terms of the option. The option was granted in partial payment for services to be rendered by the consultant, which services we valued at $36,000 for fiscal 1998. All of these amounts were expensed and, as a result, paid-in capital was increased by such amounts. (c) During the week of March 31, 1997, we completed a private placement, through a placement agent, of 833,667 shares of our common stock pursuant to which we received net proceeds of approximately $4,370,000, after payment of fees and expenses of approximately $632,000. Each of the shares issued was accompanied by the right, under certain circumstances, to receive additional shares of our common stock if the first sale of the shares through a broker-dealer were less than $8.00 per share. We issued 136,863 additional shares pursuant to these rights. (d) In December 1997, we completed a private placement in which we issued (a) 4,500 shares of a new Series A Convertible Preferred Stock, (b) Class A Warrants to purchase 315,000 shares of our common stock at an exercise price of $8.05 per share, and (c) Class B Warrants to purchase 135,000 shares of our common stock at an exercise price of $9.10 per share. We received net proceeds of approximately $4,110,000, after payment of fees and expenses of approximately $390,000. In connection with this transaction, we paid a finder's fee of $295,000 and issued to an affiliate of the finder a warrant, upon the same terms as the Class A Warrants, to acquire an aggregate of 185,000 shares of our common stock. All of the issued Series A Preferred Stock was converted during fiscal 1999 into a total of 1,987,622 shares of our common stock. During fiscal 1999, Class A Warrants and the warrants issued to the affiliate of the finder to purchase 325,000 shares of our common stock were exercised and we received aggregate proceeds of $2,616,250. The remaining Class A Warrants expired unexercised on December 19, 1998. Also during fiscal 1999, Class B Warrants to purchase 60,000 shares of our common stock were exercised and we received aggregate proceeds of $546,000. The remaining Class B Warrants will expire on December 19, 2000, if not exercised before then. F-11 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 6. SHAREHOLDERS' EQUITY (Continued) (e) On September 18, 1998, we entered into a private equity credit agreement with Sovereign Partners, L.P. Pursuant to this agreement, Sovereign Partners agreed to purchase up to $5 million of our common stock during the 18-month period ending on September 30, 2000, subject to extension by mutual agreement. From time to time during the term of the agreement, but no more frequently than once every 30 days, we can require Sovereign Partners to purchase between $500,000 and $1 million of our common stock. The purchase price for each share of common stock to be paid by Sovereign Partners will equal 85% of the average closing bid price of the common stock during the five trading days immediately preceding the day we notify Sovereign Partners of a purchase obligation. Sovereign Partners's obligation to purchase our common stock is subject to certain conditions, including: (1) the average closing bid price of our common stock has been at least $1.00 per share for the 20 trading days preceding the date of our notice of purchase to Sovereign Partners; (2) our common stock continues to be traded on The Nasdaq Stock Market; (3) the total number of shares of common stock that we may sell to Sovereign Partners under the agreement cannot exceed 1,543,765 shares, unless we first obtain shareholder approval as required by the rules of The Nasdaq Stock Market, Inc. (4) the number of shares of common stock we may sell to Sovereign Partners on any draw date, when aggregated with all other shares then owned by Sovereign Partners, cannot exceed 9.9% of our total common stock then outstanding; and (5) a current prospectus must then be available to permit Sovereign Partners to publicly resell the shares of common stock that it acquires from us under the agreement. As we have registered only 1,500,000 shares for resale by Sovereign Partners, we cannot sell them more than this amount without registering additional shares. We have sold Sovereign Partners in excess of $1 million of our common stock under the agreement. As a result, we have the right to terminate the agreement without any further obligation to Sovereign Partners. During August 1999, we sold Sovereign Partners 395,426 shares of common stock under the agreement and received gross proceeds of $500,000, or $1.26 per share. Our net proceeds were $408,726 after related fees and expenses of $91,274. During November 1999, we sold Sovereign Partners 606,061 shares of common stock under the agreement and received gross proceeds of $1,000,000, or $1.65 per share. Our net proceeds were $878,727 after related fees and expenses of $121,273. In negotiating the November 1999 sale, Sovereign Partners waived the average closing bid price condition and agreed to a purchase price per share of $1.65. Sovereign Partners has agreed not to engage in any short sales of our common stock, except after it receives a purchase notice from us, and then only for the number of shares of common stock covered by our purchase notice. Under a related registration rights agreement, we have agreed to maintain effectiveness of a registration statement under the Securities Act for the resale by Sovereign Partners of the shares of common stock it purchases under the agreement. If we fail to maintain effectiveness of the registration statement, Sovereign Partners may require us to pay a penalty equal to 1% of the purchase price of the common stock then held by it for each 30-day period that the registration statement is not effective. F-12 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 6. SHAREHOLDERS' EQUITY (Continued) In connection with our agreement with Sovereign Partners, we issued to Cardinal Capital Management, Inc., as finder, a two-year warrant expiring September 18, 2000 to purchase 100,000 shares of our common stock at an exercise price of $8.00 per share. If the closing sales price of our common stock exceeds $10.00 for five consecutive trading days, we may give Cardinal Capital notice of our intention to redeem the warrant. If Cardinal Capital does not exercise the warrant prior to the redemption date specified in our redemption notice, we may redeem the warrant for $1,000. The shares of our common stock issuable to Cardinal Capital upon exercise of this warrant have not been registered for sale under the Securities Act. We also paid Cardinal Capital a cash fee of $30,000 when we entered into the agreement and have agreed to pay Cardinal Capital an additional cash fee equal to 6% of the dollar amount of any sales of common stock to Sovereign Partners under the agreement, with our initial $30,000 payment to be credited against this fee. 7. COMMON STOCK RESERVED FOR FUTURE ISSUANCE At February 29, 2000, we had reserved a total of 1,508,858 of our authorized 20,000,000 shares of common stock for future issuance as follows: Outstanding warrants 175,000 Stock option plan 791,580 Possible issuance under private equity credit agreement 542,278 ----------- 1,508,858 =========== 8. STOCK OPTION PLAN Our stock option plan provides for the grant of options to officers, directors, employees and consultants. Options may be either incentive stock options or non-qualified stock options, except that only employees may be granted incentive stock options. Options generally vest over a period of three years. The maximum term of an option is ten years. The plan will terminate in August 2004, though options granted prior to termination may expire after that date. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan, excluding the grants to consultants discussed in Note 6, consistent with the method of Statement of Financial Accounting Standards No. 123 (see Note 2), our net loss and net loss per share would have increased to the pro forma amounts indicated below:
Fiscal 2000 Fiscal 1999 Fiscal 1998 ------------------- --------------------- ----------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ----- -------- ----- -------- ----- Net loss (in thousands) $3,364 $3,403 $4,479 $4,787 $5,975 $6,247 Net loss per share $0.40 $0.41 $0.63 $0.68 $1.49 $1.54
F-13 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 8. STOCK OPTION PLAN (Continued) The fair value of each option grant is estimated on the date of grant using the Black Scholes option-pricing method with the following weighted average assumptions used for grants.
2000 1999 1998 ---- ---- ---- Dividend yield 0% 0% 0% Expected volatility 99.0% 83.5% 81.4% Risk-free interest rate 5.17% to 6.24% 4.93% 6.25% Expected lives, in years 5 to 10 5 5
The weighted average fair value of options granted during fiscal 2000, fiscal 1999 and fiscal 1998 was $1.17, $2.03 and $4.16 per share, respectively. A summary of the status of our stock option plan at February 29, 2000, February 28, 1999 and February 28, 1998 and the changes during the years then ended is presented below:
2000 1999 1998 ------------------------- ----------------------- ---------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Underlying Exercise Underlying Exercise Underlying Exercise Options Price Options Price Options Price ------------- ----------- ----------- ---------- ----------- ---------- Outstanding at beginning of year 407,277 $5.81 337,727 $6.07 275,200 $4.66 Granted 152,700 $1.55 167,150 $2.92 134,650 $8.11 Exercised -- -- (57,749) $5.21 (17,571) $3.39 Forfeited (168,627) $4.61 (39,851) $6.89 (54,552) $4.86 ----------- ----------- ---------- 391,350 $3.63 407,277 $4.67 337,727 $6.07 Outstanding at end of year =========== =========== ========== Exercisable at end of year 206,161 $4.92 203,844 $5.81 188,401 $5.47 =========== =========== ========== The following table summarizes information about stock options under the plan at February 29, 2000:
Options Outstanding Options Exercisable ------------------------------------------------------ ----------------------------------- Weighted Average Weighted Remaining Average Weighted Range of Number Contractual Exercise Number Average Exercise Price Outstanding Life Price Exercisable Exercise Price ------------------ ---------------- ------------------ -------------- --------------- ---------------- $0.84 - $1.69 110,700 4.93 $1.17 -- -- $2.59 - $3.38 170,100 3.20 $3.00 110,001 $3.10 $4.38 - $4.50 11,500 6.68 $4.46 8,833 $4.48 $5.95 - $6.91 30,900 3.71 $6.30 28,899 $6.26 $7.00 - $7.50 39,000 2.08 $7.31 39,000 $7.31 $8.38 25,650 2.71 $8.38 17,096 $8.38 $10.38 3,500 2.19 $10.38 2,332 $10.38 ------------ ---------- 391,350 206,161 ============ ==========
Subsequent to February 29, 2000, we granted options to officers of our company and other employees to purchase a total of 136,500 shares of our common stock. F-14 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 9. RETIREMENT PLAN Effective November 15, 1999, any of our full-time employees who has completed three months of service is eligible to participate in a company sponsored 401(k) plan. Contributions to the plan, which are determined at the discretion of our Board of Directors, were $3,090 for the year ended February 29, 2000. 10. COMMITMENTS We lease office, manufacturing and warehouse space, totaling approximately 15,000 square feet, from two of our directors who also are our founders and principal shareholders. The lease currently expires on April 30, 2002 with monthly rental payments of $6,280; subject to increase on May 1, 2001. Under the lease, we pay all real estate taxes and maintenance costs, and maintain property and liability insurance on the leased property. The future minimum aggregate lease payments under this operating lease are as follows at February 29, 2000: Fiscal year ending February 28, ------------------------------- 2001 $ 75,360 2002 75,360 2003 12,560 ------------- $ 163,280 ============= Rent expense was $75,360, $75,360 and $75,360 in fiscal 2000, fiscal 1999 and fiscal 1998, respectively. We have an agreement with our contract manufacturer that requires it to purchase certain raw materials based upon our forecast of expected delivery needs for our products. If our actual delivery needs are less than our forecasted amounts, we may be required to reimburse it for restocking fees and/or inventory holding costs as well as potentially purchasing certain excess stock of raw materials from it. At February 29, 2000, the amount of raw material inventory held by the outside manufacturer was $154,000 and our cost of undelivered product at the manufacturer's location was $42,000. Neither of these amount are included in inventory at February 29, 2000. 11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK We monitor the granting of credit to all our customers and, generally, no collateral is required. In fiscal 2000, net revenues from one major customer exceeded 10% of total net revenues and, in fiscal 1999, net revenues from two major customers exceeded 10% of total net revenues. For fiscal 1998, we did not have any revenues from any single customer that exceeded 10% of total net revenues. Net revenues from these major customers were as follows: 2000 1999 1998 ----------- ----------- ----------- Customer A $ 186,858 $ 117,637 $ 36,443 Customer B 7,652 261,328 1,100 Customer C 61,883 170,658 71,991 ----------- ----------- ----------- $ 256,393 $ 549,623 $ 109,534 =========== =========== =========== F-15 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Continued) Accounts receivable from these customers were as follows at February 29, 2000 and February 28, 1999 2000 1999 ------------ ----------- Customer A $ 71,668 $ 49,886 Customer B -- 3,860 Customer C 58,283 4,208 ------------ ----------- $ 129,951 $ 57,954 ============ =========== We had net revenues from customers located outside of the United States of $329,062, $812,203 and $314,000 during fiscal 2000, fiscal 1999 and fiscal 1998, respectively. All of our foreign sales are denominated in U.S. dollars and generally are made either on a prepaid basis or against letters of credit. 12. CONTINGENCIES An action by the former owner of the "C-Phone" trademark seeking to cancel our registration of the "C-Phone" trademark is pending before the U.S. Patent and Trademark Office's Trial and Appeals Board. If we are unable to satisfactorily resolve this matter with the former owner or are not successful in the current Patent and Trademark Office proceeding, we may need to change the identifying name on some of our products. In addition, we may determine that it is appropriate to change our corporate name. We also may be subject to damages, if it can be shown that we have infringed the former owner's common law rights. We also are involved in various legal proceedings which are incidental to the conduct of our business. Although the final resolution of these matters cannot be determined, our management's opinion is that the final outcome of these matters will not have a material adverse effect on our financial position or results of operations. 13. INCOME TAXES The significant components of the deferred tax were as follows at February 29, 2000 and 1999:
2000 1999 ----------- ----------- Net operating loss carryforwards $ 9,225,635 $ 7,518,939 Alternative minimum tax credit carryforwards -- 5,924 Allowance for doubtful accounts 196,361 83,927 Research and development tax credit -- 201,211 Inventory reserve 247,213 602,593 Fixed assets 76,157 67,732 Unicap 46,273 -- Other 32,798 31,708 ----------- ----------- Deferred tax assets 9,824,437 8,512,034 Valuation allowance (9,824,437) (8,512,034) ----------- ----------- Net deferred tax assets $ -- $ -- =========== ===========
We provide a valuation allowance for deferred tax assets that are not expected to be realized. Due to the recent net losses incurred by us, a valuation allowance has been established for all deferred tax assets. F-16 C-PHONE CORPORATION NOTES TO FINANCIAL STATEMENTS -------------------- 13. INCOME TAXES (Continued) Reconciliation of differences between the statutory U.S. Federal income tax rate and our effective tax rate are as follows:
2000 1999 1998 --------- ---------- --------- Federal statutory income tax rate (34)% (34)% (34)% State income taxes, net of federal benefit (5) (5) (5) Valuation allowance increase 39 39 39 --------- ---------- --------- 0% 0% 0% ========= ========== =========
At February 29, 2000, we estimate that we had available net operating loss carryforwards of approximately $23,000,000 for Federal and state purposes, which may be used to reduce future taxable income, if any. The Federal carryforwards begin to expire in 2009 and the state carryforwards begin to expire in 2001. The Federal net operating loss carryforward may be subject to limitation under the rules regarding changes in stock ownership as determined under the Internal Revenue Code. F-17 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 7, 2000, we dismissed PricewaterhouseCoopers LLP as our independent accountants, and appointed the accounting firm of Ernst & Young, LLP. Our Audit Committee and Board of Directors participated and approved the decision to change independent accountants. The reports of PricewaterhouseCoopers LLP on the financial statements for the past two years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits of the two most recent fiscal years and through March 7, 2000, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information required by this Item 9 is incorporated by reference from our definitive proxy statement which we will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 on or before June 29, 2000. ITEM 10. EXECUTIVE COMPENSATION. The information required by this Item 10 is incorporated by reference from our definitive proxy statement which we will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 on or before June 29, 2000. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item 11 is incorporated by reference from our definitive proxy statement which we will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 on or before June 29, 2000. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 9 is incorporated by reference from our definitive proxy statement which we will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 on or before June 29, 2000. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. 3. Articles of incorporation and by-laws. 3(i)(a) Restated Certificate of Incorporation, as filed with the Secretary of State of the State of New York on February 24, 1994(1) (b) Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of New York on August 9, 1996(2) 19 (c) Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of New York on August 12, 1997(3) (d) Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of New York on December 18, 1997(4) 3(ii) By-laws, as currently in effect(1) 4. Instruments defining the rights of security holders, including indentures. 4.1 Form of certificate representing shares of the Common Stock(5) 4.2 Form of Class A Warrant, dated December 19, 1997, of C-Phone Corporation(4) 4.3 Form of Class B Warrant, dated December 19, 1997, of C-Phone Corporation(4) 4.4 Common Stock Purchase Warrant, dated as of September 18, 1998, of C-Phone Corporation issued to Cardinal Capital Management, Inc.(6) 9. Voting trust agreement and amendments - None. 10. Material contracts. 10.1 (a) Lease, dated May 1, 1993, between C-Phone Corporation and Daniel Flohr and Tina Jacobs(1) (b) Addendum, dated as of May 1, 1996, to Indenture of Lease, between C-Phone Corporation and Daniel Flohr and Tina Jacobs(7) (c) Addendum, dated as of May 1, 1999, to Indenture of Lease, between C-Phone Corporation and Daniel Flohr and Tina Jacobs(10) 10.2 (a) Employment Agreement, dated as of March 1, 1994, between C-Phone Corporation and Daniel Flohr, as amended(8) (b) Amendment No. 2 to Employment Agreement, dated as of March 1, 1996, between C-Phone Corporation and Daniel Flohr(7) 10.3 (a) Employment Agreement, dated as of March 1, 1994, between C-Phone Corporation and Tina Jacobs, as amended(8) (b) Amendment No. 2 to Employment Agreement, dated as of March 1, 1996, between C-Phone Corporation and Tina Jacobs(7) 10.4 Employment Agreement, dated as of December 3, 1998, between C-Phone Corporation and Stuart Ross(10) 10.5 C-Phone Corporation Amended and Restated 1994 Stock Option Plan and form of Option Agreement(9) 10.6 (a) Form of Securities Purchase Agreement, dated as of December 17, 1997, between C-Phone Corporation and each purchaser party thereto(4) (b) Form of Registration Rights Agreement, dated December 19, 1997, between C-Phone Corporation and each purchaser party thereto(4) 20 10.7 (a) Private Equity Credit Agreement, dated as of September 18, 1998, between C-Phone Corporation and Sovereign Partners, L.P.(6) (b) Registration Rights Agreement, dated as of September 18, 1998, between C-Phone Corporation and Sovereign Partners, L.P.(6) 11. Statement re computation of per share earnings - Not required since this computation can be clearly determined from the material contained in this report on Form 10-KSB. 13. Annual report to security holders for the last fiscal year, Form 10-Q or 10-QSB or quarterly report to security holders, if incorporated by reference in the filing - Not applicable. 16. Letter on change in certifying accountant - Letter, dated March 6, 2000, from PricewaterhouseCoopers, LLP. (11) 18. Letter on change in accounting principles - Not applicable. 21. Subsidiaries of the small business issuer - None. 22. Published report regarding matters submitted to vote of security holders - Not applicable. 23. Consent of experts and counsel 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Ernst & Young LLP 24. Power of attorney - Not applicable. 27. Financial Data Schedule 28. Information from reports furnished to state regulatory authorities - Not applicable. 99. Additional Exhibits - Not applicable. - ------------------- (1) Incorporated by reference to an Exhibit filed as part of our Registration Statement on Form S-1 (the "S-1 Registration Statement") (Registration No. 33-80280), filed on June 14, 1994. (2) Incorporated by reference to an Exhibit filed as part of our Quarterly Report on Form 10-QSB for the fiscal quarter ended August 30, 1996. (3) Incorporated by reference to an Exhibit filed as part of our Quarterly Report on Form 10-QSB for the fiscal quarter ended August 30, 1997. (4) Incorporated by reference to an Exhibit filed as part of our Current Report on Form 8-K, dated December 31, 1997. (5) Incorporated by reference to an Exhibit filed as part of Amendment No. 2 to our Registration Statement on Form S-1 (Registration No. 33-80280), filed on August 11, 1994. (6) Incorporated by reference to an Exhibit filed as part of our Current Report on Form 8-K, dated September 24, 1998. 21 (7) Incorporated by reference to an Exhibit filed as part of our Annual Report on Form 10-KSB for the fiscal year ended February 29, 1996. (8) Incorporated by reference to an Exhibit filed as part of Amendment No. 1 to our Registration Statement on Form S-1 (Registration No. 33-80280), filed on July 21, 1994. (9) Incorporated by reference to an Exhibit filed as part of our Registration Statement on Form S-8 File No. 333-87865), filed on September 27, 1999. (10) Incorporated by reference to an Exhibit filed as part of our Annual Report on Form 10-KSB for the fiscal year ended February 28, 1999. (11) Incorporated by reference to an Exhibit filed as part of our Current Report on Form 8-K, dated March 7, 2000. (b) REPORTS ON FORM 8-K. We did not file a Current Report on Form 8-K during the quarter ended February 29, 2000; however, we did file a Current Report on Form 8-K on March 10, 2000, responding to Item 4 - "Changes in Registrant's Accountant" and Item 6 - "Other Events." 22 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 26, 2000 C-PHONE CORPORATION By: /s/ PAUL H. ALBRITTON -------------------------------- Paul H. Albritton, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Dated: May 26, 2000 /s/ PAUL H. ALBRITTON ------------------------------------ Paul H. Albritton President, Chief Executive Officer and Director (Principal Executive Officer) May 26, 2000 /s/ DANIEL P. FLOHR ------------------------------------ Daniel P. Flohr Director May 26, 2000 /s/ TINA L. JACOBS ------------------------------------ Tina L. Jacobs Director May 26, 2000 /s/ SEYMOUR L. GARTENBERG ------------------------------------ Seymour L. Gartenberg Director May 26, 2000 /s/ E. HENRY MIZE ------------------------------------ E. Henry Mize Director May 26, 2000 /s/ DONALD S. MCCOY ------------------------------------ Donald S. McCoy Director May 26, 2000 /s/ STUART E. ROSS ------------------------------------ Stuart E. Ross Director May 26, 2000 /s/ KURT SVENDSON ------------------------------------ Kurt Svendson Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 23 EXHIBIT INDEX 23.1 Consent of Ernst & Young LLP 23.2 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule 24 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-95306) and Form S-3 (No. 333-46309) of C-Phone Corporation of our report dated April 20, 2000, with respect to the financial statements of C-Phone Corporation included in the Annual Report (Form 10-KSB) for the year ended February 29, 2000. /s/ ERNST & YOUNG LLP - ------------------------- Raleigh, North Carolina May 25, 2000 EX-23.2 3 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANT We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-95306) and Form S-3 (No. 333-46309) of C-Phone Corporation of our report dated April 15, 1999, relating to the financial statements, which appears in this Form 10-KSB. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------- Raleigh, North Carolina May 25, 2000 EX-27 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF FEBRUARY 29, 2000 AND THE STATEMENTS OF OPERATION AND STATEMENTS OF CASH FLOW FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THESE FINANCIAL STATEMENTS. 0000835585 C-Phone Corporation 1 USD 12-MOS FEB-29-2000 MAR-01-1999 FEB-29-2000 1 2,517,633 0 293,583 (83,086) 1,051,804 3,869,623 1,054,643 (949,527) 3,974,739 496,292 0 0 0 89,801 3,388,646 3,974,739 1,346,114 1,401,150 1,227,927 1,230,927 0 (8,119) 0 (3,363,628) 0 (3,363,628) 0 0 0 (3,363,628) (0.40) (0.40)
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