As filed with the Securities and Exchange Commission - February 11, 1999
Registration No. 333-68865
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------
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)
------------
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)
------------
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. [ ]
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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.
<PAGE>
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, FEBRUARY 10, 1999
1,600,000 SHARES OF COMMON STOCK C-PHONE CORPORATION
offered by Sovereign Partners, L.P. and 6714 Netherlands Drive
Cardinal Capital Management, Inc. Wilmington, North
Carolina 28405
(910) 395-6100
C-Phone is engaged primarily in the engineering, manufacturing and
marketing of video conferencing systems.
This prospectus relates to the resale of a maximum of 1,600,000 shares
of our common stock, consisting of:
o up to 1,500,000 shares, which we may sell to Sovereign Partners, L.P.
pursuant to the terms of an equity credit agreement; and
o up to 100,000 shares, which Cardinal Capital Management, Inc. may
acquire upon exercise of a warrant that it received as part of its
finder's fee for arranging the agreement.
From time to time, Sovereign Partners and Cardinal Capital may resell
any of these shares. We will not receive any proceeds from such resales.
However, we will receive the proceeds from the initial sale of shares to
Sovereign Partners and upon exercise of the warrant by Cardinal Capital. We will
pay all the expenses in connection with the registration and sale of the shares,
except for the expenses incurred by the selling shareholders. Additional
information concerning our arrangement with Sovereign Partners is set forth
under the caption "C-Phone Corporation - Recent Financing Arrangement with
Sovereign Partners."
The selling shareholders have not advised us of any specific plans for
the resale of their shares except as described herein, but we anticipate that
the shares will be sold from time to time primarily in transactions on The
Nasdaq Stock Market at the market price prevailing at the time of sale. Such
transactions could include block transactions. It also is possible that sales
may be made in negotiated transactions with institutional investors or
otherwise.
Sovereign Partners is an "underwriter" within the meaning of the
Securities Act in connection with the resale of the shares it receives pursuant
to the agreement. Any broker-dealers that participate with Sovereign Partners in
the sale of the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. Accordingly, any discounts,
concessions or commissions received by Sovereign Partners or by brokers or
dealers acting on its behalf, and any profits received by them on the resale of
the shares might be deemed to be underwriting discounts and commissions under
the Securities Act. We have agreed to indemnify Sovereign Partners against
certain liabilities, including liabilities arising under the Securities Act.
Our common stock is traded on the Nasdaq National Market under the
symbol "CFON." On February 9, 1999, the last reported sales price of our common
stock was $2-15/16.
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.
____________, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SUMMARY OF THE TERMS OF SALE TO SOVEREIGN PARTNERS ...................................... 3
RISK FACTORS ............................................................................ 4
Potential Effects of Our Agreement with Sovereign Partners ..................... 4
History of Losses and Lack of Significant Revenues ............................. 6
Additional Funds May Be Needed for Continued Development
and Commercialization of our Products ................................. 6
No Guarantee that Funds will be Available from
our Arrangement with Sovereign Partners ............................... 6
Unproven Market for our Products ............................................... 6
Limited Sales and Marketing Capabilities ....................................... 7
Possible Inability to Successfully Compete ..................................... 7
Dependence on a Limited Number of Key Employees ................................ 7
Inefficient Production Levels .................................................. 8
Historical Dependence on Few Customers ......................................... 8
Dependence on Foreign Sales .................................................... 8
Dependence on Third Party Manufacturers and Sole Source Suppliers .............. 8
Use of Contract Manufacturers .................................................. 8
Uncertainty Due to Rapid Introduction of Competitive
Products and Technological Changes .................................... 9
Limited Protection of Intellectual Property Rights ............................. 9
Limited Financial Resources to Enforce and Defend Intellectual Property Rights.. 9
Compliance with Government Regulations ......................................... 9
Control by Existing Principal Shareholders ..................................... 10
Possible Inability to Continue to Use C-Phone Name ............................. 10
Potential Adverse Impact on Market Price of Common Stock ....................... 10
Potential Volatility of Stock Price ............................................ 10
Year 2000 Compliance ........................................................... 11
No Expectation that We will Pay Dividends ...................................... 11
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ....................................... 11
WHERE YOU CAN FIND MORE INFORMATION ..................................................... 12
C-PHONE CORPORATION ..................................................................... 12
Description of our Business .................................................... 12
Recent Financing Arrangement with Sovereign Partners ........................... 13
USE OF PROCEEDS ......................................................................... 14
SELLING SHAREHOLDERS .................................................................... 15
PLAN OF DISTRIBUTION .................................................................... 15
Manner of Sales; Broker-Dealer Compensation .................................... 15
Filing of Supplement to Prospectus In Certain Instances ........................ 16
Certain Persons Deemed to be Underwriters ...................................... 16
Regulation M ................................................................... 16
DESCRIPTION OF OUR CAPITAL STOCK ........................................................ 17
LEGAL MATTERS ........................................................................... 17
EXPERTS ................................................................................. 18
</TABLE>
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
2
<PAGE>
SUMMARY OF THE TERMS OF SALE TO SOVEREIGN PARTNERS
The following summarizes some of the more important terms of our
arrangement with Sovereign Partners. More detailed information concerning our
agreement with Sovereign Partners and the terms of the warrant we issued to
Cardinal Capital is set forth under "C-Phone Corporation - Recent Financing
Arrangement with Sovereign Partners."
Securities to be sold: C-Phone common stock
Maximum purchase price: $5,000,000
Period of sale: 18 months after the date of this
prospectus
Maximum amount of each draw: $1,000,000
Minimum amount of each draw: $ 500,000
Draw dates: Dates selected by C-Phone, but no
more frequently then once very 30
days.
Sale price per share to Sovereign Partners: 85% of average market price
Payment and delivery of shares: Ten days following a draw date
Conditions to draws: o Average market price of our
common stock has been at least
$1
o Our common stock must continue
to be traded on The Nasdaq
Stock Market
o No more than a total of
1,500,000 shares may be issued
to Sovereign Partners by
C-Phone under the agreement
and this prospectus
o Sovereign Partners' ownership
of our common stock after each
draw cannot exceed 9.9% of our
outstanding shares
o The registration statement
which includes this prospectus
must be effective
Limits on short sales: Sovereign Partners may engage in
short sales only after we have
notified them of an upcoming draw,
and only with respect to the
number of shares covered by the
draw
Ability to immediately resell shares: Sovereign Partners and Cardinal
Capital are able to immediately
resell to the public any shares
they acquire from us
Finder's fee: For arranging the sale to
Sovereign Partners:
o We issued Cardinal Capital a
warrant to purchase up to
100,000 shares at $8 per
share, expiring September 18,
2000
o We will pay Cardinal Capital
6% of the cash received from
each draw, $30,000 of which
was paid in advance
3
<PAGE>
RISK FACTORS
INVESTING IN C-PHONE 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.
POTENTIAL EFFECTS OF OUR AGREEMENT WITH SOVEREIGN PARTNERS
PROCEEDS TO BE RECEIVED FROM SOVEREIGN PARTNERS. We have registered
1,500,000 shares of our common stock under this prospectus. We also have agreed
that Sovereign Partners is not required to pay more than a total of $5,000,000
for all of the shares it purchases from us. Since the price at which we will
sell our shares to Sovereign Partners is not fixed but is at a 15% discount to
the average market price of our common stock, the number of shares we sell to
Sovereign Partners and the proceeds we will receive will vary. In addition, we
are required to pay to Cardinal Capital 6% of the proceeds we receive from
Sovereign Partners as part of the fee for Cardinal Capital's efforts in
assisting us with our arrangement with Sovereign Partners. The following table
sets forth information concerning the number of shares of common stock we would
sell to Sovereign Partners and the proceeds we would receive, depending on the
average market price of our common stock at the times of sale.
<TABLE>
<CAPTION>
Net Proceeds after
Per Share Average Per Share Price Paid Number of Payment of
Market Price by Sovereign Partners Shares Sold Gross Proceeds Finders Fee
------------ --------------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$5.00 $4.25 1,176,471 $5,000,000 $4,700,000
$4.00 $3.40 1,470,588 $5,000,000 $4,700,000
$3.00 $2.55 1,500,000 $3,825,000 $3,595,500
$2.00 $1.70 1,500,000 $2,550,000 $2,397,000
$1.00 $0.85 1,500,000 $1,275,000 $1,198,500
</TABLE>
POTENTIAL SIGNIFICANT INCREASE IN NUMBER OF OUTSTANDING SHARES.
Although we only have registered for resale a total of 1,500,000 shares of our
common stock under this prospectus, the number of shares that we can require
Sovereign Partners to purchase from us may exceed such total. Our agreement
requires Sovereign Partners to purchase $5,000,000 of our shares. As the market
price for our common stock decreases, the number of shares which may be issued
increases. If we were to require Sovereign Partners to purchase our common stock
at a time when our stock price is depressed, our existing common shareholders
will experience substantial dilution. There is no minimum price at which we can
sell our common stock to Sovereign Partners. However, Sovereign Partners is not
required to purchase our common stock if the market price is below $1.00 per
share. If we sell a total of 1,500,000 shares to Sovereign Partners at a time
when the average market price is less than approximately $3.92, we will have
received less than the full amount that we are permitted to require Sovereign
Partners to purchase from us. If we determine to sell additional shares, we will
be required to file an additional registration statement. In addition, we cannot
issue more than 1,543,765 shares without shareholder approval The following
table sets forth the number of shares that we would be required to issue to
Sovereign Partners if we sold it the maximum amount of $5,000,000 based on a
range of stock prices. The table also shows the percentage that such shares
would constitute, immediately after such issuance, of the total number of shares
which we currently have outstanding.
4
<PAGE>
Per Share Average Per Share Price Paid Number of Percentage of
Market Price by Sovereign Partners Shares Issuable Outstanding(2)
------------ --------------------- --------------- --------------
$5.00 $4.25 1,176,471 12.9%
$4.00 $3.40 1,470,588 15.6%
$3.92 $3.33 1,500,000 15.8%
$3.01(1) $2.56 1,956,610 19.7%
$3.00 $2.55 1,960,784 19.7%
$2.00 $1.70 2,941,176 26.9%
$1.00 $0.85 5,882,353 42.4%
----------------
(1) Market price as of February 9, 1999.
(2) Based on 7,978,605 shares of common stock outstanding as of
February 9, 1999.
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF COMMON STOCK. The resale by
Sovereign Partners of the common stock that it purchases from us will increase
the number of our publicly traded shares, which could depress the market price
of our common stock. Moreover, as all the shares we sell to Sovereign Partners
will be available for immediate resale, the mere prospect of our sales to it
could depress the market price for our common stock .
PRIOR RELATIONSHIP WITH SOVEREIGN PARTNERS. In December 1997, when the
market price of our common stock was $7.00 per share, we completed a private
placement of 4,500 shares of convertible preferred stock, Class A warrants to
purchase 500,000 shares of common stock at $8.05 per share and Class B warrants
to purchase 135,000 shares of common stock at $9.10 per share. Sovereign
Partners purchased 44.4% of such securities and paid a total of $2,000,000,
excluding the purchase price for the common stock received upon exercise of the
Class A and B warrants. 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. The following table below
summarizes the securities sold to Sovereign Partners and the other investors:
<TABLE>
<CAPTION>
Sovereign Partners All Other Investors
------------------------------------- ----------------------------------------
Amount of Securities Common Stock Amount of Securities Common Stock
-------------------- issued upon -------------------- issued upon
Converted Conversion Converted/ Conversion
Issued Exercised/ or Exercise Issued Exercised or Exercise
------ ---------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock 2,000 2,000 839,322 2,500 2,500 1,148,300
Class A Warrants 140,000 140,000 140,000 360,000 185,000(1) 185,000
Class B Warrants 60,000 60,000 60,000 75,000 0(2) 0
--------- ---------
TOTAL - Common Stock 1,039,322 1,333,300
Percentage of shares 19.5% 25.0%
outstanding(3)
</TABLE>
- -----------------
(1) The unexercised Class A warrants expired on December 19, 1998.
(2) The Class B warrants expire on December 19, 2000.
(3) Based on 5,342,566 shares of common stock outstanding on the date the
private placement was completed (December 19, 1997).
5
<PAGE>
HISTORY OF LOSSES AND LACK OF SIGNIFICANT REVENUES
During our three fiscal years ended February 28, 1998 and the nine
months ended November 30, 1998, we incurred significant losses. Until market
acceptance of our products is established, which we cannot assure you will
occur, we expect to continue to incur significant losses due to our expenditures
for product development and the commercialization of our products. The following
table summarizes our total revenues and net losses since March 1, 1995.
Year Ended February 28,
-------------------------------------------- Nine Months Ended
1996 1997 1998 November 30, 1998
---- ---- ---- --------------------
Total revenues $1,786,115 $2,042,878 $1,890,666 $1,346,776
Net loss $4,161,336 $3,008,224 $5,974,828 $2,975,756
ADDITIONAL FUNDS MAY BE NEEDED FOR CONTINUED DEVELOPMENT
AND COMMERCIALIZATION OF OUR PRODUCTS
If any of our 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. This will require us to raise
substantial additional capital. From time to time, we also need capital for
research and development of new products. While we have identified potential
sources of capital, 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.
NO GUARANTEE THAT FUNDS WILL BE AVAILABLE FROM
OUR ARRANGEMENT WITH SOVEREIGN PARTNERS
As discussed below in the section "C-Phone Corporation - Recent
Financing Arrangement with Sovereign Partners," Sovereign Partners obligations
to purchase our common stock is subject to certain conditions. If these
conditions are not satisfied, we cannot require Sovereign Partners to purchase
our shares. 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 obligation to us, we may not be able to force it to do so.
As a result, we cannot assure you that we will receive any funds from our
agreement with Sovereign Partners.
6
<PAGE>
UNPROVEN MARKET FOR OUR PRODUCTS
We have no reliable data to assure us that there will be adequate
market acceptance of stand-alone video conferencing products in general, or of
our products in particular. As a result, we cannot assure you that our video
conferencing products will gain sufficient market acceptance to generate
significant revenues. Factors which could negatively impact the acceptance of
our product, include:
o less than complete "lip synchronization" when our product is used with
a regular (analog) telephone and is operated in high resolution mode.
o the higher cost associated with ISDN telephone lines as compared to
analog telephone lines, including the possible need for special
installation and higher monthly service fees.
o 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.
LIMITED SALES AND MARKETING CAPABILITIES
We do not currently possess all of the sales and marketing personnel
and capabilities necessary to fully commercialize our products. While we are
devoting a material portion of our available resources to expand our sales and
marketing capability, we cannot assure you that we will be successful. If we are
not successful, our financial condition and business will be significantly and
adversely effected.
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, video conferencing products are being developed by
a number of companies. Some of our competitors are more established, benefit
from greater market recognition and have significantly greater financial,
technological, manufacturing and marketing resources than us. We expect that our
video conferencing products will face substantial competition from both existing
and potential competitors. Existing competitors for our DS-324(TM) product line
include PictureTel Corporation, Polycom, Inc. and VTEL Corporation.
The primary competitor for our C-Phone Home(TM) product is 8x8, Inc., a
manufacturer of integrated video compression semiconductors and associated
software which sells a line of stand-alone video conferencing products using
analog telephone lines. In addition, 8x8 sells stand-alone video phones to
several third parties who resell the product under their own name, and licenses
its video phone 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. 8x8 also markets
a stand-alone 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.
These potential competitors sell television and/or telephone products into which
they may integrate video conferencing, thereby eliminating the need to purchase
a separate video conferencing product. As a result, we cannot assure you that we
will be able to compete successfully in the video phone or video conferencing
market.
7
<PAGE>
DEPENDENCE ON A LIMITED NUMBER OF KEY EMPLOYEES
Because we are a small, technology driven company we are heavily
dependent upon the efforts and talents of a limited number of people, including
Daniel Flohr, our Chief Executive Officer. Tina Jacobs, our Chief Operating
Officer, Stuart Ross, our Director of Engineering, and James Jarvis, our Vice
President of Sales and Marketing. If any of our key employees left us, we
believe that it would be difficult to replace them in a timely manner, if at
all. If we were unable to quickly replace key employees, our operations will be
significantly and adversely effected.
INEFFICIENT PRODUCTION LEVELS
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 a successful transition to higher production volume with
acceptable profit margins.
HISTORICAL DEPENDENCE ON FEW CUSTOMERS
Historically, we have relied on a small number of customers for a
significant amount of our business and our ten largest customers accounted for
over 60% of our total net revenues during the nine months ended November 30,
1998. A loss of any of these larger customers or a substantial reduction in
orders from any of these customers will substantially reduce our short-term
revenues and could significantly affect our operations, unless we are able to
obtain additional orders from new customers.
DEPENDENCE ON FOREIGN SALES
During the nine months ended November 30, 1998, almost 50% of our total
net revenues were from customers outside the United States. A reduction in the
volume of non-U.S. trade, any material restrictions on such trade or
fluctuations in foreign exchange rates could significantly reduce our revenues
from non-U.S. sales. 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 such minimum level of purchases. Therefore,
such distributors could reduce or curtail their purchases at any time without
financial penalty.
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SOLE SOURCE SUPPLIERS
The manufacturing of our products is subject to a variety of risk,
including:
o Reliance on a sole source of supply for certain components.
o Reliance on third party manufacturers and assemblers to manufacture
and/or assemble certain components and subassemblies.
o Reliance on third party manufacturers for certain specialized
subassemblies, some of which are manufactured outside of the United
States and only to customer order or are inventoried in limited
quantities.
If such sources of supply or manufacturers were to become unavailable,
we cannot assure you that other sources of supply or manufacturers 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. USE OF CONTRACT MANUFACTURERS
8
<PAGE>
We intend to rely on third party contract manufacturers to produce our
products, when and if market demand develops. This reliance involves risks,
including
o Reduced control over delivery schedules.
o The inability to ship product under "just-in-time" arrangements.
o Less control over quality assurance.
UNCERTAINTY DUE TO RAPID INTRODUCTION OF COMPETITIVE
PRODUCTS AND TECHNOLOGICAL CHANGES
The technology underlying video conferencing has been, and is expected
to continue to be, subject to rapid change, as new products are introduced and
different and standards are developed. Our success, if any, will depend in part
on our ability to respond quickly to new product developments by others and
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 are able to maintain such programs, we may not be able to
foresee and respond to technological advances in a timely manner, if at all.
There may be technological developments and new products introduced by
competitors which could render our then existing products noncompetitive or
obsolete.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The technology applicable to our products is developing rapidly. A
number of companies have filed applications for, or have been issued, patents
relating to products or technology that 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 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
LIMITED FINANCIAL RESOURCES TO ENFORCE AND DEFEND INTELLECTUAL PROPERTY RIGHTS
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, these actions may not be
adequate to deter misappropriation of our proprietary information, and we may
not have adequate financial resources to finance 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.
9
<PAGE>
COMPLIANCE WITH GOVERNMENT REGULATIONS
If we redesign or otherwise modify any of our products, or if current
regulations are revised, we may be required to have our products recertified by
the FCC or otherwise brought into compliance in order to continue selling such
products. We cannot assure you as to when, if ever, that any such redesigned or
modified products would continue to be in compliance with applicable
governmental regulations. In addition, we must comply with certain similar
requirements of various foreign government agencies to effect our foreign sales.
While our foreign distributors, as part of their distribution agreements, are
responsible for ensuring compliance with foreign government regulations, we
cannot assure you that they will do so. If our foreign distributors fail to
ensure such compliance, we may be unable to effect sales in their respective
countries as we do not have the necessary resources to ensure compliance outside
the Untied States.
CONTROL BY EXISTING PRINCIPAL SHAREHOLDERS
Our two principal executive officers, Daniel Flohr and Tina Jacobs,
beneficially owned, as of February 9, 1999, 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 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
A proceeding to cancel registration of our "C-Phone"(R) trademark is
pending before the U. S. Patent and Trademark Office's Trial and Appeal Board to
determine whether the use by us of our trademark is so confusingly similar to
the use by another company that we should not have been granted a registration
of the trademark. The Patent and Trademark Office registered the "C-Phone"
trademark to us in 1995. In August 1996, we were advised that the former
registered owner of the C-Phone trademark had filed a petition to cancel our
registration. The former owner's petition alleges that there was a likelihood of
confusion arising from our use of the trademark, and that its failure to file a
required affidavit was inadvertent. 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.
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF COMMON STOCK
As of February 9, 1999, we had a total of 7,978,605 shares of common
stock issued and outstanding, of which 6,854,930 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
ability to publicly resell these restricted shares may adversely affect
prevailing market prices for our common stock.
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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 our common stock include:
o actual or anticipated fluctuations in our operating results,
o changes in alliances or relationships with our customers,
o new products or technical innovations by us or by our existing or
potential competitors,
o trading activity and strategies occurring in the marketplace with
respect to our common stock,
o general market conditions and other factors unrelated to us or outside
of our control.
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. While we have identified critical all
of our third-party suppliers, we have not yet received from them adequate
assurance 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. 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. 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 on our common stock. For the
foreseeable future, we expect that our earnings, if any, will be retained 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.
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 under "Risk Factors" and
in the documents which we incorporate by reference, could cause materially
different results from those anticipated or projected:
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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.
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 of such document 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 obtained.
This prospectus is part of a registration statement filed with the SEC.
Our registration statement contains more information than this prospectus
regarding us and our common stock and includes supplemental exhibits and
schedules. You can obtain 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 following
documents:
o Annual Report on Form 10-KSB for our fiscal year ended February 28,
1998.
o Quarterly Reports on Form 10-QSB for our fiscal quarters ended May 31,
1998, August 31, 1998 and November 30, 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.
o Description of our common stock, which is 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,
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You also may obtain this information by telephoning Mr. Albritton at
(910) 395-6100.
This prospectus is accompanied by a copy of our Annual Report on Form
10-KSB for our fiscal year ended February 28, 1998 and our Quarterly Report on
Form 10-QSB for our most recent fiscal quarter.
C-PHONE CORPORATION
DESCRIPTION OF OUR BUSINESS
We are engaged primarily in the engineering, manufacturing and
marketing of video conferencing systems. In 1993, we introduced C-Phone, our
first PC-based video conferencing system, which operates over digital networks.
In 1997, we introduced C-Phone Home, a stand-alone set-top "video phone," which
operates over analog (or regular) telephone lines using a standard television
set. In early 1998, we introduced DS-324, a stand-alone video conferencing
system, which operates over either analog or digital telephone lines.
We presently market several stand-alone video conferencing products,
including:
o DS-324 for business and personal use.
o DS-324/Pro(TM) for business use and special applications.
o DS-324/AV(TM) for security and surveillance applications.
o DS-324/Multipoint System(TM) for distance learning and training
o C-Phone Home for individual home use.
We believe that our stand-alone products currently have greater market
potential than our PC-based products. Therefore, during the second quarter of
calendar 1998, we shifted our resources to our stand-alone 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 stand-alone products are marketed to end-users and to
distributors, resellers and original equipment manufacturers, who integrate the
product with other equipment for resale to specific industries such as health
care and security services.
RECENT FINANCING ARRANGEMENT WITH SOVEREIGN PARTNERS
On September 18, 1998, we entered into the private equity credit
agreement with Sovereign Partners. Pursuant to the agreement, Sovereign Partners
has agreed to purchase 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 $1,000,000 of our common stock until
all such purchases total $5,000,000 The purchase price for each share will equal
85% of the average closing bid price of our common stock during the five trading
days immediately preceding the day we notify Sovereign Partners of a purchase
obligation.
Sovereign Partners' obligation to purchase shares of our common stock
is subject to certain conditions, including:
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o The average closing bid price of our common stock has been at least
$1.00 per share for the 20 trading days preceding the date of our
notice of purchase to Sovereign Partners.
o Our common stock continues to be traded on The Nasdaq Stock Market.
o The total number of shares that we may sell to Sovereign Partners under
the agreement cannot exceed 1,543,765 shares, unless we have obtain
shareholder approval as required by the rules of The Nasdaq Stock
Market., Inc. We do not presently intend to sell Sovereign Partners
more than 1,500,000 shares. Accordingly, this prospectus only covers
such number of shares. If we decide in the future to sell additional
shares to Sovereign Partners, we must first file another registration
statement covering such additional shares and obtain approval from our
shareholders to sell any of such additional shares in excess of a total
of 1,543,765 shares.
o The number of shares we may sell to Sovereign Partners on any draw
date, when aggregated with all other shares then owned by Sovereign
Partners that it purchased under the agreement, cannot exceed 9.9% of
the total common stock we then have outstanding.
o This prospectus must continue to be available to permit Sovereign
Partners to publicly resell the shares that it acquires from us under
the agreement.
We may terminate the agreement without any further obligation to
Sovereign Partners at any time after we have sold it at least $1,000,000 of
common stock. If we terminate the agreement prior to such time, we must pay
Sovereign Partners a penalty of up to $150,000, depending upon the amount of
such shortfall. Sovereign Partners has agreed not to engage in any short sales
of our common stock, 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 it purchases under the agreement. If we fail to
do so, Sovereign Partners may require us to pay a penalty equal to 1% of the
purchase price of the shares then held by Sovereign Partners for each 30-day
period that the registration statement is not effective.
In connection with the agreement, we issued to Cardinal Capital, as
finder, a two-year warrant to purchase 100,000 shares of common stock at an
exercise price of $8.00 per share. If the closing sales price of our common
stock exceeds $10.00 for five consecutive trading days, we may give Cardinal
Capital notice of our intention to redeem the warrant. In Cardinal Capital does
not exercise the warrant prior to the redemption date specified in our
redemption notice, we may redeem the warrant for $1,000. We also paid Cardinal
Capital a cash fee of $30,000 and have agreed to pay Cardinal Capital an
additional cash fee equal to 6% of the dollar amount of any sales of common
stock to Sovereign Partners under the agreement, with our initial $30,000
payment to be credited against such fee.
Sovereign Partners is an "underwriter" within the meaning of the
Securities Act in connection with its resale of shares of our common stock under
this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the resale of our common stock by
Sovereign Partners or Cardinal Capital. However, we will receive proceeds from
our sale of common stock to Sovereign Partners under the agreement and from the
exercise of the warrant issued to Cardinal Capital. We could receive up to
$5,000,000 under the agreement with Sovereign Partners and up to $800,000 from
the exercise of the warrant, before payment of any fees and expenses we have
incurred or in the future may incur. We cannot assure you that we will, or will
14
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be allowed to, require Sovereign Partners to purchase any of our common stock or
that the warrant will be exercised. The decision to exercise the warrant is
within the sole discretion of the Cardinal Capital.
Any net proceeds we receive from the sales of our common stock will be
used for general corporate purposes and working capital, including for the
marketing of our stand-alone 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 as of February 9,
1999.
The shares being offered by Sovereign Partners consist of shares of
common stock that it may purchase from us pursuant to the private equity credit
agreement. For additional information about the agreement, see "C-Phone
Corporation - Recent Financing Arrangement with Sovereign Partners." Steven
Hicks and Daniel Pickett are the principal members of Southridge Capital
Management LLC, the sole general partner of Sovereign Partners. In such
capacity, Southridge Capital and each of Messrs. Hicks and Pickett may be deemed
to own all the shares of common stock beneficially owned by Sovereign Partners.
Southridge Capital and Messrs. Hicks and Pickett each disclaim beneficial
ownership of such shares. 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. Sovereign
Partners does not beneficially own any of our common stock other than the shares
it may be required to purchase pursuant to the private equity credit agreement.
The shares being offered by Cardinal Capital consist of shares of
common stock that it may acquire upon exercise of the warrant we issued to it as
finder. Scott F. Koch is the President and sole shareholder of Cardinal Capital.
In such capacity, Mr. Koch may be deemed to beneficially own all the shares of
common stock beneficially owned by Cardinal Capital. Mr. Koch disclaims
beneficial ownership of such shares. For additional information about the
warrant, see "C-Phone Corporation - Recent Financing Arrangement with Sovereign
Partners." One of the officers of Cardinal Capital 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. Cardinal Capital does not beneficially own any of our
common stock other than the shares it may acquire upon exercise of the warrant.
Except for these relationships, neither Sovereign Partners nor Cardinal
Capital has had a material relationship with us or any of our affiliates within
the past three years.
<TABLE>
<CAPTION>
SHARES OF COMMON
SHARES OF COMMON STOCK STOCK TO BE
BENEFICIALLY OWNED SHARES OF COMMON BENEFICIALLY OWNED
NAME OF SELLING SHAREHOLDER PRIOR TO THE OFFERING STOCK BEING OFFERED(1) AFTER THE OFFERING(1)
- --------------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Sovereign Partners, L.P. 1,500,000 1,500,000 0
Cardinal Capital Management, Inc. 100,000 100,000 0
</TABLE>
- ----------------
(1) Assumes the sale of all the shares of common stock which are being
offered pursuant to this prospectus.
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PLAN OF DISTRIBUTION
MANNER OF SALES; BROKER-DEALER COMPENSATION.
Sovereign Partners and Cardinal Capital may resell any shares of common
stock that they acquire from us pursuant to the private equity credit agreement
or upon exercise of the warrant. They may elect to sell any such shares in
privately negotiated transactions or in the over-the-counter market through
brokers and dealers. Such brokers and dealers may act as agent or as principals
and may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders or from the purchasers of their shares
of common stock for whom the broker-dealers may act as agent or to whom the
broker-dealers may sell as principal, or both. The selling shareholders also may
sell the shares in reliance upon Rule 144 under the Securities Act at such times
as they are eligible to do so. We have been advised by the selling shareholders
that they have not made any arrangements for the distribution of the shares of
common stock. Broker-dealers who effect sales for the selling shareholders may
arrange for other broker-dealers to participate. Broker-dealers engaged by the
selling shareholders will receive commissions or discounts from them in amounts
to be negotiated prior to the sale.
FILING OF SUPPLEMENT TO PROSPECTUS IN CERTAIN INSTANCES.
If either selling shareholder notifies us that it has entered into a
material arrangement (other than a customary brokerage account agreement) with a
broker or dealer for the sale of shares of common stock under this prospectus
through a block trade, purchase by a broker or dealer or similar transaction, we
will file a supplement to this prospectus under Rule 424(c) under the Securities
Act. Such a supplement will disclose:
o The name of each such broker-dealer.
o The number of shares involved.
o The price at which those shares were sold.
o The commissions paid or discounts or concessions allowed to such
broker-dealer(s).
o If applicable, that such broker-dealer(s) did not conduct any
investigation to verify the information contained or incorporated by
reference in this prospectus, as supplemented.
o Any other facts material to the transaction.
CERTAIN PERSONS DEEMED TO BE UNDERWRITERS
Sovereign Partners is an "underwriter" within the meaning of the
Securities Act in connection with the sale of the shares it may receive pursuant
to the agreement. Any broker-dealers that participate with Sovereign Partners in
the sale of those shares may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales. Accordingly, any discounts,
concessions or commissions received by them or by brokers or dealers acting on
their behalf and any profits received by them on the resale of their shares of
common stock might be deemed to be underwriting discounts and commissions under
the Securities Act.
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REGULATION M
We have informed the selling shareholders that Regulation M promulgated
under the Securities Exchange Act may be applicable to them with respect to any
purchase or sale of our common stock. In general, Rule 102 under Regulation M
prohibits any person connected with a distribution of our common stock (a
"Distribution") from directly or indirectly bidding for, or purchasing for any
account in which it has a beneficial interest, any of our common stock or any
right to purchase our common stock for a period of one business day before and
after completion of its participation in the Distribution (we refer to that time
period as the "Distribution Period").
During the Distribution Period, Regulation M prohibits the selling
shareholders and any other persons engaged in the Distribution from engaging in
any stabilizing bid or purchasing our common stock except for the purpose of
preventing or retarding a decline in the open market price of our common stock.
No such person may effect any stabilizing transaction to facilitate any offering
at the market. Inasmuch as the selling shareholders will be reoffering and
reselling our common stock at the market, Regulation M prohibits them from
effecting any stabilizing transaction in contravention of Regulation M with
respect to our common stock.
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.
COMMON STOCK. The holders of the our common stock have one vote per
share. Such holders 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 February 9, 1999, we had a total of
7,978,605 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, the rights and preferences of such series, which may
include:
o Dividend rate and whether dividends shall be cumulative.
o Voting rights, if any.
o Redemption price, if any.
o Amount payable in the event of involuntary or voluntary liquidation.
o Terms and conditions on which shares of preferred stock may be
converted if the shares of that series are convertible
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Our Board previously designated 5,000 preferred shares as Series A
Preferred Stock, of which 4,500 shares were issued to the investors in our
December 1997 private placement. All of such shares were converted prior to
November 30, 1998. Accordingly, we have no preferred shares outstanding.
LEGAL MATTERS
The law firm of Warshaw Burstein Cohen Schlesinger & Kuh, LLP will give
its opinion on the validity of our 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
Our financial statements as of February 28, 1998 and 1997 and for the
three fiscal years ended February 28, 1998, incorporated in this prospectus
constituting part of the registration statement on Form S-2 by reference to our
Annual Report on Form 10-KSB for the fiscal 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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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 ......................................... 25,000
Accounting fees and expenses .................................... 10,000
Miscellaneous expenses .......................................... 1,596
-------
Total .................................................. $38,000
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 722 of the New York Business Corporation Law
(the "BCL"), Article SIXTH of C-Phone'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 C-Phone'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)
II-1
<PAGE>
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 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 C-Phone 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 C-Phone, or is or was
serving at the request of C-Phone 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 C-Phone, 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 C-Phone 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 C-Phone'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
C-Phone'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.
C-Phone 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.
II-2
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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.
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. (previously filed)
ITEM 17. UNDERTAKINGS.
C-Phone hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of C-Phone'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.
C-Phone 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.
II-3
<PAGE>
(iii) Include any additional or changed material
information on the plan of distribution.
provided, however, that C-Phone 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 C-Phone 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 C-Phone pursuant to the foregoing provisions, or otherwise, C-Phone
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.
In the event that a claim for indemnification against such liabilities
(other than the payment by C-Phone of expenses incurred or paid by a director,
officer or controlling person of C-Phone 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, C-Phone 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 Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Wilmington, State of North Carolina,
on February 10, 1999.
C-PHONE CORPORATION
By: /s/ PAUL H. ALBRITTON
-------------------------------------
Paul H. Albritton
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Dated:
February 10, 1999 *
--------------------------------------------
Daniel P. Flohr
President, Chief Executive Officer
and Director (Principal Executive Officer)
February 10, 1999 *
--------------------------------------------
Tina L. Jacobs
Director
February 10, 1999 *
--------------------------------------------
Seymour L. Gartenberg
Director
February 10, 1999 *
--------------------------------------------
E. Henry Mize
Director
February 10, 1999 *
--------------------------------------------
Donald S. McCoy
Director
February 10, 1999 *
--------------------------------------------
Stuart E. Ross
Director
February 10, 1999 /s/ Paul H. Albritton
--------------------------------------------
Paul H. Albritton
Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
*By: /s/ Paul H. ALBRITTON
--------------------------------------------
Paul H. Albritton
attorney-in-fact
II-5
EXHIBIT 5
WARSHAW BURSTEIN COHEN
SCHLESINGER & KUH, LLP
555 Fifth Avenue
New York, New York 10017
Telephone: (212) 984-7700
Facsimile: (212) 972-9150
February 10, 1999
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, Registration No. 333-68865 (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 the Investor and (b) 100,000 shares of Common Stock (the "Warrant Shares")
issuable upon exercise of the common stock purchase warrant (the "Warrant"),
dated September 18, 1998 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 Agreement, 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, will be validly
issued, fully paid and non-assessable; and
<PAGE>
(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.
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.
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
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectus
constituting part of this Amendment No. 1 to the 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.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 10, 1999
