SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-24426
C-PHONE CORPORATION
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(Exact name of small business issuer as specified in its charter)
NEW YORK 06-1170506
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6714 NETHERLANDS DRIVE
WILMINGTON, NORTH CAROLINA 28405
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(Address of principal executive offices)
(910) 395-6100
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No .
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 4,347,293 shares of common
stock as of JANUARY 10, 1997.
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Transitional Small Business Disclosure Form Yes No X
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C-PHONE CORPORATION
FORM 10-QSB
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of February 29, 1996 and November 30, 1996
(unaudited) 3
Statements of Operations for the three and nine months ended
November 30, 1995 and 1996 (unaudited) 4
Statements of Cash Flows for the nine months ended November
30, 1995 and 1996 (unaudited) 5
Notes to Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-PHONE CORPORATION
BALANCE SHEETS
FEBRUARY 29, NOVEMBER 30,
1996 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,852,820 $ 1,869,672
Short-term investments 2,426,403 365,183
Accounts receivable, net of allowance for
doubtful accounts of $170,000 at February
29, 1996 and $78,000 at November 30, 1996
(unaudited) 398,004 343,509
Inventories 1,061,496 1,201,678
Prepaid expenses and other current assets 123,915 65,836
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Total current assets 5,862,638 3,845,878
Property and equipment, net 308,248 274,677
Other assets 67,320 78,905
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Total assets $ 6,238,206 $ 4,199,460
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 289,362 $ 287,159
Accrued expenses 222,998 223,947
Current obligations under capital leases 16,103 15,586
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Total current liabilities 528,463 526,692
Long-term obligations under capital leases 11,507 -
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Total liabilities 539,970 526,692
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Shareholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 4,347,293 shares
issued and outstanding at February 29,
1996 and November 30, 1996 (unaudited) 43,473 43,473
Paid-in capital 13,495,376 13,495,376
Accumulated deficit (7,840,613) (9,866,081)
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Total shareholders' equity 5,698,236 3,672,768
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Total liabilities and shareholders' equity $ 6,238,206 $ 4,199,460
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The accompanying notes are an integral part of the financial statements.
3
C-PHONE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1995 1996 1995 1996
---- ---- ---- ----
Net sales $ 621,796 $ 332,955 $ 1,531,480 $ 1,400,483
Software development and
other revenue - 149,485 - 149,485
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Total revenue 621,796 482,440 1,531,480 1,549,968
----------- ------------ ----------- -----------
Cost of goods sold 468,007 299,921 1,230,108 1,163,298
Cost of software development
and other revenue - 74,429 - 74,429
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Total cost of revenue 468,007 374,350 1,230,108 1,237,727
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Gross profit 153,789 108,090 301,372 312,241
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Operating expenses:
Selling, general
and administrative 642,746 512,696 3,036,171 1,680,653
Research, development
and engineering 285,418 235,155 841,991 768,123
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Total operating expenses 928,164 747,851 3,878,162 2,448,776
----------- ------------ ----------- -----------
Operating loss (774,375) (639,761) (3,576,790) (2,136,535)
Interest expense (1,072) (566) (3,670) (2,059)
Interest income 75,785 29,458 313,495 113,126
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Net loss $ (699,662) $ (610,869) $(3,266,965) $(2,025,468)
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Per-share data:
Net loss per share $ (0.16) $ (0.14) $ (0.75) $ (0.47)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Weighted average number
of common shares and
common share equivalents
outstanding 4,347,293 4,347,293 4,347,293 4,347,293
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The accompanying notes are an integral part of the financial statements.
4
C-PHONE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED NOVEMBER 30,
1995 1996
Cash flows from operating activities:
Net loss $ (3,266,965) $ (2,025,468)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 134,201 99,158
Provision for doubtful accounts 15,000 41,941
Changes in operating assets and liabilities:
Accounts receivable (479,357) 12,554
Inventories (252,238) (140,182)
Prepaid expenses and other current assets 143,485 58,079
Other assets (59,450) (11,585)
Accounts payable 11,458 (2,203)
Accrued expenses (13,633) 949
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Net cash used in operating activities (3,767,499) (1,966,757)
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Cash flows from investing activities:
Equipment purchases (82,520) (65,587)
Purchase of short term investments (7,240,775) (1,647,371)
Maturities of short investments 7,354,819 3,708,591
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Net cash provided by investing
activities 31,524 1,995,633
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Cash flows from financing activities:
Payment of capital lease obligations (17,897) (12,024)
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Net cash used in financing activities (17,897) (12,024)
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Net (decrease) increase in cash
and cash equivalents (3,753,872) 16,852
Cash and cash equivalents, beginning of period 5,261,105 1,852,820
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Cash and cash equivalents, end of period $ 1,507,233 $ 1,869,672
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Supplemental disclosure of cash flow information:
Interest paid $ 3,670 $ 2,059
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Income taxes paid $ - $ -
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The accompanying notes are an integral part of the financial statements.
5
C-PHONE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of C-Phone Corporation (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation SB. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three and nine months periods ended November 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending February 28, 1997. The unaudited financial statements should be read in
conjunction with the audited financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-KSB for the fiscal year ended February
29, 1996.
2. STOCK OPTIONS
As of November 30, 1996, options for 280,717 shares of common stock were
outstanding under the Company's 1994 Stock Option Plan (the "Plan") (52,500 of
which are non-qualified options exercisable at prices which range from $3.00 to
$7.00 per share, depending upon date of grant, and 228,217 of which are
incentive stock options exercisable at prices which range from $3.125 to $7.50
per share, depending upon the date of the grant), and options for 219,283 shares
of common stock were available for future grants. Due to vesting provisions
included in the options, only options representing 78,367 shares were
exercisable as of November 30, 1996, of which 21,200 are exercisable at $3.125
per share, 15,000 are exercisable at $7.00 per share, 34,500 are exercisable at
$7.25 per share and 7,667 are exercisable at $7.50 per share. As of November 30,
1996, no options had been exercised since the inception of the Plan.
3. NET LOSS PER SHARE
Per-share data has been computed on the basis of the weighted average number of
shares of common stock outstanding during the periods. Common Stock options and
warrants are not included for the three and nine month periods ended November
30, 1995 and November 30, 1996 as they would be anti-dilutive.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company has been primarily engaged in the engineering, manufacturing
and marketing of C-Phone, a line of PC-based video conferencing systems.
Recently, the Company has engaged in contractual software development related to
its PC-based video conferencing systems. In addition, the Company has recently
completed development of C-Phone Home-TM-, a television "set-top" box video
system which allows video telephone calls to be made over regular telephone
lines using a standard television set. See "Financial Condition".
In August 1994, the Company completed its initial public offering (the
"Public Offering") of 2,000,000 shares of Common Stock, pursuant to which it
received net proceeds of approximately $12,288,000, of which approximately
$1,947,000 was used for the repayment of indebtedness and accrued interest
thereon. The remainder of the net proceeds was used, and the Company expects
will continue to be used, for sales and marketing of C-Phone, the continued
development of additional C-Phone products and features and related products,
such as C-Phone Home-TM-, and working capital, including funding anticipated
increases in inventories and receivables.
The Company commenced operations in 1986 as a manufacturer of promotional
radios and, in 1990, developed data/fax modems under the name "TWINCOM". In
early 1993, because of continued price pressures, shrinking margins and for
competitive reasons, the Company shifted its primary focus from modems to the
development of C-Phone, and during the fiscal year ended February 28, 1995, the
Company phased out its modem product line as it was no longer profitable. Since
1993, the Company has invested significant resources in product development,
engineering and marketing activities for C-Phone and related products. As a
result of these activities and the low volume of sales during the initial
commercialization of C-Phone, the Company has incurred significant losses during
the last two fiscal years and the three and nine months periods ended November
30, 1996. The Company expects to continue to make significant expenditures for
product development and marketing in the foreseeable future.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in Item 1 - "Description of
Business" and elsewhere in the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 29, 1996.
7
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1996 ("3RD QUARTER 97") AS COMPARED TO THREE
MONTHS ENDED NOVEMBER 30, 1995 ("3RD QUARTER 96")
REVENUE. Revenues decreased 22% to $482,440 in 3rd Quarter 97 from
$621,796 in 3rd Quarter 96. Revenues for 3rd Quarter 97 included $149,485 of
software development revenue related to software developed by the Company at two
customers' requests for use with C-Phone products. The remaining revenues for
3rd Quarter 97, which consisted of sales of C-Phone products, decreased 46% from
3rd Quarter 96. The Company believes that such decrease in revenue was
primarily related to a change in sales and marketing personnel. While the
Company hired a new Vice President of Sales and Marketing in September 1996 and
replaced several sales and marketing personnel in November 1996, appropriate
indoctrination, integration and training of such persons and the required
lead-time for such persons to generate sales was not sufficient to produce
tangible results during 3rd Quarter 97.
COST OF REVENUE. Cost of revenue consists of cost of goods sold and cost
of software development and other revenue. Cost of goods sold includes labor,
materials and other manufacturing costs (such as salaries, supplies, leasing
costs and depreciation related to production operations). Cost of software
development and other revenue includes the allocation of salaries and benefits
of personnel and the cost of outside services directly related to such revenue.
Cost of goods sold decreased 36% to $299,921 (90% of net sales) in 3rd Quarter
97 from $468,007 (75% of net sales) in 3rd Quarter 96. The decrease in cost of
goods and the increase in the percentage to net sales were both primarily
related to the decrease in sales. The cost of software development and other
revenue ($74,429) in 3rd Quarter 97 was 50% of the related revenue; the Company
had no similar revenue in 3rd Quarter 96.
GROSS PROFIT. Gross profit decreased to $108,090 (22% of revenues) for 3rd
Quarter 97 from $153,789 (25% of revenues) in 3rd Quarter 96. The decrease in
the gross profit percentage was primarily the result of the decrease in net
sales partially offset by the software development and other revenue.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased 20% to $512,696 (106% of revenues) in 3rd Quarter 97 from
$642,746 (103% of revenues) in 3rd Quarter 96. The primary reason for the
decrease was an 80% reduction in trade show expenses to approximately $40,000
for 3rd Quarter 97 from approximately $200,000 in 3rd Quarter 96 as the result
of the Company's decision not to participate in this fiscal year's Comdex show
in Las Vegas. This decrease was partially offset by an increase in general and
administrative expenses primarily from increased personnel costs resulting from
additional customer support personnel and a reallocation of duties of certain
personnel from research, development and engineering. The Company expects that
it will continue to incur substantial selling, general and administrative
expenses for the remainder of Fiscal 1997 as a
8
result of the continued commercialization of the C-Phone product line.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 18% to $235,155 (49% of revenue) for 3rd Quarter
97 from $285,418 (46% of revenue) for 3rd Quarter 96. The decrease was
primarily the result of the reallocation of approximately $65,000 of certain
personnel and benefit costs to the cost of software development revenue.
Without this reallocation, research, development and engineering expenses for
3rd Quarter 97 would approximate the same amount as for the 3rd Quarter 96 as
the majority of these allocated costs were for permanent personnel. All of
these costs were charged to operations as incurred and were funded by the
Company's cash reserves. The Company expects to continue to invest significant
resources during the foreseeable future in new product development and
engineering.
OPERATING LOSS. As a result of the factors discussed above, the Company's
operating loss decreased 17% to $639,761 in 3rd Quarter 97 from $774,375 in 3rd
Quarter 96.
INTEREST. Interest income decreased to $29,458 in 3rd Quarter 97 from
$75,785 in 3rd Quarter 96 as a result of decreased investments, as the Company
utilized the net proceeds of the Public Offering for the continuing development
and commercialization of C-Phone products.
INCOME TAXES. The Company's losses for 3rd Quarter 97 and 3rd Quarter 96
may be utilized as an offset against future earnings, although there can be no
assurance that future operations will produce taxable earnings.
NINE MONTHS ENDED NOVEMBER 30, 1996 ("NINE MONTHS 97") AS COMPARED TO NINE
MONTHS ENDED NOVEMBER 30, 1995 ("NINE MONTHS 96")
REVENUES. Revenues increased 1% to $1,549,968 in Nine Months 97 from
$1,531,480 in Nine Months 96. The revenues for Nine Months 97 included $149,485
of software development revenue discussed above and $1,400,483 of sales of
C-Phone products, while the revenues for Nine Months 96 consisted only of sales
of C-Phone products. Net sales of C-Phone products deceased 9% for the Nine
Months 97 as compared to the Nine Months 96. The Company believes that the
decrease in net sales was primarily related to a change in sales and marketing
personnel in 3rd Quarter 97 as discussed above.
COST OF REVENUE. Cost of revenue consists of cost of goods sold and cost
of software development and other revenue. Cost of goods sold includes labor,
materials and other manufacturing costs (such as salaries, supplies, leasing
costs and depreciation related to production operations). Cost of software
development and other revenue includes the allocation of salaries and benefits
of personnel and the cost of outside services directly related to such revenue.
Cost of goods sold decreased 5% to $1,163,298 (83% of net sales) in Nine Months
97 from $1,230,108 (80% of net sales) in
9
Nine Months 96. The decrease in cost of goods sold and the increase in the
percentage to net sales were both primarily related to the decrease in sales.
The cost of software development and other revenue ($74,429) was 50% of the
related revenue; the Company had no similar revenue in Nine Months 96.
GROSS PROFIT. Gross profit increased to $312,241 (20% of revenues) for
Nine Months 97 from $301,372 (20% of revenues) in Nine Months 96. The gross
profit produced from sales of goods in Nine Months 97 was $237,185 (17% of net
sales). The gross profit percentage related to software development and other
revenue (50%) offset the decrease in the gross profit percentage related to net
sales, which decrease was primarily the result of the decrease in net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased 45% to $1,680,653 (or 108% of revenues) in Nine Months 97
from $3,036,171 (or 198% of revenues) in Nine Months 96. The primary reason for
the decrease was a 67% reduction in selling and marketing expenses to
approximately $725,000 for Nine Months 97 from approximately $2,175,000 in Nine
Months 96, of which approximately $1,200,000 was directly related to a
nationwide advertising and marketing campaign which ran for most of the three
months ended May 31, 1995 ("1st Quarter 96"). As discussed above, the decrease
in trade show expenses was partially offset by an increase in general and
administrative expenses primarily from an increase in personnel costs resulting
from additional customer support personnel and a reallocation of duties of
certain personnel from research, development and engineering. The Company
expects that it will continue to incur substantial selling, general and
administrative expenses for the remainder of Fiscal 1997 as a result of the
continued commercialization of the C-Phone product line.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses decreased 9% to $768,123 (50% of revenue) for Nine Months
97 from $841,991 (55% of revenue) for Nine Months 96. The decrease was
primarily the result of the reallocation of approximately $65,000 of certain
personnel and benefit costs to the cost of software development revenue and a
decrease in personnel costs resulting from a partial change in duties of certain
personnel to selling, general and administrative. Without the reallocation of
personnel costs to cost software development, research, development and
engineering expenses for Nine Months 97 would be approximately the same amount
as such expenses for Nine Months 96 as the majority of these allocated costs
were for permanent personnel. All of these costs were charged to operations as
incurred and were funded by the Company's cash reserves. The Company expects to
continue to invest significant resources during the foreseeable future in new
product development and engineering.
OPERATING LOSS. As a result of the factors discussed above, the Company's
operating loss decreased 40% to $2,136,535 in Nine Months 97 from $3,576,790 in
Nine Months 96.
10
INTEREST. Interest income decreased to $113,126 in Nine Months 97 from
$313,495 in Nine Months 96 as a result of decreased investments as the Company
utilized the net proceeds of the Public Offering for the continuing development
and commercialization of C-Phone products.
INCOME TAXES. The Company's losses for Nine Months 97 and Nine Months 96
may be utilized as an offset against future earnings, although there is no
assurance that future operations will produce taxable earnings.
FINANCIAL CONDITION
The Company has financed its recent operations primarily through the Public
Offering in August 1994, which raised net proceeds of approximately $12,288,000.
At November 30, 1996, the Company had working capital of $3,319,186 (a
decline from $5,334,175 at February 29, 1996) and cash and cash equivalents
(including short-term investments) of $2,234,855 (as compared to $4,279,223 at
February 29, 1996). The Company's invested funds consist primarily of United
States Treasury Bills and obligations of United States government agencies.
During the nine months ended November 30, 1996, operating activities used
$1,966,757 of net cash, primarily to fund operating activities as well as to
fund increases in inventories, investing activities provided $1,995,633 of net
cash, primarily from maturities of short-term investments, and financing
activities used $12,024 of net cash for payments on capital lease obligations.
Due to the technical nature of the Company's business and the anticipated
expansion of its C-Phone technology into new applications, management expects to
continue to expend significant resources for continued development and
engineering as well as selling and marketing expenses.
The Company believes that while its working capital, together with funds
from operations, will be sufficient to meet the Company's projected operating
needs and capital expenditures for the balance of Fiscal 1997 (i.e., through
February 28, 1997), the Company will require additional working capital during
the fiscal year ending February 28, 1998. On January 8, 1997, the Company
announced the introduction of C-Phone Home-TM-, a TV-based set-top videophone,
jointly developed with Analog Devices, Inc. In an attempt to penetrate the
market, the Company has determined to price C-Phone Home-TM- at a level below
its current cost, to make up the difference through a monthly subscription fee
and the resale of long-distance telephone usage in connection therewith and to
market C-Phone Home-TM- through consumer electronic stores. Assuming customer
acceptance, of which there can be no assurance, such pricing philosophy and
method of distribution will require a substantial investment by the Company for
inventory and marketing expenditures. The Company does not have adequate
working capital to fund the substantial necessary investment and, therefore, has
begun the planning process to determine the nature, timing and amount of funds
needed and to identify various institutions to
11
assist in raising such resources. In order to raise additional working capital,
the Company may sell its securities and may enter into loan relationships with
institutional lenders. However, there can be no assurance that any such
additional funds can be obtained on acceptable terms, if at all. If necessary
funds are not timely obtained, the Company's business would be materially
adversely affected.
The Company leases its facility and has financed a portion of its
manufacturing equipment expenditures through capital leases. As of November 30,
1996, the Company had no material commitments for capital expenditures.
At February 28, 1996, the Company estimates that it had available net
operating loss carryforwards of approximately $7,345,000 for Federal purposes
and net economic loss carryforwards of approximately $7,597,000 for state
purposes, which may be used to reduce future taxable income, if any. The Federal
carryforwards will expire starting in 2009 and the state carryforwards will
expire starting in 1999.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27. Financial Data Schedule
99. Press Release, dated January 8, 1997
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
quarter ended November 30, 1996.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
C-PHONE CORPORATION
Date: January 14, 1997 By: /s/DANIEL P. FLOHR
---------------------------------
Daniel P. Flohr
President and Chief
Executive Officer
(Principal Executive Officer)
Date: January 14, 1997 By: /s/PAUL H. ALBRITTON
---------------------------------
Paul H. Albritton
Vice President and Chief
Financial Officer
(Principal Accounting and
Financial Officer)
13