As filed with the Securities and Exchange Commission - December 14, 1998
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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C-PHONE CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 06-1170506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6714 NETHERLANDS DRIVE
WILMINGTON, NORTH CAROLINA 28405
(910) 395-6100
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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DANIEL P. FLOHR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
C-PHONE CORPORATION
6714 NETHERLANDS DRIVE
WILMINGTON, NORTH CAROLINA 28405
(910) 395-6100
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
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Copies of all communications, including all
communications sent to the agent for
service, should be sent to:
MICHAEL D. SCHWAMM, ESQ.
WARSHAW BURSTEIN COHEN
SCHLESINGER & KUH, LLP
555 FIFTH AVENUE
NEW YORK, NEW YORK 10017
(212) 984-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Securities to be Registered(1) Registered Price Per Share(3) Offering Price(3) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share 1,500,000 Shares(1) $3.156 $4,734,375 $1,317
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Common Stock, $.01 par
value per share 100,000 Shares(2) $3.156 $ 315,625 $ 88
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TOTAL ........................................................................................................ $1,404
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(1) Consists of shares of Common Stock issuable pursuant to the terms of the
Private Equity Credit Agreement (the "Equity Line"), dated as of September
18, 1998, between the Registrant and Sovereign Partners, L.P.
(2) Consists of shares of Common Stock issuable upon exercise of warrants
issued to the finder for the Equity Line.
(3) Pursuant to Rule 457(c), the proposed maximum offering price per share and
proposed maximum aggregate offering price have been calculated on the basis
of the average of the high and low sale prices of the Common Stock as
reported on The Nasdaq National Market on December 7, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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The information in this Prospectus is subject to completion and may be changed.
The selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission (of which this
Prospectus is a part) is effective. This Prospectus is not an offer to sell
these securities, and is not soliciting an offer to buy these securities, in any
state where such offer or sale is not permitted
PROSPECTUS SUBJECT TO COMPLETION
December 10, 1998
1,600,000 SHARES OF COMMON STOCK C-PHONE CORPORATION
OFFERED BY CERTAIN SELLING SHAREHOLDERS 6714 Netherlands Drive
Wilmington, North Carolina 28405
(910) 395-6100
Two shareholders may sell up to a total of 1,600,000 shares of our
common stock from time to time on the Nasdaq National Market at the prevailing
market price or in private, negotiated transactions. The shares will be sold at
prices determined by the selling shareholders. We will not receive any part of
the proceeds from the sale, although we will pay the expenses in connection with
the registration of the shares, except for expenses of the selling shareholders.
One of the selling shareholders, Sovereign Partners, L.P. will acquire
the shares to be sold by it pursuant to the terms of a Private Equity Credit
Agreement that we entered into with it on September 18, 1998. This Agreement
relates to 1,500,000 shares of our common stock. The other selling shareholder,
Cardinal Capital Management, Inc., will acquire the shares to be sold by it upon
the exercise of a warrant that it received as part of its finder's fee for
arranging the Private Equity Credit Agreement with Sovereign Partners. The
warrant relates to 100,000 shares of our common stock. Additional information
concerning our arrangement with Sovereign Partners is set forth under the
caption "The Company - Recent Financing Arrangement with Sovereign Partners."
Our common stock is traded on the Nasdaq National Market under the
symbol "CFON." On December 9, 1998, the last reported sales price of our common
stock was $3-9/32.
A PURCHASE OF SHARES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE
"RISK FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
December __, 1998
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document which we file
at the SEC's Public Reference Rooms in Washington, D.C., New York City and
Chicago. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The SEC maintains a internet website at
http://www.sec.gov where certain of our publicly filed information may be found.
This Prospectus is part of a registration statement we filed with the
SEC. The registration statement contains more information than this Prospectus
regarding us and our common stock, including supplemental exhibits and
schedules. You can get a copy of the registration statement from the SEC at the
address listed above or from its internet website.
The SEC allows us to "incorporate by reference" into this Prospectus
the information we file with it. This means that we are deemed to be disclosing
such information to you by referring you to those documents. This information is
important and should be reviewed. The information incorporated by reference is
considered to be part of this Prospectus.
We incorporate by reference into this Prospectus the documents listed
below:
o Annual Report on Form 10-KSB for the fiscal year ended February
28, 1998;
o Quarterly Reports on Form 10-QSB for the fiscal quarters ended May
31, 1998 and August 31, 1998;
o Current Report on Form 8-K, filed on September 24, 1998;
o Proxy Statement, dated June 9, 1998, with respect to our 1998
annual meeting of shareholders; and
o Description of the common stock contained in Item 1 of our
Registration Statement on Form 8-A, dated June 22, 1994.
You may request a copy of these filings, at no cost, by writing to us
at the following address:
C-Phone Corporation
6714 Netherlands Drive
Wilmington, North Carolina 28405
Attention: Paul Albritton, Chief Financial Officer
You also may obtain this information by telephoning Mr. Albritton
directly at (910) 395-6100.
You should rely on the information incorporated by reference or
provided in this Prospectus or any supplement. We have not authorized anyone to
provide you with different information. You should not assume that the
information in this Prospectus or any supplement is accurate as of any date
other than the date on the front of such document. We are not making an offer of
our shares in any state where the offer is not permitted.
THE COMPANY
DESCRIPTION OF OUR BUSINESS
We are engaged primarily in the engineering, manufacturing and
marketing of video conferencing systems. In 1993, we introduced C-Phone(R), our
first PC-based video conferencing
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system, which operates over digital networks. In 1997, we introduced C-Phone
Home(TM), a TV-based set-top "video phone," which operates over analog (or
regular) telephone lines using a standard television set. In early 1998, we
introduced DS-324(TM), a TV-based video conferencing system, which operates over
either analog or digital telephone lines. In May 1998, we introduced C-Phone
ITV(TM), a TV-based set-top device that provides internet access using a
standard television set and an analog telephone line.
We presently market several TV-based video conferencing products,
including the following:
o the DS-324 for business and personal use.
o the DS-324/Pro(TM) for business use and special applications.
o the DS-324/AV(TM) for security and surveillance applications.
o the DS-324/Multipoint System(TM) for distance learning and training
o C-Phone Home for individual home use.
We believe that our TV-based video conferencing products currently have
greater market potential than our PC-based products and, therefore, have
recently shifted our resources to our TV-based products. We are continuing to
support our PC-based products and will provide equipment to our existing
customer base and to new customers in connection with their specialized
applications.
Our products are marketed through a variety of channels depending upon
the product. Our TV-based video conferencing product is marketed to end-users,
distributors, resellers and original equipment manufacturers ("OEMs") which
integrate the product with other equipment for resale to specific industries
such as health care and security services. C-Phone ITV currently is being
marketed to our existing customers for specific applications such as healthcare
and to selected foreign markets. We are continuing to explore other market
opportunities for C-Phone ITV.
We have incurred significant losses during our three fiscal years ended
February 28, 1998 and the six months ended August 31, 1998. Until market
acceptance of our products is established, of which there can be no assurance,
we expect to continue to incur significant losses due to our expenditures for
product development and the commercialization of our products.
For additional information about us, we refer you to our most recent
Annual Report on Form 10-KSB and Quarterly Report on Form 10-QSB, copies of
which accompany this Prospectus.
RECENT FINANCING ARRANGEMENT WITH SOVEREIGN PARTNERS
On September 18, 1998, we entered into a Private Equity Credit
Agreement with Sovereign Partners, L.P., who had been an investor in our
December 1997 private placement. Pursuant to the Agreement, Sovereign Partners
has agreed to purchase up to $5 million of our common stock during the 18-month
period commencing on the date of this Prospectus. From time to time during the
term of the Agreement, but no more frequently than once every 30 days, we can
require Sovereign Partners to purchase between $500,000 and $1 million of our
common stock. The purchase price for each share of common stock to be paid by
Sovereign Partners will equal 85% of the average closing bid price of the common
stock during the five trading days immediately preceding the day we notify
Sovereign Partners of a purchase obligation.
Sovereign Partners' obligation to purchase shares of common stock is
subject to certain conditions, including: (i) the continued effectiveness of the
registration statement (of which this Prospectus is a part), (ii) the average
closing bid price of the common stock being at least $1.00 per share for the 20
trading days preceding the date of our notice of purchase to it; (iii) the
continued trading
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of the common stock on The Nasdaq Stock Market; and (iv) Sovereign Partners's
ownership of the common stock not being more than 9.9% of the total common stock
then outstanding.
We may terminate the Agreement without any further obligation to
Sovereign Partners at any time after we have sold it at least $1 million of
common stock. Sovereign Partners has agreed not to engage in any short sales of
our common stock (which means that it will not sell any shares that it does not
yet own), except that it may engage in such sales after it receives a purchase
notice from us but only for the number of shares of common stock covered by our
purchase notice.
Under a related registration rights agreement, we have agreed to file
and maintain effectiveness of a registration statement for the resale by
Sovereign Partners of the shares of common stock it purchases under the
Agreement. If we fail to do so, Sovereign Partners may require us to pay certain
penalties.
In connection with the Agreement, we issued to Cardinal Capital
Management, Inc., as finder, a two-year warrant to purchase 100,000 shares of
common stock at an exercise price of $8.00 per share. We may redeem this
warrant, at our option and for nominal consideration, if the closing sales price
of the common stock exceeds $10.00 for five consecutive trading days. We also
paid Cardinal Capital Management a cash fee of $30,000 and have agreed to pay
Cardinal Capital Management an additional cash fee equal to 6% of the dollar
amount of any sales of common stock to Sovereign Partners under the Agreement,
with our initial $30,000 payment to be credited against such fee.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
We have made statements in this Prospectus, and in the documents we
incorporate by reference, that are considered by the SEC to be "forward-looking
statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Sometimes these statements contain words such as "may,"
"believe," "expect," "continue," "intend," "anticipate" or other similar words.
These statements are not guarantees of our future performance and are subject to
risks, uncertainties and other factors that could cause our actual performance
or achievements to be materially different from those which we project. We have
no obligation to release publicly the result of any revisions to any of our
"forward-looking statements" to reflect events or circumstances that occur after
the date of this Prospectus or to reflect the occurrence of other unanticipated
events.
The following factors, among others, discussed below under "Risk
Factors" or in the documents which we incorporate by reference, could cause
materially different results from those anticipated or projected:
o inability to obtain capital for continued development and
commercialization of our products;
o inability to generate market acceptance of our products;
o failure to obtain new customers or retain existing customers;
o inability to manage our growth;
o loss of our key employees;
o changes in general economic and business conditions; and
o changes in industry trends.
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RISK FACTORS
INVESTING IN OUR COMMON STOCK IS VERY RISKY. AS A RESULT, YOU SHOULD BE
ABLE TO SUSTAIN A COMPLETE LOSS OF YOUR INVESTMENT. IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS BEFORE PURCHASING ANY OF OUR COMMON STOCK.
ADDITIONAL FUNDS MAY BE NEEDED FOR CONTINUED DEVELOPMENT AND COMMERCIALIZATION
OF OUR TV-BASED PRODUCTS
The continued development and commercialization of our TV-based
products will require a significant amount of capital. We believe that our
current working capital, together with anticipated funds from our operations,
will be sufficient to meet our projected operating needs and capital
expenditures through the second quarter of our fiscal year ending February 29,
2000. However, if our TV-based products gain significant market acceptance, we
will need to substantially increase the amount we spend on manufacturing,
inventory and marketing and will have increased costs associated with the
carrying of anticipated increased accounts receivable. In such event, we will
require additional capital. We anticipate that such additional capital should be
available through one or more possible sources, including the following:
o the sale of common stock to Sovereign Partners under our
Agreement, assuming that we have satisfied the conditions which
will allow us to require Sovereign Partners to purchase such
common stock. (These conditions are discussed below under the
caption "No Guarantee that Funds will be Available from our
Arrangement with Sovereign Partners").
o other private sales of our common stock.
o private sales of our unissued preferred stock or debt securities.
o the exercise of our previously issued common stock purchase
warrants, if the market price of our common stock were to exceed
the exercise price of such warrants. We currently have outstanding
warrants to purchase 350,000 shares of our common stock, of which
175,000 are exercisable at $8.05 per share and expire in December
1998, 75,000 are exercisable at $9.10 per share and expire in
December 2000, and 100,000 are exercisable at $8.00 per share and
expire in September 2000.
o a public offering of our common stock.
However, we are unable to assure you that additional capital will be
available from any of these sources when needed or, if available, that the terms
of any then available financing will be favorable or will be acceptable to us.
If we need additional capital, our inability to raise such capital will have a
very adverse effect on our business, financial condition and operations.
FUNDS NEEDED FOR OTHER PRODUCTS
From time to time, we may require working capital for the development
of additional products. While we currently do not have any development plans
that will require additional cash resources, we may develop such a need in the
future. Unless we receive adequate income from sales of our existing products,
we will be required to raise additional capital. We cannot assure you that
additional capital will be available when needed or, if available, that the
terms of such financing will be favorable or will be acceptable to us. If we
need additional capital, our inability to raise such capital will have a very
adverse effect on any product development and also may have an adverse effect on
our business, financial condition and operations.
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NO GUARANTEE THAT FUNDS WILL BE AVAILABLE FROM OUR ARRANGEMENT WITH SOVEREIGN
PARTNERS
As we discussed above, the Agreement with Sovereign Partners requires
it to purchase, at our election, up to $5 million of our common stock over the
next 18 months. However, such election may only be made if certain conditions
are satisfied. These conditions include:
o the continued effectiveness of the registration statement (of
which this Prospectus is a part) covering the sale by Sovereign
Partners of the common stock it may acquire;
o the average closing bid price of our common stock being at least
$1 per share during the 20 trading days preceding the date of our
election to Sovereign Partners;
o the continued trading of our common stock on The Nasdaq Stock
Market; and
o Sovereign Partners' ownership of our common stock not being more
than 9.9% of the total common stock then outstanding.
The obligation of Sovereign Partners to purchase our common stock is
not secured or guaranteed. If Sovereign Partners does not have available funds
at the time it is required to make a purchase or if Sovereign Partners otherwise
refuses to honor its commitment to us, we may not be able to force it to honor
its obligation to us.
As a result, we cannot assure you that we will receive any funds from
our Agreement with Sovereign Partners.
UNPROVEN MARKET FOR TV-BASED VIDEO PHONES AND VIDEO CONFERENCING PRODUCTS
GENERAL. We believe that a market for our TV-based video conferencing
products exists. However, we have no reliable data to assure us that there will
be adequate market acceptance of TV-based video conferencing products in
general, or of our products in particular. As a result, we cannot assure you
that our TV-based video conferencing products will gain sufficient market
acceptance to generate significant revenues.
C-PHONE HOME. In the 1980s, a number of companies, including some who
are substantially larger and better known than we are, unsuccessfully tried to
sell stand-alone (or self-contained) video phones products that permitted video
telephone calls over analog telephone lines. We believe that these attempts were
unsuccessful as a result of a poor price-to-performance ratio primarily due to:
o the low quality of the video portion of the telephone call when
compared to TV quality video (which is the standard against which
our potential users appear to measure acceptable video);
o poor sound quality; and
o the lack of "lip synchronization" (that is the movement of
speaker's lips did not appear to be in synchronization with the
audio portion of the video call).
While the quality of the video and audio, including the degree of "lip
synchronization," of C-Phone Home is substantially better than earlier products,
the product still may not meet consumer expectations due to:
o less "lip synchronization" when the product is operated in high
resolution mode; and
o the reduction in the quality of the video when the call is made
over a noisy phone line or there is substantial movement in the
video content being transmitted.
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DS-324 PRODUCTS. While our DS-324 product line, when using an ISDN
(digital) telephone, typically delivers the video portion of the call with
quality approaching or at "TV-quality" and with no noticeable lack of "lip
synchronization," we cannot assure you that the product will meet market
expectations. In addition, ISDN telephone lines require special installation and
involve higher monthly service fees than analog telephone lines. Furthermore, as
is the case with our analog products (although to a much lesser extent),
substantial movement in the video content being transmitted reduces the quality
of the video.
As a result, we cannot assure you that we will be able to sell a
significant number of our products or that we will be able to achieve a
satisfactory level of market acceptance of our products within a reasonable
period of time, if at all.
UNDEVELOPED MARKET FOR OUR ITV PRODUCT
In May 1998, we introduced C-Phone ITV, a TV-based set-top device that
provides internet access using a standard TV. While we are marketing this device
to our existing customers for specific applications such as healthcare and
security services, we have only sold an insignificant number of this device.
Microsoft Corp., Phillips Electronics N.V. and Sony Corp., among others, are
selling competitive products. However, to date, such products have not received
widespread consumer acceptance. We are continuing to explore other marketing
opportunities for C-Phone ITV but we do not yet know if we will be able to
identify marketing opportunities or that, even if we do, the device will gain
sufficient market acceptance to generate significant commercial sales
RISKS RELATED TO RELATIONSHIPS WITH STRATEGIC PARTNERS
From time to time, we have entered into strategic relationships with
third parties to develop market awareness and to establish marketing outlets for
our products. To date, these relationships have not generated significant sales
and we cannot assure that any such relationships may generate significant sales
in the future.
LIMITED MARKETING EXPERIENCE
We have limited sales, marketing and distribution experience. We do not
currently possess all of the sales, marketing and distribution capabilities
necessary to fully commercialize our products. We are devoting a material
portion of our available resources to commercialize our TV-based video
conferencing products. However, we are uncertain as to whether we will be able
to establish and retain a sales and marketing capability which would be
successful in gaining commercial market acceptance for such products. If we fail
to establish the necessary sales, marketing and distribution network, our
financial condition could be significantly and adversely effected. See
"Management of Growth," below.
POSSIBLE INABILITY TO SUCCESSFULLY COMPETE
As a result of recent technological advances and the adoption of
international standards which enable products from different manufacturers to be
compatible with one another (such as the H.324 standards for making video
telephone calls over telephone lines), video conferencing products 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 us. We expect that our
TV-based video conferencing products will face substantial competition from both
existing and potential competitors.
The primary competitor for our C-Phone Home product is 8x8, Inc., a
manufacturer of integrated video compression semiconductors and associated
software which sells a line of TV-based video conferencing products using analog
telephone lines. In addition, 8x8 sells TV-based video phones to several third
parties who resell the product under their own name, and licenses its video
phone
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technology to other companies, including 3COM Corporation, Kyushu Matsushita
Electric Co., Ltd., Leadtek Research, Inc. and Truedox Technology Corporation,
each of which sells competing products
Existing competitors for our DS-324 product line include PictureTel
Corporation, Polycom, Inc. and VTEL Corporation. PictureTel, Polycom and VTEL
currently sell high-end, business oriented TV-based products which only use
digital telephone lines. While these competitive products are significantly more
expensive then our products, they may still impact our ability to sell our
DS-324 product line. 8x8, also recently announced that it has introduced a
TV-based video phone in Europe that operates only over an ISDN telephone line
and which may compete with our DS 324 product line.
Potential competitors for our video conferencing products may include
well-known established suppliers of consumer electronic products, such as Lucent
Technologies, Inc., Philips Electronics N.V., Sony Corp, and Tandberg, Inc. Many
of these potential competitors sell television and telephone products into which
they may integrate video conferencing, thereby eliminating the need to purchase
a separate video conferencing product. As a result, we cannot assure you that we
will be able to compete successfully in the video phone or video conferencing
market.
We expect that we will face substantial competition with respect to
C-Phone ITV from a number of other companies, including Microsoft Corp.,
Phillips Electronics N.V. and Sony Corp.
DEPENDENCE ON OUR EXISTING MANAGEMENT AND TECHNICAL PERSONNEL
Continued development of our business and operations has been dependent
upon the efforts and talents of three of our executive officers, Daniel Flohr,
Tina Jacobs and Stuart Ross, and the services of certain key marketing and
technical personnel. If any of our key personnel leave our employ, or if we are
unable to attract and then retain additional qualified personnel in connection
with commercialization of our TV-based video conferencing products, our
operations will be significantly and adversely effected.
CUSTOMER SERVICE AND SUPPORT.
Our continued success will depend, in part, upon our ability to provide
our customers, either directly or through third party providers, technical
support and customer service for the products we sell. We presently provide
support services directly to our U.S. customers, but we rely on our foreign
strategic partners to supply support services outside of the United States. If
our business expands, we cannot assure you that we will be able to continue to
directly provide such services to our U.S. customers. If this happens, we would
be required to negotiate third-party support services and we may not be able to
negotiate agreements on terms that are favorable or acceptable to us. If we are
unable to provide adequate support services, our business will be significantly
and adversely affected.
LIMITED MANUFACTURING EXPERIENCE
While we have been manufacturing certain video conferencing components
since 1994, our sales volume to date has kept production at relatively low and
inefficient levels. In order for us to become profitable, we must be able to
manufacture our products at acceptable costs. We cannot assure you that we will
be able to make the transition to higher production volume, successfully or
within acceptable profit margins. We anticipate relying on third-party contract
manufacturers for producing our products in volume. Although we have started
using such manufacturers, we cannot assure you that any such relationships will
be satisfactory or that we can agree on contract terms that are favorable or
acceptable to us. Furthermore, unforeseen technical or other difficulties may
arise which could interfere with the manufacture of our products, or prevent, or
create delays in, marketing of our products.
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DEPENDENCE ON FEW CUSTOMERS
During the six months ended August 31, 1998, revenues from
Alternative Options Inc. and Fotron S.A. (PTTY) Ltd. accounted for 25% and 13%,
respectively, of our net revenues from TV-based products (and 21% and 11%,
respectively, of our total net revenues), and our ten largest customers for
TV-based products accounted for approximately 72% of our net revenues from
TV-based products (and 61% of our total net revenues). A loss of any of these
larger customers or a substantial reduction in orders from any of these
customers (which has occurred from time to time) will substantially reduce our
revenues and significantly affect our operations unless we are able to obtain
additional orders from new customers.
DEPENDENCE ON FOREIGN SALES
During the six months ended August 31, 1998, our non-U.S. net sales
aggregated approximately 45% of total net sales, and were derived from resellers
primarily located in Turkey, South Africa, Japan, Slovenia, France, Canada,
Mexico, Spain and Korea. Ninety six percent of these revenues were from TV-based
product sales and 4% were from PC-based product sales. During our fiscal year
ended February 28, 1998, our non-U.S. net sales aggregated approximately 17% of
total net sales, and were derived from resellers primarily located in South
Africa, India, Malaysia, Mexico, Canada, Korea and Japan. Fifty six percent of
these revenues were from TV-based product sales and 44% were from PC-based
product sales. A reduction in the volume of non-U.S. trade or any material
restrictions on such trade could significantly reduce our revenues.
We generally require our foreign customers to prepay for their
purchases due to the difficulty in collecting foreign accounts receivable. The
potential of a larger order from one or more foreign customers could require us
to change this policy although we do not presently contemplate such a situation.
A change in our payment policy would expose us to increased credit risks.
Foreign sales are denominated in U.S. dollars and we do not incur any foreign
currency risks; however, fluctuations in currency exchange rates could cause our
products to become relatively more expensive to foreign customers, which could
result in a reduction in foreign sales or the need to make such sales at a lower
gross profit.
Although we require certain of our non-North American distributors to
annually purchase a minimum amount of our products to maintain their exclusive
distributorships, we do not have written agreements with any of these
distributors which require the purchase of any minimum quantities of our
products and, therefore, such distributors could reduce or curtail their
purchases at any time without financial penalty
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SUPPLIERS.
We rely 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 these manufacturers are our sole source of
supply. We also rely on third party manufacturers and assemblers to manufacture
and/or assemble certain components and subassemblies for our products. These
products are built to our specifications and require fabrication equipment which
we do not presently possess. Further, we rely on third party manufacturers for
specialized subassemblies, including our color camera. This camera, although not
built to Company specifications, is manufactured outside of the United States
and is inventoried by the manufacturer only in limited quantities. While we
believe that all of our components could be obtained elsewhere if needed or that
we could redesign our products to use alternative components, we cannot assure
you that other sources of supply would be available without significant delay or
increased cost, or that the use of alternative available components would not
require us to re-engineer portions of our products. The use of alternative
products could impose additional cost and significant delay.
We intend to rely on third party contract manufacturers to produce our
products, when and if market demand develops. In addition, our reliance on third
parties to manufacture and sub-assemble certain components involve significant
risks, including reduced control over delivery schedules, the
9
<PAGE>
inability to ship product under "just-in-time" arrangements and quality
assurance. Furthermore, certain of our manufacturers, sub-assemblers and
suppliers, including suppliers of components made outside the United States, may
require us to make firm scheduling and delivery commitments and deliver secure
financing arrangements, such as letters of credit, as a condition to fulfillment
of their contractual obligations to us. Our failure to obtain an adequate supply
of components and required sub-assembler services on a timely basis would have a
significant adverse effect on our business. If we are successful in selling
larger quantities of our products, we will become even more dependent on a
timely supply of purchased inventory, and we will be required to devote
significant capital to inventory. We currently do not have the financial
resources necessary to fully fund a very significant increase in sales.
RAPID TECHNOLOGICAL CHANGES
The technology underlying video conferencing is subject to rapid
change, including potential introduction of new products and technologies which
may have a significant adverse impact on our products. Our success, if any, will
depend in part on our ability to respond quickly to technological advances by
developing and introducing new products or features. We cannot assure you that
we will have the financial ability to maintain the necessary ongoing research,
development and engineering programs to accomplish this goal. Even if we
maintain such programs, we may not be able to foresee and respond to
technological advances in a timely manner, if at all. In addition, even though
the design of our products allows components to be replaced as new technologies
develop, there may be technological developments and new products introduced by
competitors which could render our then existing products noncompetitive or
obsolete.
MANAGEMENT OF GROWTH
Our introduction of TV-based video conferencing products is placing a
significant strain on our limited personnel, management and other resources. Our
ability to manage any future growth effectively will require us to continue to
attract, train, motivate and manage our employees successfully and to continue
to improve our operational, financial and management systems. If we fail to
effectively manage our growth, our business and operating results will be
significantly effected.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
We have four United States patents (one of which is a design patent)
and have pending five United States patent applications and one foreign patent
application, all of which relate to technology incorporated in our 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 our products is developing rapidly. A number of
companies have filed applications for, or have been issued, patents relating to
products or technology that is similar to some of the products or technology
being developed or used by us. The scope and validity of these patents, the
extent to which we may be required to obtain licenses thereunder or under other
proprietary rights and the cost and availability of licenses, are unknown. We
cannot assure you that our patent applications will result in patents being
issued or that, if issued, the patents will afford us protection against
competitors developing similar or related technologies. Although our earliest
patent was granted in 1995, and patents generally have a seventeen-year life,
due to rapidly developing technology, we contemplate that alternative
technological solutions will be devised to accomplish the purposes of our
patents substantially before such patents expire. We cannot assure you that
other parties have not applied for, or will not obtain, patents under which we
would need to be granted a license or around which we would be forced to
redesign our products.
We seek to protect our intellectual property rights through a
combination of trade secret, nondisclosure and other contractual arrangements,
and patent, copyright and trademark laws. We generally enter into
confidentiality agreements with our employees, consultants, sales
representatives and certain potential customers and limit access to and
distribution of our proprietary information. However, we cannot assure you that
these actions will be adequate to deter misappropriation of our proprietary
10
<PAGE>
information, that we will be able to detect unauthorized use of our intellectual
property rights, or that we can afford the high cost required to enforce,
through litigation, our intellectual property rights. Any such litigation could
result in a substantial diversion of managerial time and resources, which could
be better and more fruitfully utilized on other activities. Since we do not have
the resources to maintain a staff whose primary function is to investigate the
level of protection afforded to third parties on devices and components which we
use in our products, we cannot assure you that a claim that our products
infringe on the intellectual property rights of others will not be asserted
successfully against us in the future.
COMPLIANCE WITH FCC REGULATIONS
Our 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 public switched telephone networks.
These regulations, among other things, require that our products comply with
such regulations as a prerequisite to marketing them. Although our video
conferencing products are currently in compliance with such regulations, if we
redesign or otherwise modify such products, or if current regulations or
industry standards are revised, we cannot assure you as to when, if ever, that
our redesigned or modified products will be in compliance with applicable
governmental regulations and evolving industry standards. In addition, we must
comply with certain similar requirements of various foreign government agencies
to effect our foreign sales. Our foreign distributors, as part of their
distribution agreements, are responsible for ensuring compliance with, and
obtaining any necessary permits from, such foreign government agencies.
CONTROL BY EXISTING PRINCIPAL SHAREHOLDERS
Our two principal executive officers, Daniel Flohr and Tina Jacobs,
beneficially owned, as of December 10, 1998, a total of 1,097,375 shares
(approximately 14%) of our currently outstanding common stock. As a result of
such holdings, Mr. Flohr and Ms. Jacobs may continue to have, the ability to
significantly influence the election of all of our directors and the outcome of
substantially all other matters which may be put to a vote of our shareholders.
POSSIBLE INABILITY TO CONTINUE TO USE C-PHONE NAME
In 1995, the U.S. Patent and Trademark Office registered the "C-Phone"
trademark to us. In 1996, in order to more closely identify our company with our
products, all of which currently use the C-Phone name, and in an attempt to
eliminate confusion among investors, we changed our name to C-Phone Corporation.
In August 1996, we were advised by the Patent and Trademark Office that the
former registered owner of the C-Phone trademark (which trademark was canceled
in 1993 for failure to submit a required affidavit), had filed a petition to
cancel our registration. Such petition alleged that there was a likelihood of
confusion arising from our use of the trademark, and that the former owner's
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 respect to the matter is pending
before the Patent and Trademark Office's Trial and Appeal Board, who will
determine whether the conflicting use by us is so confusingly similar that we
should not have been granted a registration of the trademark. If we are not
successful in these proceedings, we may need to change the identifying name on
our products. We also would need to consider whether we should change our
corporate name. In addition, we could be subject to damages, if the former owner
of the mark could show that we had infringed its common law rights. Any change
in our use of the C-Phone name would result in a loss of good will and
identification which we have been promoting since 1993, and could have a
temporary adverse impact on our marketing plans.
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POTENTIAL FOR ISSUANCE OF SIGNIFICANT SHARES OF COMMON STOCK
Pursuant to the Agreement with Sovereign Partners, we may sell to it up
to $5 million of our common stock during the next eighteen months (but not in
excess of approximately 1,543,000 shares). For more information about the
Agreement with Sovereign Partners, see "The Company - Recent Financing
Arrangement with Sovereign Partners." The resale by Sovereign Partners of the
common stock could depress the market price of our common stock. Moreover, as
all the common stock to be sold to Sovereign Partners will be available for
immediate resale by it, the mere prospect of such sales could further adversely
affect the market price for the common stock
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF COMMON STOCK
As of December 10, 1998, we had a total of 7,979,114 shares of common
stock issued and outstanding, of which 6,855,739 shares were held by
non-affiliates and are freely tradeable in the public market without restriction
under the Securities Act of 1933. The remaining 1,123,375 shares were held by
our directors and executive officers and are considered "restricted securities"
subject to the resale limitations of Rule 144 under the Securities Act. The
prospect of the ability to publicly resell these restricted shares may adversely
affect prevailing market prices for the common stock.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price for our common stock has been, and is likely to
continue to be, highly volatile. Factors which could significantly affect the
market price of the common stock could include actual or anticipated
fluctuations in our operating results, changes in alliances or relationships
with our customers, new products or technical innovations by us or by our
existing or potential competitors, trading activity and strategies occurring in
the marketplace with respect to our common stock, general market conditions and
other factors unrelated to us or outside of our control.
YEAR 2000 COMPLIANCE
Computer systems may experience problems handling dates beyond the year
1999 because many computer programs use only two digits to identify a year in a
date field. While we have adopted and begun to implement a Year 2000 compliance
program, such program is not yet complete and we cannot assure that such program
will be completed in a timely manner. While we have identified critical
third-party suppliers, we have not yet completed evaluation of their Year 2000
readiness. In addition, although our business is not dependent on any single or
small number of customers, Year 2000 problems which significantly interrupt the
normal business operations of a significant number of our customers and
potential customers could significantly and adversely impact us. Furthermore, we
have not yet developed a contingency plan in the event of unsuccessful
implementation of our Year 2000 project or as a result of the noncompliance by
any of our key suppliers or customers. While we believe that our Year 2000 plan
will significantly reduce our exposure from the problems associated with the
Year 2000 issue, we cannot assure you that our internal operations will not be
significantly affected by the Year 2000 issue or that Year 2000 problems
involving our suppliers or customers will not significantly and adversely affect
us.
NO EXPECTATION THAT WE WILL PAY DIVIDENDS
We never have paid any dividends and, for the foreseeable future, we
expect to retain earnings, if any, to finance the expansion and development of
our business. Any future payment of dividends will be within the discretion of
our Board of Directors and will depend, among other factors, on our earnings,
capital requirements, and operating and financial condition.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock by
Sovereign Partners. However, we will receive proceeds from our issuance of
common stock to Sovereign Partners and from the exercise of the warrants issued
to Cardinal Capital Management. We could receive up to $5 million under the
Agreement with Sovereign Partners and up to $800,000 from the exercise of the
warrants, before payment of any fees and expenses we have incurred or in the
future may incur. The decision to exercise the warrants is within the sole
discretion of the Cardinal Capital Management. We cannot assure you that we
will, or will be allowed to, require Sovereign Partners to purchase any of our
common stock or that the warrants will be exercised.
Any net proceeds we receive from the sales of our securities will be
used for general corporate purposes and working capital, including for the
marketing of our TV-based video conferencing products and for the funding of
anticipated increases in inventories and receivables related to these products.
SELLING SHAREHOLDERS
The following table sets forth certain information about the ownership
of our common stock by Sovereign Partners and Cardinal Capital Management as of
December 10, 1998.
Sovereign Partners purchased 2,000 shares of our Series A Preferred
Stock and 200,000 common stock purchase warrants in our December 1997 private
placement. Sovereign Partners has converted all such preferred shares, exercised
all such warrants and sold all of the shares of common stock that it received
upon such conversions and exercises.
One of the principals of Cardinal Capital Management was a principal of
the company that acted as a finder for our December 1997 private placement. Such
company received as payment of its finder's fee, among other things, warrants to
purchase 185,000 shares of our common stock. All of such warrants have been
exercised and all of the shares of common stock that were received upon such
exercise have been sold.
Except for these relationships, neither Sovereign Partners nor Cardinal
Capital Management has had a material relationship with us or any of our
affiliates within the past three years.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON
BENEFICIALLY OWNED STOCK TO BE
PRIOR TO SHARES OF COMMON BENEFICIALLY OWNED
NAME OF SELLING SHAREHOLDER THE OFFERING (1) STOCK TO BE SOLD (3) AFTER THE OFFERING(3)
- --------------------------- ---------------- -------------------- ---------------------
<S> <C> <C> <C>
Sovereign Partners, L.P. 1,500,000(1) 1,500,000 0
Cardinal Capital Management, Inc. 100,000(2) 100,000 0
</TABLE>
- ----------------
(1) Consists of shares of common stock which Sovereign Partners may acquire
pursuant to the Private Equity Credit Agreement. For additional
information about the Agreement, see "The Company - Recent Financing
Arrangement with Sovereign Partners."
(2) Consists of shares of common stock which Cardinal Capital Management
may acquire upon exercise of the warrant we issued to it as finder for
our Private Equity Credit Agreement with Sovereign Partners. Scott F.
Koch, the President and sole shareholder of Cardinal Capital
Management, may be deemed to beneficially own all the shares of common
stock beneficially owned by Cardinal Capital Management.
(3) Assumes the sale of all the shares of common stock which may be sold
pursuant to this Prospectus.
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PLAN OF DISTRIBUTION
We are registering the common stock on behalf of Sovereign Partners and
Cardinal Capital Management, as selling shareholders. We will pay all costs,
expenses and fees in connection with the registration of these shares. The
selling shareholders will pay their own attorney fees and all brokerage
commissions and selling expenses incurred by them upon the sale of their shares.
The decision to offer and sell the common stock and the timing and
amount of any sales that are made, is and will be within the sole discretion of
the selling shareholders. The selling shareholders will determine the prices at
which they sell their common stock. Offers and sales of such common stock may be
effected from time to time in transactions (which may include block
transactions) on The Nasdaq Stock Market or in private, negotiated transactions.
Such transactions may involve broker-dealers as agents or principals. If the
selling shareholders use broker-dealers to complete their sales, such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders and/or from you as purchaser (which
compensation as to a particular broker-dealer might be in excess of customary
commissions). The selling shareholders have advised us that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of any of their common stock.
The selling shareholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of their common
stock against certain liabilities, including liabilities arising under the
Securities Act of 1933.
Sovereign Partners is an "underwriter" within the meaning of the
Securities Act in connection with the sale of shares of our common stock under
this Prospectus. Any broker-dealers that act in connection with the sale of the
common stock also may be deemed to be an "underwriter" and any profit on the
resale of such shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act. The Securities Act may impose
liability on the selling shareholders or any broker-dealer who may be used by
the selling shareholders for violations of the federal securities laws. If this
Prospectus contains untrue statements or omissions of material facts, the
purchaser of the shares may have a claim for damages against the selling
shareholders or any broker-dealer that they used to sell their shares.
We have advised Sovereign Partners that it is required to deliver a
copy of this Prospectus with any sale of such common stock. We also have
informed Sovereign Partners that the anti-manipulative rules under the
Securities Exchange Act of 1934, including Regulation M, may apply to any sales
by it of our common stock. Regulation M, with certain exceptions, prohibits any
person subject to such Regulation 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 SEC from Regulation M or unless
otherwise permitted under Regulation M, Sovereign Partners will not be permitted
to engage in any stabilization activity in connection with our common stock, and
will not be permitted to bid for or purchase our common stock or to attempt to
induce any person to purchase our common stock other than as permitted under the
Securities Exchange Act. The Selling Shareholders may be entitled, under
agreements entered into with us, to indemnification against liabilities under
the Securities Act, the Securities Exchange Act and otherwise.
DESCRIPTION OF OUR CAPITAL STOCK
We are authorized to issue up to 20,000,000 shares of common stock, par
value $.01 per share, and up to 1,000,000 shares of preferred stock, par value
$.01 per share.
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COMMON STOCK. The holders of the our common stock have one vote per
share. The holders of our common stock are entitled to receive, subject to the
preferential rights of the holders of any shares of any series of the preferred
stock then outstanding out of the assets legally available therefor, dividends
at such time and in such amounts as our Board of Directors may determine.
Subject to the preferential rights of the holders of any shares of any series of
our preferred stock, upon liquidation, dissolution or winding up of our Company,
the assets legally available for distribution to our shareholders, will be
distributed ratably among our common shareholders. As of December 10, 1998, we
had a total of 7,979,114 shares of common stock outstanding.
PREFERRED STOCK. Our Board of Directors is authorized to issue up to
1,000,000 shares of preferred stock from time to time, in one or more series,
fixing in each case, among other things: (i) the dividend rate and whether
dividends shall be cumulative, (ii) voting rights, if any, (iii) the redemption
price, if any, (iv) the amount payable in the event of involuntary or voluntary
liquidation and (v) the terms and conditions on which shares of preferred stock
may be converted if the shares of that series are to be issued with the
privilege of conversion. The Board has currently designated 5,000 preferred
shares as Series A Preferred Stock, of which 4,500 shares were issued to the
investors in a December 1997 private placement. As of December 10, 1998, no
shares of Series A Preferred Stock remained outstanding.
LEGAL MATTERS
The law firm of Warshaw Burstein Cohen Schlesinger & Kuh, LLP will give
its opinion on the validity of the common stock. 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 financial statements of C-Phone Corporation as of February 28, 1998
and 1997 and for the three years ended February 28, 1998, incorporated in this
Prospectus on Form S-2 by reference to the Annual Report on Form 10-KSB of
C-Phone Corporation for the year ended February 28, 1998, have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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==========================================
You should only rely on the information
incorporated by reference or provided in
this Prospectus or any supplement. You
should not assume that the information in
this Prospectus or any supplement is
accurate as of any date other than the
date on the cover of such document. We
have not authorized anyone else to provide
you with different information. We are not
making an offer of shares of common stock
in any state where the offer is not
permitted
TABLE OF CONTENTS
PAGE
Where You Can Find More Information 2
The Company 2
Special Note Regarding Forward-Looking
Statements 4
Risk Factors 5
Use of Proceeds 13
Selling Shareholders 13
Plan of Distribution 14
Description of our Capital Stock 14
Legal Matters 15
Experts 15
==========================================
==========================================
1,600,000 Shares
C-PHONE CORPORATION
Common Stock
-------------------
PROSPECTUS
-------------------
_________, 1998
==========================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the estimated amounts of all
expenses payable by the Company in connection with the registration of the
Shares:
SEC registration fee ................................................ $ 1,404
Legal fees and expenses ............................................. 15,000
Accounting fees and expenses ........................................ 7,500
Miscellaneous expenses .............................................. 1,096
-------
Total ...................................................... $25,000
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 722 of the New York Business Corporation Law
(the "BCL"), Article SIXTH of the Company's Restated Certificate of
Incorporation provides that "To the fullest extent now or hereafter provided for
or permitted by law, the Corporation shall indemnify the directors and officers
of the Corporation and, in connection therewith, advance expenses with respect
thereto. The rights to indemnification and advancement of expenses granted
hereby shall not limit or exclude, but shall be in addition to, any other rights
which may be granted by or pursuant to any by-law, resolution or agreement
permitted by law; shall be deemed to constitute a contractual obligation of the
Corporation to any director or officer of the Corporation who serves in such a
capacity at any time while such rights are in effect; shall continue to exist
after the repeal or modification hereof, to the extent permitted by law, with
respect to events occurring prior thereto; and shall continue as to a person who
has ceased to be a director or officer and shall inure to the benefit of the
estate, spouse, heirs, executors, administrators or assigns of such person."
In addition, Section 8.01 of the Company's By-Laws provides that "The
Corporation shall, to the fullest extent now or hereafter permitted by the New
York Business Corporation Law, indemnify any Director or officer who is or was
made, or threatened to be made, a party to an action, suit or proceeding
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, whether civil or criminal, whether involving
any actual or alleged breach of duty, neglect or error, any accountability, or
any actual or alleged misstatement, misleading statement or other act or
omission and whether brought or threatened in any court or administrative or
legislative body or agency, including an action by or in the right of any other
corporation of any type or kind, domestic or foreign, or any partnership, joint
venture, trust, employee benefit plan or other enterprise, which any Director or
officer of the Corporation is serving or served in any capacity at the request
of the Corporation, by reason of the fact that he, his testator or intestate, is
or was a Director or officer of the Corporation, or is serving or served such
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise in any capacity, against judgments, fines, amounts paid in
settlement, and costs, charges and expenses, including attorneys' fees, actually
and necessarily incurred in connection with the defense of such action, suit or
proceeding or any appeal therein; provided, however, that no indemnification
shall be provided to any such Director or officer if a judgment or other final
adjudication adverse to the Director or officer establishes that (i) his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Such right of indemnification
shall not be deemed exclusive of any other rights to which such Director or
officer may be entitled apart from the foregoing provisions. The foregoing
provisions of this Section 8.1 shall be deemed to be a contract between the
Corporation and each Director and officer who serves in such capacity at any
time while this Article 8 and the relevant provisions of the New York Business
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Corporation Law and other applicable law, if any, are in effect, and any repeal
or modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought or threatened based in
whole or in part upon any such state of facts."
The BCL, among other things, permits the Company to indemnify any
person who was or is a party to any action by reason of the fact that such
person is or was or has agreed to become a director or officer of the Company,
or is or was serving at the request of the Company as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise
against any liability incurred by him or her in connection with such action, if
such person acted in good faith and in a manner such person reasonably believed
to be in, or not opposed to, the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that his or her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that the
person did not act in good faith and in a manner which such person reasonably
believed to be in, or not opposed to, the best interest of the Company and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
As permitted by Section 402(b) of the BCL, Article SEVENTH of the
Company's Restated Certificate of Incorporation provides that "To the fullest
extent now or hereafter provided for or permitted by law, directors of the
Corporation shall not be liable to the Corporation or its shareholders for
damages for any breach of duty in their capacity as directors. Any repeal or
modification hereof shall not adversely affect any right or protection of a
director of the Corporation existing hereunder with respect to any act or
omission occurring prior to such repeal or modification." Section 402(b) of the
BCL permits a corporation to eliminate or limit the personal liability of its
directors to its shareholders and the corporation for damages for any breach of
duty in such capacity.
The BCL, among other things, provides that the foregoing provisions of
the Company's Restated Certificate of Incorporation and By-Laws do not limit the
liability of any director if a judgment or other final adjudication adverse to
him or her establishes that his or her acts were in bad faith or involved
intentional misconduct or a knowing violation of law or he or she gained in fact
a financial profit or other advantage to which he or she was not legally
entitled or that his or her acts violated the BCL.
The Company also has obtained directors and officers liability
insurance which covers the expenses incurred (subject to a deductible amount) in
defending against a claim for breach of duty of a director or officer to the
extent that such claim is also subject to a right of indemnification.
ITEM 16. EXHIBITS.
Exhibit No. Description
4.1 - Private Equity Credit Agreement, dated as of September 18,
1998, between C-Phone Corporation and Sovereign Partners, L.P.
(incorporated by reference to Exhibit 1 to the Current Report
on Form 8-K, filed by C-Phone Corporation on September 25,
1998).
4.2 - Registration Rights Agreement, dated as of September 18, 1998,
between C-Phone Corporation and Sovereign Partners, L.P.
(incorporated by reference to Exhibit 2 to the Current Report
on Form 8-K, filed by C-Phone Corporation on September 25,
1998).
4.3 - Common Stock Purchase Warrant, dated as of September 18, 1998,
of C-Phone Corporation issued to Cardinal Capital Management,
Inc. (incorporated by reference to Exhibit 3 to the Current
Report on Form 8-K, filed by C-Phone Corporation on September
25, 1998).
5 - Opinion of Warshaw Burstein Cohen Schlesinger & Kuh, LLP.
II-2
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23.1 - Consent of PricewaterhouseCoopers LLP.
23.2 - Consent of Warshaw Burstein Cohen Schlesinger & Kuh, LLP
(included in their opinion filed as Exhibit 5).
24 - Power of Attorney. (included on page II-4).
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The Company undertakes that it will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
provided, however, that the Company does not need to give the
statements in paragraph (a)(1)(i) and (a)(1)(ii) if the information
required in a post-effective amendment is incorporated by reference
from periodic reports filed by the Company under the Exchange Act.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
II-3
<PAGE>
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe it meets all of
the requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wilmington, State of North Carolina, on December 10,
1998.
C-PHONE CORPORATION
By: /s/ Daniel P. Flohr
---------------------------------------
Daniel P. Flohr, President
(Chief Executive Officer)
Each person whose signature appears below constitutes and appoints
Daniel P. Flohr, Tina L. Jacobs and Paul H. Albritton, and each of them, his or
her true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments, including post-effective
amendments, to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933, hereby
ratifying and confirming all that said attorneys-in-fact or substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Dated:
December 10, 1998 /s/ Daniel P. Flohr
--------------------------------------------
Daniel P. Flohr
President, Chief Executive Officer
and Director (Principal Executive Officer)
December 10, 1998 /s/ Tina L. Jacobs
--------------------------------------------
Tina L. Jacobs
Director
December 10, 1998 /s/ Seymour L. Gartenberg
--------------------------
Seymour L. Gartenberg
Director
December 10, 1998 /s/ E. Henry Mize
--------------------------------------------
E. Henry Mize
Director
December 10, 1998 /s/ Donald S. McCoy
--------------------------------------------
Donald S. McCoy
Director
December 10, 1998 /s/ Stuart E. Ross
--------------------------------------------
Stuart E. Ross
Director
December 10, 1998 /s/ Paul H. Albritton
--------------------------------------------
Paul H. Albritton
Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
EXHIBIT 5
WARSHAW BURSTEIN COHEN
SCHLESINGER & KUH, LLP
555 Fifth Avenue
New York, New York 10017
Telephone: (212) 984-7700
Facsimile: (212) 972-9150
December 10, 1998
C-Phone Corporation
6714 Netherlands Drive
Wilmington, North Carolina 28405
Gentlemen and Ladies:
You have requested our opinion, as counsel for C-Phone Corporation, a
New York corporation (the "Company"), in connection with the Registration
Statement on Form S-2 (the "Registration Statement") under the Securities Act of
1933 (the "Act"), filed by the Company with the Securities and Exchange
Commission (the "Commission").
The Registration Statement relates to the offering by certain selling
shareholders of up to 1,600,000 shares of the Company's common stock, $.01 par
value per share (the "Common Stock"), consisting of (a) 1,500,000 shares of
Common Stock (the "Equity Line Shares") issuable to Sovereign Partners, L.P.
(the "Investor") pursuant to the terms of a Private Equity Credit Agreement (the
"Equity Line Agreement"), dated as of September 18, 1998, between the Company
and (b) 100,000 shares of Common Stock (the "Warrant Shares") issuable upon
exercise of the warrant (the "Warrant") issued to Cardinal Capital Management,
Inc. (the "Finder").
In the preparation of our opinion, we have examined (1) the Restated
Certificate of Incorporation of the Company, as amended to date, (2) the By-Laws
of the Company, in effect on the date hereof, (3) minutes of meetings of the
Company's Board of Directors, as made available to us by executive officers of
the Company, (4) a certificate from an executive officer of the Company, (5) the
Registration Statement, (6) the Equity Line, and (7) the Warrant. In our
examinations, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the originals of all documents submitted to us as certified, photostatic or
conformed copies, and the authenticity of the originals of all such latter
documents.
Based upon such examination, we are of the opinion that:
(1) the Equity Line Shares, when issued and delivered in
accordance with the terms of the Equity Line Agreement, Series A
Preferred Shares, will be validly issued, fully paid and
non-assessable; and
(2) the Warrant Shares, when issued and delivered in
accordance with the terms of the Warrant, will be validly issued, fully
paid and non-assessable.
II-6
<PAGE>
We hereby consent to the filing of our opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus included in the Registration Statement. In so doing,
we do not admit that we are in the category of persons whose consent is required
under Section 7 of the Act or the rules and regulations of the Commission
promulgated thereunder.
Certain partners of our Firm beneficially own an aggregate of 12,105
shares of Common Stock.
Sincerely yours,
WARSHAW BURSTEIN COHEN
SCHLESINGER & KUH, LLP
AAK/MDS
II-7
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-2 of our report,
dated May 8, 1998, except as to the information presented in Note 14, for which
the date is May 15, 1998, on the financial statements of C-Phone Corporation as
of February 28, 1998 and 1997 and for the three years ended February 28, 1998,
which appears on page F-1 of C-Phone Corporation's Annual Report on Form 10-KSB
for the year ended February 28, 1998. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
- -----------------------------------
PricewaterhouseCoopers LLP
Raleigh, North Carolina
December 10, 1998
