SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
C-PHONE CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
- --------------------------------------------------------------------------------
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
<PAGE>
C-PHONE CORPORATION
6714 NETHERLANDS DRIVE
WILMINGTON, NORTH CAROLINA 28405
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 1, 1997
The Annual Meeting of shareholders of C-Phone Corporation (the
"Company") will be held at the Landfall Park Hampton Inn & Suites, 1989 Eastwood
Road, Wilmington, North Carolina at 9:00 a.m., on August 1, 1997, for the
following purposes:
1. To elect six directors to serve until the next Annual Meeting
of shareholders and until their respective successors are
elected and qualified;
2. To approve the issuance of up to 2,501,001 shares of the
Company's common stock upon exercise of "contingent value
rights" granted to investors in the Company's March 1997
private placement;
3. To approve an amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of
common stock from ten million shares of common stock to twenty
million shares of common stock;
4. To approve an amendment to the Company's Certificate of
Incorporation to authorize the Company to issue up to one
million shares of preferred stock;
5. To ratify the selection of Coopers & Lybrand L.L.P. as the
Company's independent accountants for the fiscal year ending
February 28, 1998; and
6. To transact such other business as properly may come before
the Annual Meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on June 12, 1997
as the record date for determining shareholders entitled to receive notice of
and to vote at the Annual Meeting and any adjournments thereof.
By Order of the Board of Directors,
Tina L. Jacobs,
SECRETARY
June __, 1997
IMPORTANT: THE COMPANY INVITES YOU TO ATTEND THE ANNUAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE VOTE BY
COMPLETING, SIGNING AND DATING THE ENCLOSED PROXY AND RETURNING IT PROMPTLY TO
THE COMPANY IN THE ENCLOSED SELF-ADDRESSED, POSTAGE PREPAID ENVELOPE. IF YOU
ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN
PERSON.
<PAGE>
C-PHONE CORPORATION
6714 NETHERLANDS DRIVE
WILMINGTON, NORTH CAROLINA 28405
---------
PROXY STATEMENT
---------
1997 ANNUAL MEETING OF SHAREHOLDERS
This Proxy Statement is furnished to shareholders of C-Phone
Corporation, a New York corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board of
Directors") for use at the Annual Meeting of shareholders of the Company (the
"Annual Meeting") to be held at 9:00 a.m. on August 1, 1997 at the Landfall Park
Hampton Inn & Suites, 1989 Eastwood Road, Wilmington, North Carolina, and any
adjournments thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting. This Proxy Statement, the attached Notice of Annual Meeting, the
accompanying form of proxy and the Annual Report to shareholders for the fiscal
year ended February 28, 1997 ("Fiscal 1997") are first being sent to
shareholders of the Company on or about June , 1997.
Only shareholders of record at the close of business on June 12, 1997
(the "Record Date") are entitled to notice of, and to vote at, the Annual
Meeting or any adjournment thereof. On the Record Date, there were issued and
outstanding 5,202,856 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"). All of such shares are of one class, with equal
voting rights, and each holder thereof is entitled to one vote on all matters
voted on at the Annual Meeting for each share registered in such holder's name.
Presence in person or by proxy of holders of 2,601,429 shares of Common
Stock will constitute a quorum at the Annual Meeting. Assuming a quorum is
present, (i) directors will be elected by a plurality of the votes cast at the
Annual Meeting by the holders of shares entitled to vote, (ii) the proposals to
approve the amendments (the "Charter Amendments") to the Company's Certificate
of Incorporation (a) to increase the authorized number of shares of common stock
from ten million shares of common stock to twenty million shares of common
stock, and (b) to authorize the issuance of up to one million shares of
preferred stock will require the affirmative vote of the holders of a majority
of all outstanding shares entitled to vote at the Annual Meeting, and (iii) all
other matters to come before the Annual Meeting, including (a) the proposal to
approve the issuance of up to 2,501,001 shares (the "Rights Shares") of Common
Stock upon exercise of "contingent value rights" granted to investors in the
Company's March 1997 private placement, and (b) ratification of the selection of
Coopers & Lybrand L.L.P., as independent accountants for the current fiscal
year, will require the affirmative vote of a majority of the votes cast at the
Annual Meeting by the holders of shares entitled to vote.
If a shareholder, present in person or by proxy, abstains on any
matter, the shareholder's shares will not be voted on such matter. Abstentions
may be specified on all proposals submitted to a shareholder vote, other than
the election of directors. In accordance with New York law, abstentions will not
be counted in determining the votes cast in connection with the approval of the
issuance of the Rights Shares or the ratification of the selection of
independent accountants. However, abstentions are considered in determining the
number of votes required to approve the Charter Amendments. Thus, an abstention
from voting on such matters has the same legal effect as a vote "against" the
matter, even though a shareholder may interpret such action differently. Votes
withheld in connection with the election of one or more of the nominees for
director will not be counted as votes cast for such individuals.
A proxy submitted by a shareholder also may indicate that all or a
portion of the shares represented by such proxy are not being voted by such
shareholder with respect to a particular matter. This could occur, for example,
when a broker is not permitted to vote shares held in street name on certain
matters in the absence of instructions from the beneficial owner of the shares.
Brokers who hold shares in street name have
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<PAGE>
the authority to vote on certain routine matters on which they have not received
instructions from their beneficial owners. Brokers holding shares in street
name, who do not receive instructions, are entitled to vote on the election of
directors and ratification of the appointment of the independent accountants,
since such matters are considered to be routine, but will not be entitled to
vote on the proposals to approve the Charter Amendments or the proposal to
approve the issuance of the Rights Shares, since such matters are not considered
to be routine. Under applicable New York law, "broker non-votes" on any proposal
(where a broker submits a proxy but does not have authority to vote a customer's
shares on such proposal) will be considered to be not entitled to vote on that
proposal and, thus, will not be counted in determining whether such proposal
receives the vote of the required amount of shares present and entitled to vote
at the Annual Meeting. Since a broker is not required to vote shares held in
"street name" in the absence of instructions from the beneficial shareholder
and, in the absence of instructions, is not permitted to vote on the proposals
to approve the Charter Amendments and the issuance of the Rights Shares, a
shareholder's failure to instruct his or her broker may result in the
shareholder's shares not being voted.
A proxy, in the accompanying form, which is properly executed, duly
returned to the Company and not revoked, will be voted in accordance with the
instructions contained thereon. If no specific instructions are indicated on the
proxy, the shares represented thereby will be voted FOR the (i) election of the
persons nominated herein as directors, (ii) approval of the issuance of the
Rights Shares, (iii) approval of the Charter Amendments, and (iv) ratification
of the selection of Coopers & Lybrand L.L.P. as the Company's independent
accountants for the current fiscal year; as well as FOR the transaction of such
other business as properly may come before the Annual Meeting.
Each proxy granted may be revoked by the person granting it at any time
(i) by giving written notice to such effect to the Secretary of the Company,
(ii) by execution and delivery of a proxy bearing a later date, or (iii) by
attendance and voting in person at the Annual Meeting; except as to any matter
upon which, prior to such revocation, a vote shall have been cast at the Annual
Meeting pursuant to the authority conferred by such proxy. The mere presence at
the Annual Meeting of a person appointing a proxy does not revoke the
appointment.
PRINCIPAL SHAREHOLDERS
Set forth below is information, as of June 12, 1997, with respect to
the beneficial ownership of the Common Stock by (i) each person or group who is
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each of the current directors of the Company (who
also constitute the nominees for election as directors at the Annual Meeting),
(iii) each of the executive officers of the Company named in the "Summary
Compensation Table" below, and (iv) all executive officers and directors of the
Company, as a group (eight persons). Except as indicated in the footnotes to
this table, the Company believes that the persons named in this table have sole
voting and investment power with respect to the shares of Common Stock
indicated.
<TABLE>
<CAPTION>
NAME SHARES BENEFICIALLY OWNED PERCENT OF CLASS
- --------------- ------------------------- ----------------
<S> <C> <C>
Daniel P. Flohr 1,156,745(1) 22.2%
Tina L. Jacobs 1,156,745(1) 22.2%
Dan Purjes 448,042(2) 8.2%
Stuart E. Ross 38,333(3) *
Seymour L. Gartenberg 25,000(4) *
E. Henry Mize 11,000(5) *
Donald S. McCoy 7,500(6) *
All executive officers and
directors, as a group 1,280,578(7) 24.1%
</TABLE>
- --------------------------------
* less than 1%
2
<PAGE>
(1) Consists of (i) 767,854 shares owned directly by Mr. Flohr, 250,000 of
which have been deposited in escrow to secure the timely fulfillment by
the Company of certain of its obligations made in connection with the
Company's March 1997 private placement (see "Approval of the Issuance
of the Rights Shares"), (ii) 378,481 shares owned directly by Ms.
Jacobs, and (iii) 10,410 shares owned by a trust (the sole trustee of
which is Mr. Flohr's mother) for the benefit of Mr. Flohr's and Ms.
Jacobs' minor daughter. Mr. Flohr and Ms. Jacobs are husband and wife
and their address is c/o C-Phone Corporation, 6714 Netherlands Drive,
Wilmington, North Carolina 28405.
(2) Consists of (i) 111,521 shares owned directly by Mr. Purjes, (ii)
116,521 shares issuable upon exercise of warrants (issued by the
Company in connection with its 1994 initial public offering) owned by
Mr. Purjes, and (iii) 70,000 shares owned by WBM LLC and 150,000 shares
issuable upon exercise of warrants (issued by the Company in connection
with its March 1997 private placement) owned by WBM LLC. WBM LLC is an
affiliate of Josephthal Lyon & Ross Incorporated ("JLR"). Mr. Purjes,
the Chairman and Chief Executive Officer of JLR, is the managing member
of WBM LLC. Does not include (i) any Rights Shares which may be issued
to Mr. Purjes or to WBM LLC, or (ii) any of the 250,000 shares
(referred to in Note (1) above) deposited by Mr. Flohr in escrow with
JLR. See "Approval of the Issuance of the Rights Shares." Mr. Purjes'
address is c\o Josephthal Lyon & Ross Incorporated, 200 Park Avenue,
New York, New York 10166.
(3) Consists of shares issuable upon exercise of that portion of options
granted pursuant to the Company's 1994 Stock Option Plan (the "Stock
Option Plan") that are presently exercisable or are scheduled to become
exercisable on or before September 3, 1997.
(4) Consists of (i) 15,000 shares owned directly by Mr. Gartenberg, and
(ii) 10,000 shares issuable upon exercise of that portion of options
granted pursuant to the Stock Option Plan that are presently
exercisable or are scheduled to become exercisable on or before
September 3, 1997.
(5) Consists of (i) 1,000 shares owned directly by Mr. Mize, and (ii)
10,000 shares issuable upon exercise of that portion of options granted
pursuant to the Stock Option Plan that are presently exercisable or are
scheduled to become exercisable on or before September 3, 1997.
(6) Consists of shares issuable upon exercise of that portion of options
granted pursuant to the Stock Option Plan that are presently
exercisable or are scheduled to become exercisable on or before
September 3, 1997.
(7) Consists of (i) the shares referred to in notes (1), (3), (4), (5) and
(6) to this table, (ii) 7,000 shares owned directly by executive
officers of the Company, and (iii) 35,000 shares issuable upon exercise
of that portion of options granted to such executive officers pursuant
to the Stock Option Plan that are presently exercisable or are
scheduled to become exercisable on or before September 3, 1997.
The Company does not know of any arrangements, including any pledge by
any person of securities of the Company, the operation of which at a subsequent
date may result in a change in control of the Company.
Based solely upon a review of Forms 3, 4 and 5 filed with the
Securities and Exchange Commission and the Company under the Securities Exchange
Act of 1934 (the "Exchange Act") and a review of written representations
received by the Company, no person who at any time during Fiscal 1997 was a
director, executive officer or beneficial owner of 10% or more of the
outstanding shares of Common Stock failed to file, on a timely basis, reports
required by Section 16(a) of the Exchange Act, except that (i) Stuart E. Ross, a
Director and executive officer of the Company, inadvertently filed late a Form 4
for November 1996 reporting one transaction involving the acquisition of options
to purchase Common Stock granted pursuant to the Stock Option Plan, and (ii)
David DeSimone, an executive officer of the Company, inadvertently filed late a
Form 3 for September 1996 reporting his initial ownership of Common Stock and an
option to purchase Common Stock granted pursuant to the Stock Option Plan.
3
<PAGE>
ELECTION OF DIRECTORS
(ITEM 1 ON THE PROXY CARD)
DIRECTORS AND NOMINEES
The Company's By-Laws provide for a Board of Directors of not less than
three directors. The Board of Directors has fixed the number of directors at
six. The persons named in the accompanying form of proxy, unless otherwise
instructed, intend to vote the shares of Common Stock covered by valid proxies
FOR the election of the six persons named in the following table, each of whom
has been designated by the Board of Directors as a nominee for election as
director. In the event that any of such persons does not continue to be
available for election, the persons named in the accompanying form of proxy will
have discretionary power to vote for a substitute and will have discretionary
power to vote or withhold their vote for any additional nominees named by
shareholders. There are no circumstances presently known to the Board of
Directors which would render any of the following persons unavailable to
continue to serve as a director, if elected.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Daniel P. Flohr 42 Chairman of the Board, President and Chief Executive
Officer; and Director since March 1986
Tina L. Jacobs 37 Executive Vice President, Chief Operating Officer,
Secretary and Treasurer; and Director since March 1986
Stuart E. Ross 37 Vice President and Director of Engineering;
and Director since December 1993
E. Henry Mize 55 Director since June 1994
Seymour L. Gartenberg 66 Director since August 1994
Donald S. McCoy 66 Director since September 1995
</TABLE>
The business experience of each of the foregoing persons, during the
past five years, is as follows:
DANIEL P. FLOHR co-founded the Company in March 1986 with Ms. Jacobs
and has served as the President and a director for more than the past five
years.
TINA L. JACOBS co-founded the Company in March 1986 with Mr. Flohr and
has served as an executive officer and a director for more than the past five
years.
STUART E. ROSS joined the Company in January 1994, after acting as an
independent consulting engineer to the Company, through New Potato Technologies,
Inc. ("NPT"), during the initial development of the Company's video conferencing
products. For more than five years prior thereto, Mr. Ross was the principal of
NPT, an engineering consulting and creative design firm specializing in
electronic media, software design, consumer electronics and communications
systems.
E. HENRY MIZE has been a private investor since 1992. For more than
five years prior thereto, Mr. Mize was employed by Philip Morris USA, a consumer
goods company, and had been its Vice President, Regional Sales for the Northeast
and Southeast United States.
SEYMOUR L. GARTENBERG has been a business consultant and private
investor since 1991 and President of The City College Fund, a non-profit
organization located in New York City, since October 1993. Until he retired in
1991, Mr. Gartenberg had been employed by Sony Music Entertainment Inc. (and its
predecessors, CBS Records Inc. and CBS/Records Group, a division of CBS Inc.), a
multinational record company, as Executive Vice President for more than five
years prior thereto.
4
<PAGE>
DONALD S. MCCOY has been a technology assessment and planning
consultant, specializing in the field of consumer electronics for more than the
past five years. Dr. McCoy was Vice President, Technology of CBS Inc. from 1983
to 1987 and general manager of the CBS Technology Center from 1979 to 1987.
All directors hold office until the next Annual Meeting of shareholders
of the Company and until their successors are elected and qualified or until
their earlier resignation. Except with respect to Mr. Flohr and Ms. Jacobs,
there are no family relationships among the directors or executive officers of
the Company.
In connection with the Company's August 1994 initial public offering,
the Company agreed to use its best efforts, until August 1997, to cause one
individual, if designated by Josephthal Lyon & Ross Incorporated ("JLR"), the
managing underwriter of such offering, to be elected to the Company's Board of
Directors. To date, JLR has not exercised its right to designate such an
individual.
The business and affairs of the Company are managed under the direction
of the Board of Directors. The Board has responsibility for establishing broad
corporate policies and for the overall performance of the Company, rather than
day-to-day operating details. Members of the Board of Directors are kept
informed of the Company's business by various reports and documents sent to them
at least quarterly, as well as by reports presented at meetings of the Board and
its Committees by executive officers and other employees of the Company.
The Board of Directors has an Audit Committee and a Compensation
Committee, the members of which serve at the discretion of the Board of
Directors. The Audit Committee, which currently consists of Mr. Gartenberg
(Chairman), Ms. Jacobs, Dr. McCoy and Mr. Mize, among other things, confers with
the independent accountants and financial officers of the Company, recommends to
the Board of Directors the independent accountants to be selected to audit the
Company's annual financial statements and approves any special assignments given
to such accountants. The Compensation Committee, which currently consists of Mr.
Mize (Chairman), Mr. Gartenberg and Dr. McCoy, among other things, reviews the
compensation levels of the Company's executive officers and makes
recommendations to the Board of Directors regarding salaries and incentive
programs. The Compensation Committee also administers the Stock Option Plan and
make grants thereunder.
During Fiscal 1997, there were eight meetings of the Board of
Directors, five meetings of the Compensation Committee and four meetings of the
Audit Committee. During this period, each director attended at least 75% of the
total number of all meetings of the Board of Directors held during the period
that he or she served as a director and of the committees thereof on which he or
she served.
The Board of Directors does not have a separate nominating committee.
The Board of Directors will consider nominees recommended by shareholders for
election as director at the 1998 Annual Meeting, provided that any such
recommendation is submitted in writing by February 28, 1998 to the Board of
Directors, c/o the Secretary of the Company, 6714 Netherlands Drive, Wilmington,
North Carolina 28405, accompanied by a description of the proposed nominee's
qualifications and other relevant biographical information and the consent of
the proposed nominee to serve.
The Company currently pays its non-employee directors an annual fee of
$5,000 and reimburses them for out-of-pocket expenses incurred in connection
with their services as directors. The Company's non-employee directors (Seymour
L. Gartenberg, E. Henry Mize and Donald S. McCoy) were granted non-qualified
options to purchase 5,000 shares of Common Stock under the Stock Option Plan, at
the time they were first elected to the Board of Directors. During Fiscal 1997,
the Company determined that, in addition to their initial grant of options,
non-employee directors should receive an annual grant of options for 2,500
shares of Common Stock for each year of service. As a result, Mr. Gartenberg and
Mr Mize, who had been serving as directors since 1994, each received additional
options to purchase 5,000 shares of Common Stock, and Dr. McCoy, who was first
elected to the Board in 1995, received additional options to purchase 2,500
shares of Common Stock. All of the options granted in Fiscal 1997 are
exercisable at $3.00 per share, the fair market value of the Common Stock at the
date of grant. It is anticipated that, after the 1997 Annual Meeting, grants of
non-qualified options to purchase 2,500 shares of Common Stock (exercisable at
the fair market value of
5
<PAGE>
the Common Stock at the date of grant) under the Stock Option Plan will be made
to the non-employee directors elected by the shareholders to the Board of
Directors at the 1997 Annual Meeting.
EXECUTIVE OFFICERS OF THE COMPANY
Executive officers of the Company are appointed by, and serve at the
discretion of, the Board of Directors. In addition to Mr. Flohr, Ms. Jacobs and
Mr. Ross, whose business experience is set forth above, the executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Paul H. Albritton 54 Vice President and Chief Financial Officer
David DeSimone 42 Vice President, Marketing and Sales
</TABLE>
PAUL H. ALBRITTON has been Vice President and Chief Financial Officer
of the Company since May 1994. From 1992 until he joined the Company, Mr.
Albritton was self-employed as a business consultant and, in such capacity,
consulted for the Company during April 1994. For more than the five years prior
to 1992, Mr. Albritton was employed by Acton Corporation (now Sunstates
Corporation), a public company engaged in automobile insurance underwriting,
manufacturing and certain other businesses, where he was Executive Vice
President and a director.
DAVID DESIMONE has been Vice President of Marketing and Sales of the
Company since September 1996. From 1981 until he joined the Company, Mr.
DeSimone was employed by MCI Telecommunications Corporation, a national
long-distance telecommunications services company, and had been its Director of
Marketing for the Integrated Client Services Division from 1994 to 1996 and
Regional Sales Manager for Business Markets from 1992 until 1994.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded or paid to or earned by the Company's chief
executive officer and the other executive officers of the Company who received
cash compensation from the Company aggregating at least $100,000 during Fiscal
1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
------------------- ------
NAME AND FISCAL NUMBER OF SECURITIES
PRINCIPAL POSITION YEAR SALARY UNDERLYING OPTIONS (#)
- ------------------ ---- ------ ----------------------
<S> <C> <C> <C>
Daniel P. Flohr(2) 1997 $130,000 --
President and Chief 1996 $130,000 --
Executive Officer 1995 $140,769 --
Tina L. Jacobs(3) 1997 $110,000 --
Executive Vice President and 1996 $110,000 --
Chief Operating Officer 1995 $120,772 --
Stuart E. Ross(4) 1997 $100,000 30,850 shares(5)
Vice President and 1996 $100,000 10,000 shares(5)
Director of Engineering 1995 $100,000 25,000 shares(5)
</TABLE>
- -------------------------
6
<PAGE>
(1) During each of the three fiscal years ended February 28, 1997, the
Company provided certain personal benefits to its executive officers
which benefits to any such individual did not exceed the lesser of
$50,000 or 10% of the cash compensation received by such individual.
(2) Pursuant to an amendment to Mr. Flohr's employment agreement, effective
August 26, 1994, his annual base salary was reduced from $150,000 to
$130,000. In addition, for Fiscal 1997, Mr. Flohr was given the
opportunity to receive a minimum bonus of $100,000 if certain
performance goals were achieved (which did not occur). See "Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements."
(3) Pursuant to an amendment to Ms. Jacobs' employment agreement, effective
August 26, 1994, her annual base salary was reduced from $130,000 to
$110,000. In addition, for Fiscal 1997, Ms. Jacobs was given the
opportunity to receive a minimum bonus of $100,000 if certain
performance goals were achieved (which did not occur). See "Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements."
(4) See "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements."
(5) Represents incentive stock options granted under the Stock Option Plan.
See "Stock Option Plan."
STOCK OPTION PLAN
STOCK OPTIONS GRANTED IN FISCAL 1997
The following table sets forth information concerning individual grants
of stock options made during Fiscal 1997 to each of the Company's executive
officers named in the Summary Compensation Table who received a grant of stock
options during Fiscal 1997. The Company did not grant any stock appreciation
rights during Fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
---- ----------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Stuart E. Ross 10,850 shares(1) 7.2% $3.125 November 11, 2001
20,000 shares(2) 13.2% $3.375 August 8, 2001
</TABLE>
- ------------------------
(1) The options were granted pursuant to the Stock Option Plan by the Stock
Option Committee on November 6, 1996, are incentive stock options, have an
option price equal to the fair market value on the date of grant and vest
one year after the date of grant.
(2) The options were granted pursuant to the Stock Option Plan by the Stock
Option Committee on August 1, 1996, are incentive stock options, have an
option price equal to the fair market value on the date of grant and vest
in three substantially equal annual installments commencing one year after
the date of grant.
STOCK OPTIONS HELD AT THE END OF FISCAL 1997
The following table sets forth the total number of exercisable and
un-exercisable stock options held by each of the Company's executive officers
named in the Summary Compensation Table who held any stock options as of
February 28, 1997. No options to purchase Common Stock were exercised by any of
the Company's executive officers during Fiscal 1997 and no stock appreciation
rights were outstanding during Fiscal 1997.
7
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FEBRUARY 28, 1997 AT FEBRUARY 28, 1997
--------------------- --------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stuart E. Ross 20,000 shares 45,850 shares $34,167 $200,827
</TABLE>
DESCRIPTION OF STOCK OPTION PLAN
The Stock Option Plan was adopted by the Board of Directors of the
Company on August 16, 1994 and approved by shareholders of the Company on August
4, 1995. The Board of Directors adopted certain amendments to the Stock Option
Plan on November 28, 1995 and August 1, 1996. The Stock Option Plan, as amended,
authorizes the issuance, within ten years from the date of its adoption, of
options covering up to 500,000 shares of Common Stock (subject to adjustment in
certain circumstances) to directors, executive officers and other key employees
of, and consultants to, the Company. As of May 30, 1997, options for an
aggregate of 17,156 shares of Common Stock granted under the Stock Option Plan
had been exercised, options for 292,710 shares of Common Stock, at exercise
prices ranging from $2.375 to $10.625 per share, were outstanding under the
Stock Option Plan and 190,134 shares of Common Stock were available for the
grant of future options under the Stock Option Plan. The Stock Option Plan is
intended to provide an incentive to continued employment or association of such
key employees and other individuals by enabling them to acquire a proprietary
interest in the Company and by offering comparable incentives to enable the
Company better to attract, compete for and retain highly qualified individuals,
as well as to associate the interests of such persons with those of the Company
and its shareholders.
Options granted under the Stock Option Plan may be either "Incentive
Stock Options" as that term is defined in Section 422 of the Internal Revenue
Code of 1986, or options which do not qualify as Incentive Stock Options
("Non-Qualified Stock Options").
Incentive Stock Options may be granted only to employees of the
Company. An Incentive Stock Option must expire within ten years from the date it
is granted (five years in the case of such options granted to a holder of more
than 10% of the outstanding Common Stock). Incentive Stock Options are first
exercisable not earlier than one year from the date of grant. The exercise price
of an Incentive Stock Option must be at least equal to the fair market value of
the Common Stock on the date such Incentive Stock Option is granted (or 110% of
the fair market value of the Common Stock in the case of such options granted to
a holder of more than 10% of the outstanding Common Stock). To the extent that
the aggregate fair market value of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by an optionee during
any calendar year exceeds $100,000, such options will be treated as
Non-Qualified Stock Options.
The Company may issue Non-Qualified Stock Options under the Stock
Option Plan to executive officers, directors and key employees of the Company
and advisors and consultants to the Company. The exercise price of Non-Qualified
Stock Options must be at least equal to the fair market value of the Common
Stock on the date such Options are granted and will have such expiration date
and vesting schedule as determined by the Stock Option Committee at the time of
grant.
Prior to its amendment in August 1996, the Stock Option Plan provided
for a one-time grant to each non-employee director of the Company of
Non-Qualified Stock Options to purchase 5,000 shares of Common Stock at the time
when he or she was first elected to the Board of Directors. Such Non-Qualified
Stock Options have an exercise price equal to the fair market value of the
Common Stock on the date of grant, vest one year after the date of grant and
expire ten years after the date of grant.
Payment of the exercise price upon exercise of an option must be paid
in cash or, if permitted by the applicable option agreement, by delivery of
shares of Common Stock, currently exercisable options to acquire
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Common Stock or other property valued at its then fair market value. Options are
not transferable by the optionee, other than by will or applicable laws of
descent and distribution. In the event of termination of the optionee's
relationship with the Company other than for cause, the optionee's options will
expire on the earlier of stated expiration or three months after the date of
termination (except in the case of death, disability or retirement, in which
event the period is extended to 12 months). Upon a change in control of the
Company, all outstanding options become immediately exercisable in full.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Daniel Flohr serves as President and Chief Executive Officer of the
Company pursuant to an employment agreement, dated as of March 1, 1994, as
amended, at an annual base salary of $130,000. Pursuant to this agreement, Mr.
Flohr was entitled to receive incentive compensation for Fiscal 1997 if certain
performance goals (which were not achieved) were attained. It is anticipated
that the Compensation Committee of the Board of Directors will establish an
incentive bonus arrangement, based upon the Company attaining certain levels of
performance, for Fiscal 1998; however, neither the amount of such incentive, nor
the levels of performance to be attained, has yet been determined. Mr. Flohr's
employment agreement is automatically renewed annually unless notice of
non-renewal is given by either party at least six months prior to the end of the
then current term. In the event that Mr. Flohr's employment is terminated by the
Company for any reason without cause and prior to expiration of the then current
term, Mr. Flohr would be entitled to receive, in one lump sum, the aggregate
base salary that he would have received had he been employed through the end of
the then current term.
Tina Jacobs serves as Executive Vice President and Chief Operating
Officer of the Company pursuant to an employment agreement, dated as of March 1,
1994, as amended, at an annual base salary of $110,000. Pursuant to this
agreement, Ms. Jacobs was entitled to receive incentive compensation for Fiscal
1997 if certain performance goals (which were not achieved) were attained. It is
anticipated that the Compensation Committee of the Board of Directors will
establish an incentive bonus arrangement, based upon the Company attaining
certain levels of performance, for Fiscal 1998; however, neither the amount of
such incentive, nor the levels of performance to be attained, has yet been
determined. Ms. Jacobs' employment agreement is automatically renewed annually
unless notice of non-renewal is given by either party at least six months prior
to the end of the then current term. In the event that Ms. Jacobs' employment is
terminated by the Company for any reason without cause and prior to expiration
of the then current term, Ms. Jacobs would be entitled to receive, in one lump
sum, the aggregate base salary that she would have received had she been
employed through the end of the then current term.
Stuart Ross serves as Director of Engineering of the Company pursuant
to an employment agreement, dated as of December 30, 1993, which is
automatically renewed at the end of each calendar year unless notice of
non-renewal is given by either party at least 90 days prior to the end of the
then current year. Mr. Ross' annual base salary was increased from $100,000 to
$115,000, effective May 7, 1997. In the event that Mr. Ross' employment is
terminated by the Company without cause, Mr. Ross would continue to receive his
salary for a period equal to the lesser of (i) two months, and (ii) the balance
of the term of his employment agreement. Mr. Ross' employment agreement also
provides that, for a period of three years following his termination of
employment, he will not, in any capacity, compete with the Company. In August
1996, the Company granted Mr. Ross an option expiring on August 1, 2001 to
purchase 20,000 shares of Common Stock at an exercise price of $3.375 per share,
which option vests in three equal annual installments beginning on August 1,
1997 and expires on August 1, 2001. In November 1996, the Company granted Mr.
Ross an additional option expiring on November 6, 2001 to purchase 10,850 shares
of Common Stock at an exercise price of $3.125 per share, which option vests on
November 6, 1997 and expires on November 6, 2001. See "Stock Option Plan."
David DeSimone serves as Vice President of Marketing and Sales of the
Company pursuant to a two-year employment agreement, dated as of August 15,
1996, at an annual base salary of $100,000. At the commencement of his
employment with the Company, and to assist him in his relocation to Wilmington,
North Carolina, Mr. DeSimone received a non-accountable relocation expenses
payment of $35,000. Pursuant to his employment agreement, Mr. DeSimone is
entitled to receive incentive compensation for Fiscal 1998 and Fiscal 1999
ranging from (i) $30,000, if net sales of the Company (excluding sales of
C-Phone Home) for Fiscal
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1998 reach $4 million, to (ii) $300,000 if such net sales reach $15 million. If
net sales exceed $15 million, the Compensation Committee will determine the
appropriate level of incentive compensation. Pursuant to his employment
agreement, Mr. DeSimone was also entitled to incentive compensation for Fiscal
1997 of up to $100,000 if certain performance goals were achieved (which did not
occur). In addition, Mr. DeSimone was granted (i) an option to purchase 30,000
shares at an exercise price of $2.375 per share, which option vests in three
equal annual installments beginning September 3, 1997 and expires September 3,
2001, (ii) an option (which has terminated) to purchase 5,000 shares of Common
Stock at an exercise price of $2.375 per share if the Company achieved certain
performance goals (which did not occur), and (iii) an option to purchase 5,000
shares of Common Stock at an exercise price of $2.375 per share, which option
will vest on September 3, 1997, if the Company achieves certain performance
goals during the first six months of Fiscal 1998. In addition, the Company has
agreed to issued to Mr. DeSimone, during Fiscal 1998 and Fiscal 1999, options to
acquire at least an additional 10,000 shares of Common Stock, subject to the
Company achieving, in such fiscal years, performance goals to be determined by
the Compensation Committee. Mr. DeSimone's employment agreement is automatically
renewed annually unless notice of non-renewal is given by either party at least
90 days prior to the end of the then current term. In the event that Mr.
DeSimone's employment is terminated by the Company without cause, Mr. DeSimone
would continue to receive his salary for a period equal to the lesser of (i) two
months, and (ii) the balance of the term of his employment agreement. Mr.
DeSimone's employment agreement also provides that, for a period of two years
following his termination of employment, he will not, in any capacity, compete
with the Company.
The Company maintains a $1,500,000 key person insurance policy on the
life of Mr. Flohr, of which the Company is the beneficiary for $1,000,000 and
Ms. Jacobs (Mr. Flohr's wife) is the beneficiary for $500,000. Ms. Jacobs
reimburses the Company for the cost of her pro rata share of the policy. The
Company also maintains a $500,000 key person insurance policy on the life of Mr.
Ross, of which the Company is the sole beneficiary.
CERTAIN TRANSACTIONS
Mr. Flohr and Ms. Jacobs own the Company's Wilmington, North Carolina
facility, including the land on which the facility is located, and lease it to
the Company pursuant to a triple net lease. The Company is responsible for all
costs and expenses, including applicable taxes, relating to the facility. In
April 1996, the Company exercised the first of two successive three-year options
to extend the lease term until April 30, 1999. In accordance with the lease
terms, effective May 1, 1996, the annual base rent was increased from $60,000 to
$75,360 (the fair market rental value of the facility as of the beginning of the
renewal term). In addition, Mr. Flohr and Ms. Jacobs allow the Company to use
approximately 9,000 square feet of a 1.4 acre adjacent tract of land owned by
them as a parking area for the Company's employees and customers, in
consideration for which the Company provides minimal maintenance of the parking
area and pays $330 per year of real estate taxes on the tract of land. The
Company believes that the terms and conditions of the lease are no less
favorable to the Company than those available from unaffiliated third parties.
The facility is being fully utilized and Mr. Flohr and Ms. Jacobs have offered
to construct an additional building to the Company's specifications on the
adjacent tract, and to lease such building, when constructed, to the Company on
terms similar to the existing lease, including at a rental no greater than fair
market value at the commencement of the lease term.
APPROVAL OF THE ISSUANCE OF
THE RIGHTS SHARES
(ITEM 2 ON THE PROXY CARD)
BACKGROUND
During the week of March 31, 1997, the Company completed a private
placement (the "March 1997 private placement"), through JLR as the placement
agent, pursuant to which the Company issued an aggregate of 833,667 shares of
Common Stock (the "Original Shares") to the investors (the "Investors")
participating therein. Accompanying each of the Original Shares was the right,
under certain circumstances, to receive
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additional shares of Common Stock in accordance with the terms of a "contingent
value right" (the "Rights"). The Company sold the Original Shares and Rights at
a price of $6.00 per Original Share and received net proceeds of approximately
$4,370,000 (after payment of fees and expenses of approximately $632,000), which
has been, and will be, used for working capital, including for the marketing of
the Company's TV-based video phone, C-Phone Home(TM), and funding anticipated
increases in inventories and receivables related to the commercialization of
C-Phone Home.
The Investors have the right to register, under the Securities Act of
1933 (the "1933 Act"), the Original Shares and the shares of Common Stock
issuable upon exercise of the Rights (the "Rights Shares"). In accordance with
the terms of such registration right, the Company prepared at its expense, and
filed on April 16, 1997 with the Securities and Exchange Commission (the "SEC"),
a registration statement on Form S-3 (the "Registration Statement") under the
1933 Act covering the Original Shares and the maximum number of Rights Shares.
The Company has agreed to use its reasonable best efforts to (i) have the
Registration Statement declared effective by the SEC, and (ii) maintain the
Registration Statement current for the lesser of one year after the date that
the Registration Statement is declared effective (the "Effective Date"), or
until the securities included in the Registration Statement have been sold
thereunder. In connection with the March 1997 private placement, Daniel Flohr,
President and Chief Executive Officer of the Company, delivered to JLR, as
escrow agent for the Investors, an aggregate of 250,000 of his own shares of
Common Stock, which shares will be forfeited at the rate of 1,000 shares a day
if the Effective Date does not occur on or before July 19, 1997; and, in the
event that the Effective Date does not occur on or before October 17, 1997, the
remaining escrowed shares will be forfeited.
In consideration for JLR's services as placement agent in the March
1997 private placement, the Company (i) paid JLR a fee of $450,180 (or 9% of the
gross proceeds received by the Company in the placement), (ii) agreed to
reimburse JLR for up to $25,000 of its out-of-pocket expenses, and (iii) issued
to WBM LLC, an affiliate of JLR, warrants (the "1997 Warrants") to acquire an
aggregate of 150,000 shares of Common Stock at an exercise price of $9.60 per
share (120% of the closing bid price for the Common Stock on The Nasdaq National
Market on the trading day immediately prior to the first closing of the
placement). The 1997 Warrants expire 90 days after the Effective Date and the
shares of Common Stock issuable upon exercise of the 1997 Warrants have been
included in the Registration Statement.
TERMS OF THE RIGHTS
The Rights are automatically exercised at the time, and from time to
time, as the Original Shares are first publicly sold through a broker dealer
after the Effective Date, and expire one year after the Effective Date. The
terms of the Rights provide that, upon the first such sale of any Original
Shares at a price of less than $8.00 per share, the seller of the Original
Shares will automatically receive, for each such Original Share sold, without
the payment of any additional consideration, such number of Rights Shares as
equals (i) $8.00 divided by the Adjusted Price, minus (ii) one; where the
Adjusted Price will equal the greater of (x) the average closing bid price per
share of Common Stock on The Nasdaq National Market for the ten trading days
immediately preceding the date of sale of the Original Shares, or (y) $2.00.
Although the average closing bid price of the Common Stock on The Nasdaq
National Market since the closing of the March 1997 private placement through
May 30, 1997 has not been below $8.00 per share, it is theoretically possible
(if all the Original Shares are sold during such one-year period at a time when
the Adjusted Price is $2.00) that the Company will be required to issue an
additional 2,501,001 Rights Shares. The holders of the Rights, and the Rights
Shares issuable upon exercise thereof, are not entitled to any preemptive
rights.
REASONS FOR THE PROPOSAL
The rules of The Nasdaq National Market require that a company, whose
common stock is listed on The Nasdaq National Market, obtain shareholder
approval prior to the issuance by such company of additional shares of common
stock, in a transaction (or series of related transactions), other than a public
offering, when (i) the number of shares of comon stock being issued equals or
exceeds 20% or more of the number of shares of common stock outstanding before
such transaction (or series of related transactions), and (ii) the shares of
common stock are being sold at a price per share which is less than the greater
of the per share book value
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or the per share market value of the common stock as of the time of the
transaction. On March 31, 1997, when the first closing under the March 1997
private placement occurred, the last reported sale price of the Common Stock on
The Nasdaq National Market was $8.50 per share, and during the week immediately
prior thereto, the highest reported last sale price of the Common Stock was
$9.188 per share. The issuance of any Rights Shares in excess of a nominal
amount, when combined with the number of Original Shares issued in the 1997
Placement, will exceed 20% of the number of shares of Common Stock outstanding
immediately prior to the March 1997 private placement. As a result of the
foregoing, and in order for the Company's Common Stock to continue to be listed
on The Nasdaq National Market, the Company is required to obtain shareholder
approval prior to the issuance of the Rights Shares.
If the proposal to approve the issuance of the Rights Shares is not
approved by the shareholders of the Company, and the Rights Shares are required
to be issued in accordance with the terms of the Rights, the Company will fail
to meet the continued listing requirements of The Nasdaq National Market, and
the Company anticipates that the Common Stock will be removed from listing on
The Nasdaq National Market. The Company has agreed with the Investors in the
March 1997 private placement to (i) include a proposal to approve the issuance
of the Rights Shares in these proxy materials, and (ii) use its best efforts to
cause the Company's Board of Directors to recommend (and not withdraw) approval
of such proposal to the Company's shareholders.
The Company entered into, and consummated, the March 1997 private
placement based on a determination by its Board of Directors that the Company's
then level of cash and cash equivalents was inadequate to permit the Company to
continue in existence for a sustained period. While the Board of Directors
considered the potential disadvantages of the possible issuance of the Rights
Shares, including (i) the potential dilution of the voting power per share of
Common Stock, (ii) the potential dilution of the Common Stock book value, and
(iii) the potential negative impact on earnings per share of Common Stock, after
lengthy and extensive negotiations with several investment banking firms and
potential investors, the Board of Directors determined that it was in the best
interests of the Company and its shareholders for the Company to proceed with
the March 1997 private placement based on the Board's belief that the March 1997
private placement offered the most favorable terms then available to the Company
given the then existing market conditions and the Company's then need for
additional cash resources.
REQUIRED VOTE
The approval of the issuance of the Rights Shares will require the
affirmative vote of a majority of the votes cast at the Annual Meeting by the
holders of shares entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE ISSUANCE OF THE RIGHTS SHARES.
APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
(ITEM 3 ON THE PROXY CARD)
BACKGROUND
On May 8, 1997, the Board of Directors unanimously adopted, subject to
shareholder approval at the Annual Meeting, an amendment (the "Common Stock
Amendment") to the Company's Certificate of Incorporation (the "Certificate")
which would increase the number of shares of Common Stock which the Company
would be authorized to issue.
The Company's Certificate currently authorizes the issuance of up to 10
million shares of Common Stock. As of May 30, 1997, there were 5,202,856 shares
of Common Stock outstanding, 2,501,001 shares of Common Stock reserved for
issuance upon exercise of the Rights, 482,844 shares of Common Stock reserved
for issuance upon exercise of stock options granted or available for grant
pursuant to the Stock Option Plan,
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and 350,000 shares of Common Stock reserved for issuance upon exercise of
currently outstanding warrants. As a result, only 1,463,299 shares of Common
Stock are unreserved and available for future issuance.
REASONS FOR THE PROPOSED AMENDMENT
The Board of Directors believes that approval of the Common Stock
Amendment to increase the number of authorized but unissued shares of Common
Stock is in the best interests of the Company and its shareholders, as it would
permit the Company to have additional shares of Common Stock available for
issuance to meet the Company's future business needs as they arise. The Company
has no present arrangements, agreements, understandings or plans for the
issuance or use of the additional shares of Common Stock proposed to be
authorized by the Common Stock Amendment; however, if C-Phone Home gains market
acceptance (of which there can be no assurance), the Company's pricing strategy
and the very substantial investment which would then be required by the Company
for manufacturing, inventory build-up and marketing expenditures related to the
commercialization of C-Phone Home, may require the Company to obtain additional
working capital before the end of the current calendar year. The Company has
commenced the planning process to raise such funds. The Board of Directors
believes that the availability of additional shares of Common Stock will provide
the Company with the flexibility to issue shares of Common Stock for such
purpose, as well as for a variety of other proper corporate purposes as the
Board of Directors may deem advisable without further action by the Company's
shareholders, except as may be required by law, regulation or the requirements
of The Nasdaq National Market, on which the Common Stock is listed. These other
purposes could include, among other things, the purchase of property, the
acquisition of other companies, the use of shares of Common Stock for various
equity compensation and other employee benefit plans and the declaration of
Common Stock dividends or distributions.
TERMS OF THE PROPOSED AMENDMENT
The Board of Directors of the Company is proposing to amend the
Certificate to increase the number of shares of Common Stock from ten million
shares of common stock to twenty million shares of common stock. If the Common
Stock Amendment is approved by the shareholders, Article FOURTH of the
Certificate would be amended to read in its entirety substantially as follows:
"FOURTH: The aggregate number of shares which the Corporation shall
have authority to issue is twenty million (20,000,000) shares of common
stock, $.01 par value."
EFFECTS OF THE PROPOSED AMENDMENT
Depending upon the circumstances in which additional shares of Common
Stock are issued, the overall effects of such issuance may be to render more
difficult or to discourage a merger, tender offer, proxy contest or the
assumption of control by a holder of a large block of Common Stock and the
removal of incumbent management. Management of the Company is not currently
aware of any possible takeover attempts of the Company, and the Common Stock
Amendment is not in response to any effort by any party to accumulate the Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation in opposition to management or otherwise. The Common Stock
Amendment is not part of a plan to recommend a series of similar amendments to
the shareholders and, except as set forth below under "Approval of the Amendment
to the Company's Certificate of Incorporation to Authorize Preferred Stock", the
Board of Directors does not contemplate recommending the adoption of any other
amendments to the Certificate which could be construed to affect the ability of
third parties to take over or change the control of the Company.
Holders of Common Stock are not entitled to preemptive rights, and to
the extent that any additional shares of Common Stock or securities convertible
into Common Stock may be issued on other than a pro rata basis to current
shareholders, the present ownership portion of current shareholders may be
diluted. Based on the Certificate and the Company's By-laws and the applicable
provisions of the New York Business Corporation Law, shareholders will have no
dissenters' or similar rights with respect to the adoption of the Common Stock
Amendment or upon the issuance of any shares of Common Stock thereunder.
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If the proposal set forth below under the caption "Approval of the
Amendment to the Company's Certificate of Incorporation to Authorize Preferred
Stock" also is approved by the shareholders at the Annual Meeting, Article
FOURTH will be replaced by the text set forth below under such caption.
REQUIRED VOTE
The approval of the Common Stock Amendment requires the affirmative
vote by the holders of a majority of all outstanding shares of Common Stock
entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
APPROVAL OF THE COMMON STOCK AMENDMENT.
APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO AUTHORIZE PREFERRED STOCK
(ITEM 4 ON THE PROXY CARD)
BACKGROUND
On May 8, 1997, the Board of Directors unanimously approved, subject to
shareholder approval at the Annual Meeting, an amendment to the Certificate (the
"Preferred Stock Amendment") which would authorize the Company to issue, from
time to time, as determined by the Board of Directors, up to one million shares
of preferred stock, par value $.01 per share (the "Preferred Stock"). The
Certificate currently does not authorize the issuance of shares of Preferred
Stock.
REASONS FOR THE PROPOSED AMENDMENT
The Board of Directors believes that the approval of the Preferred
Stock Amendment is advisable and in the best interests of the Company and its
shareholders, as it would permit the Company to have shares of Preferred Stock
available for issuance to meet the Company's future business needs as they
arise. The Company has no present arrangements, agreements, understandings or
plans for the issuance or use of the shares of Preferred Stock proposed to be
authorized by the Preferred Stock Amendment; however, as previously mentioned,
if C-Phone Home gains market acceptance (of which there can be no assurance),
the commercialization of C-Phone Home, may require the Company to obtain
additional working capital before the end of the current calendar year. The
Company anticipates that such funds should be available through the sale of its
securities. Depending upon market conditions existing at such time and the
Company's then financial condition, among other factors, the Company may not be
able to effect an offering of its shares of Common Stock or such an offering may
not be in the best interests of the Company and its shareholders due, among
other reasons, to the dilutive nature thereof on existing shareholders. As a
result, it may be necessary or desirable to effect an offering of securities
senior to or convertible into shares of Common Stock or securities which have
rights not otherwise afforded to the holders of Common Stock. The purpose of the
Preferred Stock Amendment is to give the Company the flexibility to issue
Preferred Stock, if the Board of Directors determines that such action is in the
best interests of the Company and its shareholders, as an alternate means of
financing. The Board of Directors believes that the availability of shares of
Preferred Stock will provide the Company with the flexibility to issue shares of
Preferred Stock for such purpose, as well as for a variety of other proper
corporate purposes as the Board of Directors may deem advisable without further
action by the Company's shareholders, except as may be required by law,
regulation or the requirements of The Nasdaq National Market, on which the
Common Stock is listed. These other purposes could include, among other things,
the purchase of property, the acquisition of other companies and the use of
shares of Preferred Stock for various equity compensation and other employee
benefit plans.
TERMS OF THE PROPOSED AMENDMENT
If the Preferred Stock Amendment is approved by shareholders, and the
Common Stock Amendment described above under "Approval of the Amendment to the
Company's Certificate of Incorporation to Increase
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the Number of Authorized Shares of Common Stock" is also so approved, Article
FOURTH of the Certificate would be amended to read in its entirety substantially
as follows:
"FOURTH: (a) The aggregate number of shares which the
Corporation shall have the authority to issue is twenty-one million
(21,000,000) shares, which shall consist of twenty million (20,000,000)
shares of common stock, $.01 par value ("Common Shares"), and one
million (1,000,000) shares of preferred stock, $.01 par value
("Preferred Shares"). Except as otherwise provided in accordance with
this Certificate of Incorporation, the Common Shares shall have
unlimited voting rights, with each Common Share being entitled to one
vote, and the right to receive the net assets of the Corporation upon
dissolution, with each Common Share participating on a pro rata basis.
(b) The Board of Directors is authorized, from time to time
and without shareholder action, to provide for the issuance of
Preferred Shares in one or more series not exceeding in the aggregate
the number of Preferred Shares authorized by this Certificate of
Incorporation, as amended from time to time; and to determine with
respect to each such series the voting powers, if any (which voting
powers, if granted, may be full or limited), designations, preferences
and relative, participating, option or other special rights, and the
qualifications, limitations or restrictions relating thereto, including
without limiting the generality of the foregoing (i) the voting rights,
if any, relating to Preferred Shares of any series (which may be one or
more votes per share or a fraction of a vote per share or no vote per
share, which may vary over time and which may be applicable generally
or only upon the happening and continuance of stated events or
conditions), (ii) the rate of dividend, if any, to which holders of
Preferred Shares of any series may be entitled (which may be cumulative
or noncumulative), (iii) the rights of holders of Preferred Shares of
any series in the event of liquidation, dissolution or winding up of
the affairs of the Corporation, (iv) the rights, if any, of holders of
Preferred Shares of any series to convert or exchange such Preferred
Shares of such series for shares of any other class or series of
capital stock, or for any other securities, property or assets, of the
Corporation or any subsidiary (including the determination of the price
or prices or the rate or rates applicable to such rights to convert or
exchange and the adjustment thereof, and the time or times during which
a particular price or rate shall be applicable), (v) whether or not the
Preferred Shares of any series shall be redeemable and, if so, the
terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share
payable in case of redemptions, which amount may vary under different
conditions and at different dates, and (vi) whether any Preferred
Shares of any series shall be redeemed pursuant to a retirement or
sinking fund or otherwise and the terms and conditions of such
obligation.
(c) Before the Corporation shall issue any Preferred Shares
of any series, a Certificate of Amendment to this Certificate of
Incorporation fixing the voting powers, designations, preferences, the
relative, participating, option or other rights, if any, and the
qualifications, limitations and restrictions, if any, relating to the
Preferred Shares of such series, and the number of Preferred Shares of
such series authorized by the Board of Directors to be issued shall be
filed with the Department of State of the State of New York in
accordance with the New York Business Corporation Law and shall become
effective without any shareholder action. The Board of Directors is
further authorized to increase or decrease (but not below the number of
Preferred Shares of any series then outstanding) the number of shares
of such series subsequent to the issuance of shares of such series."
In the event that the Preferred Stock Amendment is approved by
shareholders and the Common Stock Amendment described above under "Approval of
the Amendment to the Company's Certificate of Incorporation to Increase the
Number of Authorized Shares of Common Stock" is not so approved, the following
paragraph (a) would be substituted for paragraph (a) of proposed Article FOURTH
set forth immediately above:
"(a) The aggregate number of shares which the Corporation shall
have the authority to issue is eleven million (11,000,000) shares,
which shall consist of ten million (10,000,000) shares of common stock,
$.01 par value ("Common Shares"), and one million (1,000,000) shares of
preferred
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stock, $.01 par value ("Preferred Shares"). Except as otherwise
provided in accordance with this Certificate of Incorporation, the
Common Shares shall have unlimited voting rights, with each Common
Share being entitled to one vote, and the right to receive the net
assets of the Corporation upon dissolution, with each Common Share
participating on a pro rata basis."
EFFECTS OF THE PROPOSED AMENDMENT
The proposed Preferred Stock Amendment will give the Board of Directors
the express authority, without further action of the shareholders, to issue
shares of Preferred Stock from time to time in one or more series and to fix
before issuance with respect to each series (i) the designation and the number
of shares to constitute each series, (ii) the liquidation rights and
preferences, if any, (iii) the dividend rights (which could be senior to the
Common Stock) and interest rates, if any, (iv) the rights and terms of
redemptions, (v) whether the shares of Preferred Stock are to be convertible or
exchangeable into shares of Common Stock or other securities of the Company, and
the rates thereof, (vii) any limitation on the payment of dividends on the
Common Stock while any shares of Preferred Stock are outstanding, (viii) the
voting power, if any, of the shares of Preferred Stock in addition to the voting
rights provided by law, which voting power may be general or special, and (ix)
such other provisions as will not be inconsistent with the Certificate. All the
shares of any one series of Preferred Stock will be identical in all respects.
Holders of any series of Preferred Stock, when and if issued, may have priority
claims to dividends and to any distribution upon liquidation of the Company, and
may have other preferences over the Common Stock, including a preferential right
to elect directors in the event that Preferred Stock dividends (if the Preferred
Stock carries a dividend) are not paid for a specified period.
The specific terms of any Preferred Stock to be authorized pursuant to
the Preferred Stock Amendment will depend primarily on market conditions, and
other factors existing at the time of issuance. The Board of Directors currently
has no plans, understandings or agreements for issuing any shares of Preferred
Stock, and does not intend to issue any Preferred Stock, except on terms which
it deems to be in the best interests of the Company and its shareholders. The
Board of Directors has considered the potential disadvantages to the issuance of
Preferred Stock (such as the negative impact a Preferred Stock dividend may have
on the Company's earnings per share, if any, the liquidating preference the
Preferred Stock would have over the Common Stock and the potential dilution of
any shareholders' equity to the extent that Preferred Stock, when and if issued,
may be redeemable or convertible into Common Stock); however, the Board of
Directors believes that the advantages of future flexibility afforded by the
ability to issue Preferred Stock outweigh the disadvantages, and would be in the
best interests of the Company and its shareholders.
It is not possible to state the precise effects of the authorization of
the Preferred Stock upon the rights of the holders of Common Stock until the
Board of Directors determines to issue Preferred Stock and sets the respective
preferences, limitations and relative rights of the holders of each class or
series of Preferred Stock so issued. However, such effects might include (i)
reduction of the amount otherwise available for payment of dividends on the
Common Stock, to the extent dividends are payable on any issued Preferred Stock,
(ii) restrictions on dividends on the Common Stock, (iii) dilution of the voting
power of the Common Stock to the extent that the Preferred Stock has voting
rights, (iv) conversion of the Preferred Stock into Common Stock at such prices
as the Board determines, which could include issuance at or below the fair
market value or original issue price of the Common Stock, and (v) the holders of
Common Stock not being entitled to participate in the Company's assets upon
liquidation until satisfaction of any liquidation preference granted to holders
of the Preferred Stock.
Depending upon the circumstances in which shares of Preferred Stock are
issued, the overall effects of such issuance may be to render more difficult or
to discourage a merger, tender offer, proxy contest or the assumption of control
by a holder of a large block of Common Stock and the removal of incumbent
management. The Board of Directors, when it deems it in the best interests of
the Company and its shareholders, also could authorize holders of a series of
Preferred Stock to vote either separately as a class or with the holders of
Common Stock, on any merger, sale or exchange of assets by the Company or on any
other extraordinary corporate transaction. The issuance of new shares also could
be used to dilute the stock ownership of a person or entity seeking to obtain
control of the Company, should the Board of Directors
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consider the action of such entity or person not to be in the best interests of
the shareholders and the Company. In addition, the mere existence of a class of
authorized Preferred Stock could have the effect of discouraging unsolicited
takeover attempts. As stated above, management of the Company is not currently
aware of any possible takeover attempts of the Company, and the Preferred Stock
Amendment is not in response to any effort by any party to obtain control of the
Company by means of a merger, tender offer, solicitation in opposition to
management or otherwise. The Preferred Stock Amendment is not part of a plan to
recommend a series of similar amendments to the shareholders and, except as set
forth above under "Approval of the Amendment to the Company's Certificate of
Incorporation to Increase the Number of Authorized Shares of Common Stock", the
Board of Directors does not contemplate recommending the adoption of any other
amendments to the Certificate which could be construed to affect the ability of
third parties to take over or change the control of the Company.
Holders of Common Stock will not be entitled to preemptive rights with
respect to any issuance of shares of Preferred Stock. Based on the Certificate
and the Company's By-laws and the applicable provisions of the New York Business
Corporation Law, shareholders will have no dissenters' or similar rights with
respect to the adoption of the Preferred Stock Amendment or upon the issuance of
shares of Preferred Stock thereunder.
REQUIRED VOTE
The approval of the Preferred Stock Amendment requires the affirmative
vote by the holders of a majority of all outstanding shares of Common Stock
entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
PREFERRED STOCK AMENDMENT.
SELECTION OF INDEPENDENT ACCOUNTANTS
(ITEM 5 ON THE PROXY CARD)
The Board of Directors has selected, subject to ratification by the
shareholders of the Company at the Annual Meeting, the firm of Coopers & Lybrand
L.L.P. as the independent accountants to audit the Company's financial
statements for its fiscal year ending February 28, 1998. Coopers & Lybrand
L.L.P. has served as the independent accountants for the Company for more than
the past five years and is, therefore, familiar with the affairs and financial
procedures of the Company. A representative of Coopers & Lybrand L.L.P. is
expected to be present at the Annual Meeting, will have the opportunity to make
a statement if such representative desires to do so and will be available to
respond to appropriate questions.
The ratification of the selection of Coopers & Lybrand L.L.P. as
independent accountants for the current fiscal year requires the affirmative
vote of a majority of the votes cast on the matter at the Annual Meeting by the
holders of shares entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
RATIFICATION OF THE SELECTION OF COOPERS & LYBRAND L.L.P. AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS.
SHAREHOLDERS' PROPOSALS FOR THE 1998 ANNUAL MEETING
A shareholder who desires to include a proposal in the proxy material
relating to the 1998 Annual Meeting of shareholders of the Company must submit
the same in writing, so as to be received at the principal executive office of
the Company (to the attention of the Secretary) on or before February 28, 1998
for such proposal to be considered for inclusion in the proxy statement for such
Annual Meeting. Such proposal must also meet the other requirements of the
Securities and Exchange Commission relating to shareholder proposals required to
be included in the Company's proxy statement.
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OTHER MATTERS
The Board of Directors does not know of any other business to be
presented for consideration at the Annual Meeting. If other matters properly
come before the Annual Meeting, the persons named in the accompanying form of
proxy intend to vote thereon in accordance with their best judgment.
The Company will bear the cost of the Annual Meeting and the cost of
soliciting proxies in the accompanying form, including the cost of mailing this
proxy statement. In addition to solicitation by mail, directors, officers and
regular employees of the Company (none of whom will be additionally compensated
for such services) may solicit proxies by telephone or otherwise. Arrangements
will be made with brokerage firms and other custodians, nominees and fiduciaries
to forward forms of proxy and proxy materials to their principals and the
Company will reimburse them for their reasonable expenses in connection
therewith.
This Proxy Statement incorporates by reference the information
contained in Item 6 - "Management's Discussion and Analysis or Plan of
Operations" and Item 7 - "Financial Statements" of the Company's Annual Report
on Form 10-KSB ("Form 10-KSB") for the fiscal year ended February 28, 1997,
which is included in the Company's 1997 Annual Report to Shareholders. THE
COMPANY WILL FURNISH, WITHOUT CHARGE, TO EACH PERSON WHOSE PROXY IS BEING
SOLICITED, UPON WRITTEN REQUEST, A COPY OF ITS FORM 10-KSB INCLUDING THE
FINANCIAL STATEMENTS, NOTES TO THE FINANCIAL STATEMENTS AND THE FINANCIAL
SCHEDULES CONTAINED THEREIN. Copies of any exhibits thereto also will be
furnished upon the payment of a reasonable duplicating charge. Written requests
for copies of any such materials should be directed to Paul H. Albritton, Chief
Financial Officer, C-Phone Corporation, 6714 Netherlands Drive, Wilmington,
North Carolina 28405.
By Order of the Board of Directors
Tina L. Jacobs
SECRETARY
June --, 1997
PLEASE DATE, SIGN AND RETURN THE ENCLOSED PROXY AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED FOR MAILING IN THE
UNITED STATES.
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C-PHONE CORPORATION
PROXY - ANNUAL MEETING OF SHAREHOLDERS - AUGUST __, 1997
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)
The undersigned shareholder of C-Phone Corporation (the "Company")
hereby constitutes and appoints Daniel P. Flohr, Tina L. Jacobs and Paul H.
Albritton, and each of them, the attorneys and proxies of the undersigned, with
full power of substitution, to represent and to vote on behalf of the
undersigned all of the shares of the Company's Comon Stock which the undersigned
is entitled to vote at the Annual Meeting of shareholders to be held at the
Landfall Park Hampton Inn & Suites, 1989 Eastwood Road, Wilmington, North
Carolina on August 1, 1997, at 9:00 a.m., and at any adjournments thereof, upon
the following proposals which are more fully described in the notice of, and
proxy statement for, the Annual Meeting.
<TABLE>
<CAPTION>
(1) Election of Directors FOR all nominees listed below (except |_| WITHHOLD AUTHORITY |_|
as marked to the contrary below) to vote for all nominees
DANIEL P. FLOHR, SEYMOUR L. GARTENBERG, TINA L. JACOBS, DONALD S. MCCOY, E. HENRY MIZE, STUART E. ROSS
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(2) Proposal to approve the issuance of the Rights Shares. |_| FOR |_| AGAINST |_| ABSTAIN
(3) Proposal to approve the amendment to the Company's Certificate of Incorporation |_| FOR |_| AGAINST |_| ABSTAIN
to authorize ten million additional shares of Common Stock.
(4) Proposal to approve the amendment to the Company's Certificate of Incorporation to |_| FOR |_| AGAINST |_| ABSTAIN
authorize the issuance of up to one million shares of preferred stock.
(5) Proposal to ratify the selection of Coopers & Lybrand L.L.P. as the Company's |_| FOR |_| AGAINST |_| ABSTAIN
independent accountants for the fiscal year ending February 28, 1998.
EACH OF THE FOREGOING MATTERS HAS BEEN PROPOSED BY THE COMPANY AND IS
INDEPENDENT AND NOT CONDITIONED ON THE APPROVAL OF ANY OTHER MATTER.
(6) In their discretion, upon such other matters as properly may come before the
Annual Meeting.
</TABLE>
(Continued and to be signed on reverse side.)
<PAGE>
Said attorneys and proxies, or their substitutes (or if only one, that
one) at said Annual Meeting, and any adjournments thereof, may exercise all of
the powers hereby given. Any proxy heretofore given is hereby revoked.
Receipt is acknowledged of the Notice of Annual Meeting of
shareholders, the Proxy Statement accompanying said Notice and the Annual Report
to shareholders for the fiscal year ended February 28, 1997.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS AND EACH OF THE ABOVE
PROPOSALS.
IN WITNESS WHEREOF, the undersigned has signed this proxy.
Dated: , 1997
------------------------------
-------------------------------------
Shareholder(s) signature
-------------------------------------
Shareholder(s) signature
NOTE: Signature(s) of shareholder should
correspond exactly with the name(s) shown
hereon. If shares are held jointly, both
holders should sign. Attorneys, executors,
administrators, trustees, guardians or
others signing in a representative capacity
should give their full titles. Proxies
executed in the name of a corporation
should be signed on behalf of the
corporation by its president or other
authorized officer.
I DO |_| DO NOT |_| EXPECT TO ATTEND THE ANNUAL MEETING.
NOTE: This proxy, properly filled in, dated and signed, should be returned
promptly in the enclosed envelope.