-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SKuEN81mxFfCV3GdbehTJuz9OUpvLLE9tsXp0qv6LS0KuHD9NFg/091af9PkxxsO AGdUAncIxze84JiMoINY5Q== 0001019056-97-000058.txt : 19970403 0001019056-97-000058.hdr.sgml : 19970403 ACCESSION NUMBER: 0001019056-97-000058 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 19970402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: C-PHONE CORP CENTRAL INDEX KEY: 0000835585 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 061170506 STATE OF INCORPORATION: NY FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24426 FILM NUMBER: 97573278 BUSINESS ADDRESS: STREET 1: 6714 NETHERLANDS DRIVE CITY: WILMINGTON STATE: NC ZIP: 28405 BUSINESS PHONE: 9103956100 MAIL ADDRESS: STREET 1: 6714 NETHERLANDS DR CITY: WILMINGTON STATE: NC ZIP: 28405 FORMER COMPANY: FORMER CONFORMED NAME: TARGET TECHNOLOGIES INC DATE OF NAME CHANGE: 19940615 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): March 31, 1997 -------------- C-Phone Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 0-24424 06-1170506 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (Commission) (IRS Employer of Incorporation) File Number) Identification No.) 6714 Netherlands Drive, Wilmington, North Carolina 28405 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (910) 395-6100 -------------- - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 5. OTHER EVENTS ------------ Pursuant to previously commenced ongoing discussions with Josephthal Lyon & Ross Incorporated ("JLR"), on March 31, 1997, C-Phone Corporation (the "Company") entered into a private placement agreement with JLR pursuant to which JLR agreed to act as placement agent for a private placement (the "Placement") of a minimum of $3,400,000, and a maximum of $5,000,000, of the Company's securities, consisting of shares of the Company's common stock ("Common Stock"), par value $.01 per share (initially valued at $6.00 per share), plus the right, under certain circumstances, to receive additional shares of Common Stock pursuant to the terms of "contingent value rights" (the "Rights") granted to the participants in the Placement (the shares of Common Stock sold in the Placement (the "Original Shares") and the Rights being, collectively, the "Securities"). The Company has granted the participants in the Placement (the "Investors"), holding in the aggregate at least 33-1/3% of the Securities sold in the Placement, one right to request, at any time subsequent to 15 days after the purchase of their Securities, on behalf of all of the Investors, the registration of the Original Shares and the shares of Common Stock issuable upon exercise of the Rights. The Company has agreed that, in such event, it will (i) within five days thereafter, prepare and file, at the Company's expense, a registration statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933 (the "1933 Act") with respect to such shares of Common Stock, (ii) thereafter use its reasonable best efforts to have the Registration Statement declared effective by the Securities and Exchange Commission, and (iii) use its reasonable best efforts to maintain the Registration Statement current for the lesser of one year after the date that the Registration Statement is declared effective (the "Effective Date"), or until the securities included in the Registration Statement had been sold thereunder. The Rights are automatically exercised at the time, and from time to time, as the Original Shares are first publicly sold through a broker dealer after the Effective Date, and expire one year after the Effective Date. The terms of the Rights provide that, upon the first such sale of any Original Shares at a price of less than $8.00 per share, the seller of the Original 2 Shares will automatically receive, for each such share sold, without the payment of any additional consideration, such additional number of shares of Common Stock as equals (i) $8.00 divided by the Adjusted Price, minus (ii) one; where the Adjusted Price will equal the greater of (x) the average closing bid price per share of Common Stock on The Nasdaq National Market (the "NNM") for the ten trading days immediately preceding the date of sale of the Original Shares, or (y) $2.00. In accordance with the rules of the NNM, the Company is required to obtain shareholder approval prior to the issuance of any shares of Common Stock, in excess of approximately 870,000 shares of Common Stock, issued or issuable to the Investors in connection with the Placement; the Company has agreed with the Investors to include a proposal for such approval on the agenda for its 1997 Annual Meeting of Shareholders, currently scheduled for early August. On March 31, 1997 and April 1, 1997, the Company completed the first tranche of the Placement, in which the Company received gross proceeds of an aggregate of $4,012,000 from the sale of an aggregate of 668,667 shares of Common Stock and associated Rights. In addition, the Company expects, in the near future, to complete the remainder of the Placement pursuant to which it would receive net proceeds of $988,000 from the sale of an aggregate of approximately 164,667 additional shares of Common Stock and associated Rights. In connection with the Placement, Daniel Flohr, Chairman, President and Chief Executive Officer of the Company, delivered to the JLR, as escrow agent for the Investors, an aggregate of 250,000 of his own shares of Common Stock, which shares will be forfeited, at the rate of 1,000 shares a day, if the Effective Date of the Registration Statement does not occur within 95 days after the Company receives a demand from the Investors to prepare the Registration Statement; and, in the event that the Effective Date does not occur with 185 days after the Company receives such demand, the remaining escrowed shares will be forfeited. The Company has agreed to pay JLR for its services (i) 9% of the gross proceeds received by the Company in the Placement, (ii) reimbursement of JLR's out-of-pocket expenses, not to exceed $25,000, and (iii) warrants (the "Warrants") to acquire an aggregate of 150,000 shares of Common Stock at an 3 exercise price of $9.60 per share (120% of the closing bid price for the Common Stock on the NNM on the trading day immediately prior to the first closing of the Placement). The Warrants expire 90 days after the Effective Date, and the shares of Common Stock issuable upon exercise of the Warrants are to be included in the Registration Statement. The Securities were offered for sale, and were sold, without registration thereof under the 1933 Act, pursuant to the exemption from registration provided by Regulation D under the 1933 Act. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS --------------------------------- (c) Exhibits 1. Placement Agent Agreement, dated March 31, 1997, between C-Phone Corporation and Josephthal Lyon & Ross Incorporated. 2. Form of Securities Purchase Agreement, dated March 31, 1997, between C-Phone Corporation and each subscriber party thereto, with terms of Contingent Value Rights granted thereby attached thereto. 3. Form of Registration Rights Agreement, dated March 31, 1997, between C-Phone Corporation and each subscriber party thereto. 4. Placement Agent Warrant Agreement, dated March 31, 1997, between C-Phone Corporation and Josephthal Lyon & Ross Incorporated. 5. Stock Pledge Agreement, dated March 31, 1997, between C-Phone Corporation and Josephthal Lyon & Ross Incorporated, as agent. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. C-PHONE CORPORATION /s/ Daniel P. Flohr -------------------------- By: DANIEL P. FLOHR President and Chief Executive Officer Date: April 1, 1997 5 EX-1 2 EXHIBIT 1 - PLACEMENT AGENT AGMT PLACEMENT AGENT AGREEMENT March 31, 1997 Josephthal Lyon & Ross Incorporated 200 Park Avenue, 24th Fl. New York, New York 10166 Dear Sirs: The undersigned C-Phone Corporation, a New York corporation (the "Company"), hereby agrees with Josephthal Lyon & Ross Incorporated ("Josephthal" or "Placement Agent") as follows: 1. BEST EFFORTS OFFERING. The Company hereby engages Josephthal to act as its exclusive agent during the term of the offering (the "Offering") as outlined herein to sell, in an aggregate offering of not less than $3,400,000 nor more than $5,000,000 on a "best efforts" basis, shares of common stock of the Company (the "Common Stock") at a purchase price per share of Common Stock equal to the lesser of (a) $6.00, and (b) 75% of the average of the closing bid price of the Company's Common Stock for the 10 trading days immediately preceding the date on which the Contingent Value Right referred to immediately below is exercised; provided, however, that in no event shall the purchase price be reduced to less than $2.00 per share. Upon the closing of the Offering (the "Closing"), investors shall receive certificates representing (a) the Common Stock on the basis of a $6.00 per share purchase price, and (b) the Contingent Value Right, exercisable for a period of one (1) year from the effective date of the Registration Statement (as defined below), entitling them to such additional number of shares of Common Stock as may be issuable pursuant to the formula set forth above. Holders of Common Stock sold in the Offering shall have one demand registration right with respect to their shares, exercisable at the request of holders of at least 33-1/3% of the shares issued in the Offering. Such demand is exercisable at any time commencing 15 days after the Closing. The Company shall pay all of the fees, expenses and disbursements of such demand registration, except for (i) any commissions which may be payable by an investor, and (ii) fees, expenses and disbursements of counsel to any investor. The Company shall prepare and file a registration statement (the "Registration Statement") with the Securities and Exchange Commission ("SEC") within 5 days of receipt of notice of such demand, which Registration Statement shall include the maximum number of shares of Common Stock issued and potentially issuable in the Offering. In the event that investors in the Offering are entitled to any shares of Common Stock in excess of 870,000 shares minus the number of Shares delivered on the Closing pursuant to the terms of the Contingent Value Rights, then the Company agrees (i) to include in its proxy materials for the Company's regularly scheduled 1997 Annual Meeting of Shareholders to be held no later than August 30, 1997, a proposal to authorize the issuance of such additional shares, (ii) to use its best efforts to obtain timely clearance from the SEC of such proxy materials, (iii) to mail such proxy materials in a timely manner and (iv) to use its best efforts to cause the Company's board of directors to recommend (and not subsequently withdraw) approval of such Proposal to shareholders. The Company shall use its reasonable best efforts to have the Registration Statement declared effective as promptly as practicable. The effectiveness of the Registration Statement shall be maintained current until the earlier of (a) all of the shares of Common Stock included therein have been sold, or (b) one year from the date on which it was declared effective. As collateral security to ensure compliance by the Company of its registration obligations hereunder, Dan Flohr, the Company's Chairman of the Board and Chief Executive Officer, shall enter into a Stock Pledge Agreement in the form annexed hereto as Exhibit A, pursuant to which he shall pledge 250,000 shares of Common Stock. In the event that for whatever reason the Registration Statement is not declared effective by the SEC within 95 days following receipt by the Company of the demand notice, then for each day subsequent to such 95th day for which the Registration Statement is not declared effective, the investors, through the escrow agent, shall be entitled to foreclose on 1,000 shares of Common Stock, up to a maximum of 90 days, or 90,000 shares. If, on the 186th day following the Company's receipt of such demand notice the Registration Statement has not yet been declared effective, then the investors through the escrow agent, may foreclose on the remaining 160,000 shares. The Common Stock will be offered in units of $500,000 each, but fractional units may be offered in the joint discretion of the Company and the Placement Agent. The Common Stock shall be offered without registration under the Securities Act of 1933, as amended (the "Act") pursuant to the exemption from registration created by Regulation D thereof, and shall be offered to "accredited investors" only, as such term is defined pursuant to Regulation D. 2. OFFERING DOCUMENT. The Company has prepared a confidential draft, dated March 28, 1997 of a proposed Form S-3 Prospectus contained in the Company's proposed Post-effective Amendment No. 1 on Form S-3 to the Company's registration statement on Form S-1 (registration no. 33-80280) (the "Disclosure Document"), which shall be in form and substance reasonably satisfactory to Josephthal. The Company agrees that it shall modify or supplement the Disclosure Document during the course of the offering to insure that the Disclosure Document does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. Josephthal will not make any use of the Disclosure Document other than for purposes of implementing this Agreement, nor will it or any of its agents, employees or participating soliciting dealers use the same or do any other act or thing in the course of the offering or sale hereunder which would constitute a violation of the Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") or any "Blue Sky" laws or regulations applicable to the offering and sale. Josephthal shall use its reasonable best efforts to deliver the Disclosure Document only to those entities whom it reasonably believes to be "accredited investors" (as such term is defined in Regulation D under the Act) and who Josephthal reasonably believes have an interest in participating in the offering contemplated hereby. 2 3. COMPENSATION. You will be paid at the Closing a cash commission of nine percent (9%) of the subscription price of the Common Stock sold by or through you. In addition, you will receive an expense allowance of up to $25,000, to cover your expenses of this Offering including legal fees and disbursements, but exclusive of any "Blue Sky" legal fees or disbursements or filing fees. In addition, you shall receive 100,000 warrants (the "Josephthal Warrants"), each of which shall entitle you to purchase one share of the Company's Common Stock at an exercise price of 120% of the closing bid price of the Common Stock on the date immediately preceding the Closing. The Josephthal Warrants shall be exercisable for a period of 90 days following the effective date of the Registration Statement, and the Common Stock underlying the Josephthal Warrants shall be included in the Registration Statement. If, the Placement Agent delivers a copy of the Disclosure Document to an investor who does not participate in the Offering but who purchases from the Company in a private placement within one (1) year after the date hereof any securities of the Company which are different from those being offered hereunder, the Placement Agent shall be entitled to compensation which it would obtain hereunder on the same basis as it would have been entitled if it had arranged for the sale of a comparable dollar amount of securities offered hereunder. 4. EXPENSES. Whether or not this Offering is successfully completed, it shall be the Company's obligation to bear all of its expenses in connection with the proposed offering, including, but not limited to, the following: filing fees, printing and duplicating costs, the Company's and, subject to the provisions of the first paragraph of Section 3, your postage and delivery expenses, registrar and transfer agent fees, reasonable counsel and accounting fees of the Company, issue and transfer taxes, if any, and "Blue Sky" counsel fees and expenses. The "Blue Sky" legal work shall be handled by the Company's counsel for the Company's account. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company represents, warrants and agrees that (i) it is authorized to enter into this Agreement and to carry out the offering contemplated hereunder and this Agreement constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, (ii) there is no finder in connection with this Offering, (iii) the Company will deliver at the Closing (a) a certificate of each of the Company's President and Treasurer to the effect that the Disclosure Document conforms to the requirements hereof and has been modified or supplemented as required by Paragraph 2 hereof and does not contain any untrue statement of material fact or fail to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and all necessary corporate approvals have been obtained to enable the Company to deliver the Common Stock in accordance with the terms of the offering and (b) an opinion of counsel for the Company to the effect that to the best of their knowledge the Disclosure Document conforms to the requirements hereof and does not (except with respect to the financial statements or forecasts as to which no opinion need be expressed) contain any untrue statement of material fact or fail to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and such other opinions as Josephthal shall reasonably require. 3 6. INDEMNIFICATION. (a) Subject to the conditions set forth below, the Company and Josephthal hereby agree that they will indemnify and hold harmless each other and each director, officer, shareholder, employee or representative thereof and each person controlling, controlled by or under common control with such party within the meaning of Section 15 of the Act or Section 20 of the 1934 Act,(individually, an "Indemnified Person") from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any claim, action, suit or proceeding (collectively, a "Claim"), including any inquiry or investigation, commenced or threatened, or in appearing or preparing for appearance as a witness in any Claim including any inquiry, investigation or pretrial proceeding such as a deposition) (collectively, a "Loss") to which such Indemnified Person may become subject under the Act, the 1934 Act or other federal or state statutory law or regulation at common law or otherwise, arising out of an act or omission of the other party related to (i) this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Disclosure Document (except those statements given in writing by an Indemnified Person expressly for inclusion therein) or omission of a material fact from the Disclosure Document, or (iii) the breach of any representation or warranty made by the other party in this Agreement. Each party further agrees that upon demand by an Indemnified Person at any time or from time to time, it will promptly reimburse such Indemnified Person for any Loss actually and reasonably paid by the Indemnified Person as to which the other party has indemnified such Indemnified Person pursuant hereto. Notwithstanding the foregoing provisions of this Paragraph 6, any such payment or reimbursement by the other party of fees, expenses or disbursements incurred by an Indemnified Person in any Claim in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against such Indemnified Person as a direct result of such person's gross negligence, bad faith or willful misfeasance will be promptly repaid to the other party. (b) Promptly after receipt by an Indemnified Person under paragraph (a) above of notice of the commencement of any Claim, such Indemnified Person will, if a claim in respect thereof is to be made against the other party under paragraph (a), notify the other party in writing of the commencement thereof. In case any such Claim is brought against any Indemnified Person, such Indemnified Person promptly shall notify the other party of the commencement thereof, and the other party shall assume the defense thereof with counsel reasonably satisfactory to such Indemnified Person; provided, however, that if the defendants in any such action include both the Indemnified Person and the other party or any corporation controlling, controlled by or under common control with the other party, or any director, officer, employee, representative or agent of any thereof, and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to such other defendant, the Indemnified Person shall have the right to select separate counsel to represent it, and the other party shall pay the reasonable fees and expenses of such separate counsel. Failure of the Indemnified Person to so notify the other party shall not relieve the other party from any obligation it may have hereunder, unless and only to the extent such failure results in the forfeiture by the other party of substantial rights and defenses and will not in any event relieve the other party from any other obligation or liability it may have to any Indemnified Person otherwise than under this Agreement. 4 Each party further agrees that it will not, without the prior written consent of the relevant Indemnified Person, settle, compromise or consent to the entry of any judgment in any pending or threatened Claim in respect of which indemnification may be sought hereunder (whether or not any Indemnified Person is a party to such Claim), unless such settlement, compromise or consent includes an unconditional, irrevocable release of each Indemnified Person from any and all liability arising out of such Claim. (c) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in paragraph (a) of this Paragraph 6 is due in accordance with its terms, but is for any reason held by a court to be unavailable on grounds of policy or otherwise, the Company and Josephthal shall contribute to the aggregate Losses to which the Company and Josephthal may be subject in such proportion so that Josephthal is responsible for that portion represented by the percentage that the aggregate of its commissions actually received under this Agreement bears to the aggregate offering price for all shares of Common Stock sold under the Disclosure Document and the Company is responsible for the balance, except as the Company may otherwise agree to reallocate a portion of such liability with respect to such balance with any other person; provided, however, that no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (c), any person controlling, controlled by or under common control with Josephthal, or any partner, director, officer, employee, representative or any agent of any thereof, shall have the same rights to contribution as Josephthal and each person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the 1934 Act, each officer of the Company and each director of the Company shall have the same rights to contribution as the Company. Any party entitled to contribution shall, promptly after receipt of notice of commencement of any Claim against such party in respect of which a claim for contribution may be made against the other party under this paragraph (c), notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this paragraph (c). The indemnity and contribution agreements contained in this Paragraph 6 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Indemnified Person or any termination of this Agreement. 7. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement is delivered in the State of New York and shall be construed and enforced in accordance with and governed by, the laws of the State of New York, without giving effect to its conflict of law principles. The parties hereto hereby agree that any action, proceeding or claim against it arising out of or of or in any way related to this Agreement shall be brought and enforced in the courts of the State of New York or the United States of America for the Southern District of New York and irrevocably submits to such exclusive jurisdiction, and hereby irrevocably waives any objection to such exclusive jurisdiction and waives any objection or claim that the same may be an inconvenient forum. 5 (b) COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (c) NOTICES. Whenever notice is required to be given pursuant to this Agreement, such notice shall be in writing and shall either be (i) mailed by first class mail, postage prepaid, addressed (a) if to Josephthal, at the address set forth at the head of this Agreement, Attention: Dan Purjes, Chairman; and (b) if to the Company, 6714 Netherlands Drive, Wilmington, NC 28405; Attention: Dan Flohr, Chairman, or (ii) delivered personally or by express courier. The notice shall be deemed given, if sent by mail, on the third day after deposit in a United States post office receptacle, or if delivered personally or by express courier, then upon receipt. (d) AMENDMENTS. This Agreement may not be amended, modified or waived, except in a writing signed by all of the parties hereto. If the foregoing correctly sets forth the understanding between Josephthal and the Company, please so indicate in the space provided below for that purpose whereupon this Agreement shall constitute a binding agreement between us. Very truly yours, C-PHONE CORPORATION By: /s/ Daniel Flohr -------------------- Daniel Flohr President and CEO Confirmed and agreed to: JOSEPHTHAL LYON & ROSS INCORPORATED By: /s/ Scott Weisman ---------------------- Scott Weisman Senior Managing Director Director of Investment Banking 6 EX-2 3 EXHIBIT 2 - SECURITIES PURCHASE AGMT. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS SECURITIES PURCHASE AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE 1933 ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. SECURITIES PURCHASE AGREEMENT C-PHONE CORPORATION THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is executed in reliance upon the transaction exemption afforded by Regulation D as promulgated by the Securities and Exchange Commission (the "SEC"), under the Securities Act of 1933, as amended, including the rules and regulations thereunder (the "1933 Act"). This Agreement has been executed by the undersigned in connection with the private placement of shares (the "Shares") of common stock ("Common Stock"), $.01 par value per share, and accompanying contingent value rights (the "Rights" and with the Shares hereinafter referred to as the "Securities"), of C-PHONE CORPORATION (NASDAQ symbol "CFON"), located at 6714 Netherlands Drive, Wilmington, NC 28405, a corporation organized under the laws of the State of New York, USA (hereinafter referred to as the "Company"). This Agreement and the offer and sale of the Securities are being made in reliance upon the provisions of Regulation D under the 1933 Act. The undersigned subscriber listed on the signature page hereto (hereinafter referred to as "Subscriber"), hereby represents and warrants to, and agrees with, the Company as follows: 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. (a) Purchase of Shares. Subject only to the conditions set forth in Section 15 hereof, Subscriber hereby agrees to purchase from the Company shares of Common Stock at an aggregate purchase price of -------------- U.S. Dollars (US$---------) (the "Purchase Price"), which number of shares shall be determined by multiplying (i) the number of Shares purchased hereby and (ii) a share price of Six Dollars ($6.00), subject to adjustment pursuant to Section 1(b) below. As set forth in Section 6, the Company is granting the Subscriber certain registration rights with respect to the Securities. (b) Rights. In addition to the issuance of the Shares, the Company shall issue to Subscriber for no additional consideration the Rights upon the terms attached hereto as Attachment A, which is incorporated herein by reference and made a part hereof. (c) Form of Payment. Subscriber shall pay the Purchase Price by delivering good funds in United States Dollars by intra-account transfer or wire transfer, unless the Company shall otherwise agree, against delivery of the Securities in accordance with the instructions provided to the Subscriber by the Company. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SUBSCRIBER. Subscriber acknowledges, represents, warrants and agrees as follows: (a) ORGANIZATIONS AND AUTHORIZATION. If Subscriber is not a natural person, (i) Subscriber is duly incorporated or organized and validly existing in the state or country of its incorporation or organization and has all requisite power and authority to purchase and hold the Securities, (ii) the decision to invest and the execution and delivery of this Agreement by Subscriber, the performance by Subscriber of its obligations hereunder and the consummation by Subscriber of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of Subscriber, and (iii) Subscriber's signatory has all right, power and authority to execute and deliver this Agreement on behalf of Subscriber. This Agreement has been duly executed and delivered by Subscriber and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of Subscriber, enforceable against Subscriber in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting the rights of creditors generally and available equitable remedies. (b) EVALUATION OF RISKS. Subscriber has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. (c) INDEPENDENT COUNSEL. Subscriber acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Securities. (d) NO REGISTRATION, REVIEW OR APPROVAL. Subscriber acknowledges and understands that the limited private offering and sale of the Securities pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the 1933 Act or under the securities or "blue sky" laws, rules or regulations of any state. Subscriber acknowledges, understands and agrees that the Securities are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the 1933 Act pursuant to Section 3(b) or Section 4(2) of the 1933 Act and Regulation D promulgated under the 1933 Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the 1933 Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. (e) INVESTMENT EXPERIENCE. Subscriber is an "accredited investor" as defined in Rule 501(a) under the 1933 Act and has provided to the Company reasonable evidence of such, including without limitation, a "Prospective Investor Questionnaire". Subscriber is aware of the Company's business affairs and financial condition and has had access to and has acquired sufficient information about the Company, including the confidential draft, dated March 28, 1997, of the proposed Form S-3 Prospectus contained in the Company's proposed Post-Effective Amendment No. 1 on Form S-3 (the "Form S-3") to the Company's registration statement on Form S-1 (registration no. 33-80280), to reach an informed and knowledgeable decision to acquire the Securities. Subscriber has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Securities. (f) INVESTMENT INTENT. Subscriber represents that it is purchasing the Securities for its own account as principal for investment purposes and not with a view towards distribution. Subscriber understands that its acquisition of the Securities has not been registered under the 1933 Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Subscriber's investment intent as expressed herein. Subscriber will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities except in compliance with applicable law including the 1933 Act and any applicable state securities laws, and the rules and regulations promulgated thereunder. 2 (g) REGISTRATION OR EXEMPTION REQUIREMENTS. Subscriber acknowledges and understands that the Securities may not be resold or otherwise transferred except in a transaction registered under the 1933 Act and any applicable state securities laws or unless an exemption from such registration is available. Subscriber understands that the Securities will be imprinted with a legend that prohibits the transfer of the Securities unless (i) they are registered or such registration is not required, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the 1933 Act and, if the Company shall so request in writing, an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the transaction is so exempt. (h) NO ADVERTISEMENTS. Subscriber is not subscribing for Securities as a result of, or subsequent to, any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or presented at any seminar or meeting. (i) LEGALITY. Subscriber has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Securities, (ii) any foreign exchange restrictions applicable to it with respect to such purchase, (iii) any governmental or other consent that may need to be obtained by it, and (iv) the income tax and other tax consequences, if any, that may be relevant to its purchase, holding, redemption, sale, or transfer of the Securities. Subscriber's subscription and payment for, and its continued ownership of, the Securities, will not violate any applicable securities or other laws of its jurisdiction. (j) DUE DILIGENCE. Subscriber and its representatives have been solely responsible for Subscriber's own "due diligence" investigation of the Company and its management and business, for its own analysis of the merits and risks of its investment in the Securities, and for its own analysis of the fairness and desirability of the terms of such investment. In taking any action or performing any role relative to the arranging of the proposed investment, Subscriber has acted solely in its own interest, and neither Subscriber nor any of its representative has acted as an agent of the Company. (k) RESALE OF THE SECURITIES. In connection with any resale of the Securities, Subscriber understands the requirements for qualifying for the exemption from registration afforded by Section 4(1) of the 1933 Act and that there can be no assurance that Subscriber will be able to qualify for any exemptions, including the exemptions afforded by Section 4(1) of the 1933 Act. Subject to Section 3(a) of the Demand Registration Rights Agreement, the Company shall have no liability in the event Subscriber is unable to qualify for the exemption afforded by Section 4(1) and is unable to offer, sell or otherwise transfer the Securities in the United States or elsewhere. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company acknowledges, represents, warrants and agrees as follows: (a) ORGANIZATION AND AUTHORIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as currently conducted. The Company is not in default or violation of any term or provision of its Articles of Incorporation, as amended to date, or its By-laws, as currently in effect, nor will the consummation of the transactions contemplated by this Agreement cause any such default or violation. The Company has all requisite corporate power and authority to enter into this Agreement, to sell the Securities hereunder and to 3 carry out and perform its obligations under the terms of this Agreement. This Agreement is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting the rights of creditors generally and available equitable remedies. (b) REPORTING ISSUER COMPANY STATUS. The Company is in full compliance in all material respects, to the extent applicable, with all reporting obligations under either Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, including the rules and regulations thereunder (the "Exchange Act"), and shall use reasonable best efforts to continue to maintain such status on a timely basis. The Company has registered the Common Stock pursuant to Section 12(g) of the Exchange Act and the Common Stock trades on The Nasdaq National Market. (c) SEC FILINGS. For a period of twelve (12) months immediately preceding this offer and sale (i) none of the Company's filings with the SEC contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) the Company has timely filed all requisite forms, reports and exhibits thereto with the SEC. (d) OPINION OF COUNSEL. Subscriber shall, upon purchase of the Securities, receive an opinion letter from counsel to the Company in the form attached hereto as Attachment B, which is incorporated herein by reference and made a part hereof, and the Company agrees that it will immediately obtain such an opinion. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SUBSCRIBER. Each of Subscriber and the Company represent to the other the following with respect to itself: (a) NON-CONTRAVENTION. The execution and delivery of this Agreement and the consummation of the issuance of the Securities and the transactions contemplated by this Agreement do not and will not conflict with or result in a breach by the Company or Subscriber of any of the terms or provisions of, or constitute a default under, the articles of incorporation, as amended to date, or by-laws, as currently in effect, of the Company, or, if Subscriber is not a natural person, of Subscriber, or any indenture, mortgage, deed of trust of other material agreement or instrument to which the Company or Subscriber, respectively, is a party or by which it or any of its properties or assets are bound, or any existing applicable law, rule or regulation or any applicable decree, judgment or order of any court, Federal or State regulatory body, administrative agency or other governmental body having jurisdiction over the Company or Subscriber, respectively, or any of its properties or assets, except for such conflicts or breaches which would not, in the aggregate, have a material adverse effect on the Company or Subscriber. (b) APPROVALS. No authorization, approval or consent of, or designation, declaration or filing with, any governmental body on the part of Subscriber or the Company is legally required for the issuance and sale of the Securities, with the exception of SEC Form D and any New York or other state blue sky filing by the Company or any placement agent. 5. LEGEND. (a) The certificate or certificates representing the Securities shall be subject to a legend restricting transfer under the 1933 Act. (b) The Securities will be issued with the following legend appearing thereon: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AND QUALIFICATION IN EFFECT WITH RESPECT THERETO UNDER THE 1933 ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAW OR WITHOUT AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO C- PHONE CORPORATION THAT SUCH REGISTRATION AND QUALIFICATION IS NOT REQUIRED UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR AN EXEMPTION THEREFROM. 4 (c) The legend endorsed on the certificate pursuant to this Section representing shares of Common Stock shall be removed and the Company shall issue a replacement certificate without such legend to the holder of such certificate if the Shares represented by such certificate are being sold pursuant to an effective registration statement under the 1933 Act (the "Registration Statement") or if such holder provides to the Company an opinion of counsel reasonably acceptable to the Company's counsel to the effect that a public sale, transfer or assignment of such Securities may be made without registration. 6. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE 1933 ACT. The Company has entered into a Demand Registration Rights Agreement with Subscriber, in the form attached hereto as Attachment C, which is incorporated herein by reference and made a part hereof. 7. UNDERWRITER. The Company understands that Subscriber disclaims being an "underwriter" (as such term is defined under the 1933 Act and the rules and regulations promulgated thereunder (an "Underwriter")), but Subscriber being deemed an Underwriter shall not relieve the Company of any obligation it has hereunder. 8. INFORMATION AVAILABLE. So long as any Registration Statement is effective covering any of the Securities, the Company will furnish to Subscriber: (a) as soon as possible after available (but in the case of the Company's Annual Report to Stockholders, within 150 days after the end of each fiscal year of the Company), one copy of (i) its Annual Report to Stockholders (which Annual Report shall contain financial statements audited in accordance with generally accepted accounting principles in the United States of America by a national firm of certified public accountants); (ii) if not included in substance in the Annual Report to Stockholders, its Annual Report on Form 10-KSB within 110 days after the end of each fiscal year of the Company; (iii) each of its Quarterly Reports to Stockholders, if any, and its Quarterly Reports on Form 10-QSB; and (iv) a full copy of the Registration Statement covering the Securities (the foregoing, in each case, including exhibits); and (b) upon the reasonable request of Subscriber, such other information that is generally available to the public. 9. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Securities to the public without registration, the Company agrees to use its reasonable best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the 1933 Act, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the Exchange Act; (c) furnish to Subscriber forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the 1933 Act and the 5 Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other publicly available reports and documents of the Company and other publicly available information in the possession of or reasonably obtainable by the Company as Subscriber may reasonably request in availing itself of any rule or regulation of the SEC allowing Subscriber to sell any such Securities without registration. 10. TEMPORARY CESSATION OF OFFERS AND SALES BY SUBSCRIBER. Subscriber acknowledges that there may occasionally be times when the Company may be required to suspend the use of the prospectus forming part of the Registration Statement covering the Shares and the shares of Common Stock issuable upon exercise of the Rights (the "Right Shares") until such time as an amendment to such Registration Statement has been filed by the Company and declared effective by the SEC, until the prospectus is supplemented or amended to comply with the 1933 Act, or until such time as the Company has filed an appropriate report with the SEC pursuant to the Exchange Act. The Company agrees to file any necessary amendments, supplements and reports as soon as practicable under the circumstances. Subscriber hereby covenants that it will not sell any shares of Common Stock pursuant to said prospectus commencing at the time at which the Company gives Subscriber written notice of the suspension of the use of said prospectus which notice shall give the reason for such suspension) and ending at the time the Company gives Subscriber written notice that Subscriber may thereafter effect sales pursuant to said prospectus, as the same may have been supplemented or amended. 11. TRANSFER OF SECURITIES AFTER REGISTRATION. Subscriber hereby covenants with the Company that while a Registration Statement is effective not to make any sale of the Securities except either (i) in accordance with the Registration Statement covering the Shares and the Right Shares, in which case Subscriber covenants to comply with the requirement of delivering a current prospectus (subject to receipt of such prospectus from the Company), or (ii) in accordance with Rule 144, in which case Subscriber covenants to comply with Rule 144. 12. TERMINATION OF OBLIGATIONS. The obligations of the Company pursuant to the Registration Rights Agreement shall cease and terminate upon the earlier to occur of (i) such time as all of the Shares have been resold and either the Rights has expired without being exercised or, to the extent that the Rights has been exercised, the Right Shares have been delivered by the Company and have been sold, or (ii) one year from the date the Registration Statement has been declared effective. 13. CLOSING DATE. The Closing Date (the "Closing Date") shall be March 31, 1997, or such other date as shall be mutually agreed upon as to time and place. 14. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. Subscriber understands that the Company's obligation to sell the Securities is conditioned upon: (a) The receipt and acceptance by the Company of this Subscription Agreement for all of the Securities as evidenced by execution of this Subscription Agreement by the President or any Vice President of the Company; and (b) Delivery to the Company by Subscriber of good funds as payment in full for the purchase of the Securities. 15. CONDITIONS TO SUBSCRIBER'S OBLIGATION TO PURCHASE. The Company understands that Subscriber's obligation to purchase the Securities is conditioned upon: (a) Acceptance by the Company of this Subscription Agreement for the sale of the Securities, as evidenced by the execution of this Agreement by its authorized officers; (b) Delivery of the Securities by the Company; and 6 (c) Delivery of the opinion of counsel. 16. NOTICES. All notices and communications regarding this Agreement shall be sent to the following: (a) If to the Company, at: 6714 Netherlands Drive Wilmington, NC 28405 Attn: Daniel P. Flohr, President Fax: (910) 395-6108; with a copy to: Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, NY 10017 Attn: Arthur A. Katz, Esq. Fax: (212) 972-9150. (b) If to Subscriber, at the address set forth on Schedule 1 hereto. 17. MISCELLANEOUS. (a) This Agreement will be construed and enforced in accordance with, and be governed by, the laws of the State of New York applicable to agreements made and to be fully performed thereon, except for matters arising under the 1933 Act, the Exchange Act and other applicable laws, without reference to principles of conflicts of law. The Company and Subscriber consent to the exclusive jurisdiction of the courts of the State of New York or the Federal Court for the Southern District of New York. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. (b) In lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. This Agreement may be executed in counterparts which shall be considered an original document and which together shall be considered a complete document. (c) This Agreement and the Schedules and Attachments hereto constitute the entire agreement between Subscriber and the Company with respect to the subject matter hereof. This Agreement may be amended only by a writing executed by both the Company and Subscriber. (d) In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. (e) Each of the Company and Subscriber agrees to keep confidential and not to disclose to, or use for the benefit of, any third party the terms of this Agreement or any other information which at any time is communicated by the other party as being confidential without the prior written approval 7 of the other party; provided, however, that this provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law. (f) Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. (g) Each of the Company and Subscriber agrees to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses) which the other may sustain or incur in connection with a material breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. (h) Subscriber acknowledges that it understands the meaning and legal consequences of the representations, warranties, covenants and agreements contained in this Agreement and the Prospective Investor Questionnaire, and agrees to indemnify and hold harmless the placement agent of this private placement from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses) which such placement agent may sustain or incur in connection with a breach by Subscriber of any representation, warranty or covenant made by it in this Agreement or the Prospective Investor Questionnaire. (i) Subscriber acknowledges that it understands the meaning and legal consequences of the representations, warranties, covenants and agreements contained in this Agreement and the Prospective Investor Questionnaire, and agrees to indemnify and hold harmless the placement agent of this private placement from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses) which such placement agent may sustain or incur in connection with a breach by Subscriber of any representation, warranty or covenant made by it in this Agreement or the Prospective Investor Questionnaire. (j) The representations, warranties, covenants and agreements made herein shall survive the execution of this Agreement and the closing of the transactions contemplated hereby. 8 IN WITNESS WHEREOF, this Securities Purchase Agreement was duly executed on the date first written below. SUBSCRIBER [NAME] By: ----------------------------- Name: Title: Executed at --------, --------, this ---- day of March, 1997 Agreed to and Accepted on this --- day of March, 1997 C-PHONE CORPORATION By: ----------------------------- Name: Title: 9 SCHEDULE 1 to SECURITIES PURCHASE AGREEMENT FULL NAME AND ADDRESS OF SUBSCRIBER FOR REGISTRATION PURPOSES: NAME: ---------------------------------------------------- ADDRESS: ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- TEL NO: ---------------------------------------------------- FAX NO: ---------------------------------------------------- SS OR TAX ID #: ---------------------------------------------------- CONTACT ---------------------------------------------------- NAME: ---------------------------------------------------- ADDRESS FOR NOTICE, IF DIFFERENT NAME: ---------------------------------------------------- ADDRESS: ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- TEL NO: ---------------------------------------------------- FAX NO: ---------------------------------------------------- DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME): NAME: ---------------------------------------------------- ADDRESS: ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- TEL NO: ---------------------------------------------------- FAX NO: ---------------------------------------------------- CONTACT NAME: ---------------------------------------------------- SPECIAL INSTRUCTIONS: ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- 10 Attachment A to SECURITIES PURCHASE AGREEMENT CONTINGENT VALUE RIGHTS 1. GRANT OF CVRS. If, at any time after March 31, 1997, until 5:30 P.M., New York time, on the first anniversary of the effective date of the Registration Statement (as defined in the Securities Purchase Agreement), the Holder shall sell any Shares in a brokerage transaction within the meaning of Section 4(4) of the Securities Act of 1933 or in a transaction directly with a market maker as such term is defined in Section 3(a)(38) of the Securities Exchange Act of 1934 (a "Sale") at a price of less than $8.00 per share, then the Holder, without the payment of any additional consideration, shall receive (the "CVR") for each Share sold, such additional number of shares of Common Stock (the "Right Shares") as shall equal (a) the quotient of (x) $8.00 divided by (y) the Adjusted Exercise Price (as such term is defined in the next sentence hereof) minus (b) one. For the purposes of this Agreement the term "Adjusted Exercise Price" shall mean the average closing bid price per share of Common Stock for the ten (10) trading days immediately preceding the exercise of the CVR by the Holder; provided, however, that in no event shall the Adjusted Exercise Price be adjusted to less than $2.00. 2. NOTICE OF SALE OF SHARES. Contemporaneously with the sale of any Shares, the Holder shall send a notice (a "Sale Notice") to the Company at its principal offices (presently located at 6714 Netherlands Drive, Wilmington, NC 28405), which notice shall specify the number of Shares sold and the date of such sale. 3. ISSUANCE OF STOCK CERTIFICATES. Promptly following the receipt by the Company of a Sale Notice, the Company shall cause its transfer agent to forthwith (and in any event within three (3) business days thereafter) issue certificates representing the whole number of Right Shares, without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall be issued in the name of the Holder thereof; provided, however, that the Company shall not be required to issue any such certificate more than once with respect to any day. 4. TRANSFER OF CVRS. The CVRs granted to the Holder under this Agreement may not be assigned except to a transferee of all or a portion of the Shares to which these CVRs attach and expire with respect to any Shares immediately following the first Sale thereof. 5. REGISTRATION RIGHTS. The Right Shares shall be subject to all of the terms of that certain Demand Registration Rights Agreement of even date herewith among the parties hereto, in the form attached to the Agreement as Attachment C, which is incorporated herein by reference and made a part hereof. 6. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to issue certificates representing fractions of Right Shares, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. 7. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the CVRs, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the CVRs, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the CVRs shall be outstanding, the Company shall use its reasonable best efforts to cause all shares of Common Stock issuable upon the exercise of the CVRs to be listed (subject to official notice of issuance) on such securities exchange or quoted on The Nasdaq Stock Market, Inc. on which the Common Stock is then listed or quoted. 8. NOTICES TO CVR HOLDERS. Nothing contained in this Agreement shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company, solely by virtue of their holding the CVRs. If, however, at any time prior to the expiration of the CVRs and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or CVR to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or CVRs, or any proposed dissolution, liquidation, winding up or sale. 2 [FORM OF SALE NOTICE PURSUANT TO SECTION 2] The undersigned hereby notifies the Company that it has sold such number of Shares and on such date as is indicated below. The undersigned requests that a certificate for such be registered in its name and that such Certificate be delivered to the undersigned at the address set forth below: DATE OF SALE NUMBER OF SHARES SOLD PRICE PER SHARE1 - ------------ --------------------- ---------------- REGISTERED HOLDER By: -------------------------------- NAME:------------------------------ DELIVERY--------------------------- ADDRESS:--------------------------- SS OR------------------------------ TAX ID #:-------------------------- - -------- 1 Copy of confirmation ticket is required to be attached to this Notice of Sale. 3 TO BE COMPLETED BY THE COMPANY: CALCULATION OF NUMBER OF SHARES REMAINING WITH ATTACHED CVRS Number of Shares Held by Holder Prior to Sale: ------------- Number of Shares Sold Pursuant to This Notice: - ------------- Number of Shares Remaining with Attached CVRs: = ============= CALCULATION OF NUMBER OF RIGHT SHARES TO BE ISSUED Initial Sale Price ($6 after gross-up of 25%): $8.00 Average Price (see Section 1) / ============= ------------- - 1.00 ------------- Number of Shares covered by this Sale Notice * ------------- Right Shares to be Issued ============= 4 EX-3 4 EXHIBIT 3 ATTACHMENT C TO SECURITIES PURCHASE AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 31st day of March, 1997, between the person listed on the signature page hereto (the "Subscriber") and C-PHONE CORPORATION, a New York corporation having its principal place of business at 6714 Netherlands Drive, Wilmington, NC 28405 (the "Company"). WHEREAS, the Company is a party to certain Securities Purchase Agreements dated the date hereof (the "Purchase Agreements"), pursuant to which it has agreed to issue and sell an aggregate of not less than three million four hundred thousand dollars ($3,400,000) nor more than five million dollars ($5,000,000) of its shares (the "Shares") of common stock, $.01 par value per share ("Common Stock"), and accompanying contingent value rights (the "Rights", and collectively with the Shares the "Securities"); and WHEREAS, the Company has agreed to grant to the Subscriber and the other subscriber parties to the various Purchase Agreements (each, a "Holder" and collectively, the "Holders") certain registration rights set forth herein with respect to the Securities; and WHEREAS, Daniel Flohr, President and Chief Executive Officer of the Company ("Flohr") has delivered to Josephthal Lyon & Ross Incorporated ("JLR") 250,000 shares of his Common Stock (the "Escrowed Shares") to be used to satisfy certain obligations to the Holders. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. REGISTRABLE SECURITIES. As used herein, the term "Registrable Security" means the Shares and the shares of Common Stock issuable upon exercise of the Rights (the "Right Shares"); provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "1933 Act") and disposed of pursuant thereto, (ii) registration under the 1933 Act is no longer required for the immediate public distribution of such Common Stock as a result of the provisions of Rule 144, or (iii) with respect to any Right Shares, they have not yet been issued and the Rights have ceased to be outstanding. The term "Registrable Securities" means any and/or all of the shares of Common Stock falling within the foregoing definition of a Registrable Security. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. RESTRICTIONS ON TRANSFER. The Holder acknowledges and understands that prior to the registration of the Registrable Securities as provided herein, the Securities are "restricted securities" as defined in Rule 144 promulgated under the 1933 Act. The Holder understands that no disposition or transfer of the Securities may be made by the Holder in the absence of (i) an opinion of counsel reasonably satisfactory to the Company that such transfer may be made, or (ii) a registration statement under the 1933 Act then being effective with respect thereto. Section 3. REGISTRATION RIGHTS. (a) At any time commencing fifteen (15) days after the date hereof, the Holders owning at least thirty-three percent (33%) of the Shares shall have the right (if not previously exercised by any other Holder or Holders), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Securities and Exchange Commission (the "SEC") within five (5) days after receipt of the Demand Registration Request a registration statement on Form S-3 (the "Registration Statement"), on one occasion, at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of all Holders of Registrable Securities, each of whom shall have the right to include their Registrable Securities therein if they have provided to the Company, within five (5) days after receipt thereof, a properly completed questionnaire of the type commonly used for offerings of this kind, so as to permit a public offering and sale of the Registrable Securities under the 1933 Act. (b) The Company will use its reasonable best efforts to maintain any Registration Statement or post-effective amendment filed under this Section 3 hereof current under the 1933 Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement and (ii) the first anniversary of the effective date of the Registration Statement. (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of any Registration Statement under Section 3(a) hereof and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the cost of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered and the fees and expenses of its counsel. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as reasonably may be requested by the Holder. (d) The Company shall not be required by this Section 3 to include a Holder's Registrable Securities in any Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters reasonably acceptable to counsel for the Holder and the Company) the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees thereof obtaining securities which are not "restricted securities", as defined in Rule 144 under the 1933 Act. (e) (i) In the event that the Registration Statement to be filed by the Company pursuant to Section 3(a) hereof is not declared effective by the SEC within ninety five (95) days after receipt by the Company of the Demand Registration Request, then JLR shall cause to be delivered from the Escrowed Shares to each Holder, as a penalty, for each day thereafter until the earlier of (A) the date that the Registration Statement is declared effective (the "Effective Date") and (B) the 185th day after the receipt by the Company of the Demand Registration Request, all rights with respect to such number of shares of Common Stock as shall equal the product of (x) 1,000 and (y) a fraction, the numerator of which is the purchase price paid for the Securities by the Holder and the denominator of which is the aggregate purchase price paid for the Securities by all of the Holders. (ii) In the event that the Registration Statement is not declared effective by the SEC within one hundred eighty five (185) days after receipt by the Company of the Demand Registration Request, then JLR shall cause to be delivered from the Escrowed Shares to each Holder, as a penalty, all rights with respect to such number of shares of Common Stock as shall equal the product of (A) 160,000 and (B) a fraction, the numerator of which is the purchase price paid for the Securities by the Holder and the denominator of which is the aggregate purchase price paid for the Securities by all of the Holders. (f) No provision contained herein shall preclude the Company from selling securities pursuant to any Registration Statement in which it is required to include Registrable Securities pursuant to this Section 3. Section 4. APPROVAL OF ISSUANCE OF EXCESS RIGHTS. Notwithstanding the obligation of the Company hereunder to register the Right Shares, the Holder acknowledges that, pursuant to the listing requirements of The Nasdaq National Market ("NNM"), the Company will be required to seek the approval (the "Rights 2 Proposal") of its shareholders prior to the issuance of any Excess Right Shares (as defined below). For purposes of this Agreement, "Excess Right Shares" shall mean any Right Shares in excess of the difference between 870,000 and the aggregate number of Shares sold pursuant to the Purchase Agreements. The Company agrees (i) to include the Rights Proposal in its proxy materials for the Company's regularly scheduled 1997 Annual Meeting of Shareholders to be held no later than August 30, 1997, (ii) to use its best efforts to obtain timely clearance from the SEC of such proxy materials, (iii) to mail such proxy materials in a timely manner and (iv) to use its best efforts to cause the Company's board of directors to recommend (and not subsequently withdraw) approval of the Rights Proposal to shareholders. Section 5. COOPERATION WITH THE COMPANY. The Holders will reasonably cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 6. REGISTRATION PROCEDURES. If and whenever the Company is required by any of the provisions of this Agreement to effect the registration of any of the Registrable Securities under the 1933 Act, the Company shall (except as otherwise provided in this Agreement), expeditiously: (a) prepare and file with the SEC and the National Association of Securities Dealers, Inc., if applicable, such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective and to comply with the provisions of the 1933 Act with respect to the sale or other disposition of all Registrable Securities covered by the Registration Statement whenever the Holder or Holders of such Registrable Securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a Registration Statement pursuant to Rule 415 under the 1933 Act); (b) furnish to each Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the 1933 Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such Holder; (c) use its reasonable best efforts to register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Holders shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable each Holder to consummate the public sale or other disposition in such jurisdictions of such Registrable Securities owned by such Holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process; (d) use its best efforts to list the Registrable Securities on the NNM or any securities exchange on which the Common Stock is then listed, if the listing of such Registrable Securities is then permitted under the rules of the NNM or such exchange; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by the Registration Statement, at any time when a prospectus relating thereto covered by the Registration Statement is required to be delivered under the 1933 Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a 3 material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 7. INFORMATION BY THE HOLDER. Each Holder of Registrable Securities included in any Registration Statement shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company reasonably may request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. Section 8. ASSIGNMENT OF REGISTRATION RIGHTS. The rights granted the Holders under this Agreement may not be assigned except to a transferee of all or a portion of the Registrable Securities. Section 9. TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant to this Agreement shall terminate as to each Holder (and permitted transferee under Section 8 hereof) upon the occurrence of any of the following: (a) all such Holder's Registrable Securities subject to this Agreement have been sold; or (b) such Holder's Registrable Securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the 1933 Act. Section 10. INDEMNIFICATION. (a) In the event of the filing of any Registration Statement with respect to Registrable Securities pursuant to Section 3 hereof, the Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls the Holder within the meaning of the 1933 Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees and expenses), to which the Distributing Holders may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the 1933 Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees and expenses) to which the Company or any such officer, director or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof); arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in a Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged 4 untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof and, provided further, that the indemnity agreement contained in this Section 10(b) shall not inure to the benefit of the Company with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Company was responsible for the failure to send or give (in violation of the 1933 Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in such Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Company was obligated to do so under the 1933 Act or the rules and regulations promulgated thereunder. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion, in which event, such legal or other expenses shall become the responsibility of the indemnifying party from and after it relinquishes its role of so pursuing such action. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for all Distributing Holders, which firm shall be designated in writing by the Distributing Holders). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 11. CONTRIBUTION. In order to provide for just and equitable contribution under the 1933 Act in any case in which (i) the Distributing Holder makes a claim for indemnification pursuant to Section 10 hereof but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 10 hereof provide for indemnification in such case, or (ii) contribution under the 1933 Act may be required on the part of any Distributing Holder, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which 5 shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees and expenses), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 11, the Holder shall not be required to contribute any amount in excess of the Purchase Price. Section 12. NOTICES. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery, or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its, his or her address set forth on the signature page of this Agreement, with a copy to the person designated in the Purchase Agreement; and (b) If to the Company, at: 6714 Netherlands Drive Wilmington, NC 28405 Attn: Daniel P. Flohr, President Fax: (910) 395-6108; with a copy to: Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, NY 10017 Attn: Arthur A. Katz, Esq. Fax: (212) 972-9150; or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile and followed by mail, delivery shall be deemed given two (2) business days after such facsimile is sent. Section 13. ASSIGNMENT. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. This Agreement cannot be assigned, amended or modified by the parties hereto, except by written agreement executed by the parties hereto. If requested by the Company, the Holder shall have furnished to the Company an opinion of counsel reasonably satisfactory to the Company to such effect. Section 14. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6 Section 15. HEADINGS. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 15. GOVERNING LAW, VENUE. This Agreement shall be governed by and construed in accordance with the laws and jurisdiction of the State of New York, with regard to conflicts of law principles. Section 17. SEVERABILITY. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceablity shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. C-PHONE CORPORATION By: ------------------------- Name: Title: HOLDER By: ------------------------- Name: Title: JOSEPHTHAL LYON & ROSS INCORPORATED By: ------------------------- Name: Title: Solely for the Purposes of Section 3(e) of this Agreement - ------------------------ Daniel P. Flohr 7 EX-4 5 EXHIBIT 4 C-PHONE CORPORATION AND JOSEPHTHAL LYON & ROSS INCORPORATED PLACEMENT AGENT WARRANT AGREEMENT Dated as of March 31, 1997 PLACEMENT AGENT WARRANT AGREEMENT dated as of March 31, 1997 by and between C-PHONE CORPORATION, a New York corporation (the "Company"), and JOSEPHTHAL LYON & ROSS INCORPORATED, (hereinafter referred to variously as the "Holder" or the "Placement Agent"). WITNESSETH WHEREAS, the Company proposes to issue to the Placement Agent warrants ("Warrants") to purchase up to an aggregate of 150,000 shares of common stock, $.01 par value, of the Company (the "Common Stock"); and WHEREAS, the Placement Agent has agreed pursuant to the placement agent agreement (the "Placement Agent Agreement") dated as of the date hereof by and between the Placement Agent and the Company to act as the Placement Agent in connection with the Company's proposed offering of its shares of Common Stock in an aggregate offering of not less than $3,400,000 nor more than $5,000,000 (the "Offering"); and WHEREAS, the Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Placement Agent Agreement) by the Company to the Placement Agent in consideration for, and as part of the Placement Agent's compensation in connection with, the Placement Agent acting as the Placement Agent pursuant to the Placement Agent Agreement; NOW, THEREFORE, in consideration of the mutual premises made herein, the payment by the Placement Agent to the Company of an aggregate of ten dollars ($10.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. GRANT. The Holder is hereby granted the right to purchase, at any time from March 31, 1997 until 5:30 P.M., New York time, on the 90th day following the date on which the Company's registration statement filed with the Securities and Exchange Commission ("SEC") which includes the shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Securities") is declared effective by the SEC (the "Expiration Date"), up to an aggregate of 150,000 shares of Common Stock at an initial exercise price (subject to adjustment as provided in Section 8 hereof) of $9.60 per share of Common Stock subject to the terms and conditions of this Agreement. 2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions, and other variations as required or permitted by this Agreement. 3. EXERCISE OF WARRANT. The Warrants initially are exercisable at an exercise price (subject to adjustment as provided in Section 8 hereof) per share of Common Stock set forth in Section 6 hereof payable by certified or official bank check in New York Clearing House funds. Upon surrender of a Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the shares of Common Stock purchased at the Company's principal offices presently located at 6714 Netherlands Drive, Wilmington, North Carolina 28405 the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional shares of the Common Stock underlying the Warrants). In the case of the purchase of less than all the shares of Common Stock purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the shares of Common Stock purchasable thereunder. 4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the issuance of certificates for shares of Common Stock or other securities, properties or rights underlying such Warrants, shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the Common Stock (and/or other securities, property or rights issuable upon the exercise of the Warrants) shall be executed on behalf of the Company by the manual or facsimile signature of the then present Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the then present Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof; and that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to officers of the Representative. 2 6. EXERCISE PRICE. 6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise provided in Section 8 hereof, the initial exercise price of each Warrant shall be $9.60 per share of Common Stock. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Section 8 hereof. 6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. REGISTRATION RIGHTS. The Warrant Securities shall be included in the registration statement to be prepared and filed by the Company with the SEC pursuant to the terms of that certain Registration Rights Agreement of even date herewith by and among the Company, the investors in the Offering and the Placement Agent. The Registration Rights Agreement is incorporated herein by reference and made a part hereof, and it is expressly agreed that the Warrant Securities shall have all of the rights and privileges of the shares of Common Stock which are the subject of the Registration Rights Agreement, and that the Holders of Warrants are third party beneficiaries of the Registration Rights Agreement. 8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. 8.1 SUBDIVISION AND COMBINATION. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.2 STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company shall pay a dividend in, or make a distribution of, shares of Common Stock or of the Company's capital stock convertible into Common Stock, the Exercise Price shall forthwith be proportionately decreased. An adjustment made pursuant to this Section 8.2 shall be made as of the record date for the subject stock dividend or distribution. 8.3 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 8, the number of Securities issuable upon the exercise at the adjusted exercise price of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 3 8.4 DEFINITION OF COMMON STOCK. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 8.5 MERGER OR CONSOLIDATION. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in Section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. 8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment of the Exercise Price shall be made: (a) Upon the issuance or sale of the Warrants or the shares of Common Stock issuable upon the exercise of the Warrants; or (b) If the amount of said adjustment shall be less than two cents (2(cent)) per Warrant Share, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least two cents (2(cent)) per Warrant Share. 9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of Warrant Shares in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation 4 of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. 11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed and/or quoted on The Nasdaq Stock Market, Inc. 12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, 5 the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made and sent when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holders. 14. SUPPLEMENTS AND AMENDMENTS. The Company and the Placement Agent may from time to time supplement or amend this Agreement without the approval of any Holders of Warrant Certificates (other than the Placement Agent) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Placement Agent may deem necessary or desirable and which the Company and the Placement Agent deem shall not adversely affect the interests of the Holders of Warrant Certificates. 15. SUCCESSORS. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holders and their respective successors and assigns hereunder. 16. TERMINATION. This Agreement shall terminate at the close of business on the earlier to occur of (i) the day the last Warrant Security issuable hereunder is issued, and (ii) the Expiration Date. 17. GOVERNING LAW: Submission to Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State without giving effect to its rules governing the conflicts of laws. The Company and the Placement Agent hereby agree that any action, proceeding or claim against it arising out of or relating in any way to, this Agreement shall be brought and 6 enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive. The Company and the Placement Agent hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon the Company or the Placement Agent (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address referred to in Section 13 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. The Company and the Placement Agent agree that the prevailing party(ies) in any such action or proceeding shall be entitled to recover from the other party(ies) all of its/their reasonable legal costs and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 18. ENTIRE AGREEMENT: Modification. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. 19. SEVERABILITY. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. 20. CAPTIONS. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Placement Agent and any other registered Holder(s) of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company, the Placement Agent and the Holder(s) of the Warrant Certificates or Warrant Securities. 22. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. [SEAL] C-PHONE CORPORATION By: ---------------------------- Name: Title: Attest: - ----------------- Secretary JOSEPHTHAL LYON & ROSS INCORPORATED By: ---------------------------- Name: Title: 8 EXHIBIT A [FORM OF WARRANT CERTIFICATE] THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. No. W- ------- WARRANT CERTIFICATE This Warrant Certificate certifies that --------, or registered assigns, is the registered holder of 150,000 Warrants, each Warrant entitling the holder to purchase initially, at any time from March 31, 1997 until 5:30 p.m. New York time on the 90th day following the date on which the Company's registration statement filed with the Securities and Exchange Commission ("SEC") which includes the shares of Common Stock $.01 par value ("Common Stock") issuable upon the exercise hereof is declared effective by the SEC ("Expiration Date"), one fully-paid and non-assessable share of Common Stock of C-Phone Corporation, a New York corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $9.60 per share of Common Stock upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of March 31, 1997 by and between the Company and Josephthal Lyon & Ross Incorporated (the "Warrant Agreement"). Payment of the Exercise Price shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company or by surrender of this Warrant Certificate. 9 No Warrant may be exercised after 5:30 p.m., New York time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, hereby shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 10 IN WITNESS WHEREOF the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of March --, 1997 C-PHONE CORPORATION [SEAL] By:------------------------- Name: Title: Attest: - --------------------------- Secretary 11 [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ------------- shares of Common Stock and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of C-Phone Corporation in the amount of $---------, all in accordance with the terms of Section 3 of the Placement Agent Warrant Agreement dated as of March 31, 1997 between C-Phone Corporation and Josephthal Lyon & Ross Incorporated. The undersigned requests that a certificate for such securities be registered in the name of ------------ whose address is --------------------- and that such Certificate be delivered to ------------------ whose address is --------------- Dated: -------------------- Signature ---------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) -------------------------------------- (Insert Social Security or Other Identifying Number of Holder) 12 [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED) --------------------------- hereby sells, assigns and transfers unto ------------------------------------. (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ------------- Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: -------------------- Signature: ------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ------------------------------- (Insert Social Security or Other Identifying Number of Assignee) 13 EX-5 6 EXHIBIT 5 STOCK PLEDGE AGMT. Stock Pledge Agreement STOCK PLEDGE AGREEMENT, dated as of March 31, 1997, made by and between Daniel P. Flohr (the "Pledgor"), and Josephthal Lyon & Ross Incorporated, as agent (in such capacity, the "Agent") for the investors (the "Investors") in a private placement of shares of common stock (the "Common Stock") of C-Phone Corporation (the "Company") made of even date herewith (the "Private Placement"). WHEREAS, (i) pursuant to the Private Placement, the Investors have severally acquired shares of the Company's Common Stock in the aggregate principal amount of not more $5,000,000, (ii) the Company has agreed, pursuant to a Registration Rights Agreement of even date herewith to register the Common Stock upon receipt of a notice of demand therefor, (iii) the Pledgor, as the Company's President and Chief Executive Officer, has agreed to pledge 250,000 shares of Common Stock to guarantee the obligations of the Company under the Registration Rights Agreement, (iv) the Pledgor (a) is the legal and beneficial owner of all of the shares of Pledged Stock (as hereinafter defined) issued by the Company, and (b) will derive material benefits from the consummation of the Private Placement; and (v) it is a condition precedent to the consummation of the Private Placement that the Pledgor shall have executed and delivered to the Agent for the ratable benefit of the Investors this Pledge Agreement. NOW, THEREFORE, in consideration of the mutual premises made herein and to induce the Agent and the Investors to enter into the documents relating to the Private Placement, including without limitation the Securities Purchase Agreement and the Prospective Investor Questionnaire, and to induce the Investors to consummate the Private Placement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby agrees with the Agent, for the ratable benefit of the Investors, as follows: 1. DEFINED TERMS. The terms defined in the preamble of this Agreement have the meanings set forth therein and the following terms have the meanings set forth below: "Agreement" means this Pledge Agreement and the Schedules and Exhibits attached hereto, as amended, supplemented or otherwise modified from time to time. "Code" means the Uniform Commercial Code from time to time in effect in the State of New York, "Collateral" means the Pledged Stock and all Proceeds thereof. "Forfeited Collateral" means so much of the Collateral as has been forfeited pursuant to the provisions of Section 7(a) hereof. "Registration Obligations" means the obligations of the Company to file a registration statement with the Securities and Exchange Commission as more fully set forth in the Registration Rights Agreement. "Pledged Stock" means the shares of capital stock of the Company, together with all stock certificates, options or rights of any nature whatsoever which may be issued or granted by the Company to the Pledgor in respect of the Pledged Stock while this Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of the Code and, in any event, shall (i) include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions made with respect thereto. 2. PLEDGE: GRANT OF SECURITY INTEREST. The Pledgor hereby pledges and delivers to the Agent for the ratable benefit of the Investors, all of the Pledged Stock specified on Schedule 1 hereto and hereby grants to the Agent, for the ratable benefit of the Investors, a first-priority security interest in the Collateral, as collateral security for the prompt and complete satisfaction and performance of all of the Registration Obligations. 3. STOCK POWERS. Concurrently with the delivery by the Pledgor to the Agent of any certificate representing the shares of the Pledged Stock, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank with, if the Agent so requests, signature guaranteed. 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants to the Agent and the Investors that as of the date hereof: (a) the Pledgor has the power and authority and the legal right to execute and deliver, to perform its obligations under, and to grant the lien on the Collateral pursuant to, this Pledge Agreement and has taken all necessary action to authorize its execution, delivery and performance of, and grant the lien on the Collateral pursuant to this Pledge Agreement; (b) this Pledge Agreement constitutes a legal, valid and binding obligation of the Pledgor, enforceable against the Pledgor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights 2 generally and except as enforceability may be limited by general principles of equity; (c) the execution, delivery and performance of this Pledge Agreement by the Pledgor will not violate any provision of any law order, writ or decree binding upon or obligation of the Pledgor; (d) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or governmental authority and no consent of any other person (including, without limitation, any stockholder or creditor of the Pledgor or any shareholder of the Company) is required in connection with the execution, delivery, or performance by the Pledgor or the validity or enforceability against the Pledgor of this Pledge Agreement; (e) no litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of the Pledgor, threatened by or against the Pledgor or against any of its properties or revenues with respect to this Pledge Agreement or any of the transactions contemplated hereby; (f) all of the shares of Pledged Stock have been duly and validly issued and are fully paid and nonassessable; and there are no outstanding subscriptions, options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements providing for the purchase, encumbrance, hypothecation, or any other purported transfer or encumbrance of any of the Pledged Stock; (g) the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Stock, free and clear of any and all liens or options in favor of, or claims of, any other person, except the lien created by this Pledge Agreement; (h) upon delivery to the Agent of the stock certificates evidencing the Pledged Stock, so long as such Pledged Stock is delivered to the Agent in the State of New York, the lien granted pursuant to this Pledge Agreement will constitute (under the laws of the State of New York) a valid, perfected, first-priority lien on the Collateral, enforceable as such against the Pledgor, all creditors of the Pledgor and any persons purporting to purchase any of the Collateral from the Pledgor; and (i) the Pledgor has beneficially owned all of the shares of Pledged Stock for a period of at least three (3) years. 5. COVENANTS. The Pledgor covenants and agrees with the Agent and the Investors that, from and after the date of this Pledge Agreement until the Registration Obligations are performed and satisfied in full: 3 (a) If the Pledgor shall, as a result of its ownership of any Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution of equity in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of or in exchange for any shares of any Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the agent for the Agent and the Investors, hold the same in trust for the Agent and the Investors and deliver the same forthwith to the Agent in the exact form received, duly endorsed by the Pledgor to the Agent, if required, together with an undated stock power covering such certificate duly executed in blank and with, if the Agent so requests, signature guaranteed, to be held by the Agent hereunder as Collateral. Any sums paid upon or in respect of any Pledged Stock upon the liquidation or dissolution of the Company shall be paid over to the Agent to be held by it hereunder as Collateral, and in case any distribution of capital shall be made on or in respect of any Pledged Stock or any property shall be distributed upon or with respect to any Pledged Stock, in either case, pursuant to the recapitalization or reclassification of the capital of the Company, or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Agent to be held by it, subject to the terms hereof, as Collateral. If any sums of money or property so paid or distributed in respect of any Pledged Stock shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Agent, hold such money or property in trust for the Agent and the Investors, segregated from other funds of the Pledgor, as Collateral. (b) Without the prior written consent of the Agent, the Pledgor will not (i) vote to enable, or take any other action to permit, any company to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of the Company, (ii) sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any lien or option in favor of, or any claim of any person with respect to, any of the Collateral, or any interest therein, except for the lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Agent, and the Investors in and to the Collateral against the claims and demands of all persons whomsoever. (c) At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent may reasonably request for the purposes of obtaining or 4 preserving the full benefits of this Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent, to be held as Collateral pursuant to this Agreement. (d) The Pledgor agrees to pay, and to indemnify and save the Agent and the Investors harmless from and against, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. (e) The Pledgor will not create, incur or permit to exist any lien upon the Pledged Stock other than the Lien in favor of the Agent for the benefit of the Investors created hereunder. 6. CASH DIVIDENDS: VOTING RIGHTS. Unless an Event of Default (as hereinafter defined) shall have occurred and be continuing and the Agent shall have given notice to the Pledgor of the Agent's intent to exercise its corresponding rights pursuant to paragraph 7 below, the Pledgor shall be permitted to receive all cash dividends paid by the Company in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock; provided, however, that the Pledgor hereby covenants that it shall not cast any vote or take any other action that, in the Agent's reasonable judgment, would impair any of the Collateral or which would be inconsistent with or result in any violation of any provision of this Pledge Agreement. 7. EVENT OF DEFAULT; RIGHTS OF THE AGENT. (a) For the purposes of this Pledge Agreement, the term "Event of Default" shall mean the failure of the Registration Statement referred to in the Registration Rights Agreement to be declared effective by the Securities and Exchange Commission within 95 days of the receipt by the Company of the Demand Registration Request (as defined in such agreement). For each day on which an Event of Default shall continue unabated, Pledgor shall forfeit, and Agent shall be entitled to exercise any of the remedies set forth in paragraph 8 hereof with respect to 1,000 shares of Pledged Stock, up to a maximum of 90 days, or 90,000 shares of Pledged Stock. If an Event of Default shall continue unabated for a period of 91 days, then Pledgor shall forfeit, and Agent shall be entitled to exercise any of the remedies set forth in paragraph 8 hereof with respect to, the remaining 160,000 shares of Pledged Stock. (b) If an Event of Default shall have occurred and be continuing and the Agent shall give notice of its intent to exercise any of the following rights to the Pledgor: (i) the Agent 5 shall have the right to receive on behalf of the Investors any and all cash dividends paid in respect of the forfeited shares of Pledged Stock and make application thereof in such order as it may determine, (ii) all forfeited shares of the Pledged Stock shall be registered in the name of the Agent or its nominee, and the Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of stockholders of the Company or otherwise, and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute record and beneficial owner thereof (including, without limitation, the right to exchange at its discretion any and all of such shares of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the Company, or upon the exercise by the Pledgor or the Agent of any right, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of such shares of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it, but the Agent shall have no duty to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) The rights of the Agent hereunder shall not be conditioned or contingent upon the pursuit by the Agent of any right or remedy against the Company or against any other person that may be or become liable in respect of all or any part of the Registration Obligations or against any other collateral security therefor, guarantee thereof or right of offset with respect thereto. The Agent shall not be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Agent be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. REMEDIES. If an Event of Default shall occur and be continuing, the Agent, on behalf of the Investors, may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Registration Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, the Company or any other person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Forfeited Collateral, or 6 any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Forfeited Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Agent or any Investor shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Forfeited Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Agent shall disburse any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale after deducting all reasonable costs and expenses of every kind incurred therein or in the care or safekeeping of any of the Forfeited Collateral or the exercise by the Agent of its rights hereunder, including, without limitation, reasonable attorneys' fees and disbursements, ratably to the Investors, in such order as the Agent may elect. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Agent arising out of the exercise by the Agent or any Investor of any of its rights hereunder; provided, however, that such waiver shall not apply to any claims, damages or demands resulting from the Agent's or any Investor's gross negligence or willful misconduct. If any notice of a proposed sale or other disposition of Forfeited Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 9. [INTENTIONALLY OMITTED]. 10. [INTENTIONALLY OMITTED]. 11. AMENDMENTS, ETC. WITH RESPECT TO THE REGISTRATION OBLIGATIONS. Until the Registration Obligations are satisfied in full, the Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the lien granted hereby. The Agent shall have no obligation to protect, secure, perfect or insure any other lien at any time held by it as security for the Registration Obligations or any property subject thereto. The Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Registration Obligations and notice of or proof of reliance by the Agent upon this Pledge Agreement; the Registration Obligations shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement; and all dealings among the Company, the Pledgor, the Agent and the Investors shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. The Pledgor waives diligence, presentment, 7 protest, demand and notice of default to or upon the Company or the Pledgor with respect to the Registration Obligations. 12. LIMITATION ON DUTIES REGARDING COLLATERAL. The Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9- 207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. Neither the Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable powers coupled with an interest. 14. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provision hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. NO WAIVER: CUMULATIVE REMEDIES. The Agent shall not by any act of (except by a written instrument pursuant to paragraph 17 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising on the part of the Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 17. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a 8 written instrument executed by the Pledgor and the Agent; provided, however that any provision of this Agreement with respect to the rights of the Agent or the Investors may be waived only by the Agent in a letter or agreement executed by the Agent. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Pledgor, the Agent and the Investors. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York without regard to the conflict-of-laws principles thereof. 18. NOTICES. Any notice hereunder shall be delivered to the address and/or telecopy number of the Pledgor and the Agent specified below and given by certified mail-return requested or by telecopier, and shall be deemed given when so sent. 19. IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO THE COMPANIES. The Pledgor hereby authorizes and instructs the Company and, if applicable, each other stockholder of the Company to comply with any instruction received by it from the Agent in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Agreement without any other or further instructions from the Pledgor, and the Pledgor agrees that the Company and/or the other stockholders of the Company shall be fully protected in so complying. 20. AUTHORITY OF AGENT. The Pledgor acknowledges that the rights and responsibilities of the Agent under this Pledge Agreement with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Agent and the Investors, be governed by such agreements with respect thereto as may exist from time to time among them, but, as between the Agent and the Pledgor, the Agent shall be conclusively presumed to be acting as agent for the Investors with full and valid authority so to act or refrain from acting, and the Pledgor shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 21. TERMINATION; RELEASE. When all Registration Obligations have been satisfied in full, this Agreement shall terminate, and the Agent, at the expense of the Pledgor, will execute and deliver to the Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the Pledgor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Agent and which has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Agent hereunder. 9 IN WITNESS WHEREOF, the Pledgor and the Agent have caused this Pledge Agreement to be duly executed and delivered as of the date first above written. -------------------------- Daniel P. Flohr Address for Notices: c/o C-Phone Corporation 6714 Netherlands Drive Wilmington, NC 28405 Telecopy: (910) 395-6108 with a copy to: Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, New York 10017 Attn: Arthur Katz, Esq. Telecopy: (212) 984-7893 JOSEPHTHAL LYON & ROSS INCORPORATED By: ------------------------- Name: Title: Address for Notices: 200 Park Avenue 24th Floor New York, New York 10166 Attention: Dan Purjes Telecopy: (212) 907-4086 with a copy to: Michael Loew, Esq. 200 Park Avenue 24th floor New York, New York 10166 Telecopy: (212) 949-9884 10 SCHEDULE 1 CERTIFICATE NO. NO. OF SHARES OF - -------------- COMMON STOCK ---------------- 3120 73,455 3114 100,000 76,545 11 -----END PRIVACY-ENHANCED MESSAGE-----