PROSPECTUS Filed Pursuant to Rule 424(b)(3)
Registration No. 333-46309
2,240,000 SHARES
C-PHONE CORPORATION
COMMON STOCK
This Prospectus relates to 2,240,000 shares (the "Shares") of Common
Stock, par value $0.01 per share (the "Common Stock"), of C-Phone Corporation
(the "Company"), consisting of (i) 1,605,000 shares of Common Stock reserved for
issuance upon conversion of shares (the "Preferred Shares") of Series A
Convertible Preferred Stock issued to investors in the Company's December 1997
private placement (the "December Placement"), (ii) an aggregate of 450,000
shares of Common Stock, of which (a) 315,000 shares of Common Stock are reserved
for issuance upon the exercise of warrants expiring December 19, 1998 (the
"One-Year Warrants"), and (b) 135,000 shares of Common Stock are reserved for
issuance upon exercise of warrants expiring December 19, 2000 (the "Three-Year
Warrants" and, with the One-Year Warrants, collectively, the "Warrants"), in
each case, issued to the investors in the December Placement, and (iii) 185,000
shares of Common Stock reserved for issuance upon the exercise of One-Year
Warrants issued to an affiliate of the finder in the December Placement.
The Shares may be offered from time to time by the selling shareholders
listed herein under "Selling Shareholders" (collectively, the "Selling
Shareholders") after the date of this Prospectus. See "Selling Shareholders".
The Company will not receive any proceeds from the sale of the Shares. Although
the Company will receive certain proceeds upon exercise of the Warrants, there
can be no assurance that any of the Warrants will be exercised. See "Use of
Proceeds." The Company will pay all expenses in connection with the registration
and sale of the Shares under this Prospectus, except that each Selling
Shareholder will pay any commissions, discounts or other fees payable to brokers
and dealers in connection with any such sale by such Selling Shareholder. The
Company estimates that its expenses of this offering will be approximately
$40,000.
The Selling Shareholders have not advised the Company of any specific
plans for the distribution of the Shares other than as described herein, but it
is anticipated that the Shares will be sold from time to time primarily in
transactions (which may include block transactions) on the Nasdaq National
Market at the market price prevailing at the time of sale, although sales also
may be made in negotiated transactions or otherwise. There can be no assurances
that any of the Shares will be sold. See "Plan of Distribution."
The Selling Shareholders may be deemed to be "Underwriters" as defined
in the Securities Act of 1933 (the "Securities Act"). If any broker-dealers are
used to effect sales, any commissions paid to such broker-dealers and, if
broker-dealers purchase any of the Shares as principals, any profits received by
such broker-dealers on the resale of such Shares, may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
profits realized by the Selling Shareholders may be deemed to be underwriting
commissions.
The Common Stock currently is traded on the Nasdaq National Market
under the symbol "CFON." On March 25, 1998, the last sale price of the Common
Stock, as reported by The Nasdaq National Market, was $4-1/8 per share.
SEE "RISK FACTORS", WHICH BEGINS ON PAGE 4 OF
THIS PROSPECTUS, FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is March 26, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission may be inspected and
copied at the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and
at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such materials can be obtained from the Public Reference Section of the
Commission at prescribed rates by writing to the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, copies of such materials may be
inspected and copied at the library of The Nasdaq National Market at 1735 K
Street, N.W., Washington, D.C. 20006. The Commission maintains an internet web
site at http://www.sec.gov which contains certain reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission.
This Prospectus constitutes a part of a Registration Statement (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") filed by the Company with the Commission under the Securities Act.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement. Statements contained herein concerning the provisions of
any document are not necessarily complete and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which are on file with the Commission (File
No. 0-24424), are incorporated into this Prospectus by reference and are made a
part hereof:
(a) The Company's Annual Report on Form 10-KSB for its fiscal year
ended February 28, 1997;
(b) The Company's Proxy Statement, dated June 26, 1997, with
respect to its 1997 annual meeting of shareholders;
(c) The Company's Quarterly Reports on Form 10-QSB for the fiscal
quarters ended May 31, 1997, August 31, 1997 and November 30,
1997; and
(d) The description of the Common Stock contained in Item 1 of the
Company's Registration Statement on Form 8-A, dated June 22,
1994.
All documents subsequently filed by the Company with the Commission
after the date of this Prospectus pursuant to Sections 13(a), 13(c), 14, and
15(d) of the Exchange Act, and prior to the filing of a post-effective amendment
to the Registration Statement which indicates that all securities offered hereby
have been sold or which de-registers all securities then remaining unsold, shall
be deemed to be incorporated by reference into the Registration Statement and to
be part hereof from the date of filing such documents; PROVIDED, HOWEVER, that
the documents enumerated above or subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act in each year during
which the offering made by the Registration Statement is in effect and prior to
the filing with the Commission of the Company's Annual Report on Form 10-KSB
covering such year, shall not be deemed to be incorporated by reference in the
Registration Statement or be a part hereof from and after the filing of such
Annual Report on Form 10-KSB.
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Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of the Registration Statement to the extent that a statement
contained herein, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement contained in this Prospectus shall be deemed to be
modified or superseded to the extent that a statement contained in a
subsequently filed document, which is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Registration Statement.
The Company will provide without charge to each person who receives
this Prospectus, upon written or oral request of such person, a copy of any of
the information that is incorporated by reference herein (not including exhibits
to the information that is incorporated by reference, unless the exhibits
themselves are specifically incorporated by reference). Such information is
available upon request from the Company, 6714 Netherlands Drive, Wilmington,
North Carolina 28405, attention: Paul Albritton, Chief Financial Officer,
telephone (910) 395-6100.
THE COMPANY
The Company has been, and is, primarily engaged in the engineering,
manufacturing and marketing of PC-based and TV-based video conferencing systems.
The Company's PC-based video conferencing systems, which operate over digital
networks, are marketed under the name C-Phone(R). The Company's stand alone
TV-based video conferencing system or "video phone", which operates over regular
analog telephone lines using a standard television set, is marketed under the
name C-Phone Home(TM). In addition, in March 1998, the Company began limited
shipments of its C-Phone DS 324 TV-based video phone, which operates over both
analog and ISDN digital telephone lines.
The Company was incorporated in New York in 1986 under the name "Target
Tuning, Inc.", as a manufacturer of promotional radios. In 1990, the Company
developed data/fax modems under the name "TWINCOM" and changed its name to
Target Technologies, Inc. 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 video conferencing products; and, during
the fiscal year ended February 28, 1995, the Company phased out its modem
product line as it was no longer profitable. In August 1994, the Company
completed its initial public offering (the "1994 Public Offering") pursuant to
which it received net proceeds of approximately $12,288,000. In March 1997, the
Company completed a private placement (the "March Placement") pursuant to which
it received net proceeds of approximately $4,370,000. In December 1997, the
Company completed a second private placement (the "December Placement") pursuant
to which it received net proceeds of approximately $4,130,000.
Since 1993, the Company has invested significant resources in product
development, engineering and marketing activities for its video conferencing
systems and related products. As a result of these activities and the low volume
of sales to date, the Company has incurred significant losses during the three
fiscal years ended February 28, 1997 and the three and nine months ended
November 30, 1997. The Company anticipates that it will continue to make
significant expenditures for product development and marketing in the
foreseeable future.
In August 1996, in order to more closely identify the Company with its
C-Phone product line and to attempt to eliminate confusion among investors, the
Company changed its name to "C-Phone Corporation." The Company's principal
executive offices are located at 6714 Netherlands Drive, Wilmington, North
Carolina 28405 and its telephone number is (910) 395-6100.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL PURCHASERS IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES.
SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S BELIEF AS WELL AS
ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO, MANAGEMENT PURSUANT
TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
EXPRESSED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS CONTAINED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO
OBLIGATION TO RELEASE PUBLICLY THE RESULT OF ANY REVISIONS TO THESE FORWARD
LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF THIS PROSPECTUS OR TO REFLECT THE OCCURRENCE OF OTHER UNANTICIPATED
EVENTS.
RISKS RELATING TO NEEDS FOR ADDITIONAL FINANCIAL RESOURCES
GENERAL. The Company, although in existence since 1986, has been, and
continues to be, engaged in the development, marketing and manufacturing of
products which require substantial financial resources. The Company currently
does not have adequate financial resources to carry out all of its anticipated
development, marketing and manufacturing plans. If the Company is unable to
obtain, on acceptable terms, the financial resources it requires, when and as
needed, the Company would be materially adversely affected.
NEED FOR ADDITIONAL CAPITAL. The Company believes that its current
working capital, which includes the net proceeds (aggregating approximately
$4,130,000) from the December Placement, together with anticipated funds from
operations, will be sufficient to meet the Company's projected operating needs
and capital expenditures, including the continued commercialization of the
Company's TV-based video phones but not including funds needed to support any
increase in sales, through the end of Fiscal 1999. Even when projecting the need
to fund additional receivables and inventory build-up from a moderate increase
in sales, the Company believes that its current working capital will be
sufficient through at least the third quarter of calendar 1998. However, if the
Company's TV-based video phones gain market acceptance, of which there can be no
assurance, the very substantial investment which would then be required by the
Company for manufacturing, inventory build-up and marketing expenditures and
carrying of accounts receivable related to the commercialization of such
products, would require the Company to obtain additional working capital. The
Company anticipates that such additional funds should be available through one
or more possible sources, including through (i) a private placement of (a) its
debt securities, including debt securities convertible into Common Stock, and/or
(b) its Common Stock or preferred stock, (ii) the exercise of the Company's
outstanding common stock purchase warrants, if the market price of the Common
Stock were to exceed the exercise price of such warrants, of which there can be
no assurance, and/or (iii) a public offering of Common Stock. Unless adequate
net cash proceeds from sales of the Company's current products is attained, the
timing or receipt of which cannot be predicted, the Company may require
additional cash resources for the development of alternative products. There can
be no assurance that additional funds needed by the Company will be available
when needed or, if available, that the terms of such fundings will be favorable
or acceptable to the Company.
RISKS RELATING TO THE COMPANY'S TV-BASED VIDEO PHONES
UNPROVEN MARKET ACCEPTANCE. The Company believes that a commercial
consumer market for the Company's TV-based video phones exists, although the
Company has no reliable data to assure that there will be significant market
acceptance of TV-based video phones in general, or of the Company's products in
particular, and there can be no assurance that the Company's TV-based video
phones will gain sufficient market acceptance to generate significant commercial
sales. Previous efforts to sell video phones by larger, better known, companies
than the Company have been unsuccessful due, in part, to the inability of such
systems to deliver video data at the rate of greater than between one-half to
ten frames per second ("fps") and to the inability of such systems to emulate a
normal telephone call, primarily as the result of lower audio quality associated
with the analog phone line's limited
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bandwidth which must be shared with video data. Currently, the Company's
TV-based video phone, when operating over an analog telephone line, is capable
of delivering video data at rates of up to 16 fps under the most ideal
circumstances. Many factors, taken either singularly or together, will lower the
frame rate. These include non-optimal conditions on the phone line to the user's
premises, the presence of noise on the phone line and substantial movement in
the video being transmitted, especially when transmitting in a high resolution
mode. In the instance when any or all of these factors are present, frame rate
may be reduced to as low as one fps. The Company believes that most users of the
Company's TV-based video phones will prefer full screen, highest resolution
mode, when frame rates are typically four to eight fps. At these lower frame
rates, there is not enough motion in the lips of the users for video and audio
synchronization to be necessary, and the Company's TV-based video phone
transmits the audio with as little processing delay as possible in an attempt to
make the users feel as if they are participating in a regular phone call. In
other conditions, where over ten to twelve fps are transmitted, lip
synchronization may be more desirable and may result in as much as a one-half
second delay in the audio transmission. Such a delay may not be acceptable by
most consumers and, as a result, there can be no assurance that the Company will
be able to achieve a satisfactory level of consumer acceptance of the Company's
TV-based video phones within a reasonable period of time, if at all. The Company
recently began limited shipments of its C-Phone DS 324 TV-based video phone,
which is capable of delivering video data at rates of up to 30 fps when used
with an ISDN digital telephone line. While many of the same factors mentioned
above also impact the audio and video of the Company's video phone when used
with an ISDN digital telephone line, the increased bandwidth afforded by a
digital telephone line significantly increases the quality of the audio and
video as compared to operation over an analog telephone line. However, due to
(i) the higher price of the Company's DS 324 video phone, and (ii) the
installation cost and higher monthly service fee of an ISDN telephone line as
compared to an analog telephone line, there can be no assurance that the
Company's DS 324 video phone will receive a commercial level of market
acceptance.
RISKS RELATED TO THE COMPANY'S RELATIONSHIP WITH SPRINT. As part of the
Company's plan to develop market awareness and acceptance for its TV-based video
phone, the Company has entered into an agreement (the "Sprint Agreement") with
an affiliate of Sprint Corporation ("Sprint") to supply Sprint with its TV-based
video phone co-branded with the C-Phone and Sprint names. However, Sprint is not
obligated to purchase any minimum number of units and, through March 20, 1998,
had purchased for resale only a limited number of units to test market the
product in five stores.
Pursuant to the Sprint Agreement, Sprint is entitled to return to the
Company any unsold units (excluding those units that it has already purchased
for its test marketing) that are held in its inventory for more than four
months, provided that no more than one-third of the total number of units
purchased by Sprint during the term of the Sprint Agreement may be returned, and
to receive, at its option, either a cash refund or a credit against future
purchase, in an amount equal to 80% of the original invoice price for such
units. At such time as Sprint has begun to purchase a significant amount of
products from the Company, of which there can be no assurance, the exercise by
Sprint of its right to return for cash of a significant number of units could
have a material adverse effect on the Company and its available cash resources.
In addition, pursuant to the Sprint Agreement and in order to permit
Sprint to continue to sell the co-branded TV-based video phone, in the event
that, among other things, (i) the Company is unwilling or unable to provide
upgrades or modifications to the software for the unit, or (ii) the Company
liquidates or becomes insolvent or the subject of a bankruptcy petition, the
Company has agreed, if requested by Sprint, to place in escrow the source codes
(the "Source Codes") for the software related to the unit. Upon the occurrence
of such events, the Source Codes would be released to Sprint on a nonexclusive,
non-transferable basis (and subject to establishment of a reasonable royalty
payment) for so long as any such event is continuing. The Company believes that
a release of the Source Codes, which include non-public, proprietary
information, could have a material adverse effect on the Company.
LIMITED MARKETING EXPERIENCE. The Company has limited sales, marketing
and distribution experience relating to retail consumer goods. The
commercialization of the Company's TV-based video phones require certain sales,
marketing and distribution capabilities, some of which the Company does not
currently possess, and there can be no assurance that the Company will be able
to establish and retain a sales and marketing capability which would
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be successful in gaining commercial market acceptance for the Company's TV-based
video phones. The Company has a national network of independent manufacturer's
representative organizations to act as the Company's national field sales force
for the Company's TV-based video phones and has a full-time National Sales
Director to manage such representatives; however, it is too early to foresee
whether the efforts of such persons will be successful. The Company is devoting
a material portion of its available resources for the commercialization of the
Company's TV-based video phones, and failure of the Company to establish the
necessary sales, marketing and distribution network for this product line will
have a material adverse effect on the Company's financial condition.
RISKS OF USING CERTAIN ANTICIPATED CHANNELS OF DISTRIBUTION. In
addition to the sale of its video phones through telecommunications companies
(see "Risks Related to the Company's Relationship with Sprint"), through
international distributors and special projects (such as the Company's
previously announced contract with the U.S. Postal Service), the Company's
marketing strategy includes sales to consumer electronic retailers, including
catalog companies. The Company has had only limited prior experience in
marketing and selling its products to consumer electronic retailers, some of
whom have special problems, such as inadequate working capital, which may affect
their ability to timely pay for their purchases from the Company and may require
the Company to grant extended credit terms. See "Dependence on Few Resellers and
Customers." Such retailers typically require that their vendors pay advertising
expense prior to consumer resale and payment to the vendor. Furthermore, and
irrespective of the contracted payment terms negotiated with such retailers,
such retailers generally do not pay for their merchandise unless and until such
merchandise "sells through" to the consumer, thereby creating higher payment
risks.
POSSIBLE INABILITY TO SUCCESSFULLY COMPETE. To date, video conferencing
over analog telephone lines has received very limited market acceptance and
TV-based video phones using ISDN telephone lines has been confined to more
expensive products designed to support limited business applications. See
"Unproven Market Acceptance." As a result of recent technological advances and
the adoption of the H.324 standards for video telephony over analog telephone
lines, consumer video phones are being developed by a number of companies, some
of which are more established, benefit from greater market recognition and have
significantly greater financial, technological, manufacturing and marketing
resources than the Company. The Company expects that the Company's TV-based
video phones may face substantial competition from many well-known established
suppliers of consumer electronic products, which may include Compression Labs,
Inc., Lucent Technologies, PictureTel Corporation, Philips Electronics N.V. and
Sony Corp; and if any of such companies, among others, determine to market a
competitive product, the Company could have difficulty obtaining necessary
retail display space for its video phones. Many of these potential competitors
sell television and telephone products into which they may integrate video phone
systems, thereby eliminating the need to purchase a separate video phone system.
Additionally, the recent introduction by Intel Corp. of chips with telephony
applications has enabled computer manufacturers to incorporate video
conferencing features into their equipment, which features may include video
phone capabilities. 8x8, Inc., a manufacturer of integrated video compression
semiconductors and associated software, from whom the Company previously had
purchased integrated circuits for the Company's products, sells TV-based video
phones which directly compete with the Company's TV-based video phones.
Additionally, 8x8, Inc. sells private label TV-based video phones to several
third parties and has licensed its video phone technology to U.S. Robotics
Access Corporation and Kyushu Matsushita Electric Co., Ltd., and the Company
anticipates that such companies also may produce competing products. As a
result, there can be no assurance that the Company will be able to compete
successfully in the video phone market.
DEPENDENCE ON EXISTING MANAGEMENT AND TECHNICAL PERSONNEL; NEED FOR
ADDITIONAL PERSONNEL TO COMMERCIALIZE THE COMPANY'S TV-BASED VIDEO PHONE. The
continued development of the Company's business and operations is dependent upon
the efforts and talents of three of its executive officers, Daniel Flohr, Tina
Jacobs and Stuart Ross, and the services of certain key technical personnel. The
loss of the services of any of these persons, as well as the inability of the
Company to attract and then retain additional qualified personnel in connection
with the commercialization of the Company's TV-based video phone, would have a
material adverse effect on the Company.
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RISKS RELATING TO THE COMPANY'S PC-BASED VIDEO CONFERENCING PRODUCTS
LIMITED MARKET ACCEPTANCE. The Company developed its initial video
conferencing product in 1993, and has developed a number of enhancements since
such time. However, the market for PC-based video conferencing has not matured
as rapidly as expected. In order to expedite the commercial introduction of its
video conferencing products, the Company's initial sales and marketing strategy
was to attempt to form alliances with strategic partners, primarily nationally
recognized system integrators, resellers, telecommunication service companies
and original equipment manufacturers, to assist the Company in identifying,
developing and exploiting specific high-volume market applications which would
incorporate the Company's video conferencing products into larger information
management and communication systems. Although the Company has entered into
several such alliances, none of such alliances have resulted in significant
commercial sales and there can be no assurance that significant commercial sales
will result from the Company's relationship with any of its strategic partners.
During 1996, the Company reoriented the emphasis of its sales and marketing
strategy and focused on sales to regional resellers, including systems
integrators, telephone system dealers and audio/visual specialists, and selected
large potential customers with needs for customized video conferencing
capabilities. As the Company's TV-based products may compete against its
PC-based products, the Company has recently determined that it will further
limit the current focus of the marketing of its PC-based products to its
existing customer base and to new customers in connection with specialized
applications. During Fiscal 1997 and the nine months ended November 30, 1997
("Nine Months 98"), U.S. resellers accounted for approximately 64.9% and 84.1%,
respectively, of the Company's net sales of PC-based products, which were resold
primarily to the U.S. Department of Defense and other Federal, state and local
governments or governmental agencies, hospitals and educational facilities, as
well as to corporate users. During Fiscal 1997 and Nine Months 98, approximately
18.9% and 1.0%, respectively, of the Company's net sales of PC-based products
were sold directly by the Company. The Company's revenues from PC-based products
since commercial introduction in 1994, through November 30, 1997, have
aggregated approximately $4,877,000.
INTENSE COMPETITION FOR DEVELOPING MARKET. Video conferencing products
have received only limited market acceptance and penetration. A number of the
companies which now compete with the Company, or which are expected to offer
products that may compete with the Company's PC-based products, are more
established, benefit from greater market recognition with national marketing
programs, and have significantly greater financial, technological, manufacturing
and marketing resources than the Company. The Company's competitors for its
PC-based products include video conferencing companies and major
telecommunications and electronic companies such as British Telecom, BT Visual
Images L.L.C., Compression Labs, Inc., Corel Corp., Creative Labs Inc., Intel
Corp., PictureTel Corporation and VTEL Corporation. In addition, numerous other
companies have announced PC-based video conferencing systems and this number is
expected to increase. Further, the latest version of the computer chips being
marketed by Intel Corp., a major computer chip manufacturer, are being shipped
with telephony applications, making video conferencing a standard part of the
available PC computing environments. Several computer manufacturers, such as
Compaq Computer Corp and Packard Bell, have incorporated video conferencing
features into their equipment. Several telephone companies have entered into
strategic alliances with one or more manufacturers of video conferencing
equipment to increase the usage of their digital telephone lines which, in turn,
if they are successful, will increase their competitive image in the marketplace
for video conferencing products. Furthermore, as expected advances in data
compression are achieved and higher speed local area networks become available,
new video conferencing products utilizing these advances are expected to compete
with the Company's products. As a result of the Company's limited marketing
resources, the Company has been utilizing regional resellers, supported by the
Company's internal marketing staff, as the Company's marketing arm. Such
regional resellers have not had the broad marketing contacts, national sales
support and resources and internal backup support to enable the Company to
penetrate the base of larger potential broad-based multiple-location users of
video conferencing who have not yet integrated video conferencing into their
organizations. In addition, the Company's TV-based video phones, as well as
similar products from others, may compete with the Company's PC-based products.
The Company is continuing to try to define its niche in the video conferencing
marketplace for its PC-based products, and while its TV-based products may
afford the Company new opportunities in this area, there can be no assurance
that the Company will be able to compete successfully in the PC-based video
conferencing market.
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RISKS RELATING TO THE COMPANY GENERALLY
CUSTOMER SERVICE AND SUPPORT. The Company's success will depend, in
part, upon its ability to provide its customers, either directly or through
others, technical support and customer service for its products. The Company
presently provides support services directly for its U.S. customers, but relies
on its foreign strategic partners to supply support services outside of the
United States. If the Company's business expands, of which there can be no
certainty, there can be no assurance that the Company can continue to directly
provide such services to its U.S. customers, in which event it would be required
to negotiate third-party support services on acceptable terms, of which there
can be no assurance. Failure to provide such support services would have a
material adverse effect on the Company.
LIMITED MANUFACTURING EXPERIENCE. While the Company has been
manufacturing certain video conferencing components since 1994, sales volume to
date has kept production at relatively low and inefficient levels. In order to
be profitable, the Company must be able to manufacture its products at
acceptable costs and there can be no assurance that the Company will be able to
make the transition to higher production volume successfully or within
acceptable profit margins. As the Company only has limited experience in
manufacturing commercial quantities of its products, and anticipates heavy
reliance on third party contract manufacturers if demand for its products
increase, there can be no assurance that unforeseen technical or other
difficulties will not arise which could interfere with the development or
manufacture of its products, or prevent, or create delays in, marketing of its
products. See "Risks Relating to Needs for Additional Financial Resources."
DEPENDENCE ON FEW CUSTOMERS. A significant portion of the Company's
past revenues have been dependent on sales to a limited number of customers.
During Fiscal 1997, net revenues from Mirage Resorts, Inc. and C-Phone Europe
NV/SA (the Company's former European distributor) constituted 14.3% and 10.3%,
respectively, of the Company's net revenues. During Nine Months 98, net revenues
from Management Systems, Inc. and Edge Systems, Inc. constituted 9.9% and 9.9%,
respectively, of the Company's net revenues from its PC-based products and the
Company's ten largest customers accounted for approximately 65% of net revenues
from PC-based products. During Nine Months 98, net revenues from Nobody Beats
the Wiz (the "Wiz"), Sprint and Topix International Gallery constituted 22.54%,
19.5 % and 13.8%, respectively, of the Company's net revenues from its TV-based
products and the Company's ten largest customers accounted for approximately 76%
of the Company's net revenues from TV-based products. Although the Company
requires its non-North American distributors to purchase a minimum annual amount
of products to maintain their exclusive distributorships, the Company does not
have written agreements with any of its customers which require the purchase of
any minimum quantities of products and, therefore, such customers could reduce
or curtail their purchases at any time. As a result, a substantial reduction in
orders from existing customers (which has occurred from time to time) would have
a material adverse effect on the Company unless the Company is able to attract
orders from new customers, of which there can be no assurance. On December 16,
1997, the Wiz filed for protection under the United States bankruptcy laws and
there can be no assurance as to the amount, if any, that the Company will
receive as payment on its outstanding accounts receivable from the Wiz (which
constitutes all sales to the Wiz during Nine Months 98), and the Company has
established an allowance for doubtful accounts equal to substantially all of its
Wiz receivables.
DEPENDENCE ON FOREIGN SALES. During Fiscal 1997, the Company's non-U.S.
net sales, all of which were from PC-based products, aggregated approximately
15.0% of total net sales, and were derived from the Company's former European
distributor and resellers in Canada, Europe and southeastern Asia. During Nine
Months 98, the Company's non-U.S. net sales aggregated approximately 11.3% of
total net sales, and were derived from resellers in Malaysia, India, Canada and
Mexico, 79% of which were PC-based product sales and 21% of which were TV-based
product sales. A reduction in the volume of non-U.S. trade or any material
restrictions on such trade could have a material adverse impact on the Company's
revenues from its PC-based video conferencing products. The Company sells to its
Canadian reseller on credit terms and usually makes its other foreign sales on a
prepaid basis due to the difficulty in collecting foreign accounts receivable;
and any change in such policy which may be occasioned by the potential of larger
orders from one or more foreign customers could expose the Company to increased
credit risks. Foreign sales are denominated in U.S. dollars and the Company does
not incur any foreign
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<PAGE>
currency risks; however, fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive to foreign customers,
which could result in a reduction in foreign sales or profitability of foreign
sales.
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SUPPLIERS. The Company
relies on a number of small and large manufacturers that supply a wide variety
of off-the-shelf semiconductor integrated circuit chips and specialized
electronic components, several of which manufacturers are the sole source of
supply. The Company also relies on third party manufacturers and assemblers to
manufacture and/or assemble certain components and sub-assemblies for the
Company's products that are built to the Company's specifications and which
require fabrication equipment the Company does not presently possess. Further,
the Company relies on third party manufacturers for specialized sub-assemblies,
including the charged coupled device color camera presently used by the Company
which, although not built to Company specifications, are manufactured outside of
the United States and are inventoried by the manufacturers in limited
quantities. While the Company believes that all these components could be
obtained elsewhere if needed and that the Company's products could be redesigned
to use alternative components, no assurance can be given that other sources of
supply would be available without significant delay or increased cost, and the
use of alternative available components could require re-engineering by the
Company of portions of its products, which could impose additional cost and
significant delay on the Company. In addition, the Company's reliance on third
parties to manufacture and sub-assemble certain components involve significant
risks, including reduced control over delivery schedules, the inability to ship
product under "just-in-time" arrangements and quality assurance. Furthermore,
certain of the Company's manufacturers, sub-assemblers and suppliers, including
suppliers of components made outside the United States, may require the Company
to make firm scheduling and delivery commitments and deliver secure financing
arrangements, such as letters of credit, as a condition to fulfillment of their
contractual obligations to the Company. Failure to obtain an adequate supply of
components and required sub-assembler services on a timely basis would have a
material adverse effect on the Company. As a result, the Company anticipates
that, if it is successful in the commercialization of its products, so that
larger quantities of its products can be sold, the Company will become even more
dependent on a timely supply of purchased inventory, and will be required to
devote significant capital to inventory. The Company currently does not have the
significant financial resources necessary to fully fund such level of
commercialization.
RAPID TECHNOLOGICAL CHANGES. The technology underlying video
conferencing products is subject to rapid change, including potential
introduction of new products and technologies which may have a material adverse
impact on the Company's products. The Company needs to maintain an on-going
research, development and engineering program and its success, if any, will
depend in part on its ability to respond quickly to technological advances by
developing and introducing new products or features. There can be no assurance
that the Company will have the financial ability to maintain an appropriate
on-going research, development and engineering program and, if it has such
ability, whether the Company will be able to foresee and respond to
technological advances in a timely manner, if at all. In addition, even though
the open architecture of the Company's products allow components to be replaced
as new technologies develop, there can be no assurance that the development of
technologies and products by competitors will not render the Company's products
non-competitive or obsolete.
MANAGEMENT OF GROWTH. The addition, in 1997, of the Company's TV-based
video phone product has placed a significant strain on the Company's limited
personnel, management and other resources. The Company's ability to manage any
future growth effectively will require it to continue to attract, train,
motivate and manage its employees successfully and to continue to improve its
operational, financial and management systems. The Company's failure to
effectively manage its growth could have a material adverse effect on the
Company's business and operating results.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS. The Company has
four United States patents (one of which is a design patent) and has pending
five United States patent applications and one foreign patent application, all
of which relate to technology incorporated in its video conferencing products
and the design of various related components. Patents and patent applications
involve complex legal and factual issues. Moreover, the technology applicable to
the Company's products is developing rapidly. A number of companies have filed
applications for,
9
<PAGE>
or have been issued, patents relating to products or technology that are similar
to some of the products or technology being developed or used by the Company.
The scope and validity of these patents, the extent to which the Company may be
required to obtain licenses thereunder or under other proprietary rights and the
cost and availability of licenses, are unknown. There can be no assurance that
the Company's patent applications will result in patents being issued or that,
if issued, the patents will afford protection against competitors developing
similar or related technologies. Although the earliest patent owned by the
Company was granted in 1995, and patents generally have a seventeen year life,
due to rapidly developing technology, the Company contemplates that alternative
technological solutions will be devised to accomplish the purposes of its
patents substantially before the Company's patents expire, but that such patents
may offer short-term protection from third parties. There can be no assurance
that other parties have not applied for, or will not obtain, patents under which
the Company would need to be granted a license or around which the Company would
be forced to redesign its products. The Company seeks to protect its
intellectual property rights through a combination of trade secret,
nondisclosure and other contractual arrangements, and patent, copyright and
trademark laws. The Company generally enters into confidentiality agreements
with its employees, consultants, sales representatives and certain potential
customers and limits access to and distribution of its proprietary information.
However, there can be no assurance that these actions will be adequate to deter
misappropriation of the Company's proprietary information, that the Company will
be able to detect unauthorized use of its intellectual property rights, or that
the Company can afford the high cost required to enforce, through litigation,
its intellectual property rights. Moreover, any such litigation could result in
substantial diversion of managerial time and resources, which could be better
and more fruitfully utilized on other activities. Furthermore, since the Company
does not have the resources to maintain a staff whose primary function is to
investigate the level of protection afforded to third parties on devices which
the Company uses in its products or sub-assemblies, there can be no assurance
that a claim that the Company's products infringe on the intellectual property
rights of others will not be asserted successfully against the Company in the
future.
COMPLIANCE WITH FCC REGULATIONS. The Company's products must comply
with certain requirements and specifications set forth in regulations adopted by
the FCC regulating electromagnetic radiation and the connection of terminal
equipment to the public switched telephone network. These regulations, among
other things, require that the Company's products be in compliance with such
regulations as a prerequisite to marketing them. Although the Company's products
are currently in compliance with such regulations, if the Company redesigns or
otherwise modifies its products, or if current regulations or industry standards
are revised, there can be no assurance as to when, if ever, the Company's
redesigned or modified products will be in compliance with applicable
governmental regulations and evolving industry standards. In addition, the
Company must comply with certain similar requirements of various foreign
government agencies to effect its foreign sales. The Company's foreign
distributors, as part of the Company's distribution agreements, are responsible
for ensuring compliance with, and obtaining any necessary permits from, such
foreign government agencies.
CONTROL BY EXISTING PRINCIPAL SHAREHOLDERS. The Company's two principal
executive officers, Daniel Flohr and Tina Jacobs, beneficially own, as of March
20, 1998, an aggregate of 1,110,745 shares (approximately 21%) of the currently
outstanding Common Stock. As a result of such holdings, such persons have had,
and may continue to have, the ability to determine the election of all of the
Company's directors, direct the policies of the Company and control the outcome
of substantially all matters which may be put to a vote of the Company's
shareholders.
POSSIBLE INABILITY TO CONTINUE TO USE C-PHONE NAME. In 1995, the U.S.
Patent and Trademark Office (the "PTO") registered the "C-Phone" trademark to
the Company. In 1996, in order to more closely identify the Company with its
products, all of which utilize the C-Phone name, and in an attempt to eliminate
confusion among investors, the Company changed its name to C-Phone Corporation.
In August 1996, the Company was advised by the PTO that a former registered
owner of the C-Phone trademark (which the PTO canceled in 1993 for failure to
submit a required affidavit), had filed a petition to cancel the Company's
registration, alleging that there was a likelihood of confusion between the
marks, and that their failure to file a required affidavit was inadvertent. The
former owner had used, and continues to use, the C-Phone name for marine
telephone products, and may have certain "common law" rights to continued use of
the name and to prevent others from using the name. A proceeding with
10
<PAGE>
respect to the matter is pending before the PTO's Trademark Trial and Appeal
Board, who will determine whether the conflicting use by the Company is so
confusingly similar that a registration should not have been granted to the
Company. If the Company is not successful in the current PTO proceedings, the
Company may need to change the identifying name on its products, may determine
that it is appropriate to change its corporate name and may be subject to
damages if it could be shown that the Company had infringed the former owner's
common law rights. Any change in the use by the Company of the C-Phone name
would result in a loss of good will and identification which the Company has
been promoting since 1993, and could have a temporary adverse impact on the
Company's marketing plans.
POTENTIAL REDEMPTION RIGHTS OF HOLDERS OF PREFERRED SHARES. The
Preferred Shares are subject to redemption at the option of the holders under
certain circumstances, including, among other things, if at any time the
aggregate number of shares of Common Stock then issued upon conversion of the
Preferred Shares would exceed 1,068,500 shares, unless prior thereto the Company
has obtained approval from its shareholders to issue additional shares. See
"Selling Shareholders." Such approval is intended to be sought at the next
meeting of shareholders of the Company, from the holders of a majority of the
total shares present and voting on the matter. While the two principal
shareholders of the Company currently beneficially own approximately 21% of the
outstanding Common Stock, there can be no assurance that any proposal submitted
to shareholders to approve the issuance of additional shares will be approved on
a timely basis, if at all. If such proposal is not adopted on a timely basis
and, as a result thereof, the holders of the Preferred Shares exercise their
rights of redemption, the Company may not have the financial ability to redeem
such Preferred Shares; and even if the Company has the financial ability to
redeem such Preferred Shares, such payment could materially adversely affect the
Company's financial condition and deplete its cash resources.
POTENTIAL FOR ISSUANCE OF SIGNIFICANT SHARES OF COMMON STOCK. While
this Prospectus covers the resale of up to 2,240,00 shares of Common Stock,
including 1,605,000 shares of Common Stock issuable upon conversion of the
Preferred Shares, the terms of conversion of the Preferred Shares are based upon
a formula, which does not limit the maximum number of shares of Common Stock
issuable upon conversion thereof. In the event that the weighted average closing
bid price of the Common Stock, in effect from time to time in determining the
number of shares issuable upon conversion of the Preferred Shares, is below
$3.30 per share, the Company would be required to register additional shares of
Common Stock for issuance upon conversion of the Preferred Shares. See "Selling
Shareholders." On March 20, 1998, the closing bid price for the Common Stock was
$4.00 and the conversion price that would have been in effect on such date was
$3.462. As a result, if all the Preferred Shares had been converted as of March
20, 1998, the Company would have been required to issue 1,316,038 shares of
Common Stock (or 25% of the number of shares of Common Stock outstanding
immediately prior to such issuance). In connection with the December Placement,
the Company also issued One-Year Warrants to purchase 500,000 shares of Common
Stock, with an exercise price of $8.05 per share, and Three-Year Warrants to
purchase 135,000 shares of Common Stock, with an exercise price of $9.10 per
share. See "Selling Shareholders." In addition to the warrants issued in the
December Placement, there are also outstanding warrants, expiring August 18,
1999, to purchase 200,000 shares of Common Stock at an exercise price of $8.40
per share.
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF COMMON STOCK AND EARNINGS
PER SHARE. The sale by the Selling Shareholders of the Common Stock being
offered hereby will significantly increase the "public float" for the Common
Stock, which in turn could depress the market price of the Common Stock.
Moreover, the prospects of such sales could have an adverse effect on the market
price for the Common Stock. The issuance of the Common Stock upon conversion of
the Preferred Shares or upon exercise of the Warrants will significantly
increase the number of shares of Common Stock outstanding which will dilute
primary earnings per share, if the Company achieves profitability, of which
there can be no assurance.
As of March 20, 1998, the Company had an aggregate of 5,348,234 shares
of Common Stock issued and outstanding, of which 4,212,489 shares were held by
non-affiliates and are freely tradeable in the public market without restriction
under the Securities Act. The remaining 1,135,745 shares were held by affiliates
of the Company and are considered "restricted securities" subject to the resale
limitations of Rule 144 under the Securities Act. The
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<PAGE>
prospect of the ability to publicly resell the shares of Common Stock not
currently trading in the public market may adversely affect prevailing market
prices for the Common Stock.
DIVIDEND POLICY. The Company has never paid any dividends and, for the
foreseeable future, the Company expects to retain earnings, if any, to finance
the expansion and development of its business. Any future payment of dividends
will be within the discretion of the Company's Board of Directors, which may be
deemed to be controlled by the Company's principal shareholders, and will
depend, among other factors, on the earnings, capital requirements and the
operating and financial condition of the Company.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
of Common Stock covered by this Prospectus. See "Plan of Distribution."
In order to sell 635,000 of the shares of Common Stock (consisting of
shares issuable upon exercise of the Warrants) covered by this Prospectus, the
Selling Shareholders must exercise the Warrants to obtain such Shares. Upon
exercise of the Warrants, the Company will receive proceeds from the exercise of
the Warrants, which, if all Warrants are exercised, will aggregate $5,253,500.
See "Plan of Distribution." The net proceeds from such exercise will be used by
the Company for working capital, including for the marketing of the Company's
TV-based video phones and funding anticipated increases in inventories and
receivables related to the Company's TV-based video phones.
SELLING SHAREHOLDERS
The Company issued to the investors (the "Investors") in the December
Placement an aggregate of (i) 4,500 Preferred Shares, with an initial stated
value of $1,000 per share (which increases at the rate of 5% per annum, such
amount, as increased from time to time, the "Stated Value"), (ii) One-Year
Warrants to acquire up to an aggregate of 315,000 shares of Common Stock, and
(iii) Three-Year Warrants to acquire up to an aggregate of 135,000 shares of
Common Stock.
Each Preferred Share is convertible, from time to time in whole or in
part at the option of the holder, into such number of shares of Common Stock as
is determined by dividing the Stated Value by the lesser of (i) $7.3575, and
(ii) 85% of the average of the closing bid price during such three consecutive
trading day period as may be selected by the holder from the 25 trading day
period preceding the date of conversion. The Preferred Shares cease to be
convertible (the "19.99% Limitation") if, at any time the aggregate number of
shares of Common Stock then issued upon conversion of the Preferred Shares would
equal 1,068,500 shares of Common Stock (the remaining shares of Common Stock
then issuable upon conversion of the Preferred Shares being the "Excess
Shares"), unless, in accordance with the rules of the Nasdaq National Market
("Nasdaq") (on which the Common Stock is traded), the Company has obtained
approval for the issuance of the Excess Shares by its shareholders, acting at a
meeting thereof by a majority of the total votes cast on such proposal by the
holders of the then outstanding Common Stock (not including any shares of Common
Stock held by present or former holders of the Preferred Shares that were issued
upon conversion of the Preferred Shares), or it has otherwise obtained
permission from Nasdaq to allow such issuances. Any outstanding Preferred Shares
on December 19, 1999 automatically will be converted into shares of Common Stock
at the conversion price then in effect.
Pursuant to certain registration rights granted to the Investors, the
Company has agreed to initially include in the registration statement (the
"Registration Statement"), of which this Prospectus is a part, such number of
shares of Common Stock as equals the sum of (i) 30% of the number of outstanding
shares of Common Stock as of the close of business on the third business day
immediately preceding the date of filing of the Registration Statement plus,
(ii) the number of shares of Common Stock issuable upon exercise of the Warrants
issued to the Investors, and thereafter, if the Registration Statement is
insufficient to cover all of the shares of Common Stock issuable upon
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<PAGE>
conversion of the Preferred Shares (based upon the market price of the Common
Stock and other relevant factors), register such additional number of shares of
Common Stock as may be required. The Company has agreed to maintain
effectiveness of the Registration Statement until the earlier of (i) the date on
which all the securities to which the Registration Statement relates have been
sold or may be sold without registration pursuant to Rule 144(k) under the
Securities Act, and (ii) December 19, 2001.
The Preferred Shares are subject to redemption at the option of its
holder if, among other things, (i) the Company fails to obtain effectiveness of
the Registration Statement by June 17, 1998 or if, after the Registration
Statement becomes effective, such effectiveness lapses for more than 30
consecutive days or more than 60 days in any 12 month period, (ii) the Company
fails to maintain the listing of the Common Stock on Nasdaq or another principal
securities exchange or automated quotation system and such failure continues for
more that 30 days, or (iii) the Preferred Shares cease to be convertible as a
result of the 19.99% Limitation and the Company has not, prior thereto, or
within 75 days after notice from holders of two-thirds of the Preferred Shares
then outstanding, obtained approval to issue additional shares of Common Stock.
In connection with the December Placement and in addition to other
consideration paid to the finder, the Company issued to Share Management Inc.,
an affiliate of the finder, One-Year Warrants to acquire an aggregate of 185,000
shares of Common Stock. The Company has agreed to include in the Registration
Statement the shares of Common Stock issuable upon exercise of such One-Year
Warrants.
The following table sets forth certain information relating to the
security ownership of the Selling Shareholders as of March 20, 1998 and as
adjusted to reflect the sale of the Common Stock in the offering covered by this
Prospectus. Except as set forth above, none of the Selling Shareholders has had
a material relationship with the Company or any of its affiliates within the
past three years.
<TABLE>
<CAPTION>
SHARES OF COMMON
SHARES OF COMMON STOCK TO BE
STOCK BENEFICIALLY BENEFICIALLY OWNED
OWNED PRIOR TO SHARES OF COMMON AFTER THE
NAME OF SELLING SHAREHOLDER THE OFFERING (1) STOCK TO BE SOLD (7) OFFERING (7)
- ---------------------------- ------------------ --------------------- -------------
<S> <C> <C> <C>
RBB Bank Aktiengesellschaft 685,000(2) 685,000 0
Excalibur Limited Partnership 274,000(3) 274,000 0
Mark Shoom 182,667(4) 182,667 0
Sovereign Partners, L.P. 913,333(5) 913,333 0
Share Management, Inc. 185,000(6) 185,000 0
</TABLE>
- ----------------
(1) The number of shares of Common Stock issuable to each Selling
Shareholder upon conversion of Preferred Shares is based upon the number of
shares registered hereby and assumes an average closing bid price of the
Common Stock (on which the conversions are based) of $3.30 per share. The
actual closing bid price, which was $4.00 on March 20, 1998, may be
significantly higher or lower at the time of conversion. See "Risk Factors
- Potential for Issuance of Significant Shares of Common Stock."
(2) Consists of (a) 535,000 shares of Common Stock issuable to such
Selling Shareholder upon conversion of 1,500 Preferred Shares, (b) 105,000
shares of Common Stock issuable to such Selling Shareholder upon exercise
of One-Year Warrants, and (c) 45,000 shares of Common Stock issuable to
such Selling Shareholder upon exercise of Three-Year Warrants. Such Selling
Shareholder holds the Preferred Shares and Warrants as agent for 31
non-affiliated, accredited investors, whose identities are not disclosable
pursuant to Austrian bank
13
<PAGE>
secrecy laws. Such Selling Shareholder does not possess voting control or
dispositive power over the securities held by such investors.
(3) Consists of (a) 214,000 shares of Common Stock issuable to such
Selling Shareholder upon conversion of 600 Preferred Shares, (b) 42,000
shares of Common Stock issuable to such Selling Shareholder upon exercise
of One-Year Warrants, and (c) 18,000 shares of Common Stock issuable to
such Selling Shareholder upon exercise of Three-Year Warrants.
(4) Consists of (a) 142,667 shares of Common Stock issuable to such
Selling Shareholder upon conversion of 400 Preferred Shares, (b) 28,000
shares of Common Stock issuable to such Selling Shareholder upon exercise
of One-Year Warrants, and (c) 12,000 shares of Common Stock issuable to
such Selling Shareholder upon exercise of Three-Year Warrants. All such
Preferred Shares are held by in trust for the benefit of such Selling
Shareholder.
(5) Consists of (a) 713,333 shares of Common Stock issuable to such
Selling Shareholder upon conversion of 2,000 Preferred Shares, (b) 140,000
shares of Common Stock issuable to such Selling Shareholder upon exercise
of One-Year Warrants, and (c) 60,000 shares of Common Stock issuable to
such Selling Shareholder upon exercise of Three-Year Warrants.
(6) Consists of 185,000 shares of Common Stock issuable to such Selling
Shareholder upon exercise of One-Year Warrants. John R. Clarke and H. David
Cowherd are the sole officers and directors of Share Management Inc.
("SMI") and may be deemed to be the beneficial owner of all shares of
Common Stock beneficially owned by SMI.
(7) Assumes the sale of all Shares offered hereby.
PLAN OF DISTRIBUTION
The Company is registering the Shares on behalf of the Selling
Shareholders. The Company will not receive any proceeds from any sales of the
Shares, but will receive proceeds of approximately $5,253,500 from the exercise
of the Warrants, if all of the Warrants are exercised, which proceeds will be
used for general working capital purposes. See "Use of Proceeds." All costs,
expenses and fees in connection with the registration of the Shares offered
hereby will be borne by the Company. Commissions, discounts and other fees
payable to brokers or dealers, if any, attributable to the sale of Shares will
be borne by the Selling Shareholders.
The decision to exercise the Warrants is within the sole discretion of
the Selling Shareholders. There can be no assurance that any of the Warrants
will be exercised.
The decision to offer and sell the Shares, and the timing and amount of
any offers or sales that are made, is and will be within the sole discretion of
the Selling Shareholders. Sales of the Shares may be effected from time to time
in transactions (which may include block transactions) on Nasdaq, in negotiated
transactions, or a combination of such methods of sale, at fixed prices which
may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Shareholders have advised the Company that they
have not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of any of their Shares. The
Selling Shareholders may effect such transactions by selling their Shares
directly to purchasers or to, or through, broker-dealers which broker-dealers
may act as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Shareholders
and/or the purchasers of such Shares for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
Selling Shareholders and any broker-dealers that act in connection with the sale
of such Shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them
14
<PAGE>
and any profit on the resale of the shares of such Shares as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Shareholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Shares
against certain liabilities, including liabilities arising under the Securities
Act. Liabilities under the federal securities laws cannot be waived.
Because the Selling Shareholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Selling
Shareholders will be subject to prospectus delivery requirements under the
Securities Act.
The Selling Shareholders, any selling broker or dealer and any
"affiliated purchasers" may be subject to Regulation M under the Exchange Act
("Regulation M"). Regulation M, with certain exceptions, prohibits any such
person from bidding for or purchasing any security which is the subject of a
distribution until the participation of such person in that distribution is
completed. In addition, Regulation M prohibits any "stabilizing bid" or
"stabilizing purchase" for the purpose of pegging, fixing or stabilizing the
price of the Common Stock in connection with this offering.
Accordingly, unless granted an exemption by the Commission from
Regulation M or unless otherwise permitted under Regulation M, the Selling
Shareholders will not be permitted to engage in any stabilization activity in
connection with the Company's securities, and will not be permitted to bid for
or purchase any securities of the Company or to attempt to induce any person to
purchase any of the Company's securities other than as permitted under the
Exchange Act. Selling Shareholders, who may be "affiliated purchasers" as
defined in Regulation M, have been advised that they must coordinate their sales
with each other for purposes of Regulation M.
The Selling Shareholders may be entitled, under agreements entered into
with the Company, to indemnification against liabilities under the Securities
Act, the Exchange Act or otherwise.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby have been passed upon for the Company by Warshaw Burstein Cohen
Schlesinger & Kuh, LLP. As of the date of this Prospectus, certain partners of
such firm beneficially own an aggregate of 12,105 shares of Common Stock.
EXPERTS
The balance sheets of the Company as of February 28, 1997 and February
29, 1996 and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended February 28, 1997,
incorporated by reference in this Prospectus on Form S-3, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
15
<PAGE>
================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
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Available Information 2
Incorporation of Certain
Documents by Reference 2
The Company 3
Risk Factors 4
Use of Proceeds 12
Selling Shareholders 12
Plan of Distribution 14
Legal Matters 15
Experts 15
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2,240,000 Shares
C-PHONE CORPORATION
Common Stock
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PROSPECTUS
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March 26, 1998
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