As filed with the Securities and Exchange Commission on August 6, 1998.
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CYNET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 7340 76-0467099
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
ORGANIZATION) CODE NUMBER)
COPIES TO:
12777 JONES ROAD, SUITE 400 JAMES J. SPRING, III SAMUEL C. BEALE
HOUSTON, TEXAS 77070 CHAMBERLAIN, HRDLICKA, WHITE, VICE PRESIDENT - GENERAL COUNSEL
(281) 897-8317 WILLIAMS & MARTIN CYNET, INC.
(ADDRESS AND TELEPHONE 1400 TWO ALLEN CENTER 12777 JONES ROAD, SUITE 400
NUMBER OF PRINCIPAL 1200 SMITH STREET HOUSTON, TEXAS 77070
EXECUTIVE OFFICES) HOUSTON, TEXAS 77002 (281) 897-8317
PHONE (713) 658-1818 (NAME, ADDRESS AND
FACSIMILE (713) 658-2553 TELEPHONE NUMBER OF
AGENT FOR SERVICE)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount Proposed
Title of Each Class of To Be Maximum Proposed Maximum Amount of
Securities To Be Registered Offering Price Aggregate Registration
Registered Per Unit Offering Price Fee
<S> <C> <C> <C> <C>
Class A Common Stock(1) 5,514,492 (2) $ 8,138,876 $ 2,401
Class B Common Stock(1) 2,697,761 (3) $ 5,358,574 $ 1,581
Series A Preferred Stock(1) 103,500 $2.00 $ 207,000 $ 61
Series B Preferred Stock(1) 107,349 $3.00 $ 322,047 $ 95
Warrants to Purchase Shares of Class A Common Stock(1) 799,000 (4) $ 201,640 $ 59
Class B Common Stock Underlying Warrants(5) 2,200,000 $1.00 $ 2,200,000 $ 649
-------
Total $ 4,846
=======
</TABLE>
- --------------------------
(1) Each of these securities is the subject of a rescission offer to be
commenced following the effectiveness of the Registration Statement, as
more fully described in the prospectus which is a part of this
Registration Statement.
(2) The shares of Class A Common Stock that are subject to the rescission
offer were issued in exchange for cash and services rendered at prices
ranging from $0.39 to $2.00 per share, and include shares issued
following the conversion of 3,364,354 shares of Series A Preferred
Stock that were originally sold at prices ranging from $1.43 to $2.00
per share.
(3) The shares of Class B Common Stock that are subject to the rescission
offer were issued in exchange for cash and services rendered at prices
ranging from $0.25 to $2.73 per share, and include shares issued
following the conversion of 1,697,891 shares of Series B Preferred
Stock that were originally sold at $3.00 per share.
(4) Warrants to purchase shares of Class A Common Stock represent (i)
warrants to purchase 738,000 shares issued in exchange for services
rendered valued at $0.26 per share and (ii) warrants to purchase 61,000
shares issued in exchange for services rendered valued at $0.16 per
share.
(5) Represents shares of Class B Common Stock underlying certain warrants
that have not yet been exercised.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION DATED AUGUST 6, 1998
PROSPECTUS
CYNET, INC.
RESCISSION OFFER
CyNet, Inc., a Texas corporation (the "Company"), is offering, upon the
terms and conditions set forth herein, to rescind the issuance or sale of an
aggregate of (i) 5,514,492 shares of no par value Class A voting common stock
("Class A Common Stock"), including 4,036,725 shares issued upon conversion of
the Company's Series A convertible preferred stock ("Series A Preferred Stock")
originally sold at prices ranging from $1.43 to $2.00 per share, (ii) 2,697,761
shares of no par value Class B nonvoting common stock ("Class B Common Stock"),
including 2,018,761 shares issued upon conversion of the Company's Series B
convertible preferred stock ("Series B Preferred Stock") originally sold at
$3.00 per share, (iii) 103,500 shares of Series A Preferred Stock, (iv) 107,349
shares of Series B Preferred Stock and (v) warrants to purchase an aggregate of
799,000 shares of the Class A Common Stock (the securities described in (i)
through (v) above are referred to collectively as the "Subject Securities") to
persons who acquired the Subject Securities from the Company between August 1996
and April 1998 (each, individually referred to as an "Offeree" and all,
collectively referred to as the "Offerees"), in exchange for cash and services
rendered at prices ranging from $0.25 to $3.00 per share (the "Rescission
Offer"). See "Rescission Offer" and "Description of Capital Stock." The Company
believes that the issuance or sale of the Subject Securities may have been in
violation of certain provisions of the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Accordingly, the Company may be liable to the Offerees in the
aggregate amount of $14,228,137, plus interest from the date of issuance, less,
with respect to shares of Series A Preferred Stock and Series B Preferred Stock
(collectively, the "Preferred Stock"), $248,128 in dividends paid to the holders
of such shares. The Company hereby offers to rescind such prior sales by
repurchasing the Subject Securities from the Offerees at the price per share
paid by the Offerees, plus an amount equal to the interest thereon at the
appropriate statutory rate per annum from the date of issuance of the Subject
Securities to the expiration of the Rescission Offer, less any dividends paid,
with respect to shares of Preferred Stock. The applicable rates of interest for
the repurchase of the Subject Securities provided by law for residents of
various jurisdictions are set forth under "Rescission Offer." The Rescission
Offer will expire on the later to occur of (x) , 1998 (30 days after
the date of this Prospectus), or (y) 30 days after the date each Offeree
receives this Prospectus, unless extended by the Company (the "Expiration
Date"). The Rescission Offer does not apply to any securities of the Company
other than the Subject Securities.
INVESTMENT IN THE SUBJECT SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THE SUBJECT SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------
All Offerees receiving the Rescission Offer are urged to read this
Rescission Offer carefully.
--------------------------------------------------------------------------
The date of this Prospectus is , 1998.
1
<PAGE>
IN CONNECTION WITH THIS OFFERING OF CERTAIN SHARES OF CLASS B COMMON STOCK
SUBJECT TO WARRANTS, CERTAIN UNDERWRITERS AND SELLING SHAREHOLDERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS B COMMON STOCK ON NASDAQ IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "PLAN OF DISTRIBUTION AND SELLING
SHAREHOLDER."
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATIONS TO ANY
SHAREHOLDERS AS TO WHETHER TO ACCEPT THE RESCISSION OFFER OR TO RETAIN THE
SUBJECT SECURITIES PURCHASED FROM THE COMPANY. EACH SHAREHOLDER MUST MAKE HIS
OWN DECISION AS TO WHETHER TO ACCEPT THE RESCISSION OFFER.
ACCEPTANCE OR REJECTION
All Offerees are requested to complete the form of Election set forth
on Exhibit A attached hereto (the "Election") accompanying this Prospectus and
return it to the Company (Attention: Samuel C. Beale, Vice President and General
Counsel), 12777 Jones Road, Suite 400, Houston, Texas 77070 as soon as
practicable, but in no event should the Election be delivered to the Company
later than the Expiration Date. The Election should be completed to indicate
whether the Offeree accepts or rejects the Rescission Offer. Offerees accepting
the Rescission Offer must enclose with the Election the original certificates or
other instruments representing the Subject Securities, properly endorsed for
transfer, with the signature(s) guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program). Any Offeree
who has not delivered a completed Election by the Expiration Date shall be
conclusively deemed to have rejected the Rescission Offer. The Election and the
stock certificates or other instruments representing the Subject Securities may
be delivered by hand or courier service, or by mail. The method of delivery of
all documents is at the election and risk of the Offeree. If an Offeree desires
to make use of the mails to deliver a completed Election to the Company,
delivery will be deemed to have occurred on the date the Election is postmarked,
and the Company recommends registered mail or certified mail, return receipt
requested, that is properly insured.
EFFECT OF REJECTION
For purposes of applicable federal and state securities laws, Offerees
who reject the Rescission Offer will be deemed to hold registered shares that
are freely tradeable. Rejection of the Rescission Offer by Offerees will not
necessarily bar the Offerees from rescission or other rights which they may have
under federal or state securities laws if the Company in fact violated such
laws. However, federal law does provide that an Offeree may, under certain
circumstances, lose any rescission rights under federal securities laws one year
from the date of purchase of such shares. In addition, most state securities
laws provide that an Offeree may lose any rescission rights by rejecting or
failing to respond to a valid rescission offer.
FINANCING OF RESCISSION LIABILITIES
The Company is currently negotiating with certain stand-by underwriters
to provide up to $9,000,000 (the "Rescission Financing") in order to finance the
repurchase of the Subject Securities from Offerees electing to accept the
Rescission Offer. The Rescission Financing will be completed prior to the date
of this Prospectus. The Company has also secured a commitment with CyNet
Holdings, LLC ("Holdings") pursuant to which Holdings will provide up to
$10,000,000 ("Holdings Commitment") of equity capital to the Company prior to
December 31, 1998. The proceeds from the Rescission Financing will be used to
purchase the first $9,000,000 of Subject Securities in connection with the
Rescission Offer. To the extent that funds in excess of $9,000,000 are needed to
repurchase the Subject Securities, the proceeds from the Holdings Commitment
will be used for such purpose. Any unused proceeds of the Rescission Financing
or the Holdings Commitment remaining after the funding of the Rescission Offer
will be used by the Company for general corporate purposes. See "Use of
Proceeds."
2
<PAGE>
SELLING SHAREHOLDER
This Prospectus also relates to the resale of 2,200,000 shares of Class
B Common Stock underlying two warrants (the "Shaffner Warrants") issued to Keith
Shaffner (the "Selling Shareholder"). The Company will not receive any proceeds
from the resale of the Class B Common Stock underlying the Shaffner Warrants,
but will receive gross proceeds of $1.00 per share in the event of the exercise
of the Shaffner Warrants (a maximum amount of $2,200,000). The Selling
Shareholder or any dealer effecting a transaction in the resale of the shares of
the Class B Common Stock, whether or not participating in a distribution, is
required to deliver a current prospectus upon such resale. Keith Shaffner has
entered into certain agreements with the Company not to sell any of the shares
of Class B Common Stock underlying the Shaffner Warrants until after February 1,
1999. See "Plan of Distribution and Selling Shareholder."
[STATE SECURITIES LAWS LEGENDS]
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK
FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. SUCH "FORWARD-LOOKING STATEMENTS" CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVES THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THOSE STATEMENTS APPEAR IN A
NUMBER OF PLACES IN THIS PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY OR ITS DIRECTORS OR OFFICERS WITH
RESPECT TO, AMONG OTHER THINGS: (I) TRENDS AFFECTING THE COMPANY'S FINANCIAL
CONDITION OR RESULTS OF OPERATION; AND (II) THE COMPANY'S BUSINESS AND GROWTH
STRATEGIES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE PROJECTED, EXPRESSED OR IMPLIED, IN THE FORWARD-LOOKING STATEMENTS AS
A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, THE INFORMATION SET FORTH UNDER THE
HEADINGS "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS", IDENTIFIES IMPORTANT
FACTORS THAT COULD CAUSE SUCH DIFFERENCES. SUCH FORWARD-LOOKING STATEMENTS SPEAK
ONLY AS OF THE DATE OF THIS PROSPECTUS AND THE COMPANY CAUTIONS POTENTIAL
INVESTORS NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT NO OFFEREE RECEIVING
THE RESCISSION OFFER EXERCISES HIS RIGHT TO RESCIND.
THE COMPANY
SERVICES
CyNet, Inc. (the "Company") is a provider of business-to-business
facsimile transmission services, using the Internet and private transmission
facilities. The Company's services are designed to reduce the cost of facsimile
transmission while making the process of transmission easier and less time
consuming. The Company was formed in April 1995 to capitalize on the dramatic
increase in the usage of third-party fax services. Initially, the Company
created HYPERCAST, the Company's fax broadcast service. During 1997 the Company
expanded its service capabilities by developing HYPERLINE, its point-to-point
fax service and in 1998 introduced HYPERWEB, its Internet fax service. The
Company's services significantly reduce most long distance telephone charges
incurred by the user. The Company believes its fax transmission services provide
customers with a less expensive, faster, and more convenient alternative than
competitive services. The Company has developed user and operating software to
operate and control its customized computer and communication equipment.
Initially, the Company developed a network by installing fax servers
("nodes") in 16 cities throughout the United States enabling the Company to
bypass the long distance carrier's networks when sending faxes to or from the
local calling areas serviced by the nodes. These nodes are connected to the
Company's Houston network operations center through telephone lines. More
recently, the Company has been able to utilize the public switching telephone
network ("PSTN") to provide low-cost facsimile services as a result of
negotiated volume-based rate arrangements with telephone common carriers
throughout the United States. The Company's nodes, combined with direct-access
long distance lines to other cities and countries through the PSTN, give the
Company a substantial amount of cost-efficient fax broadcasting capacity. The
Company believes its current operating software and other available technology
will enable it to increase capacity to meet increasing demands for facsimile
transmission services in both domestic and international markets. The Company
also intends to capitalize on emerging technologies in the telecommunications
industry generally to expand its services to include full-motion imaging and
voice communication services.
Access to the Company's network is accomplished easily and does not
require significant investment, installation expense or change in business
practices by the customer. Customers using the HYPERLINE service can connect to
the Company's network by plugging in a small device between their fax machine
and the telephone jack; customers using the HYPERCAST service purchase the
Company's specialized software, which is easily installed on the customers'
personal computers. Once connected to the network, customers are able to send
documents and images to fax machines worldwide. The network is highly secure
with data residing in the Company's computers in compressed or encrypted form,
inaccessible to unintended readers. Customers can install the Company's services
at individual fax machines or desktop computer locations, across departments or
throughout organizations. The Company sells its services through multiple sales
channels, including direct telephone sales programs, a direct field sales force,
an agent and dealer distribution network and other promotional activities.
4
<PAGE>
The Company believes its success depends, among other things, on its
ability to (i) maintain a low overhead cost structure by maximizing the benefit
of the network, (ii) negotiate low long distance rates for transmissions and
(iii) implement a cost-effective marketing and sales program.
FINANCINGS
From the Company's inception through December 31, 1996, the Company
raised approximately $1.9 million of start-up capital by forming sixteen limited
liability companies ("LLCs") with various persons who received either a 40%
(nine LLCs) or 50% (seven LLCs) interest in operations in a city or group of
cities in exchange for cash capital contributions. The Company was the manager
of the LLCs and owned the other 50% or 60% profit interest. The funds received
from LLC members were used to develop the Company's network infrastructure.
Revenue and profits from all other cities not on the network are 100% owned by
the Company. In December 1997, the Company exchanged 2,328,940 shares of Class A
Common Stock for the net equity interest ("Minority Interest") of the members
(other than the Company) in all of the LLCs, at an exchange ratio of 1.2 shares
of Class A Common Stock for each $1.00 of capital originally contributed by a
member to an LLC. As a result, the Company holds 100% of the equity interest in
the LLCs.
From August 1996 through the date of this Prospectus, the Company
raised approximately $17.2 million of additional capital through a series of
private offerings ("Offerings"), including $14,228,137 from the issuance or sale
of the Subject Securities. The proceeds from the Offerings were used principally
to develop and expand the Company's marketing and sales efforts, improve the
network and for working capital.
The Company was incorporated in Texas on April 19, 1995. The Company's
principal executive offices are located at 12777 Jones Road, Suite 400, Houston,
Texas 77070 and the telephone number is (281) 897-8317. The Company's home page
is located at http://www.cynet-fax.com. Information contained in the Company's
Web Site shall not be deemed a part of this Prospectus.
THE RESCISSION OFFER
The Company is, subject to the terms and conditions of the Rescission
Offer, offering to rescind the issuance of the Subject Securities to the
Offerees. The following table sets forth information regarding the Rescission
Offer:
<TABLE>
<CAPTION>
CLASS OF STOCK NUMBER OF SHARES
---------------- ----------------------
OUTSTANDING(1) SUBJECT TO RESCISSION OFFER
--------------- ---------------------------
<S> <C> <C>
Class A Common Stock (2)..................... 20,385,071 5,514,492
Class B Common Stock ........................ 3,097,761 2,697,761
Series A Preferred Stock..................... 103,500 103,500
Series B Preferred Stock .................... 107,349 107,349
Warrants to Purchase Class A Common Stock.... 8,049,000 799,000
Warrants to Purchase Class B Common Stock.... 2,548,954 -0-
No Proceeds from Rescission Offer............ No proceeds will be received by the Company from the
Rescission Offer. However, the Company will receive
proceeds (i) in the event of the exercise of the Shaffner
Warrants (see "Plan of Distribution and Selling
Shareholder") and (ii) from the Rescission Financing
(see "Use of Proceeds").
No Market.................................... The holders of Subject Securities who reject the
Rescission Offer will own freely tradeable shares under
the Securities Act. No public market currently exists
for any class of the Subject Securities, and the
Company provides no assurance that there will be a
market in the future. See "Shares Eligible for Future
Sale."
5
<PAGE>
Risk Factors................................. An investment in the Company involves a high degree
of risk. See "Risk Factors."
</TABLE>
- --------------------------
(1) Shares outstanding as of July 31, 1998.
(2) Excludes 1,245,000 shares underlying options granted under the
Company's 1997 Incentive Stock Option Plan.
SUMMARY SELECTED FINANCIAL DATA
The following table presents summary historical data of the Company on
a consolidated basis (i) from the audited financial statements of the Company
for the years ended December 31, 1997 and 1996 and (ii) from the unaudited
financial statements of the Company for the three months ended March 31, 1998
and March 31, 1997. The summary selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31
---------------------- ---------------------
1997 1996 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 4,960,355 $ 801,181 $ 1,926,892 $ 874,767
Loss from operations.......................... (7,295,181) (2,327,399) (819,503) (1,099,825)
Net loss applicable to common shareholders.... (7,838,378) (4,065,121) (830,288) (1,186,560)
Net loss per common share..................... $ (0.56) $ (0.37) $ (0.04) $ (0.09)
Weighted average number of common shares
outstanding................................... 14,086,177 11,019,593 22,317,316 12,522,836
</TABLE>
DECEMBER 31, MARCH 31,
1997 1998
--------------- --------------
BALANCE SHEET DATA:
Working capital(1)............................ $ 1,575,044 $ 316,106
Total assets.................................. 6,770,373 6,325,506
Stock and warrants subject to rescission...... 13,835,114 13,910,012
Capital deficit............................... (8,668,500) (9,448,788)
- --------------------------
(1) Includes $2,078,825 of deferred offering costs - see Note 3 of the Notes
to the Consolidated Financial Statements.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SUBJECT SECURITIES INVOLVES A HIGH DEGREE OF RISK.
OFFEREES SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE RESCISSION
OFFER, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES
The Company commenced business in April 1995, has a limited operating
history and has incurred operating losses since inception. Revenue from the sale
of fax transmission services will be the Company's primary source of cash flow
during 1998. Although a significant number of new accounts have been obtained in
1998 and revenue has increased, there can be no assurance that the Company will
be able to generate sales in quantities sufficient to generate positive cash
flow. In addition, there can be no assurance that the Company will not continue
to experience operating losses for the foreseeable future as it commits
additional resources to increase revenue.
NEED FOR ADDITIONAL CAPITAL AND CAPITAL REQUIREMENTS
The Company's efforts to develop and introduce its fax transmission
services have required, and will continue to require, the Company to invest in
infrastructure and systems development. In addition, the Company has incurred
substantial losses since inception and expects to continue to incur losses
through at least 1998 and thereafter, until such time as the Company's operating
revenues are sufficient to cover operating costs and provide positive cash flow.
As a result, the Company expects it will need to raise additional capital in
future periods. If the Company experiences greater than anticipated capital
requirements, if the implementation of the Company's operating strategy fails to
produce anticipated revenue growth and cash flows or if additional working
capital is required for any other reason, the Company will be required to obtain
additional sources of capital earlier than currently anticipated. The timing of
the need for additional capital also will be affected by the extent to which the
Rescission Offer is accepted. See "Rescission Offer" and "--Lack of Sufficient
Capital to Fund Rescission Offer; Potential Rescission Liability." There can be
no assurance that the Company will be able to obtain equity, debt or lease
financing when needed or on terms that the Company finds acceptable. Any
additional equity or debt financing may cause substantial dilution to the
Company's shareholders. If the Company is unable to obtain sufficient funds to
satisfy its capital requirements, it will be forced to reduce the scope of its
expansion plans, curtail operations, dispose of assets or seek extended payment
terms from its vendors, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
LACK OF SUFFICIENT CAPITAL TO FUND RESCISSION OFFER; POTENTIAL RESCISSION
LIABILITY
The Rescission Offer is being made to all persons who acquired the
Subject Securities from the Company. If all of the Offerees holding the Subject
Securities accept the Rescission Offer, the Company will be required to make
payments aggregating $14,228,137, plus the aggregate amount of interest at the
statutory interest rates from the date of issuance to the Expiration Date less
$248,128 in dividends paid on the Preferred Stock. As of March 31, 1998, the
aggregate accrued interest (on the total liability of $14,228,137) was
approximately $600,000 and continues to accrue, assuming the full liability is
incurred, at approximately $93,000 per month. The Company is currently
negotiating agreements with a group of stand-by underwriters pursuant to which
the Company will complete the Rescission Financing in order to repurchase
Subject Securities from the Offerees electing to accept the Rescission Offer.
The Company has also obtained the Holdings Commitment pursuant to which Holdings
will provide up to $10,000,000 of equity capital to the Company prior to
December 31, 1998. See "Certain Transactions." Any unused proceeds of the
Rescission Financing or the Holdings Commitment remaining after the funding of
the Rescission Offer will be used by the Company for general corporate purposes.
See "Use of Proceeds." In the event that the Rescission Financing is not
completed or that the Company is required to pay the full amount of its
potential rescission liability, it will be required to seek additional capital
through debt or equity financing or the sale of assets, and there can be no
assurance that sufficient financing can be obtained on terms acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
There can be no assurance that claims asserting violations of state or
federal securities laws will not be asserted notwithstanding the Rescission
Offer. Furthermore, there can be no assurance that the Company will not be
subject to penalties or fines relating to past securities issuances or that
other holders of the Subject Securities will not assert or prevail in claims
against the Company for rescission or damages under federal or state securities
laws. The staff of the Securities
7
<PAGE>
and Exchange Commission (the "Commission") takes the position that a person's
right of rescission under federal securities law may, under certain
circumstances, survive a rescission offer. Even if the Company were successful
in defending any securities law claims, the assertion of such claims against the
Company would result in costly litigation and significant diversions of effort
by the Company's management. In addition, the Rescission Offer will not prevent
the Commission or any state securities commission from pursuing enforcement
action against the Company with respect to any alleged violations of federal or
state securities laws. See "Rescission Offer --Effect of Rescission Offer" and
Note 8 of Notes to Consolidated Financial Statements.
RISK OF MANAGING GROWTH; RECENT MANAGEMENT CHANGES
The Company's growth has placed, and is expected to continue to place,
a significant strain on the Company's management, administrative, operational,
financial and technical resources and on its systems and controls. The Company
has made recent changes in executive-level management positions and certain of
the Company's senior management personnel have worked together only a short
time. The Company believes it will need, both in the short term and the long
term, to hire additional qualified administrative and management personnel in
all functional areas. Failure to locate, hire and retain such qualified
personnel or failure to manage the Company's growth properly could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "--Dependence on Key Personnel; Need to Hire
Additional Qualified Personnel," "Business" and "Management."
ACCOUNTANTS' EXPLANATORY PARAGRAPH
The Company's independent certified public accountants included an
explanatory paragraph in their opinion with respect to the financial statements
to reflect that recurring losses from operations and the Rescission Offer have
raised substantial doubt about the ability of the Company to continue as a going
concern. Furthermore, the financial statements do not include any adjustments
that might result from the outcome of such uncertainty. The Company's internally
generated cash flows from operations have historically been, and continue to be,
insufficient for cash needs. The Company has relied upon external equity
financing to continue its operations.
From inception through March 31, 1998, the Company incurred significant
operating losses and at March 31, 1998, the Company had a capital deficit of
$9,448,788. Until the Company can obtain monthly sales levels of approximately
$1,000,000, which the Company currently expects to be necessary to fund current
working capital needs, there is uncertainty as to the ability of the Company to
expand its business and continue as a going concern. The Company's current cash
forecast indicates that there will be negative cash flows from operations for a
substantial portion of 1998 and thereafter, until such time as the Company's
operating revenues are sufficient to cover operating costs and provide positive
cash flow. There can be no assurance that the Company will be able to generate
revenues as projected sufficient to service the cost of operations and fund the
capacity to handle the Company's growth. Further, failure to realize the sales
growth projections could shorten the period that current cash balance will be
sufficient to meet working capital needs. As a result, there can be no assurance
that the Company will be successful in funding its working capital and capacity
needs.
INFORMAL COMMISSION INQUIRY
In May 1997, the Company received a letter from the enforcement
division of the Commission in which the Company was advised of an informal
inquiry being conducted with respect to the Offerings. The Company met with the
Commission in August 1997 in an attempt to resolve the issues raised in the
informal inquiry and believes that it has complied with all information requests
from the Commission. Management believes the Rescission Offer addresses
substantially all of the issues raised by the Commission in its inquiry. While
there can be no assurance that other issues will not be raised or that the
Rescission Offer will completely satisfy the Commission's concerns, the Company
has been advised orally that upon the completion of the Rescission Offer, the
Commission currently intends to close its inquiry.
MARKET GROWTH OF FAX COMMUNICATIONS
While the Company believes the market and demand for fax transmission
services will continue to grow, there can be no assurance as to the extent of
any such growth. Even if there is continued growth in the use of fax
transmission services, there can be no assurance that an increasing number of
customers will elect to use third party service providers, such as the Company,
to fulfill their fax distribution needs, in lieu of obtaining and using their
own systems and equipment to fulfill such
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needs. If the use of third party service providers does continue to grow, there
can be no assurance that the Company will be able to attract these new users as
customers. See "Business--Competition."
COMPETITION
The Company faces a high degree of competition in each of its services.
Many of the Company's competitors, which include facsimile service providers
such as Xpedite Systems, Inc. ("Xpedite") and FaxSav, Inc. ("FaxSav") as well as
long distance carriers such as American Telephone and Telegraph Co. ("AT&T"),
MCI Communications Corp. ("MCI"), and Sprint Corp. ("Sprint"), possess
significantly greater financial, marketing, technical and other resources than
the Company. Xpedite and FaxSav each offer fax transmission services similar to
those offered by the Company. The Company does not have any knowledge as to, and
cannot predict, whether Xpedite, FaxSav or any other competitor will expand its
fax transmission services business, and there can be no assurance that these or
other existing competitors will not expand their businesses. Further, because
the Company cannot predict whether other companies will enter the business of
providing fax transmission services similar to those provided by the Company,
there can be no assurance that additional competitors will not enter the markets
served by the Company. In addition, there can be no assurance that potential
customers will not elect to use their own equipment to fulfill their needs for
fax transmission services. The foundation of the Company's telephony network
infrastructure consists of the right to use the telecommunications lines of
certain of the long distance carriers. There can be no assurance that these
companies will not discontinue or otherwise alter their relationships with the
Company in a manner that would have a material adverse effect upon the Company's
business, financial condition and results of operations. There also can be no
assurance that customers will not elect to use alternatives to the Company's fax
transmission services, including electronic mail services such as the Internet,
to carry such customers' communications or that companies offering such
alternatives will not develop features or pricing policies which are more
attractive to customers than those offered by the Company. See
"Business-Competition."
COMPANY SYSTEM FAILURE
The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its fax system infrastructure. Within 60 days from
the date of this Prospectus, the Company will have a disaster recovery plan with
a redundant network switching center. The Company's systems and operations
remain vulnerable to damage or interruption from fire, earthquake or other
natural disaster and from power loss, telecommunications failure, break-ins and
similar events. Furthermore, the hardware, software and network systems
developed by the Company are relatively new, and therefore have not withstood
the demands of the larger volume associated with the Company's revenue
projections. There can be no assurance that these systems will be adequate to
operate at the volume levels projected or operate efficiently enough to produce
the required gross margin for the Company to be profitable. The occurrence of
any of the foregoing risks could have a material adverse effect on the Company's
business, financial condition and results of operations.
LACK OF LONG-TERM CUSTOMER CONTRACTS
The majority of the Company's services are performed pursuant to
specific purchase orders from customers and other short-term arrangements. While
the Company pursues longer term contracts with customers, such contracts
typically are of a duration of six months to one year. As a result, there can be
no assurance that the majority of the Company's customers will continue to
purchase the Company's services in the future. See "Business--Customers."
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company is highly dependent on the technical and management skills
of its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain existing personnel or identify
or hire additional personnel. The failure to retain and attract the necessary
technical, managerial, financial, marketing and customer service personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's performance also depends on the
Company's ability to retain and motivate its executive officers and key
employees, several of whom have worked together for only a short time. The
Company has entered into employment agreements with four of its senior officers.
The loss of key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Risk of Managing
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Growth; Recent Management Changes and New Information Systems" and
"Management--Directors and Officers" and "Management--Employment Agreements."
TECHNOLOGICAL CHANGE
The telecommunications industry is characterized by continuous
technological change, evolving industry standards, emerging competition and
frequent new service and other product introductions. Future technological
advances in the telecommunications industry may result in the availability of
new services that could compete with the fax transmission services currently
provided by the Company or decreases in the cost of existing services that could
enable the Company's established or potential customers to fulfill their own
needs for fax transmission services more cost effectively. There can be no
assurance that the Company can successfully identify new service opportunities
and develop and bring new products and services to market in a timely and
cost-effective manner, or that products, services or technologies developed by
others will not render the Company's products, services or technologies
noncompetitive or obsolete.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's current international operations consist of fax
transmissions to locations outside the United States. The Company is planning to
increase transmissions to foreign locations and provide services for foreign
customers in the near future. The Company is also considering opportunities for
acquiring businesses with significant international operations and customers.
However, any international expansion will subject the Company to the wide range
of general business risks associated with international operations, including
(i) unexpected changes in legal and regulatory requirements, (ii) changes in
tariffs, exchange rates and other barriers, (iii) political and economic
instability; (iv) inability to repatriate net income from foreign markets, (v)
long accounts receivable payment cycles in certain countries, (vi) potentially
adverse tax consequences and (vii) the regulation of Internet access providers
by foreign regulatory authorities. There can be no assurance that such factors
will not have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, financial condition and results of
operations.
LACK OF PATENTS
The Company has developed much of its own operating and user software
and expects to continue to improve existing applications and develop new
applications in the future. The Company has not copyrighted or patented any of
its software and relies on non-disclosure agreements and common law rights of
protection. Other companies may hold or obtain patents on inventions or may
otherwise claim proprietary rights to technology useful or necessary to the
Company's business. The extent to which the Company may be required to seek
licenses under such patents or other proprietary rights of third parties, and
the cost or availability of such licenses, cannot now be predicted. The Company
relies to a significant extent on proprietary know-how, particularly with
respect to the fax communications process. There can be no assurance, however,
that others will not independently develop superior know-how or obtain access to
know-how used by the Company that the Company now considers proprietary. See
"Business--Intellectual Property."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company may, in the future, acquire or engage in efforts to acquire
customer bases and businesses from, make investments in, or enter into strategic
alliances with, companies that have customer bases, switching capabilities or
existing networks in the Company's current or target markets. Any future
acquisitions, investments, strategic alliances or related efforts will be
accompanied by the risks commonly encountered in such transactions or efforts.
Such risks include, among others, (i) the difficulty of identifying appropriate
acquisition candidates, (ii) the difficulty of assimilating the operations and
personnel of the respective entities, (iii) the potential disruption of the
Company's ongoing business, (iv) the inability of management to capitalize on
the opportunities presented by acquisitions, investments, strategic alliances or
related efforts, (v) the failure to successfully incorporate licensed or
acquired technology and rights into the Company's services, (vi) the inability
to maintain uniform standards, controls, procedures and policies and (vii) the
impairment of relationships with employees and customers as a result of changes
in management. Acquired operations typically operate independent marketing,
customer support, billing systems and other functions. Any acquisition by the
Company could result in difficulties in the integration and consolidation of
customer bases or operations. Pending such integration and consolidation, it
would be necessary for the Company to maintain separate billing systems and
other functions of the acquired operation, which could cause inefficiencies and
significant operational complexity and expense, increase the risk of billing
delays and financial
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reporting difficulties, and impair the Company's efforts to cross-sell the
products and services of the acquired operation. Additionally, in connection
with an acquisition, the Company could experience rates of customer attrition
that would be significantly higher than the rate of customer attrition that it
ordinarily experiences. Further, to the extent that any such transaction
involves customer bases or businesses located outside the United States, the
transaction would involve the risks associated with international operations.
There can be no assurance that the Company would be successful in overcoming
these risks or any other problems encountered with such acquisitions,
investments, strategic alliances or related efforts. In addition, no assurance
can be given that the Company would be able to obtain the capital it will need
to finance any such efforts. See "--Risks Associated with International
Operations."
GOVERNMENTAL REGULATION
The telecommunications industry is subject to regulation by the Federal
Communications Commission (the "FCC"), by various state public service and
public utility commissions and by various international regulatory authorities.
The FCC has the power to impose regulatory requirements on the Company and
currently classifies the Company as a "nondominant carrier." Generally, the FCC
has chosen not to closely regulate the charges or practices of nondominant
carriers. The FCC also has the power to impose more stringent regulatory
requirements on the Company and to change its regulatory classification. As a
result, there can be no assurance that the FCC will not change the Company's
regulatory classification or otherwise subject the Company to more burdensome
regulatory requirements that would have a material adverse effect on the
Company's business, financial condition and results of operations.
In connection with its anticipated international operations, the
Company will be required to satisfy a variety of foreign regulatory
requirements. The Company intends to explore and seek to comply with these
requirements on a country-by-country basis. There can be no assurance that the
Company will be able to satisfy the regulatory requirements in foreign
countries, and the failure to satisfy such requirements may prevent the Company
from operating in such countries. The failure to comply with foreign regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF PUBLIC MARKET
There has been no public trading market for the Company's Class A and
Class B Common Stock and there can be no assurance that one will develop. Upon
the completion of the Rescission Offer, the Company intends to take the
necessary actions to allow its Class A and Class B Common Stock to be traded by
means of the OTC Bulletin Board(R) service (the "OTC"). Management will attempt
to develop a public market for its Class A and Class B Common Stock by
soliciting brokers to become market makers of the shares in such a manner that
will permit trading of its Class A and Class B Common Stock using the OTC.
However, to date the Company has not completed agreements with any such
securities brokers to become market makers and there can be no assurance that
the Company will be able to solicit brokers to become market makers. As a
result, there can be no assurance that a market for the Company's Class A and
Class B Common Stock will ever develop. If any market is developed it should be
assumed that such market will be highly illiquid, sporadic and volatile.
PENNY STOCK REGULATION
The Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange system). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prepared by the Commission that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that a penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in any secondary market for a stock
that becomes subject to the penny stock rules. The Company's Class A and Class B
Common Stock may be subject to the penny stock rules, and accordingly, investors
rejecting this Rescission Offer may find it difficult to sell their shares, if
at all.
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CONTINUED CONTROL BY CERTAIN SHAREHOLDERS
Assuming 100% rejection of the Rescission Offer, CyNet Holdings, LLC
will own approximately 53.5% of the Company's Class A Common Stock. As a result,
it will be able to exercise significant influence on the business and affairs of
the Company, including election of the Company's directors and the authorization
of other corporate actions requiring shareholder approval. See "Principal
Shareholders."
AUTHORIZED STOCK
The Board of Directors of the Company has the authority to issue up to
10,000,000 shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined by the Board of Directors.
Accordingly, the Board of Directors of the Company is empowered, without further
shareholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of the Company's Common Stock. Certain companies
have used the issuance of preferred stock as an anti-takeover device and the
Board of Directors could, without further shareholder approval, issue preferred
stock with certain rights that could discourage an attempt to obtain control of
the Company in a transaction not approved by the Board of Directors. The Board
of Directors of the Company also has authority to issue up to 60,000,000 shares
of Common Stock. See "Description of Capital Stock."
DETERMINATION OF PRICE OF OFFERINGS
The offering prices and assigned values relating to the issuances of
the Subject Securities were arbitrarily determined by the Company and bore no
relationship to the Company's earnings, assets, book value or any other
generally accepted criteria of value. There can be no assurance that if an
Offeree rejects the Rescission Offer he will be able to sell in the future, if
at all, the Subject Securities for a price higher than the original offering
price.
NEED TO MAINTAIN A CURRENT PROSPECTUS
The Company must maintain a current prospectus in order for the Selling
Shareholder to sell the shares of the Class B Common Stock to which this
Prospectus relates. In the event that the Company is unable to maintain a
current prospectus due to lack of sufficient financial resources or for other
reasons, the Selling Shareholder may be unable to resell his shares of the Class
B Common Stock in any public market.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Prospectus contains forward-looking statements, including
statements regarding, among other items, the Company's future plans and growth
strategies and anticipated trends in the industry in which the Company operates.
These forward-looking statements are based on the Company's expectations and are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described herein,
including, among others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the objectives and plans
of the Company will be achieved.
YEAR 2000 RISK
Although the Company does not expect to incur significant expenditures
to address Year 2000 issues, there can be no assurance that this will be the
case. Additionally, the ability of third parties with whom the Company transacts
business to adequately address their Year 2000 issues is outside the Company's
control. There can be no assurance that the failure of the Company or such third
parties to adequately address their respective Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
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RESCISSION OFFER
BACKGROUND
From August 1996 through April 1998, the Company raised $14,228,137 of
capital through the issuance or sale of the Subject Securities. The following
table sets forth information regarding (i) the states in which the Offerees
reside, (ii) the statutory interest rates applicable in such states, and (iii)
the aggregate amount of Subject Securities issued by the Company.
STATE OR TERRITORY STATUTORY RATE AMOUNT SUBJECT TO RESCISSION
- ------------------ -------------- ----------------------------
Arizona 10% $669,899
Arkansas 6% $30,000
California 7% $1,214,451
Colorado 8% $150,000
Connecticut 6% $8,000
District of Columbia 6% $16,600
Florida 10% $201,500
Georgia 6% $17,001
Hawaii 10% $13,000
Illinois 10% $153,000
Indiana 8% $1,332,962
Iowa 5% $60,000
Kansas 15% $12,500
Kentucky 6%(1) $51,500
Louisiana ---(2) $36,500
Maryland 10% $508,450
Massachusetts 6% $78,250
Michigan 6% $2,808,046
Minnesota 6% $446,060
Mississippi 6% $50,998
Missouri 8% $35,000
Nevada ---(3) $76,000
New Hampshire 10% $5,000
New Jersey 5.5% $26,000
New York 9% $146,667
North Carolina 8% $27,500
Ohio 0% $85,002
Oklahoma 10% $7,500
Oregon 9% $6,000
Pennsylvania 6% $79,200
South Carolina 6% $43,000
Tennessee 10% $809,986
Texas 6% $4,410,425
Utah 12% $30,000
Vermont 12% $30,000
Virginia 6% $46,401
Washington 8% $41,500
Wisconsin 5% $201,239
Canada $30,000
England $33,000
France $100,000
Saudi Arabia $10,000
Taiwan $90,000
Total $14,228,137
- ------------
(1) 12% effective 7/15/98
(2) 1/1/97 through 7/31/97: 9.25%; 8/1/97 through 12/31/97: 7.9%;
1/1/98 to present: 7.3%
(3) 1/1/97 through 6/30/97: 8.25%; 7/1/97 to present: 8.5%
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The Subject Securities were not registered under the federal and state
securities laws, but were issued in reliance upon the exemptions from
registration afforded by (i) Sections 3(b) and 4(2) of the Act and Regulation D
promulgated thereunder and (ii) various state limited offering exemptions,
respectively. However, the Company believes that:
(1) Under the "integration" provisions of Regulation D, the
Offerings may be viewed as one continuous "public" offering
which was not in compliance with Regulation D;
(2) Because of the frequency and number of sales of the Subject
Securities, including the number of persons who received
offers and who purchased the Company's securities, the
issuances may not have been eligible for the exemptions from
registration pursuant to Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering;
(3) Certain of the Subject Securities may have been issued to
persons who failed to receive adequate information regarding
the Company and its financial condition, including information
regarding the Company's potential liability for possible
violations of federal and state securities laws; and
(4) The Subject Securities may have been issued in violation of
state securities laws as well as the securities laws of
Canada, England, France, Saudi Arabia and Taiwan.
The failure to provide adequate disclosure to purchasers of the Subject
Securities may result in potential liabilities under the Exchange Act and the
regulations thereunder.
If the Offerings were not conducted in compliance with applicable
securities laws, the Company may have incurred a liability to the holders of the
Subject Securities of $14,228,137 plus interest from the date of issuance less,
with respect to shares of Preferred Stock, $248,128 in dividends paid to the
holders of such shares. See "Risk Factors--Lack of Sufficient Capital to Fund
Rescission Offer; Potential Rescission Liability" and Note 8 of the Notes to the
Consolidated Financial Statements.
The Company has elected to offer to all of the Offerees the right to
rescind their acquisitions of the Subject Securities and to receive in exchange
therefor, a payment in an amount equal to the aggregate consideration paid for
the issuance of the Subject Securities, plus interest at the applicable
statutory rate in the state in which they reside (the "Statutory Rate") from the
date of issuance, less, with respect to shares of Preferred Stock, dividends
paid, or, if the Subject Securities have been disposed of at a loss, the
difference between the purchase price of such Subject Securities and the price
received upon disposition plus interest at the Statutory Rate from the date of
disposition, less dividends paid.
The Rescission Offer is being made in order to limit, so far as may be
permitted under applicable federal and state securities laws, the potential
liability of the Company with respect to the issuances of the Subject
Securities. The Rescission Offer is not an admission that the Company did not
comply with the registration provisions of applicable federal and state laws nor
is it a waiver of any applicable statutes of limitations. Notwithstanding the
Rescission Offer, there can be no assurance that the Company will not be subject
to penalties or fines relating to past securities issuances or that other
holders of the Company's securities will not assert or prevail in claims against
the Company for rescission or damages under state or federal securities laws.
See "Risk Factors--Lack of Sufficient Capital to Fund Rescission Offer;
Potential Rescission Liability" and Note 8 of the Notes to the Consolidated
Financial Statements.
ACCEPTANCE OR REJECTION
Any Offeree may accept or reject the Rescission Offer, in whole but not
in part, by completing the pertinent part of, and signing, the Election
accompanying this Prospectus (a form of which is attached hereto as Exhibit A)
and returning it to the Company (Attention: Samuel C. Beale, Vice President and
General Counsel), 12777 Jones Road, Suite 400, Houston, Texas 77070 as soon as
practicable, but in no event should it be delivered to the Company later than
the Expiration Date. The Election should be completed to indicate whether the
Offeree accepts or rejects the Rescission Offer. Any Offeree accepting the
Rescission Offer must enclose with the Election the original certificates or
other instruments representing the Subject Securities, properly endorsed for
transfer, with the signature(s) guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee
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medallion program). All acceptances of the Rescission Offer will be deemed to be
effective on the Expiration Date and, unless the offer is accepted on or before
such date, the right to accept the Rescission Offer shall terminate. Acceptances
or rejections may be revoked in a written notice received by the Company prior
to the Expiration Date. Payment for Subject Securities as to which the
Rescission Offer has been accepted will be made within five business days after
the Expiration Date.
Any Offeree who has not delivered a completed Election by the
Expiration Date shall be conclusively deemed to have rejected the Rescission
Offer.
The Election and the stock certificates or other instruments
representing the Subject Securities may be delivered by hand or courier service,
or by mail. The method of delivery of all documents is at the election and risk
of the Offeree. If delivery is by mail, delivery will be deemed to have occurred
on the date the Election is postmarked.
IF OFFEREES DESIRING TO ACCEPT THIS RESCISSION OFFER INTEND TO MAKE USE OF THE
MAILS TO RETURN THEIR STOCK CERTIFICATES OR OTHER INSTRUMENTS EVIDENCING THE
SUBJECT SECURITIES TO THE COMPANY, INSURED REGISTERED MAIL, RETURN RECEIPT
REQUESTED, IS RECOMMENDED.
FUNDING THE RESCISSION OFFER
The Company is currently negotiating agreements with a group of
stand-by underwriters pursuant to which the Company will complete the Rescission
Financing in order to repurchase Subject Securities from the Offerees electing
to accept the Rescission Offer. The Rescission Financing will be completed prior
to the date of this Prospectus. The Company has also obtained the Holdings
Commitment pursuant to which Holdings will provide up to $10,000,000 of equity
capital to the Company prior to December 31, 1998. The proceeds from the
Rescission Financing will be used to purchase the first $9,000,000 of Subject
Securities in connection with the Rescission Offer. To the extent that funds in
excess of $9,000,000 are needed to repurchase the Subject Securities, the
proceeds from the Holdings Commitment will be used for such purpose. Any unused
proceeds of the Rescission Financing or the Holdings Commitment remaining after
the funding of the Rescission Offer will be used by the Company for general
corporate purposes. See "Risk Factors" and "Use of Proceeds."
In the event that the Company is required to pay the full amount of its
potential rescission liability or is unable to successfully complete the
Rescission Financing, it would be required to seek additional capital through
debt or equity financing or the sale of assets, and there can be no assurance
that sufficient financing can be obtained. See "Risk Factors--Need for
Additional Capital and Capital Requirements and --Lack of Sufficient Capital to
Fund Rescission Offer; Potential Rescission Liability."
OTHER TERMS AND CONDITIONS
The Company has not retained, nor does it intend to retain, any person
to make solicitations or recommendations to the Offerees in connection with the
Rescission Offer.
If a fully completed and executed Election is not delivered by the
Expiration Date by each person actually receiving notice of the Rescission Offer
through this Prospectus, the Rescission Offer will be deemed to have been
rejected by such person.
Neither the Company, nor its officers and directors, may make any
recommendations to any holders of the Subject Securities with respect to the
Rescission Offer contained herein. Each person is urged to read this Prospectus
carefully and to make an independent evaluation with respect to the Rescission
Offer.
All questions as to the validity, form, eligibility (including time of
delivery) and proper completion of the Election will be determined by the
Company, which determination will be final and binding. The Company reserves the
absolute right to reject any Election not properly completed or if the completed
Election, in the opinion of counsel to the Company, would be unlawful. The
Company reserves the right to waive any irregularity in the Election. The
Company's interpretation of the
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terms and conditions of the Rescission Offer will be final and binding. The
Company will not be under any duty to give notification of defects in connection
with Elections or incur any liability for failure to give such information.
EFFECT OF RESCISSION OFFER
The Company has been advised by its counsel that it is unclear whether
the Rescission Offer will terminate the Company's liability, if any, for failure
to register the issuances of the Subject Securities under the Securities Act or
applicable state and foreign securities laws. The staff of the Commission takes
the position that a person's right of rescission under federal securities law
may, under certain circumstances, survive a rescission offer, while most state
securities laws provide that a person may lose any rescission rights by
rejecting or failing to respond to a valid rescission offer. Generally, the
statute of limitations for noncompliance with the requirement to register
securities under the Securities Act is one year, while under the various state
securities laws, the statute of limitations ranges from one to seven years from
the date of the transaction. The Company is also subject to the anti-fraud
provisions of applicable securities law or rights under common law or equity in
respect of the issuance of the Subject Securities. Subject Securities held by
Offerees who choose not to accept the Rescission Offer will, for purposes of
applicable federal and state securities laws, be registered securities as of the
Expiration Date and, unless held by persons who may be deemed to be "affiliates"
of the Company, will be freely tradeable in the public market. Subject
Securities held by affiliates of the Company will be subject to certain
restrictions on resale contained in Rule 144 under the Securities Act. See
"Shares Eligible for Future Sale" for a discussion of Rule 144.
Specific provisions of the laws of certain states in which the Offerees
now reside or resided at the time they were issued the Subject Securities are
set forth in Exhibit B attached hereto.
TAX CONSIDERATIONS OF THE RESCISSION OFFER
The following discussion is a general summary of certain United States
federal income tax consequences associated with the Rescission Offer. No attempt
has been made to comment on all United States federal tax matters relevant to
the Rescission Offer. The summary is based on existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Department
regulations promulgated thereunder, published revenue rulings and revenue
procedures of the Internal Revenue Service ("IRS"), applicable legislative
history, and judicial decisions. All such authorities are subject to change at
any time, either prospectively or retroactively, and any such change could
adversely affect the federal income tax consequences associated with the
Rescission Offer. No ruling has been requested from the IRS regarding any of the
matters discussed in this summary.
This summary represents the judgment of the Company and its advisors
regarding the United States federal income tax consequences of the Rescission
Offer. However, there is no assurance that the tax consequences discussed in
this summary will be accepted by the IRS or the courts if the Rescission Offer
becomes the subject of administrative or judicial proceedings. Realization of
the tax consequences discussed in this summary with respect to the Rescission
Offer is subject to the risk that the IRS may challenge the tax treatment and
that a court could sustain such challenge. In such case, the federal income tax
consequences of the Rescission Offer could be materially and adversely affected.
This summary does not attempt to specifically address the United States
federal income tax consequences of each Offeree who accepts the Rescission
Offer. Additionally, this summary does not discuss all of the tax consequences,
including state, local, and foreign tax consequences, that may be significant to
particular Offerees, such as dealers in securities, foreign persons, Offerees
who are not individuals, and Offerees who are subject to the alternative minimum
tax. ACCORDINGLY, ALL OFFEREES WHO ACCEPT THE RESCISSION OFFER ARE STRONGLY
URGED TO CONSULT, AND MUST RELY UPON, THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM WITH RESPECT TO AN ACCEPTANCE OF THE RESCISSION OFFER,
INCLUDING THE APPLICABILITY OF FEDERAL, STATE, LOCAL, AND FOREIGN TAX LAWS.
The transaction resulting from an acceptance of the Rescission Offer
should be analyzed as a taxable redemption of the shares of Company stock
involved in the transaction. In such case, the redemption will be treated as a
sale or exchange of the shares only if the redemption satisfies the requirements
of one or more of the provisions of Section 302(b) of the Code. This
determination is made separately for each Offeree who accepts the Rescission
Offer. Assuming that a redemption satisfies the requirements of one or more of
the provisions of Section 302(b) of the Code, the Offeree recognizes gain or
loss on the redemption in an amount equal to the difference between the
Offeree's adjusted basis in the shares immediately prior
16
<PAGE>
to the redemption and the proceeds that the Offeree receives in connection with
the redemption (including the portion of the proceeds measured by applying an
interest factor to the Offeree's original purchase price for the shares). The
character of any such gain or loss will depend on whether the shares constitute
a capital asset in the hands of the Offeree.
If a redemption does not satisfy the requirements of one or more of the
provisions of Section 302(b) of the Code, it will be treated as a distribution
by the Company that is subject to Section 301 of the Code. In such case, the
proceeds will be treated first as a dividend (taxed as ordinary income) to the
extent of the Company's current and accumulated earnings and profits, if any, at
the time of the redemption (on a pro rata basis taking into account other
Section 301 distributions made by the Company during the year, including other
redemptions resulting from the Rescission Offer that are treated as Section 301
distributions), next as a non-taxable return of the Offeree's adjusted basis in
the shares immediately prior to the redemption, and finally as amounts received
from the sale or exchange of the shares. The Company should not have either
current or accumulated earnings and profits for these purposes.
Under Section 302(b) of the Code, a redemption will be treated as a
sale or exchange of the shares if it either: (1) results in a "complete
redemption" of the Offeree's interest in the Company; (2) is "substantially
disproportionate" with respect to the Offeree; or (3) is "not essentially
equivalent to a dividend" with respect to the Offeree. These three tests, which
are more fully described below, are collectively referred to as the "Redemption
Tests" for purposes of this summary. The Redemption Tests are applied on a
Offeree-by-Offeree basis. As a result, it is possible that some redemptions will
satisfy the requirements of one or more of the Redemption Tests, while other
redemptions do not satisfy the requirements of one or more of the Redemption
Tests. Accordingly, it is possible that some persons will receive sale or
exchange treatment under Section 302(b) with respect to their redemptions while
other persons will be subject to Section 301 with respect to their redemptions.
In determining whether the requirements of any of the Redemption Tests
are satisfied, an Offeree must take into account not only shares of Company
stock that are actually owned by the Offeree (including without limitation
shares of Class A Common Stock and Class B Common Stock received upon conversion
of the Series A Preferred Stock and Series B Preferred Stock) but also shares of
Company stock that the Offeree is deemed to own within the meaning of the
constructive ownership rules under Section 318 of the Code. Under Section 318,
an Offeree may constructively own shares of Company stock actually owned (and,
in some cases, constructively owned) by certain individuals or entities that are
considered related to the Offeree for this purpose, as well as shares of Company
stock that the Offeree has the right to acquire by exercise of an option,
warrant or a conversion right. Additionally, contemporaneous or related
transactions involving the stock, or rights to acquire the stock, of the Company
may affect an Offeree's ability to satisfy one or more of the Redemption Tests.
A redemption will constitute a "complete redemption" of all shares of
Company stock owned by an Offeree for purposes of the first Redemption Test
specified above if all shares of Company stock owned by such Offeree are sold
pursuant to the Rescission Offer. For this purpose, an individual Offeree can
disregard shares of Company stock that he or she constructively owns by
attribution from family members if certain requirements specified in Section
302(c) of the Code are satisfied. A redemption will be considered "substantially
disproportionate" with respect to an Offeree if the following requirements are
satisfied: (1) the percentage of the voting stock of the Company owned by the
Offeree immediately after the redemption (taking into account all transactions
consummated pursuant to the Rescission Offer) equals less than 80 percent of the
percentage of the voting stock of the Company owned by such Offeree immediately
before the redemption; (2) the percentage of the common stock of the Company
(whether voting or nonvoting) owned by the Offeree immediately after the
redemption (taking into account all transactions consummated pursuant to the
Rescission Offer) equals less than 80 percent of the percentage of the common
stock of the Company owned by such Offeree immediately before the redemption;
and (3) the Offeree owns, immediately after the redemption (taking into account
all transactions consummated pursuant to the Rescission Offer), less than 50% of
the total combined voting power of all classes of stock of the Company entitled
to vote. A redemption will satisfy the "not essentially equivalent to a
dividend" test with respect to an Offeree if, in light of the particular facts
and circumstances surrounding the Offeree's ownership of Company stock, the
redemption results in a "meaningful reduction" of the Offeree's interest in the
Company (taking into account all transactions consummated pursuant to the
Rescission Offer).
THE FOREGOING SUMMARY IS FOR GENERAL INFORMATION ONLY, AND IS NOT INTENDED TO
CONSTITUTE, AND SHALL NOT BE CONSTRUED TO ANY EXTENT AS, LEGAL, TAX, OR
FINANCIAL ADVICE. EACH OFFEREE IS STRONGLY URGED TO CONSULT THE OFFEREE'S OWN
TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THE OFFEREE FROM THE
RESCISSION OFFER IN LIGHT OF THE OFFEREE'S SPECIFIC CIRCUMSTANCES, INCLUDING THE
17
<PAGE>
TRANSACTION(S) IN WHICH THE OFFEREE ACQUIRED OWNERSHIP OF SHARES OF THE
COMPANY'S STOCK.
TRANSACTIONS NOT SUBJECT TO RESCISSION
Since its inception, the Company has raised capital through the
issuance of its securities pursuant to transactions which are not subject to the
Rescission Offer. The Company believes that the issuance or sale of its
securities in these transactions was in accordance with applicable federal and
state securities laws as transactions not involving a public offering and exempt
from registration pursuant to Sections 3(b) and 4(2) of the Securities Act. The
following summary of the transactions not subject to the Rescission Offer is
qualified in its entirety by reference to the descriptions contained in Part II
of the Registration Statement of which this Prospectus is a part under the
caption, "Transactions Not Subject to Rescission Offer."
1. In May and August of 1995 the Company issued an aggregate of 10,000,000
shares of Class A Common Stock (after giving effect to a nine for one
share dividend) to its founding shareholders. See "Certain
Transactions."
2. Between May 1996 and July 1996, the Company issued Vickroy Stone an
aggregate of 500,000 shares of Class A Common Stock for services
rendered valued at $500,000. In February 1997, the Company repurchased
450,000 of such shares of Class A Common Stock from Mr. Stone at a
purchase price of $1.00 per share. In February 1997, Mr. Stone sold the
remaining 50,000 shares of Class A Common Stock to a partnership
related to Ray C. Davis, the founder of the Company, for $1.00 per
share. See "Certain Transactions."
3. In July 1996, the Company issued an aggregate of 1,050,000 of Class A
Common Stock to the principals of International Fax Corporation ("IFC")
and IMedia, S.A. of France ("IMedia") in connection with (i) an
agreement granting the Company a right of first refusal to acquire all
of the outstanding capital stock of IMedia, (ii) the right to utilize
IMedia's European network of fax broadcasting equipment and (iii) the
agreement of IMedia to use the Company's network for fax broadcast
traffic to the United States. The shares of Class A Common Stock were
valued by the Company at $1.00 per share. Subsequent to this series of
transactions, the Company wrote off the value of its investment. See
"Certain Transactions."
4. In May 1997, the Company issued a five-year warrant to Vickroy Stone
entitling Mr. Stone to purchase an aggregate of 450,000 shares of Class
A Common Stock at an exercise price of $2.00 per share. Inasmuch as the
exercise price of this warrant exceeded the fair market value of the
underlying Class A Common Stock, the Company determined that these
warrants had no value at the date of issuance. See "Certain
Transactions."
5. In July 1997, the Company issued Sam McKinley 400,000 shares of Class B
Common Stock in payment of a loan commitment fee. The Company
subsequently determined that it received no value in exchange for such
shares.
6. In November 1997, the Company issued 2,328,940 shares of its Class A
Common Stock to a limited number of investors in exchange for their
members' net equity interests in certain affiliated limited liability
companies.
7. On November 14, 1997, the Company entered into a Settlement Agreement
and Mutual Release with Keith Shaffner for services rendered by him
during 1996 and 1997. In exchange for a complete release of all claims
by Mr. Shaffner and his affiliate, CyFax, Inc. ("CyFax"), against the
Company, the Company issued to Mr. Shaffner: (i) a warrant entitling
Mr. Shaffner to purchase 1,150,000 shares of Class B Common Stock at a
price of $1.00 per share, exercisable on or before August 30, 1999,
(ii) a warrant entitling Mr. Shaffner to purchase 1,050,000 shares of
Class B Common Stock at a price of $1.00 per share, exercisable on or
before February 28, 2000, (iii) 500,000 shares of Class A Common Stock
and (iv) $51,000 in cash. In addition, the Company issued 200,000
shares of Class A Common Stock to CyFax for the termination of an
exclusive agent management agreement with the Company. During 1996 and
1997, the Company paid Mr. Shaffner, individually, an aggregate of
$202,951 for services rendered and paid CyFax an aggregate of $893,527
for services rendered. See "Certain Transactions."
18
<PAGE>
8. In April 1998 the Company issued a five-year warrant entitling Ray
Davis to purchase an aggregate of 2,000,000 shares of Class A Common
Stock at a price of $1.00 per share in connection with the execution of
his Employment Agreement with the Company. See "Employment Agreements".
See "Certain Transactions."
9. In May 1998 the Company issued five-year warrants entitling certain
individuals and entities to purchase an aggregate of 348,954 shares of
Class B Common Stock at prices of $1.00 and $2.00 per share. Inasmuch
as the exercise prices of these warrants exceeded the fair market value
of the underlying Class B Common Stock, the Company determined that
these warrants had no value at the date of issuance.
10. In July 1998 the Company entered into a Subscription Agreement (the
"Holdings Subscription Agreement") with CyNet Holdings, LLC
("Holdings"), pursuant to which Holdings is committed to purchase up to
10,000,000 shares of Class A Common Stock of the Company for $1.00 per
share prior to December 31, 1998. As of the date of this Prospectus,
Holdings has purchased an aggregate of 926,000 shares of Class A Common
Stock pursuant to the Holdings Subscription Agreement. Also pursuant to
the Holdings Subscription Agreement, the Company issued a five-year
warrant entitling Holdings to purchase an aggregate of 4,800,000 shares
of Class A Common Stock at a price of $1.00 per share. See "Certain
Transactions."
USE OF PROCEEDS
Neither the Rescission Offer nor the resale of Class B Common Stock
underlying the Shaffner Warrants will result in any proceeds to the Company.
However, any exercise of the Shaffner Warrants will result in gross proceeds to
the Company up to a maximum amount of $2,200,000. See "Plan of Distribution and
Selling Shareholder." The Company will use the proceeds, if any, from the
exercise of the Shaffner Warrants to repurchase the Subject Securities tendered
in response to the Rescission Offer and for general corporate purposes.
The estimated net proceeds to be received by the Company from the
Rescission Financing, after deducting estimated expenses expected to be payable
by the Company, are approximately $9,000,000. The Company will use the proceeds
of the Rescission Financing to fund the Company's obligations to repurchase the
first $9,000,000 of Subject Securities tendered pursuant to the Rescission
Offer. To the extent funds in excess of $9,000,000 are needed to repurchase the
Subject Securities, the Company will use the proceeds from the Holdings
Commitment for such purpose. Any unused proceeds of the Rescission Financing or
the Holdings Commitment after the funding of the Rescission Offer will be used
for working capital, capital expenditures and general corporate purposes.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its Common Stock
to date. The current policy of the Board of Directors is to retain earnings, if
any, to provide funds for operating and expansion of the Company's business.
Such policy will be reviewed by the Board of Directors of the Company from time
to time in light of, among other things, the Company's earnings and financial
position. The Company is required to pay dividends on its Series A and Series B
Preferred Stock prior to the payments, if any, of dividends on its Class A and
Class B Common Stock. As of March 31, 1998, the Company had accrued, but unpaid,
dividends of $344,559 on its Series A Preferred Stock and $163,510 on its Series
B Preferred Stock. During the fiscal year ended December 31, 1997, the Company
paid dividends of $192,478 on its Series A Preferred Stock and $55,650 on its
Series B Preferred Stock.
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of March 31, 1998, and as adjusted to reflect 0% 50% and 100%
acceptance of the Rescission Offer.
<TABLE>
<CAPTION>
MARCH 31, 0% 50% 100%
1998 Acceptance Acceptance Acceptance
--------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Deferred offering costs(1) $ 2,078,825 $ -- $ -- $ --
======================================================
Liabilities:
Accrued stock rights $ 110,000 $ 110,000 $ 110,000 $ 110,000
============= ========== =========== ==========
Stock subject to rescission:
Series A Preferred Stock $ 201,265 $ -- $ -- $ --
Series B Preferred Stock 319,923 -- -- --
Class A Common Stock 7,952,133 -- -- --
Class B Common Stock 5,235,051 -- -- --
Warrants to purchase Class A Common Stock 201,640 -- -- --
----------------------------------------------------------
$ 13,910,012 $ -- $ -- $ --
========================================================
Capital deficit:
Series A Preferred Stock...................$ -- $ 182,652 $ 91,326 $ --
Series B Preferred Stock................... -- 283,917 141,959 --
Class A Common Stock....................... 3,014,936 9,841,861 6,428,399 3,014,936
Class B Common Stock....................... 700,000 5,284,176 2,992,089 700,000
Outstanding warrants................................ 362,500 564,145 463,323 362,500
Deficit............................................. (12,849,224) (13,097,352) (14,305,068) (15,512,784)
Treasury stock - Class A Common Stock............... (677,000) (359,233) (518,117) (677,000)
---------------------------------------------------------
Total Capitalization (2)............................$ (9,448,788) $2,700,166 $(4,706,089) $ (12,112,348)
============= ========== ============ =============
</TABLE>
- ----------------
(1) See Note 3 of the Notes to the Consolidated Financial Statements for a
discussion regarding the treatment of deferred offering costs upon
acceptance or rejection of the Rescission Offer.
(2) Total Capitalization does not reflect application of the proceeds from
the Rescission Financing. See "Rescission Offer--Funding the Rescission
Offer" and "Use of Proceeds."
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<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents summary historical data of the Company on
a consolidated basis (i) from the audited financial statements of the Company
for the years ended December 31, 1997 and 1996 and (ii) from the unaudited
financial statements of the Company for the three months ended March 31, 1998
and 1997. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31
----------------------------- ----------------------------
1997 1996 1998 1997
----------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 4,960,355 $ 801,181 $ 1,926,892 $ 874,767
Loss from operations............................ (7,295,181) (2,327,399) (819,503) (1,099,825)
Net loss applicable to common shareholders...... (7,838,378) (4,065,121) (830,288) (1,186,560)
Net loss per common share....................... (0.56) (0.37) (0.04) (0.09)
Weighted average number of common shares
outstanding..................................... 14,086,177 11,019,593 22,317,316 12,522,836
</TABLE>
DECEMBER 31 MARCH 31,
1997 1998
------------- -------------
BALANCE SHEET DATA:
Working capital(1)......................... $ 1,575,044 $ 316,106
Total assets............................... 6,770,373 6,325,506
Stock and warrants subject to rescission... 13,835,114 13,910,012
Capital deficit............................ (8,668,500) (9,448,788)
- ------------------------
(1) Includes $2,078,825 of deferred offering costs - see Note 3 of the Notes
to the Consolidated Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1997 and 1996 and the
three months ended March 31, 1998 and 1997. It should be read in conjunction
with "Selected Financial Information" and the financial statements and the notes
thereto included elsewhere in this Prospectus. The following information
contains forward-looking statements. For a discussion of certain limitations
inherent in such statements, see "Risk Factors--Forward-Looking Statements."
OVERVIEW
The Company has committed significant resources in developing and
enhancing its computer and telecommunications technologies. From the Company's
inception through December 31, 1996, the Company raised approximately $1.9
million of start-up capital to develop its fax broadcasting network and install
nodes in selected locations throughout the United States. Since August 1996, the
Company has raised approximately $17.2 million of additional capital, including
$14,228,137 from the issuance or sale of the Subject Securities, in order to,
among other things, improve the network, develop new products and services,
expand its marketing and sales efforts, invest in capital expenditures and
satisfy its working capital requirements.
The Company derives its operating revenues by providing facsimile
transmission services to its customers. The Company charges customers for the
HYPERCAST service on a "per pages sent" basis; however, for the HYPERLINE and
HYPERWEB services, the Company's charges are based primarily upon the telephone
connection time used to make the delivery of a fax transmission to each
recipient. Although the Company generally does not have long-term contractual
service agreements with its customers, the Company believes its customers
continue to use the Company's fax transmission services once they begin to use
such services. As a result, the Company expects its operating results will
benefit from recurring monthly revenues from such customers. The Company also
receives revenues from the sale of its specialized software to its customers.
LACK OF CAPITAL TO FUND RESCISSION OFFER; POTENTIAL RESCISSION LIABILITY
The Rescission Offer is being made to all persons who acquired the
Subject Securities from the Company. If all of the Offerees accept the
Rescission Offer, the Company will be required to make payments aggregating
$14,228,137 plus the aggregate amount of interest at the Statutory Rates from
the date of issuance to the Expiration Date less dividends paid on the Preferred
Stock. As of March 31, 1998, the aggregate accrued interest was approximately
$600,000 and continues to accrue, assuming the full liability is incurred, at
approximately $93,000 per month. The Company is currently negotiating agreements
with a group of stand-by underwriters pursuant to which the Company will
complete the Rescission Financing in order to repurchase Subject Securities from
the Offerees electing to accept the Rescission Offer. The Company has also
obtained the Holdings Commitment pursuant to which Holdings will provide up to
$10,000,000 of equity capital to the Company prior to December 31, 1998. See
"Certain Transactions." Any unused proceeds of the Rescission Financing or the
Holdings Commitment remaining after the funding of the Rescission Offer will be
used by the Company for general corporate purposes. See "Use of Proceeds." In
the event that the Rescission Financing is not completed or that the Company is
required to pay the full amount of its potential rescission liability, it will
be required to seek additional capital through debt or equity financing or the
sale of assets, and there can be no assurance that sufficient financing can be
obtained on terms acceptable to the Company. See "Risk Factors--Need for
Additional Capital and Capital Requirements and --Lack of Sufficient Capital to
Fund Rescission Offer; Potential Rescission Liability."
The Company believes Offerees holding a significant amount of the
Subject Securities will not accept the Rescission Offer and expects to use the
proceeds of the Rescission Financing and the Holdings Commitment to repurchase
the Subject Securities tendered in response to the Rescission Offer. However,
there can be no assurance that significantly more Offerees may elect to rescind,
and that the Company will be able to obtain the necessary funding to repurchase
the shares tendered.
There can be no assurance that claims asserting violations of state or
federal securities laws will not be asserted notwithstanding the Rescission
Offer. Furthermore, there can be no assurance that the Company will not be
subject to penalties or fines relating to past securities issuances or that
other holders of the Company's securities will not assert or
22
<PAGE>
prevail in claims against the Company for rescission or damages under federal or
state securities laws. While the Company believes that the Subject Securities
were offered and sold in compliance with the registration provided under the
Securities Act, if a holder of Subject Securities were to assert a claim based
upon a violation thereof, the position of the Securities and Exchange Commission
is that liabilities under the federal securities laws are not terminated by
making a Rescission Offer. Even if the Company were successful in defending any
securities law claims, the assertion of such claims against the Company would
result in costly litigation and significant diversions of effort by the
Company's management. In addition, the Rescission Offer will not prevent the
Securities and Exchange Commission or any state securities commission from
pursuing enforcement action against the Company with respect to any alleged
violations of federal or state securities laws. See "Risk Factors--Lack of
Sufficient Capital to Fund Rescission Offer; Potential Rescission Liability" and
Note 8 of Notes to Consolidated Financial Statements.
RISK OF MANAGING GROWTH; RECENT MANAGEMENT CHANGES
The Company's growth has placed, and is expected to continue to place,
a significant strain on the Company's management, administrative, operational,
financial and technical resources and on its systems and controls. The Company
has made recent changes in executive-level management positions and certain of
the Company's senior management personnel have worked together only a short
time. The Company believes that it will need to hire, both in the short term and
the long term, additional qualified administrative and management personnel in
all functional areas. Failure to locate, hire and retain such qualified
personnel or failure to manage the Company's growth properly could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Risk Factors--Dependence on Key Personnel; Need to
Hire Additional Qualified Personnel," "Business" and "Management."
LACK OF SUFFICIENT CASH FLOW
The Company's independent certified public accountants included an
explanatory paragraph in their opinion with respect to the financial statements
to reflect that recurring losses from operations and the Rescission Offer have
raised substantial doubt about the ability of the Company to continue as a going
concern. Furthermore, the financial statements do not include any adjustments
that might result from the outcome of such uncertainty. The Company's internally
generated cash flows from operations have historically been and continue to be
insufficient for cash needs. The Company has relied upon external equity
financing to continue its operations.
At March 31, 1998 the Company had positive net working capital of
$316,106 principally as a result of the sale of its Preferred Stock. The Company
obtained $2,146,335 and $11,165,123 of cash from financing activities for the
years ended December 31, 1996 and 1997, respectively. Until the Company can
obtain monthly sales levels of approximately $1,000,000, which the Company
believes will be necessary to fund current working capital needs, there is
uncertainty as to the ability of the Company to expand its business and continue
as a going concern. The Company's current cash forecast indicates that there
will be negative cash flows from operations for a substantial portion of 1998
and thereafter, until such time as the Company's operating revenues are
sufficient to cover operating costs and provide positive cash flow. See "Risk
Factors--Need For Additional Capital and Capital Requirements." There can be no
assurance that the Company will be able to generate revenues as projected
sufficient to service the cost of operations and fund the capacity to handle the
Company's growth. Failure to realize the sales growth projections could shorten
the period that current cash balances will be sufficient to meet working capital
needs. As a result, there can be no assurance that the Company will be
successful in funding its working capital and capacity needs.
CERTAIN ACCOUNTING POLICIES
Fax broadcast revenues are recognized as services are performed.
Expenditures for research and development of telecommunication technology as it
relates to fax broadcasting and to various customer interface and application
needs are charged to expense as incurred. Such research and development
expenditures have not been significant to the Company's results of operations.
Deferred taxes result from temporary differences between the financial
statement and income tax basis of assets and liabilities. The Company adjusts
the deferred tax asset valuation allowance based on judgments as to future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.
23
<PAGE>
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Since these are disclosure standards, results of
operations and financial position will be unaffected by implementation of these
new standards. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of a Business Enterprise" ("SFAS 131"), establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. Both of
these new standards are effective for periods beginning after December 15, 1997
and require comparative information for earlier years to be restated. Adoption
of these standards is expected to have no effect on the Company's financial
statement disclosures.
In February 1998, the Financial Accounting Standards Board issued a new
disclosure standard. Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132"). The new standard standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Adoption of SFAS 132 is expected to have no effect on the Company's financial
statement disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires the Company to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the
Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the Company does not expect
adoption of the new standard on January 1, 2000 to affect its financial
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenues increased from $874,767 for the three months ended March 31,
1997 to $1,926,892 for the three months ended March 31, 1998. The increase of
$1,052,125 or 120% was due primarily to changes in management and sales and
marketing efforts.
Cost of revenues increased from $647,410 for the three months ended
March 31, 1997 to $1,614,904 for the three months ended March 31, 1998. The
increase of $967,494 or 150% was attributable primarily to the increase in
telephone charges from $608,872 or 69.6% of net revenues to $1,248,648 or 64.8%
of net revenues for the three months ended March 31, 1997 and 1998,
respectively. In addition, depreciation charges on equipment and an increase in
direct salaries of $114,229 and $210,791, respectively, contributed to the
increase. Gross margin decreased from 25.99% for the three months ended March
31, 1997 to 16.19% for the three months ended March 31, 1998 due to the above
factors. Management expects to obtain more favorable telephone rates to improve
gross margin.
Selling, general and administrative expenses ("SG&A") decreased from
$1,327,182 for the three months ended March 31, 1997 to $1,131,491 for the three
months ended March 31, 1998, a decrease of $195,691 or 15%. The decrease in SG&A
was due to a decrease in consulting fees from $371,670 for the three months
ended March 31, 1997 to $52,622 for the three months ended March 31, 1998.
Travel and entertainment expenses decreased from $201,935 for the three months
ended March 31, 1997 to $27,847 for the three months ended March 31, 1998, due
to attending fewer trade shows and reductions in other promotional activities.
General and administrative salaries increased from $405,980 for the three months
ended March 31, 1997 to $546,983 for the three months ended March 31, 1998 due
to the Company's growth. Legal
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and professional fees increased from $4,876 to $78,362 for the three months
ended March 31, 1997 and 1998, respectively. Current management is intent on
controlling costs and has implemented a budget to contain fixed costs.
The Company had a net loss of $817,143 for the three months ended March
31, 1998, compared to a net loss of $1,114,525 for the three months ended March
31, 1997. The decrease in net loss is due to the factors discussed above.
Net loss per common share decreased from $0.09 to $0.04 for the three
months ended March 31, 1997 compared to the three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenues increased from $801,181 for the year ended December 31, 1996
to $4,960,355 for the year ended December 31, 1997. The increase of $4,159,174
or 519% was primarily due to (i) the Company being in business for an additional
year, (ii) increased customer awareness and size of the customer base and (iii)
increased promotional and sales efforts.
Cost of revenues increased from $872,418 for the year ended December
31, 1996 to $4,812,141 for the year ended December 31, 1997. The increase of
$3,939,723 or 452% was attributable to the revenue increase. The cost of
revenues as a percentage of revenues decreased from 109% to 97%. The decrease in
cost of revenues as a percentage of revenues was due principally to the fixed
costs being spread over larger revenues and the negotiation of more favorable
long distance rates.
Selling, general and administrative expenses ("SG&A") increased from
$2,256,162 for the year ended December 31, 1996 to $7,443,395 for the year ended
December 31, 1997, an increase of $5,187,233 or 230%. The increase in SG&A was
due to several factors. Salaries and benefits increased approximately $1.9
million as the Company added a significant number of employees to accommodate
its growth. Also, advertising and promotion expenses increased approximately
$1.1 million due to the placement of advertisements in national newspapers and
magazines, as well as local newspapers. Consulting, legal and professional fees
increased $756,811 primarily due to the Company's engagement of outside
professionals in connection with the Rescission Offer and other corporate
matters. Travel and entertainment expenses increased $332,396 during 1997.
Other expenses totaled $1,903,937 for the year ended December 31, 1996
compared with other income of $56,821 for the year ended December 31, 1997. In
1996, the Company wrote-off investments totaling $1,202,577 and incurred
interest expenses of $700,000; while in 1997, there were no investment
write-offs and interest expenses were $2,000. The interest expense for the year
ended December 31, 1996 resulted from (i) the conversion of a $100,000
convertible note into 400,000 shares of Class B Common Stock valued at $400,000
and (ii) the issuance of 400,000 shares of Class B Common Stock valued at
$400,000 as payment for a loan commitment fee.
The investment write-offs resulted from two transactions. The first
transaction involved an agreement with a non-related foreign company in which
the Company exchanged 1,050,000 shares of the Company's Common Stock for (i)
access to a fax network in Europe and (ii) a right of first refusal to acquire
all of the foreign company's outstanding stock. The Company has been unable to
use the foreign fax network and has recorded a loss on investment of $1,050,000
for the year ended December 31, 1996, based on the estimated market value of the
Company's Common Stock at $1.00 per share. The second transaction involved an
investment of $152,577 in a multi-level marketing company that the Company
anticipated it would use to market its services. The Company elected not to
pursue this method of marketing and determined its investment to be worthless;
accordingly the Company recorded a loss on investment of $152,577 for the year
ended December 31, 1996.
The Company incurred a net loss of $7,099,174 for the year ended
December 31, 1997 compared to a net loss of $4,061,271 for the year ended
December 31, 1996. The increase in net loss was primarily due to the increase in
SG&A.
Net loss per common share increased from $0.37 to $0.56 for the year
ended December 31, 1996 compared to the year ended December 31, 1997.
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The Company may in the future experience significant fluctuations in
its results of operations. Such fluctuations may result in volatility in the
price and/or value of the Company's Common Stock if any market develops. Results
of operations may fluctuate as a result of a variety of factors, including
demand for the Company's services, the introduction of new services and service
enhancements by the Company or its competitors, market acceptance of new
services, the mix of revenues between Internet-based versus telephony-based
delivery, the timing of significant marketing programs, the number and timing of
the hiring of additional personnel, competitive conditions in the industry and
general economic conditions. Shortfalls in revenues may adversely and
disproportionately affect the Company's results of operations because a high
percentage of the Company's operating expenses are relatively fixed.
Accordingly, the Company believes that period to period comparisons of results
of operations are not necessarily meaningful and should not be relied upon as an
indication of future results of operations. There can be no assurance that the
Company will be profitable or that the Company's operating results will meet
management's current expectations.
LIQUIDITY AND CAPITAL RESOURCES
From its inception, the Company has financed its operations and
expansion primarily through funds raised through the formation of LLCs
(approximately $1.9 million) and a series of private offerings (approximately
$17.2 million). At March 31, 1998 the Company had a cash position of $115,891
and a positive net working capital position of $316,106, which includes
$2,078,825 of deferred offering costs. See Note 3 in the Note to the
Consolidated Financial Statements.
Net cash used in operating activities was $1,334,455 and $7,383,501 for
the years ended December 31, 1996 and 1997, respectively. The increase in net
cash used in operating activities for the year ended December 31, 1997 was
primarily due to the net operating loss of the Company. Net cash used in
operating activities was $1,744,640 and $597,536 for the three-month periods
ended March 31, 1997 and 1998, respectively. The decrease in net cash used in
operations for the three-month period ended March 31, 1998 was primarily due to
the decrease in net operating loss of the Company.
Net cash used in investment activities was $654,962 and $3,413,758 for
the years ended December 31, 1996 and 1997, respectively. Net cash used in
investment activities was $485,263 and $127,871 for the periods ended March 31,
1997 and 1998, respectively. These amounts were due primarily to capital
expenditures for operating equipment, including computer equipment and software,
furniture and fixtures and telecommunications equipment.
Net cash provided by financing activities was $2,146,335 and
$11,165,123 for the years ended December 31, 1996 and 1997, respectively. Net
cash provided by financing activities was $5,503,749 and $124,898 for the
periods ended March 31, 1997 and 1998, respectively. The Company has obtained
financing primarily through a series of issuances of its Common and Preferred
Stock. Through the date of this prospectus, the Company has raised approximately
$19.2 million from these issuances of which $14,228,137 is subject to the
proposed Rescission Offer.
The Company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. As of
December 31, 1997, the Company's sources of external and internal financing were
limited. The Company does not expect that internal sources of liquidity will
improve until additional operating revenues are generated and, until such time,
the Company will continue to rely on external sources for liquidity. Until the
Company can obtain monthly gross revenues of approximately $1,000,000, which the
Company believes would be sufficient to fund working capital needs, there is
uncertainty as to the ability of the Company to expand its business and continue
as a going concern. There is no assurance that the current working capital will
be sufficient to cover cash requirements during that period or to bring the
Company to a positive cash flow position. In addition, lower than expected
earnings resulting from adverse economic conditions or otherwise, could restrict
the Company's ability to expand its business as planned, and, if severe enough,
may shorten the period in which the current working capital may be expected to
satisfy the Company's requirements, force curtailed operations, or cause the
Company to sell assets.
The Company is currently negotiating agreements with a group of
stand-by underwriters pursuant to which the Company will complete the Rescission
Financing in order to repurchase Subject Securities from the Offerees electing
to accept the Rescission Offer. The Company has also obtained the Holdings
Commitment pursuant to which Holdings will provide up to $10,000,000 of equity
capital to the Company prior to December 31, 1998. See "Certain Transactions."
Any unused proceeds of the Rescission Financing or the Holdings Commitment
remaining after the funding of the Rescission Offer will be used by the Company
for general corporate purposes. See "Use of Proceeds." In the event that
Rescission Financing is not completed or that the Company is required to pay the
full amount of its potential rescission liability, it will be required to seek
additional capital through debt or equity financing or the sale of assets, and
there can be no assurance
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that sufficient financing can be obtained on terms acceptable to the Company.
See "Risk Factors--Need for Additional Capital and Capital Requirements and
- --Lack of Sufficient Capital to Fund Rescission Offer; Potential Rescission
Liability."
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue. The Year 2000 issue
is the result of computer programs being written using two digits (rather than
four) to define the applicable year and equipment with time-sensitive embedded
components. Any of the Company's programs that have time-sensitive software or
equipment that has time-sensitive embedded components may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. Although no assurance can be given because of
the potential wide-scale manifestations of this problem which may affect the
Company's business, the Company presently believes that the Year 2000 issue will
not pose significant operational problems for its computer systems and that the
Year 2000 issue will not have a material impact on its cost of operations. The
Company also may be vulnerable to other companies' Year 2000 issues. The
inability of the Company or any of its vendors or customers to address their
Year 2000 issues in a timely manner could have a material adverse effect on the
Company's financial condition or results of operations.
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BUSINESS
SERVICES
The Company is a provider of business-to-business facsimile
transmission services, using the Internet and private transmission facilities.
The Company's services are designed to reduce the cost of facsimile transmission
while making the process of transmission easier and less time consuming. The
Company was formed in April 1995 to capitalize on the dramatic increase in the
usage of third-party fax services. Initially, the Company created HYPERCAST, the
Company's fax broadcast service. During 1997 the Company expanded its service
capabilities by developing HYPERLINE, its point-to-point fax service and in 1998
introduced HYPERWEB, its Internet fax service. The Company's services
significantly reduce most long distance telephone charges incurred by the user.
The Company believes that its fax transmission services provide customers with a
less expensive, faster, and more convenient alternative than competitive
services. The Company has developed user and operating software to operate and
control its customized computer and communication equipment.
Initially, the Company developed a network by installing fax servers
("nodes") in 16 cities throughout the United States enabling the Company to
bypass the long distance carrier's networks when sending faxes to or from the
local calling areas serviced by the nodes. These nodes are connected to the
Company's Houston network operations center through telephone lines. More
recently, the Company has been able to utilize the public switching telephone
network ("PSTN") to provide low-cost facsimile services as a result of
negotiated volume-based rate arrangements with telephone common carriers
throughout the United States. The Company's nodes, combined with direct-access
long distance lines to other cities and countries through the PSTN, give the
Company a substantial amount of cost-efficient fax broadcasting capacity. The
Company believes its current operating software and other available technology
will enable it to increase capacity to meet increasing demands for facsimile
transmission services in both domestic and international markets. The Company
also intends to capitalize on emerging technologies in the telecommunications
industry generally to expand its services to include full-motion imaging and
voice communication services.
Access to the Company's network is accomplished easily and does not
require significant investment, installation expense or change in business
practices by the customer. Customers using the HYPERLINE service can connect to
the Company's network by plugging in a small device between their fax machine
and the telephone jack; customers using the HYPERCAST service purchase the
Company's specialized software, which is easily installed on the customers'
personal computers. Once connected to the network, customers are able to send
documents and images to fax machines worldwide. The network is highly secure
with data residing in the Company's computers in compressed or encrypted form,
inaccessible to unintended readers. Customers can install the Company's services
at individual fax machines or desktop computer locations, across departments or
throughout organizations. The Company sells its services through multiple sales
channels, including telephone sales programs, a direct field sales force, an
agent and dealer distribution network and other promotional activities.
The Company has developed software to operate and control its
customized computer and communications equipment. The Company devotes
considerable resources in developing and enhancing its computer and
telecommunication technology in fax communication and customer interface
applications. The Company's HYPERCAST and HYPERLINE fax software enables
customers to use their own computers to create letters, memos, product
information sheets, customer correspondence or other documents using any
Windows(R) program. Then, with the click of a button, the customer sends the
document image and the recipients' fax numbers to the Houston network operations
center and from there, the document image is automatically transmitted to the
recipients. The document image is transmitted electronically from the customer's
computer to the Company's computer rather than being sent through a fax machine,
thereby avoiding the fuzziness inherent in the fax scanning process. With
HYPERLINE, the image can also be transmitted to a single recipient via a normal
fax machine with the use of a connector provided by the Company that is placed
in line between the telephone jack and the fax machine.
HYPERWEB permits Internet users to access and use the Company's
network. Over the last five years the use of the Internet has increased
substantially, resulting in significant level of user interest. The Company
believes the Internet and E-mail will provide significant growth opportunities
for the Company's fax transmission business. HYPERWEB enables the user to create
an E-mail message in the usual manner and include a fax phone number in the
"To:" field. The E-mail message is sent, via the Internet, to the Houston
network operations center where it is converted into a fax document and sent via
the Company's fax servers to the recipient's fax number. HYPERWEB also allows
users that do not have a computer to send and receive E-mail via their fax
machine.
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STRATEGY
The Company believes its success depends, among other things, on its
ability to (i) maintain a low overhead cost structure by maximizing the benefit
of the network, (ii) negotiate low long-distance rates for transmissions and
(iii) implement a cost effective marketing and sales program.
Key elements of the Company's strategy include (i) utilizing existing
technologies to expand the reach of its fax transmission services into domestic
and international markets, (ii) developing its network and emerging technologies
to provide full-motion imaging and voice communication services to customers,
(iii) capitalizing on lower long distance rates by continuing to negotiate
volume-based rate arrangements with telephony common carriers and (iv) pursuing
acquisitions or strategic alliances that will allow the Company to compete more
effectively with larger, more diversified competitors and to respond to dynamic
changes in the telecommunications industry.
The Company has initiated discussions with certain acquisition or joint
venture candidates, including FaxMate, Inc. ("FaxMate"), a manufacturer of
specialized software based in St-Laurent, Quebec, Canada. After the completion
of the Rescission Offer, the Company intends to continue its discussions to
complete a transaction with FaxMate and will pursue other strategic transactions
which compliment the Company's existing services or increase the number and type
of services offered by the Company. Any transaction will be subject to a variety
of conditions, including conditions beyond the control of the Company. As a
result, there can be no assurance that the Company will be able to complete any
such transactions on acceptable terms and conditions. See "Risk Factors--Risks
Associated with Acquisitions, Investments and Strategic Alliances."
CURRENT FAX MARKET
Technological advances over the past decade have improved the speed and
quality of facsimile transmissions and reduced the cost of fax machines to
consumers, resulting in a large and increasing worldwide installed base of fax
machines. The proliferation of fax machines and their ease of operation has
caused fax usage to increase significantly as a principal means of
business-to-business communications. In addition, the Company believes lower
utilization costs of the PSTN and other domestic and international telephone
networks as well as improved transmission technologies have made the
transmission of documents by fax a cost-effective and preferred alternative to
mail, courier and telex services. In addition, there recently has been a
substantial increase in the installed base of fax-capable personal computers.
Users of fax machines incur a variety of indirect costs in transmitting
documents by fax, in addition to the direct costs of purchasing a fax terminal
and telephone expenses. A facsimile transmission typically requires the user to
print, copy and physically transport the document to the fax machine where
congestion is often encountered. Outgoing fax transmissions may block fax
reception capability. In addition, support personnel may spend considerable time
sending fax transmissions to multiple addresses. Congested telephone lines may
require repeated retries to busy fax telephone numbers, and further consume
personnel time. Fax machines can feed several pages of a multi-page document at
one time, unknown to the operator, causing expensive repetitive transmissions.
Finally, transmission reports confirming fax deliveries must be manually
assembled.
The Company's fax transmission services address certain of these
indirect costs by automating the elements involved in fax transmission, thereby
reducing overall transmission costs. As a result of the marketing efforts of the
Company and other fax transmission service providers, businesses which rely upon
fax transmission for communications are recognizing the benefits of automating
and properly managing the fax transmission process. In addition, businesses
which would otherwise use the United States mail, courier services or other
means to transport documents are increasingly utilizing fax transmission
services to lower their overall cost and to increase the reliability, timeliness
and predictability of document delivery.
The Company provides fax transmission services in both domestic and
international markets. According to industry sources, the size of the worldwide
fax phone bill market is $103 billion. The Company believes the market for its
fax transmission services represents approximately 10% of the total fax phone
bill market and will continue to offer significant growth opportunities for
independent, well-capitalized providers of these services.
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OPERATIONS
The Company believes it has developed a system designed to provide high
quality fax distribution services with competitive customer support capabilities
on a cost-effective basis. The Company's system is designed to minimize
telecommunications expenses as the volume of fax communications processed
increases. The Company's fax communications center can receive fax input from
the Internet, a sender's personal computer, a mainframe, a minicomputer, a local
area network (LAN), and a fax machine. Fax and fax telephone directory input is
delivered to the Company's server and is processed for pricing and customer
approval. Once the customer approves the order, the input is automatically
prepared for delivery to the list of fax numbers supplied by the customer. Fax
documents are then transmitted to the recipients via the Company's network.
Fax transmission logs showing the results of the broadcast are
available on hard copy or via fax or E-mail at the customer's request or are
directly downloadable to the customer's computer.
When the Company routes fax transmissions to recipients directly from
Houston without accessing the network, the Company uses various long distance
carriers. Major telecommunications carriers have competed and are expected to
continue to compete to obtain the Company as a customer. See "--Competition."
Deregulation in the telecommunications industry has enabled the Company to enter
into agreements with several carriers to provide long distance service at
cost-effective rates.
The Company will be required to add additional telecommunications
facilities and enhance its network infrastructure to meet the anticipated
traffic needs and maintain excess capacity to accommodate expected increases in
demand for its services.
The Company has standardized its equipment specifications and limited
the number of its suppliers to achieve cost efficiencies. Substantially all of
the network computing equipment is available from large, well-established
suppliers. The Company continually evaluates new developments in electronic
document delivery technology in connection with the design and enhancement of
its system and development of services to be offered to customers. The Company's
equipment has been designed for modular expansion to respond to expected
increases in demand for the Company's services.
The Company has developed safeguards to minimize the impact of power
outages and other operational problems. The Company has installed power backup
systems at its computer center in Houston, Texas, and all network locations
throughout the U.S. to provide an uninterrupted power supply in the event of a
disruption in service provided by the local utility. The Company has not
suffered any material interruption in its business. As the Company grows, it
intends to add another primary computer center hub for back-up and expansion.
CYNET SERVICES
FAX BROADCAST
The Company conducts its fax broadcasting operations through its
HYPERCAST software product. Using the HYPERCAST software provided by the
Company, customers transmit documents along with a list of recipient fax
telephone numbers to the Company's Houston network operations center. The
network center assigns a job number to the transmission, prepares a quotation of
the customer's cost of the job and, after receiving the customer's approval,
broadcasts the fax transmissions through the network to the recipient fax
numbers furnished by the customers. Features of the HYPERCAST services include
(i) single and multiple page transmissions, (ii) merging capabilities of lists
of names and addresses into form documents and (iii) high quality print
resolution for any font size or appearance. In general, the Company charges
customers on a "per pages sent" basis for the HYPERCAST service.
POINT TO POINT FAX
The Company introduced its HYPERLINE and HYPERWEB service products to
meet the needs of the customer that sends high volumes of documents to single
recipients in scattered geographic locations. Significant long-distance charges
can be generated in this situation. HYPERLINE is supplied to the customer as
software that acts as a printer on a personal
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computer or as a connector placed in line between a normal fax machine and the
telephone jack. A document created on the customer's computer is "printed" to
the Houston network operations center with a fax number, but in contrast to
HYPERCAST, the fax is immediately transmitted to the recipient without any
further approval. The document can get to the Houston network operations center
through a telephone connection or through an Internet connection to the
Company's Internet site. Unlike HYPERCAST, a fax can be sent with HYPERLINE
through a normal fax machine. The Company supplies the customer a connector that
is placed between the telephone jack and the fax machine. The operator sends the
fax as usual to the fax number of the intended recipient. However, the connector
intercepts the call and routes it to the Company's Houston network operations
center where it is sent through the Company's network to the recipient. The
Company's network is highly secure with data residing in the Company's computers
in compressed or encrypted form, inaccessible to unintended readers.
HYPERWEB is designed to be used by people that use E-mail to
communicate. Not everyone has the ability to receive E-mail, but they may have
the use of a fax machine. In this instance, the person creates a normal E-mail
message and addresses it "To:" [fax number]@cynetfax.com. The message is sent
over the Internet to the Company's Internet site. It is then automatically
converted to a fax document and transmitted to the number contained in the "To:"
field. HYPERWEB also allows users that do not have an E-mail address to receive
E-mail on their fax machine. With this service, the user is given an E-mail
address such as [email protected]. From that point on, any E-mail sent to
the customers' E-mail address will be transmitted by the Company's network and
converted into a fax document.
Since inception, the Company has committed a substantial amount of its
resources toward research, development and related activities. The Company
expects to continue such activities as it continues to explore new developments
in electronic document distribution technology and develop new products and
services.
EQUIPMENT SAFEGUARDS AND SUPPLIERS
The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its fax system infrastructure. Within 60 days from
the date of this Prospectus, the Company will have a disaster recovery plan with
a redundant network switching center. The Company's systems and operations are
vulnerable to damage or interruption from fire, earthquake or other natural
disaster and from power loss, telecommunications failure, break-ins and similar
events. Furthermore, the hardware, software and network systems developed by the
Company are relatively new, and therefore have not withstood the demands of the
larger volume associated with the Company's revenue projections. See "Risk
Factors-Company System Failure." Substantially all of the Company's computing
equipment is readily available from large, well-known suppliers.
CUSTOMERS
The Company sells its products and services primarily to small and
medium sized businesses with document transmission needs. Customers using the
HYPERLINE service can connect to the Company's network by plugging in a small
device between their fax machine and the telephone jack; customers using the
HYPERCAST service purchase the Company's specialized software, which is easily
installed on the customers' personal computers. Customers can also install the
Company's services at individual fax machines or desktop computer locations,
across departments or throughout organizations. As of the date of this
Prospectus, the Company had approximately 8,600 installed customers. The
majority of the Company's services are performed pursuant to specific purchase
orders from customers and other short term arrangements. While the Company
pursues longer term contracts with customers, such contracts are typically of a
duration of six to twelve months. No single customer accounted for more than 4%
of the Company's revenues during 1997 or during the three months ended March 31,
1998.
SALES AND MARKETING
Selling the Company's products and services requires a thorough
understanding of the applications of the Company's services to a particular
customer's business, a focus on the identified market opportunities and the
ability to overcome potential customer's objections to using a third party
service provider to fulfill its electronic document distribution service needs.
The Company's sales personnel are trained to understand and use the terminology
of participants in the targeted industry and to direct their sales efforts to
the persons within the potential customer's organization who would directly
benefit from the Company's electronic document distribution service.
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The Company employs a team of 20 sales and support personnel in the
Houston office. The Company sells its products and services through multiple
sales channels, including telephone sales programs, a direct field sales force,
an agent and dealer distribution network, direct mail and other promotional
activities at trade shows and on the Company's web site on the Internet. In
addition, the Company obtains customer prospects through referrals from existing
customers.
In April 1998 the Company began utilizing sales agents, who are not
employees of the Company, to act as representatives of the Company in its sales
and marketing efforts. The Company currently utilizes 15 sales agents, and
expects to utilize more sales agents in the future.
The Company does not currently use strategic alliances with other
companies as a means of selling its services, but expects to use strategic
acquisitions and alliances as a means of continued growth and expansion.
COMPETITION
The market for facsimile transmission services is competitive and the
Company expects that competition will increase in the future. The Company
believes its ability to compete successfully will depend upon a number of
factors, including market presence, the capacity, reliability and security of
its network infrastructure, the pricing policies of its competitors and
suppliers, the timing of introductions of new services and service enhancements
by the Company and its competitors, and industry and general economic trends.
The Company believes its current and potential competitors generally
fall into the following groups: (i) telecommunications companies such as AT&T,
MCI, Sprint, LDDS Worldcom and the regional Bell operating companies, (ii)
telecommunications resellers, such as Frontier Corporation, Biztel Corporation
and Eastern Telecom, (iii) Internet service providers, such as Uunet
Technologies and NETCOM On-Line Communications Services, Inc. and (iv) direct
fax delivery competitors, including Xpedite Systems, Inc. and FaxSav, Inc. Many
of the Company's competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
that those available to the Company. As a result, they may be able to develop
and expand their communications and network infrastructures and devote greater
resources to the marketing and sale of their products and services than the
Company can. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their services to address the needs of the Company's
current and prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition to direct competitors, many of the
Company's larger potential customers may seek to internally fulfill their fax
transmission needs through the deployment of their own computerized fax
communications systems or network infrastructures for intra-company faxing.
The Company believes its software, product development and sale
approach distinguishes it from its competitors. The Company's proprietary
software allows its customers to direct all of their fax transmissions from a
desktop computer. Management believes that its internal software development
team permits the Company to develop and introduce new products and react to
changes in customer requirements more quickly than many of its competitors. The
Company's sales personnel are trained to utilize solution selling techniques
aimed at specific customer needs.
Increased competition may result in price reductions, reduced gross
margins or erosion of the Company's market share, any of which would have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures will not have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATIONS
The telecommunications industry is subject to regulation by the FCC, by
various state public service and public utility commissions and by various
international regulatory authorities. The FCC has the power to impose regulatory
requirements on the Company and currently classifies the Company as a
"nondominant carrier." Generally, the FCC has chosen not to closely regulate the
charges or practices of nondominant carriers. The FCC also has the power to
impose more stringent regulatory requirements on the Company and to change its
regulatory classification. As a result, there can be no assurance that the FCC
will not change the Company's regulatory classification or otherwise subject the
Company to more
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burdensome regulatory requirements that would have a material adverse effect on
the Company's business, financial condition or results of operations.
In connection with its anticipated international operations, the
Company may be required to satisfy a variety of foreign regulatory requirements.
The Company intends to explore and seek to comply with these requirements on a
country-by-country basis. There can be no assurance that the Company will be
able to satisfy the regulatory requirements in foreign countries and the failure
to satisfy such requirements may prevent the Company from operating in such
countries. The failure to comply with foreign regulatory requirements could have
a material adverse effect on the Company's business, financial conditions and
results of operations.
EMPLOYEES
The Company currently employs 81 persons, substantially all of whom are
full-time employees, and none of whom are now covered by a collective bargaining
arrangement. All of the Company's employees are located at the Company's
headquarters in Houston, Texas. The Company considers its relationships with its
employees to be satisfactory.
INTELLECTUAL PROPERTY
The Company currently holds no United States or foreign patents. The
Company has registered the trademark names HYPERCAST and HYPERLINE in the United
States. The Company regards certain of its computer software as proprietary and
seeks to protect such software with common law copyrights, trade secret laws,
non-disclosure agreements and other safeguards. There can be no assurance,
however, that the steps taken by the Company to protect its proprietary rights
will be adequate or that others will not independently develop technologies
similar or superior to the Company, or obtain access to the Company's know-how
or software codes, concepts, ideas or documentation. Further, there can be no
assurance that the Company's non-disclosure agreements with its employees will
adequately protect the Company's trade secrets.
PROPERTIES
The Company does not own any real property. The Company's headquarters
facility, which includes its administrative, sales, marketing, management
information systems and development offices and its operations center, is
located in approximately 15,500 square feet of leased space in Houston, Texas.
The lease on the Houston facility expires in March 2000. The Company leases an
aggregate of approximately 2,500 square feet in 16 cities across the United
States where the nodes are located. Facilities for the Company's nodes are
leased under short-term agreements of two years or less. The Company believes
its existing facilities are adequate to meet current requirements and that
suitable additional space in close proximity to its headquarters will be
available as needed to accommodate growth of its operations.
INSURANCE
The Company maintains insurance covering risks incurred in the ordinary
course of business, including general liability, special and business property
coverage (including coverage of electronic data processing equipment and media),
and business interruption insurance. The Company is the beneficiary of key-man
term life insurance covering certain of its executive officers. The Company
believes its insurance coverage is adequate.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which the Company
believes could have a material adverse effect on the Company. From time to time
the Company becomes involved in complaints related to the distribution of
unsolicited faxes for a customer of the Company. The distribution of unsolicited
faxes is subject to restriction under federal law and some state laws. The
Company has developed procedures designed to minimize its exposure to claims of
this type. The Company may have rescission liability in connection with the
sales of the Subject Securities. See "Rescission Offer."
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the directors and officers of the
Company and their respective ages and positions (ages as of July 15, 1998):
NAME AGE POSITION
--------- ------ -------------
Vincent W. Beale, Sr. 50 Chairman of the Board, Chief Executive Officer,
President and Director
Bernard B. Beale 41 Executive Vice President
David R. Hearon, Jr. 61 Vice President of Operations
Thomas J. Affeldt 42 Vice President of Sales and Marketing
Samuel C. Beale 42 Vice President, General Counsel and Secretary
Ray C. Davis 41 Director
Wayne Schroeder 55 Director
VINCENT W. BEALE, SR. was elected Chairman of the Board of Directors,
Chief Executive Officer and President of the Company on January 28, 1998. Mr.
Beale acted as a consultant to the Company from June 1997 until January 1998.
Mr. Beale is the President and majority owner of CyNet Holdings, LLC, a limited
liability company which is the largest shareholder of the Company. Mr. Beale is
also the President and Managing Director of BNB Capital, Inc., an investment
banking firm. Prior to joining the Company, Mr. Beale was employed for more than
fifteen years with various firms including Merrill Lynch, Pierce, Fenner &
Smith, Inc., Kidder Peabody & Co., Inc., PaineWebber, Inc. and Shearson Lehman
Hutton, Inc.
BERNARD B. BEALE joined the Company in January 1998 as a special
consultant to the Chairman to assist in the reorganization of the Company's
business operations. In July 1998 Mr. Beale was named Executive Vice President
of the Company. For more than ten years prior to joining the Company, Mr. Beale
was employed by The Equitable Company, a financial services firm, and certain
other investment banking firms. Mr. Beale holds a Master of Science degree in
Business Management from Aurora University and a Bachelor of Arts degree in
History from Oakwood College.
DAVID R. HEARON, JR. was employed by the Company in March 1998 as Vice
President of Operations. From July 1996 until joining the Company, Mr. Hearon
was President of Hearon & Associates, and independent consulting firm providing
consulting services in the areas of information technology, manufacturing,
customer support, re-engineering and human resource development. From 1959 to
May 1996, Mr. Hearon was employed by Lucent Technologies and its predecessors,
AT&T and Western Electric, in management positions related to telecommunications
and information technology, including engineering, manufacturing voice and data
networks, and call centers. Mr. Hearon holds a Bachelor's degree in Mechanical
Engineering from the City College of New York and has participated in
post-graduate business and engineering programs at the University of Chicago and
City College of New York.
THOMAS J. AFFELDT joined the Company in March 1998 as Vice President of
Sales and Marketing. From August 1995 to February 1998, Mr. Affeldt was employed
as Regional Director of Sales for Comsul Ltd., a technology consulting firm. For
more than ten years prior to August 1995, Mr. Affeldt was employed by IBM
Corporation and Siemens Rohm Communications, Inc. in various positions related
to the sales and installation of telecommunications hardware and software.
Before entering the telecommunications industry, Mr. Affeldt was employed by the
McKinsey & Company in the areas of accounting and management consulting. Mr.
Affeldt holds a Bachelor of Business Administration degree from the University
of South Florida.
SAMUEL C. BEALE became Vice President, General Counsel and Secretary of
the Company in May 1998. For more than seven years prior to May 1998, Mr. Beale
was an attorney engaged in private law practice. Prior to entering the practice
of law in November 1990, Mr. Beale spent more than ten years in the computer
industry with companies such as IBM Corporation, Sperry Univac, Martin Marietta
and IOCs, in positions ranging from systems engineer to data processing
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manager. Mr. Beale holds a Juris Doctor degree from the Ohio State University
College of Law and a Bachelor of Arts degree from Harvard University.
RAY C. DAVIS is the Company's founder and served as President and Chief
Executive Officer from its inception in April 1995 through January 1998. He has
been a member of the Board of Directors since May 1995 and currently provides
technical services to the Company pursuant to his employment agreement with the
Company. Mr. Davis was President of ValuFax, Inc. from April 1994 to March 1995.
From February 1991 to April 1994, Mr. Davis was President of Ondisk, Inc. Mr.
Davis has authored twenty-one computer and telecommunications books, published
four trade newspapers, and published four CD-ROM based information and marketing
databases.
WAYNE SCHROEDER joined the Company in October 1997 as Chief Financial
Officer and Secretary and was elected to the Board of Directors in February
1998. In April 1998 Mr. Schroeder resigned as an officer of the Company to
become the Controller of Capstar Broadcasting Corporation. Mr. Schroeder was
Vice President - Finance, Secretary and Director of Boundless Corporation from
November 1996 to October 1997. Mr. Schroeder was self-employed as a financial
and accounting consultant from June 1994 to October 1996. From July 1987 to May
1994, Mr. Schroeder served as Chief Operating Officer, Chief Financial Officer
and a director of Arrhythmia Research Technology, Inc. Mr. Schroeder graduated
from the University of Texas at Austin with a degree in finance and accounting.
Vincent W. Beale, Sr., Bernard B. Beale and Samuel C. Beale are
siblings. There are no other family relationships among any of the Company's
directors and executive officers.
DIRECTOR COMPENSATION
Directors who are employees or consultants of the Company will not
receive any compensation for serving as directors. All directors will be
reimbursed for ordinary and necessary expenses incurred in attending any meeting
of the Board of Directors or any committee thereof or otherwise incurred in
their capacity as directors.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all forms of
compensation paid by the Company to the named individuals for the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
LONG-TERM
NAME AND PRINCIPAL OTHER ANNUAL COMPENSATION ALL OTHER
POSITION FISCAL YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
-------- ----------- ------ ----- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ray C. Davis, President 1997 $198,430 $50,000 $7,500(1) - $250,000(2)
and Chief Executive 1996 $116,923 - - - $195,081(3)
Officer 1995 - - - - $ 81,919(3)
Vickroy Stone, Chief 1997 - - -(4) - -
Financial Officer 1996 - - $617,401(5) - -
(9/95 to 2/97) 1995 - - - - -
John Kim, Vice 1997 $262,302 $6,000 - - -
President, Sales 1996 $34,854 $31,450 - - -
(4/96 to present)
Keith Shaffner, 1997 $9,231 - - - $1,976,663(6)
Vice President
(6/97 to 11/97)
</TABLE>
35
<PAGE>
- ------------------
(1) Represents the value of providing Mr. Davis the use of an automobile owned
by the Company.
(2) Represents consideration paid to Mr. Davis in exchange for his assignment
to the Company of all of his "intellectual property." See "Certain
Transactions."
(3) Represents advances made by the Company to Mr. Davis that were repaid
by Mr. Davis incident to the purchase of 277,000 shares of Class A
Common Stock from the Davis Family Partnership, Ltd. for $277,000. See
"Certain Transactions."
(4) Excludes (i) the repurchase by the Company of 450,000 shares of Class A
Common Stock from Mr. Stone for $450,000 (described in footnote 5
below) and (ii) the issuance of warrants to purchase 450,000 shares of
Class A Common Stock which were deemed to have no value on the date of
issuance. See "Certain Transactions."
(5) Represents $117,401 paid and 500,000 shares of Class A Common Stock,
valued at $500,000, issued to Mr. Stone for financial advisory services
rendered. See "Certain Transactions."
(6) Represents $1,005,136 paid to Mr. Shaffner individually and $971,527 paid
to his affiliate, CyFax, Inc. See "Certain Transactions."
No other director or executive officer received salary and bonus which
exceeded $100,000 during any of the three fiscal years ended December 31, 1997.
See "Employment Agreements" below for information regarding the current
compensation of certain of the Company's directors and officers.
EMPLOYMENT AGREEMENTS
On June 17, 1997, the Company entered into a Consulting Agreement with
Vincent W. Beale, Sr., pursuant to which Mr. Beale agreed to assist the Company
with respect to an initial public offering and certain proposed mergers and
acquisitions. Mr. Beale was paid an aggregate of $189,000 in consulting fees
under the terms of the Consulting Agreement.
Effective February 1, 1998, the Company terminated his Consulting
Agreement and entered into an employment agreement with Vincent W. Beale, Sr.
pursuant to which Mr. Beale serves as the Chairman of the Board and Chief
Executive Officer of the Company. The agreement has an initial term of five
years and can continue for additional one-year periods upon the agreement of Mr.
Beale and the Company, and requires Mr. Beale to devote substantially all of his
business time, attention and energy exclusively to the business of the Company,
and to use his best efforts to promote the success of the Company's business. In
exchange, Mr. Beale is entitled to (i) receive an annual salary, commencing
February 1, 1998, of $180,000 (subject to annual review by the Board of
Directors), (ii) earn an incentive bonus in accordance with the Company's bonus
plan to be established for its executives, (iii) receive a signing bonus of
$30,000, (iv) an option under the Company's 1997 Incentive Stock Option Plan to
purchase 100,000 shares of Class A Common Stock at a price of $0.39 per share
which vests ratably over a four-year period and (v) participate in the Company's
other employee benefit plans. Mr. Beale's employment agreement is terminable by
the Company at any time for "cause," as specified in the agreement, and in
certain other events. The employment agreement also contains covenants limiting
Mr. Beale's right to compete with the Company during the term of the employment
agreement and for two years after the termination of his employment.
Effective March 1, 1998, the Company entered into an employment
agreement with David R. Hearon, Jr. pursuant to which Mr. Hearon serves as the
Vice President of Operations of the Company. The agreement has an initial term
of four years and can continue for additional one-year periods upon the
agreement of Mr. Hearon and the Company, and requires Mr. Hearon to devote
substantially all of his business time, attention and energy exclusively to the
business of the Company, and to use his best efforts to promote the success of
the Company's business. In exchange, Mr. Hearon is entitled to (i) receive an
annual salary, commencing March 1, 1998, of $150,000 (subject to annual review
by the Board of Directors), (ii) earn an incentive bonus in accordance with the
Company's bonus plan to be established for its executives, (iii) receive a
signing bonus of $30,000, (iv) an option under the Company's 1997 Incentive
Stock Option Plan to purchase 75,000 shares of Class A Common Stock at a price
of $0.39 per share which vests ratably over a four-year period and (v)
participate in the Company's other employee benefit plans. Mr. Hearon's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Hearon's right to compete with
the Company during the term of the employment agreement and for two years after
his termination of employment.
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<PAGE>
Effective March 3, 1997, the Company entered into a three-year
executive employment agreement with Ray C. Davis, the founder of the Company.
The agreement was automatically renewable at the end of its initial term for
consecutive one-year terms and provided for an annual base salary of $220,000,
and incentives (annual and long-term), retirement benefits, welfare benefits,
and fringe benefits which were available to other executive employees of the
Company. Mr. Davis received a $50,000 signing bonus from the Company upon
execution of his agreement. The agreement also contained provisions for the
acceleration of certain compensation due to Mr. Davis in the event of a "change
of control" of the Company, as defined in the agreement.
Effective April 13, 1998, the employment agreement between the Company
and Ray C. Davis was terminated and Mr. Davis entered into a new employment
agreement with the Company. The agreement has an initial term of five years and
can continue for additional one-year periods upon the agreement of Mr. Davis and
the Company, and provides for Mr. Davis to (i) receive an annual salary,
commencing April 13, 1998, of $150,000 (subject to annual review by the Board of
Directors), (ii) receive a warrant to purchase an aggregate of 2,000,000 shares
of Class A Common Stock at a price of $1.00 per share and (iii) participate in
certain of the Company's other employee benefit plans. The employment agreement
provides that Mr. Davis will devote approximately one-half of his business time
and attention to the business of the Company. All inventions and technological
improvements to the Company's software developed by Mr. Davis during the term of
the employment agreement will be the property of the Company and the Company
will not be required to compensate Mr. Davis for any such inventions or
improvements. Mr. Davis' employment agreement is terminable by the Company at
any time for "cause," as specified in the employment agreement, and in certain
other events. The employment agreement also contains covenants limiting Mr.
Davis's right to compete with the Company during the term of the employment
agreement and for three years after his termination of employment.
Effective July 22, 1998, the Company entered into an employment
agreement with Bernard B. Beale pursuant to which Mr. Beale serves as the
Executive Vice President of the Company. The agreement has an initial term of
four years and can continue for additional one-year periods upon the agreement
of Mr. Beale and the Company, and requires Mr. Beale to devote substantially all
of his business time, attention and energy exclusively to the business of the
Company, and to use his best efforts to promote the success of the Company's
business. In exchange, Mr. Beale is entitled to (i) receive an annual salary,
commencing July 22, 1998, of $150,000 (subject to annual review by the Board of
Directors), (ii) earn an incentive bonus in accordance with the Company's bonus
plan to be established for its executives, (iii) receive a signing bonus of
$30,000, (iv) an option under the Company's 1997 Incentive Stock Option Plan to
purchase 150,000 shares of Class A Common Stock at a price of $0.39 per share
which vests ratably over a four-year period and (v) participate in the Company's
other employee benefit plans. Mr. Beale's employment agreement is terminable by
the Company at any time for "cause," as specified in the agreement, and in
certain other events. The employment agreement also contains covenants limiting
Mr. Beale's right to compete with the Company during the term of the employment
agreement and for two years after his termination of employment.
Effective July 22, 1998, the Company entered into an employment
agreement with Samuel C. Beale pursuant to which Mr. Beale serves as the Vice
President, General Counsel and Secretary of the Company. The agreement has an
initial term of three years and can continue for additional one-year periods
upon the agreement of Mr. Beale and the Company, and requires Mr. Beale to
devote substantially all of his business time, attention and energy exclusively
to the business of the Company, and to use his best efforts to promote the
success of the Company's business. In exchange, Mr. Beale is entitled to (i)
receive an annual salary, commencing July 22, 1998, of $108,000 (subject to
annual review by the Board of Directors), (ii) earn an incentive bonus in
accordance with the Company's bonus plan to be established for its executives,
(iii) receive a signing bonus of $30,000, (iv) an option under the Company's
1997 Incentive Stock Option Plan to purchase 100,000 shares of Class A Common
Stock at a price of $0.39 per share which vests ratably over a four-year period
and (v) participate in the Company's other employee benefit plans. Mr. Beale's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Beale's right to compete with the
Company during the term of the employment agreement and for two years after his
termination of employment.
INCENTIVE STOCK OPTION PLAN
On October 20, 1997, the Board of Directors and a majority of the
holders of the Class A Common Stock adopted the Company's 1997 Incentive Stock
Option Plan (the "1997 Plan"). A total of 2,000,000 shares of Class A Common
Stock has been reserved for issuance under the 1997 Plan. The shares available
under the 1997 Plan will be used primarily to grant "incentive stock options"
(within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended) in the future to certain employees of the Company and its subsidiaries.
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The purpose of the 1997 Plan is to promote the financial success of the
Company and increase shareholder value by (i) strengthening the Company's
ability to develop and maintain management, (ii) motivating performance by the
Company's management, (iii) encourage management and employees of the Company to
maintain an equity ownership in the Company, (iv) attract and retain senior
executives by providing incentive compensation opportunities comparable to those
provided by other companies and (v) enable key employees to participate in the
long-term growth of the Company.
The 1997 Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors (the "Plan Administrator"). The Plan
Administrator determines, subject to the provisions of the 1997 Plan, the
employees to whom options are granted and the number of options to be granted.
The Plan Administrator may grant "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986.
The Plan Administrator may set the price and the time at which options
granted under the 1997 Plan may be exercised. The right to exercise options
granted under the 1997 Plan may be conditioned upon the employee remaining
employed by the Company for a period fixed by the Plan Administrator. Incentive
stock options granted under the 1997 Plan must have an exercise price equal to
at least the fair market value of the Class A Common Stock on the date the
option is granted. Each option granted under the 1997 Plan may have a term of up
to ten years, except that incentive stock options granted to a shareholder who,
at the time of grant, owns more than 10% of the voting stock of the Company, may
have a term of up to five years. The exercise price of incentive stock options
granted to shareholders possessing more than 10% of the combined voting power of
all classes of stock of the Company may be not less than 110% of the fair market
value on the date of grant. Shares subject to options under the 1997 Plan may be
purchased for cash or by surrendering shares of outstanding Common Stock.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their shareholders for monetary
damages under certain conditions and circumstances. The Articles of
Incorporation of the Company limit the liability of directors of the Company (in
their capacity as directors, but not in their capacity as officers) to the
Company or its shareholders to the fullest extent permitted by Texas law.
Specifically, no director of the Company will be personally liable to the
Company or its shareholders for monetary damages for any act or omission in such
director's capacity as a director, except for (i) a breach of the director's
duty of loyalty to the Company or its shareholders, (ii) acts or omissions not
in good faith which involve intentional misconduct or a knowing violation of the
law, (iii) an act or omission for which the liability of a director is expressly
provided for by an applicable statute or (iv) any transaction from which the
director derived an improper personal benefit, whether or not the benefit
resulted from an action taken in the person's official capacity.
The inclusion of this provision in the Company's Articles of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its shareholders. However, such limitation on liabilities does
not affect the standard of conduct with which directors must comply, the
availability of equitable relief or any causes of action based on federal law.
The Company's Articles of Incorporation provide for the indemnification
of its current and former officers and directors to the fullest extent permitted
by applicable law.
CERTAIN TRANSACTIONS
RAY C. DAVIS. In May and August of 1995, the Company issued an
aggregate of 10,000,000 shares of Class A Common Stock (after giving effect to a
nine for one share dividend) to the Davis Family Partnership, Ltd., the Charles
C. Davis Trust, the Nicholas M. Davis Trust and the Rachel I. Davis Trust
(collectively, the "Davis Interests") for services rendered by Ray C. Davis in
connection with the organization of the Company. The Company valued such
services at $1,000.
In August 1996, the Company purchased 277,000 shares of Class A Common
Stock from the Davis Family Partnership, Ltd. for $277,000. The purchase price
of $1.00 per share of Class A Common Stock was deemed by Mr. Davis, the then
sole director of the Company, to be equal to the fair market value of the shares
purchased based upon sales of shares
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<PAGE>
of Class A Common Stock by the Company to private investors, at or near the time
of the purchase of shares from the Davis Family Partnership, Ltd. A majority of
the proceeds from the sale of shares of Class A Common Stock to the Company was
used by Mr. Davis to repay certain loans and advances made to him by the Company
during prior periods.
Effective March 3, 1997, Mr. Davis assigned to the Company all right,
title and interest to all "intellectual property" which Mr. Davis owned. In
exchange for such assignment, the Company paid Mr. Davis $250,000. The
Assignment of Intellectual Property executed by Mr. Davis in favor of the
Company defines "intellectual property" to include (i) all patents, patent
applications, patent disclosures and related documents, (ii) all trademarks,
service marks, trade dress logos and trade names, (iii) all copyrights and
registrations and applications for registration thereof, (iv) all mask works and
registrations and applications for registrations, (v) all computer software,
data and documentation, (vi) all trade secrets and confidential business
information, know how, and related business information, (vii) all proprietary
rights relating to any of the foregoing items and (viii) all copies and tangible
embodiments of any of the foregoing.
JEAN-DAVID BENICHOU. In July 1996, the Company issued an aggregate of
1,050,000 of Class A Common Stock to the principals of International Fax
Corporation ("IFC") and IMedia, S.A. of France ("IMedia") in connection with (i)
an agreement granting the Company a right of first refusal to acquire all of the
outstanding capital stock of IMedia, (ii) the right to utilize IMedia's European
network of fax broadcasting equipment and (iii) the agreement of IMedia to use
the Company's network for fax broadcast traffic to the United States. The shares
of Class A Common Stock were valued by the Company at $1.00 per share. In
connection with this transaction, Ray C. Davis caused the Davis Interests to
sell Jean-David Benichou, a principal of IFC and IMedia, 250,000 shares of Class
A Common Stock at a price of $1.00 per share. Subsequent to this series of
transactions, the Company wrote off the value of its investment.
VICKROY STONE. Between May 1996 and July 1996, the Company paid
$117,401 and issued 500,000 shares of Class A Common Stock (valued at $1.00 per
share) to Vickroy Stone in exchange for services rendered. In February 1997, the
Company repurchased 450,000 of such shares of Class A Common Stock from Mr.
Stone at a purchase price of $1.00 per share. In February 1997, Mr. Stone sold
the remaining 50,000 shares of Class A Common Stock to a partnership affiliated
with Ray C. Davis for $1.00 per share. In May 1997, the Company issued a
five-year warrant to Vickroy Stone entitling Mr. Stone to purchase an aggregate
of 450,000 shares of Class A Common Stock at an exercise price of $2.00 per
share.
KEITH SHAFFNER. In November 1996, the Company issued warrants to
purchase an aggregate of 738,000 shares of Class A Common Stock at an exercise
price of $1.00 per share to various persons for assistance in the organization
and formation of the LLCs. Among the persons receiving such warrants was Keith
Shaffner, formerly a Vice President of the Company. Mr. Shaffner received a
warrant to purchase 145,500 shares of Class A Common Stock in this transaction,
the value of which was $37,830. Also in 1996, the Company paid Mr. Shaffner an
aggregate of $111,315 for services rendered. On November 14, 1997, the Company
entered into a Settlement Agreement and Mutual Release with Mr. Shaffner for
services rendered by him during 1996 and 1997. In exchange for a complete
release of all claims by Mr. Shaffner and his affiliate, CyFax, Inc. ("CyFax"),
against the Company, the Company issued to Mr. Shaffner: (i) a warrant to
purchase 1,150,000 shares of Class B Common Stock at a price of $1.00 per share,
exercisable on or before August 30, 1999, valued at $184,000, (ii) a warrant to
purchase 1,050,000 shares of Class B Common Stock at a price of $1.00 per share,
exercisable on or before February 28, 2000, valued at $178,500, (iii) 500,000
shares of Class A Common Stock, valued at $500,000, and (iv) $51,000 in cash. In
addition, the Company issued 200,000 shares of Class A Common Stock, valued at
$78,000, to CyFax for the termination of an exclusive agent management agreement
with the Company. The Company also paid Mr. Shaffner, individually, $91,636, and
CyFax an aggregate of $893,527 for services rendered in 1997.
CYNET HOLDINGS, LLC. From February 1998 through July 1998, Holdings
purchased an aggregate of 9,473,000 shares of Class A Common Stock from the
Davis Interests for an aggregate amount of $1,250,000. The funds utilized by
Holdings to purchase such shares were generated from equity capital. Vincent W.
Beale, Sr. is the President and majority owner of Holdings. In July 1998, the
Company entered into a Subscription Agreement with Holdings (the "Holdings
Subscription Agreement") pursuant to which Holdings is committed to purchase up
to 10,000,000 shares of Class A Common Stock of the Company for $1.00 per share
prior to December 31, 1998. As of the date of this Prospectus, Holdings has
purchased an aggregate of 926,000 shares of Class A Common Stock pursuant to the
Holdings Subscription Agreement. In consideration for providing the Holdings
Commitment, the Company (i) issued a five-year warrant entitling Holdings to
purchase an aggregate of 4,800,000 shares of Class A Common Stock at a price of
$1.00 per share and (ii) entered into a registration rights agreement granting
Holdings certain demand and piggy-back registration rights covering the
Company's securities held by Holdings.
39
<PAGE>
COMPANY POLICY
Any future transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will be approved in
advance by a majority of the disinterested members of the Board of Directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, the
number of outstanding shares of Class A Common Stock (the Company's only class
of voting securities) owned by (i) each person known by the Company to
beneficially own more than 5% of its outstanding Class A Common Stock, (ii) each
director, (iii) each named executive officer and (iv) all officers and directors
as a group.
<TABLE>
<CAPTION>
Shares of Class A Common
Name of Beneficial Owner Stock Beneficially Owned Percent of Class(1)
- ----------------------------------------- ------------------------------- ---------------------------
<S> <C> <C>
CyNet Holdings, LLC...................... 15,199,000(2) 53.5%
Vincent W. Beale, Sr..................... 15,199,000(3) 53.5%
Ray C. Davis............................. 2,000,000(4) 7.0%
All directors and executive officers
as a group (7 people)................ 17,199,000(5) 60.5%
</TABLE>
- --------------------------
(1) Percentages shown are based upon (i) 20,385,071 shares of Class A
Common Stock presently outstanding and (ii) warrants to purchase
8,049,000 shares of Class A Common Stock.
(2) Includes (i) 9,473,000 shares purchased from the Davis Interests, (ii)
926,000 shares purchased pursuant to the Holdings Subscription
Agreement and (iii) 4,800,000 shares which may be purchased at any time
prior to April 13, 2003, at a purchase price of $1.00 per share, upon
exercise of a warrant issued pursuant to the Holdings Subscription
Agreement. See "Certain Transactions".
(3) Represents 15,199,000 shares of Class A Common Stock beneficially owned
of record by CyNet Holdings, LLC, of which Mr. Beale is the President
and majority owner.
(4) Represents 2,000,000 shares of Class A Common Stock which may be
purchased at any time prior to April 13, 2003, at a purchase price of
$1.00 per share, upon exercise of a warrant issued pursuant to his
employment agreement with the Company. See "Employment Agreements".
(5) Includes an aggregate of 6,800,000 shares of Class A Common Stock that
such persons have the right to acquire within 60 days pursuant to
warrants held by such persons.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 60,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock. The following summary
description of certain terms of the capital stock of the Company is qualified in
its entirety by reference to the Company's Articles of Incorporation, which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part.
COMMON STOCK
The Company has authorized 60,000,000 shares of Common Stock, no par
value, of which 40,000,000 shares have been designated as Class A Common Stock
and 20,000,000 shares have been designated as Class B Common Stock. As of the
date of this Prospectus, 20,385,071 shares of Class A Common Stock and 3,097,761
shares of Class B Common Stock are outstanding. In addition, warrants to
purchase 8,049,000 shares of Class A Common Stock and warrants to purchase
2,548,954 shares of Class B Common Stock are currently outstanding. Except as
required by applicable law, including the Texas Business Corporation Act
("TBCA"), the holders of Class B Common Stock have no voting rights. The holders
of Class B Common Stock are entitled under the TBCA to vote in connection with
the voluntary dissolution of the Company.
40
<PAGE>
The holders of both Class A and Class B Common Stock are entitled to receive
such dividends, if any, as may be declared by the Board of Directors from time
to time out of legally available funds. Upon liquidation or dissolution of the
Company, the holders of both Class A and Class B Common Stock are entitled to
share ratably in all assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding. Holders of
Class A and Class B Common Stock have no preemptive rights to acquire new
securities issued by the Company and have no rights to convert their Common
Stock into any other securities of the Company.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred
Stock, no par value ("Preferred Stock"). The Preferred Stock may be issued in
one or more series, the terms of which may be determined at the time of issuance
by the Board of Directors, without further action by shareholders, and may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion, redemption
rights and sinking fund provisions.
The Company has an aggregate of 210,849 shares of Preferred Stock
outstanding as of the date of this Prospectus. The Company has no present plans
for the issuance of additional shares of Preferred Stock.
SERIES A PREFERRED STOCK
The Board of Directors has authorized the issuance of 3,600,000 shares
of Series A Preferred Stock. As of the date of this Prospectus, 103,500 shares
of Series A Preferred Stock are outstanding.
RANKING. The Series A Preferred Stock ranks senior to the Company's
Class A and Class B Common Stock and Series B Preferred Stock with respect to
dividends and rights upon liquidation or dissolution of the Company. As long as
any Series A Preferred Stock is outstanding, the Company cannot create,
authorize or issue any class of securities that is senior to or on parity with
the Series A Preferred Stock without the approval of holders of at least 66 2/3%
of the Series A Preferred Stock.
VOTING RIGHTS. Except as required by applicable law, holders of Series
A Preferred Stock are not entitled to vote.
DIVIDEND RIGHTS. The holders of Series A Preferred Stock are entitled
to receive out of funds of the Company legally available therefor, dividends at
an annual rate of $0.24 per share. Such dividends are payable semi-annually in
arrears in equal installments of $0.12 on June 15 and December 15. Dividends
accrue and cumulate from the date of first issuance and are paid to holders of
record as of the record date of the last day of May and November in each year.
Accumulated dividends do not bear interest. So long as any shares of the Series
A Preferred Stock is outstanding, the Company may not declare or pay any
dividend on the Class A or Class B Common Stock until all accumulated, unpaid
dividends on the Series A Preferred Stock have been paid in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series A Preferred are
convertible by the holder at any time before September 1, 1998 at a conversion
rate of 1.1 shares of Class A Common Stock for each share of Series A Preferred
Stock, and thereafter at a conversion rate of one for one. Any accrued and
unpaid dividends are payable to holders of the Series A Preferred Stock at the
time of conversion. At any time on or after January 1, 1999, the Company may
cause the conversion of the Series A Preferred Stock, in whole or in part, at
the rate of one share of Class A Common Stock for each share of Series A
Preferred Stock.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Series A
Preferred Stock are entitled to receive, out of the remaining net assets of the
Company available for distribution to shareholders before any distribution or
payment made to holders of Class A or Class B Common Stock or other junior
capital stock, the Series A Preferred Stock stated value of $2.00 per share,
plus any accrued and unpaid dividends. Upon payment of the full amount of such
stated value plus any unpaid dividends, the holders of Series A Preferred Stock
are not entitled to any further participation in any distribution of assets of
the Company.
41
<PAGE>
SERIES B PREFERRED STOCK
The Board of Directors has authorized the issuance of 2,000,000 shares
of Series B Preferred Stock. As of the date of this Prospectus, 107,349 shares
of Series B Preferred Stock are outstanding.
RANKING. The Series B Preferred Stock ranks junior to the Series A
Preferred Stock and senior to the Company's Class A and Class B Common Stock
with respect to dividends and rights upon liquidation or dissolution of the
Company. As long as any Series B Preferred Stock is outstanding, the Company
cannot create, authorize or issue any class of securities that is senior to or
on parity with the Series B Preferred Stock without the approval of holders of
at least 66 2/3% of the Series B Preferred Stock.
VOTING RIGHTS. Except as required by applicable law, holders of Series
B Preferred Stock are not entitled to vote.
DIVIDEND RIGHTS. The holders of Series B Preferred Stock are entitled
to receive, out of funds of the Company legally available therefor, dividends at
an annual rate of $0.30 per share. Such dividends are payable semi-annually in
arrears in equal installments of $0.15 on June 15 and December 15. Dividends
accrue and cumulate from the date of first issuance and are paid to holders of
record as of the record date of the last day of May and November in each year.
Accumulated, unpaid dividends do not bear interest. So long as any shares of the
Series A or B Preferred Stock is outstanding, the Company may not declare or pay
any dividend on the Class A or Class B Common Stock or other capital stock until
all accumulated, unpaid dividends on the Series A and Series B Preferred Stock
have been paid in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series B Preferred Stock
are convertible by the holder at any time before September 1, 1998 at a
conversion rate of 1.1 shares of Class B Common Stock for each share of Series B
Preferred Stock, and thereafter at a conversion rate of one for one. Any accrued
and unpaid dividends are payable to holders of the Series B Preferred Stock at
the time of conversion. At any time on and after January 1, 1999, the Company
may cause the conversion of the Series B Preferred Stock, in whole or in part,
at the rate of one share of Class B Common Stock for each share of Series B
Preferred Stock.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts, other liabilities of the Company, and Series A Preferred
shareholders, the holders of the Series B Preferred Stock are entitled to
receive, out of the remaining net assets of the Company available for
distribution to shareholders, before any distribution or payment made to holders
of Class A or Class B Common Stock or other junior capital stock, the Series B
Preferred Stock stated value of $3.00 per share plus any accrued and unpaid
dividends. Upon payment of the full amount of such stated value plus any unpaid
dividends, the holders of Series B Preferred Stock are not entitled to any
further participation in any distribution of assets by the Company.
WARRANTS
The Company has issued warrants to purchase an aggregate of 8,049,000
Shares of Class A Common Stock at exercise prices ranging from $1.00 to $2.00
per share expiring no later than July 2003, and warrants to purchase an
aggregate of 2,548,954 shares of Class B Common Stock at exercise prices ranging
from $1.00 to $2.00 per share, expiring no later than May 2003.
TRANSFER AGENT
The Transfer Agent and Registrar for the Class A and Class B Common
Stock is .
42
<PAGE>
PLAN OF DISTRIBUTION AND SELLING SHAREHOLDER
This Prospectus also relates to the resale of up to 2,200,000 shares of
Class B Common Stock by Keith Shaffner (the "Selling Shareholder") upon exercise
of outstanding warrants to purchase up to 2,200,000 shares of Class B Common
Stock. From June 1997 to August 1997, Mr. Shaffner served as a Vice President of
the Company. The Company granted Mr. Shaffner one demand registration right
covering the shares of Class B Common Stock underlying these warrants. In
satisfaction of such demand registration right, the Company will include the
shares to be issued to Mr. Shaffner upon exercise of the warrants, subject to
customary limitations in the Registration Statement of which this Prospectus is
a part. The Company will bear the costs incidental to the registration of these
shares, except that Mr. Shaffner will bear his proportional share of
underwriting discounts and commissions and the costs of any separate counsel
retained. Prior to the resale of such shares, Mr. Shaffner beneficially owns (i)
742,096 shares of Class A Common Stock, (ii) 145,500 shares of Class A Common
Stock purchasable at $1.00 per share pursuant to a warrant and (iii) 2,200,000
shares of Class B Common Stock purchasable at $1.00 per share pursuant to
warrants which, assuming the exercise thereof, represents 41.5% of the currently
outstanding shares of Class B Common Stock.
The Company will not receive any proceeds from the resale of Class B
Common Stock by the Selling Shareholder; however, the Company will receive the
exercise price of $1.00 per share for each share of Class B Common Stock
purchased by the Selling Shareholder upon exercise of his warrants.
The 2,200,000 shares offered by the Selling Shareholder, may be sold by
one or more of the following methods, without limitation: (i) ordinary brokerage
transactions and transactions in which the broker solicits purchases; and (ii)
face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Shareholder may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the Selling
Shareholder in amounts to be negotiated. Such brokers and dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act. The Selling Shareholder or any broker or dealer
effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a prospectus. As a
result of such shares being registered under the Securities Act, holders who
subsequently resell such shares to the public may be deemed to be underwriters
with respect to such shares of Class B Common Stock, with the result that they
may be subject to certain statutory liabilities if the registration statement to
which this Prospectus relates is defective by virtue of containing a material
misstatement or omitting to disclose a statement of material fact. The Company
has not agreed to indemnify any Selling Shareholder regarding such liabilities.
Mr. Shaffner has entered into certain agreements with the Company
pursuant to which he has agreed not to sell any shares of Class B Common Stock
until February 1, 1999.
SHARES ELIGIBLE FOR FUTURE SALES
The Subject Securities will be freely tradeable to the extent the
Subject Offerees reject the Rescission Offer. The Company's securities not
subject to the Rescission Offer were issued by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
Any of the Company's securities issued upon the exercise of options or warrants
not subject to the Rescission Offer will constitute "restricted securities."
Restricted securities may be resold publicly only following their effective
registration under the Securities Act or pursuant to an exemption from the
registration requirements of that act, such as Rule 144 thereunder.
In general, under Rule 144 as currently in effect, a person, including
an affiliate of the Company, who has beneficially owned restricted securities
for a period of at least one year from the date such restricted securities were
acquired from the Company or an affiliate, is entitled to sell, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the
then-outstanding shares of Common Stock or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions relating to the
manner and notice of sale and the availability of current public information
about the Company.
Under Rule 144(k), if a period of at least two years has elapsed from
the date restricted securities were acquired from the Company or an affiliate, a
holder of such restricted securities who is not an affiliate of the Company at
the time of
43
<PAGE>
the sale and has not been an affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately after the date of this
Prospectus without regard to the volume and manner of sale limitations described
above.
There has been no public trading market for the Company's Class A and
Class B Common Stock and there can be no assurance that one will develop. Upon
the completion of the Rescission Offer, the Company intends to take the
necessary actions to allow its Class A and Class B Common Stock to be traded by
means of the OTC Bulletin Board(R) service (the "OTC"). Management will attempt
to develop a public market for its Class A and Class B Common Stock by
soliciting brokers to become market makers of the shares in such a manner that
will permit trading of its Class A and Class B Common Stock using the OTC.
However, to date the Company has not completed agreements with any such
securities brokers to become market makers and there can be no assurance that
the Company will be able to solicit brokers to become market makers. As a
result, the Company's Class A and Class B Common Stock should be considered
highly illiquid and there can be no assurance that a market for the Company
Class A and Class B Common Stock will ever develop, or if developed, be
sustained. If any market is developed it should be assumed that such market will
be highly illiquid, sporadic and volatile. The sale of substantial amounts of
Class A or Class B Common Stock in the open market, or the availability of
shares for sale, may adversely affect the market price of the Class A or Class B
Common Stock and the ability of the Company to raise funds through equity
offerings in the future. See "Risk Factors--Lack of Public Market."
The Company expects it will enter into registration rights agreement
with a group of stand-by underwriters, who, collectively, will acquire Subject
Securities from Offerees electing to accept the Rescission Offer and additional
shares of Class A Common Stock in connection with providing the Rescission
Financing. See "Rescission Offer." Pursuant to those agreements, such stand-by
underwriters would be entitled to request the Company to file a registration
statement covering the resale of the Company's securities held by them.
The Company expects that the Company, its directors, executive officers
and certain shareholders would agree not to offer or sell any of their shares
for an agreed-to "lockup" period from the date of this Prospectus without the
prior written consent of Holdings and the stand-by underwriters, except for
issuances in connection with (i) future acquisitions, subject to certain
conditions, and (ii) and upon the exercise of outstanding warrants and pursuant
to options granted under the 1997 Plan.
LEGAL MATTERS
The validity of the shares of Common Stock subject to the Rescission
Offer will be passed upon for the Company by Chamberlain, Hrdlicka, White,
Williams & Martin, Houston, Texas.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report (which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended. The Company has
filed a Registration Statement on Form SB-2 (together with all amendments,
schedules and exhibits thereto, the "Registration Statement") with the
Commission under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus, which is included as part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. Statements contained in this Prospectus
as to the contents of any contract or other document referred to herein are not
necessarily complete, and in each instance that a reference is made to a
contract or other document filed as an exhibit to the Registration Statement,
each such statement is qualified in all respects by such reference. A copy of
the Registration Statement may be examined without charge at the Commission's
principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section
44
<PAGE>
of the Commission upon payment of certain fees prescribed by the Commission.
Copies of such materials may also be obtained over the Internet at
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited and reported upon by its
independent public accounting firm and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CYNET, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants............ F-2
Consolidated Balance Sheets .................................. F-3
Consolidated Statements of Loss............................... F-4
Consolidated Statements of Capital Deficit.................... F-5 - F-6
Consolidated Statements of Cash Flows ........................ F-7
Notes to Consolidated Financial Statements.................... F-8 - F-25
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CyNet, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of CyNet, Inc. as of
December 31, 1997 and the related consolidated statements of loss, capital
deficit and cash flows for each of the two years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CyNet,
Inc. at December 31, 1997 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred losses for the years
ended December 31, 1997 and 1996 totaling $7,099,174 and $4,061,271,
respectively, and at December 31, 1997 had a capital deficit of $8,668,500. The
Company will require additional working capital to develop and support its
technologies and business until the Company either (1) achieves a level of
revenues adequate to generate sufficient cash flows from operations; or (2)
receives additional financing necessary to support its working capital
requirements. Also, the Company is expected to issue a rescission offer
pertaining to (1) certain private placements of the Company's common and
preferred stock during 1996, 1997 and 1998 and (2) the issuance of certain
common and preferred stock and stock warrants issued for services provided
during the same periods. The potential liability of the Company, less dividends
paid and excluding interest, for the proposed rescission offer totaled
$13,825,349 and $13,910,012 as of December 31, 1997 and March 31, 1998,
respectively. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
BDO SEIDMAN, LLP
Houston, Texas
February 12, 1998, except for footnotes 8
and 14, which are as of July 24, 1998
F-2
<PAGE>
DECEMBER 31, MARCH 31,
1997 1998
---------- ----------
(unaudited)
ASSETS
Current Assets:
Cash .............................................. $ 716,400 $ 115,891
Accounts receivable, less allowance for doubtful
accounts of $83,000 and $103,000 ............... 274,809 441,975
Prepaid expenses:
Deferred offering costs (Note 3) ................ 2,078,825 2,078,825
Other ........................................... 108,769 173,697
---------- ----------
Total Current Assets ............................ 3,178,803 2,180,388
Property and Equipment, less accumulated depreciation
and amortization (Note 4) .......................... 3,564,947 3,490,851
Organization costs, less accumulated
amortization of $19,003 and $21,359 ................ 26,623 24,267
---------- ----------
$6,770,373 $6,325,506
========== ==========
<PAGE>
CYNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND CAPITAL DEFICIT
Current Liabilities:
Accounts payable and accrued expenses ......................... $ 998,835 $ 1,246,213
Dividends payable ............................................. 494,924 508,069
Accrued stock rights .......................................... 110,000 110,000
------------ ------------
Total Current Liabilities ..................................... 1,603,759 1,864,282
------------ ------------
Stock and warrants subject to rescission (Note 8):
Preferred stock - Series A ..................................... 211,265 201,265
Preferred stock - Series B ..................................... 229,923 319,923
Common stock - Class A ......................................... 7,922,132 7,952,133
Common stock - Class B ......................................... 5,270,149 5,235,051
Common stock warrants - Class A ................................ 201,645 201,640
------------ ------------
13,835,114 13,910,012
Commitments and Contingencies (Notes 8 and 11)
Capital Deficit (Note 8):
Cumulative Convertible Preferred Stock:
Series A, non-voting, $2.00 and $1.43 stated value;
3,600,000 shares authorized; 108,500 and 103,500
shares issued and outstanding .............................. -- --
Series B, non-voting, $3.00 stated value; 2,000,000
shares authorized; 77,349 and 107,349 shares issued and
outstanding ................................................ -- --
Common stock:
Class A voting, no par value; 40,000,000 shares authorized;
19,770,165 and 19,868,305 shares issued and outstanding .... 3,014,936 3,014,936
Class B nonvoting, no par value; 20,000,000 shares authorized;
2,954,470 and 2,958,136 shares issued and outstanding ...... 700,000 700,000
Outstanding warrants ......................................... 362,500 362,500
Deficit ...................................................... (12,018,936) (12,849,224)
------------ ------------
(7,941,500) (8,771,788)
Less - treasury stock at cost, 419,233 shares of Class A
common stock and 359,233 shares of Class A common stock
and 18,041 shares of Class B common stock ................... (727,000) (677,000)
------------ ------------
Total Capital Deficit ......................................... (8,668,500) (9,448,788)
------------ ------------
$ 6,770,373 $ 6,325,506
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ----------------------------
1997 1996 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues .................................... $ 4,960,355 $ 801,181 $ 1,926,892 $ 874,767
Cost of revenues ............................ 4,812,141 872,418 1,614,904 647,410
------------ ------------ ------------ ------------
Gross profit (loss) ......................... 148,214 (71,237) 311,988 227,357
Selling, general and administrative
expenses ................................. 7,443,395 2,256,162 1,131,491 1,327,182
------------ ------------ ------------ ------------
Loss from operations ........................ (7,295,181) (2,327,399) (819,503) (1,099,825)
------------ ------------ ------------ ------------
Other income (expense):
Loss on write-off of investments (Note 10) -- (1,202,577) -- --
Interest expense (Note 5) ................. (2,000) (700,000) -- (2,000)
Interest income ........................... 67,348 7,286 2,360 5,900
Other ..................................... (8,527) (8,646) -- --
------------ ------------ ------------ ------------
56,821 (1,903,937) 2,360 3,900
------------ ------------ ------------ ------------
Net loss before minority interest
in net (income) loss of consolidated
subsidiaries .............................. (7,238,360) (4,231,336) (817,143) (1,095,925)
Minority interest in net (income) loss
of consolidated subsidiaries .............. 139,186 170,065 -- (18,600)
------------ ------------ ------------ ------------
Net loss before dividends on preferred stock (7,099,174) (4,061,271) (817,143) (1,114,525)
Dividends on preferred stock ................ (739,204) (3,850) (13,145) (72,035)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders .. $ (7,838,378) $ (4,065,121) $ (830,288) $ (1,186,560)
============ ============ ============ ============
Net loss per common share - basic
and assuming dilution ..................... $ (.56) $ (.37) $ (.04) $ (.09)
============ ============ ============ ============
Weighted average number of common
shares outstanding ....................... 14,086,177 11,019,593 22,317,316 12,522,836
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK
-------------------- --------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 SHARES AMOUNT SHARES AMOUNT
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
BALANCE, at December 31 1995 .............................. -- $ -- -- $ --
Class A common stock issued for compensation and services . -- -- -- --
Purchase of treasury shares, Class A common stock ......... -- -- -- --
Issuance of Class A common stock for network access rights -- -- -- --
Issuance of Class A common stock through a private
placement subject to rescission ......................... -- -- -- --
Class A common stock issued for services .................. -- -- -- --
Issuance of Class A common stock from treasury subject to
rescission .............................................. -- -- -- --
Issuance of Class A common stock from treasury
for compensation ........................................ -- -- -- --
Issuance of Series A preferred stock through a private
placement subject to rescission ......................... 213,200 -- -- --
Issuance of Class A common stock warrants for services .... -- -- -- --
Accrued dividends on preferred stock ...................... -- -- -- --
Net loss .................................................. -- -- -- --
---------- ------ ---------- ------
BALANCE, at December 31, 1996 ............................. 213,200 -- -- --
Reclassification of common stock and warrants
subject to rescission ................................... -- -- -- --
Issuance of Class B common stock subject to rescission .... -- -- -- --
Issuance of Series A and B preferred stock issued
for compensation ....................................... 3,500 -- 13,033 --
Issuance of Class A common stock for compensation
and services ............................................ -- -- -- --
Issuance of Class B common stock for compensation
and services ............................................ -- -- -- --
Issuance of Class B common stock on conversion of notes
payable and for loan commitment fees .................... -- -- -- --
Issuance of Series A preferred stock through a private
placement subject to rescission ......................... 3,251,154 -- -- --
Issuance of Series B preferred stock through a private
placement subject to rescission ......................... -- -- 1,755,541 --
Issuance of Class A common stock warrants for services .... -- -- -- --
Issuance of Class B common stock warrants for services .... -- -- -- --
Purchase of treasury shares, Class A common stock ......... -- -- -- --
Issuance of Class A common stock from treasury, 114,500
shares subject to rescission ............................ -- -- -- --
Issuance of Class A common stock to purchase minority
interests ............................................... -- -- -- --
Issuance of Class A common stock on conversion of
Series A preferred stock ................................ (3,359,354) -- -- --
Issuance of Class B common stock on conversion of
Series B preferred stock ................................ -- -- (1,691,225) --
Accrued dividends on preferred stock ...................... -- -- -- --
Net loss .................................................. -- -- -- --
---------- ------ ---------- ------
BALANCE, at December 31, 1997 ............................. 108,500 $ -- 77,349 $ --
========== ====== ========== ======
</TABLE>
(1) Outstanding warrants consisted of the following at December 31:
1996 1997
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- ---------- --------
Class A common stock warrants 738,000 $ 191,880 1,249,000 $191,880
Class B common stock warrants -- -- 2,200,000 362,500
-------- ---------- ---------- --------
738,000 $ 191,880 3,449,000 $554,380
======== ========== ========== ========
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
<TABLE>
<CAPTION>
CLASS A CLASS B OUTSTANDING
COMMON STOCK COMMON STOCK WARRANTS (1) TREASURY STOCK
- ------------------------ -------------------- --------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SHARES AMOUNT TOTAL
- ---------- ----------- --------- -------- --------- --------- ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10,000,000 $ 1,000 -- $ -- -- $ -- $ (363,566) -- $ -- $ (362,566)
550,000 550,000 -- -- -- -- -- -- -- 550,000
-- -- -- -- -- -- -- 277,000 (277,000) (277,000)
1,050,000 1,050,000 -- -- -- -- -- -- -- 1,050,000
956,280 -- -- -- -- -- -- -- -- --
43,720 43,720 -- -- -- -- -- -- -- 43,720
-- -- -- -- -- -- -- (187,000) -- --
-- -- -- -- -- -- -- (5,000) 5,000 5,000
-- -- -- -- -- -- -- -- -- --
-- -- -- -- 738,000 191,880 -- -- -- 191,880
-- -- -- -- -- -- (3,850) -- -- (3,850)
-- -- -- -- -- -- (4,061,271) -- -- (4,061,271)
- ---------- ----------- --------- -------- --------- --------- ------------ -------- --------- -----------
12,600,000 1,644,720 -- -- 738,000 191,880 (4,428,687) 85,000 (272,000) (2,864,087)
-- (93,720) -- -- -- (191,880) -- -- (5,000) (290,600)
-- -- 25,000 -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
810,000 578,000 -- -- -- -- -- -- -- 578,000
-- -- 100,000 -- -- -- -- -- -- --
-- -- 800,000 700,000 -- -- -- -- -- 700,000
-- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
-- -- -- -- 511,000 -- -- -- -- --
-- -- -- -- 2,200,000 362,500 -- -- -- 362,500
-- -- -- -- -- -- -- 450,000 (450,000) (450,000)
-- -- -- -- -- -- -- (115,767) -- --
2,328,940 885,936 -- -- -- -- -- -- -- 885,936
4,031,225 -- -- -- -- -- -- -- -- --
-- -- 2,029,470 -- -- -- -- -- -- --
-- -- -- -- -- -- (491,075) -- -- (491,075)
-- -- -- -- -- -- (7,099,174) -- -- (7,099,174)
- ---------- ----------- --------- -------- --------- --------- ------------ -------- --------- -----------
19,770,165 $ 3,014,936 2,954,470 $700,000 3,449,000 $ 362,500 $(12,018,936) 419,233 $(727,000) $(8,668,500)
========== =========== ========= ======== ========= ========= ============ ======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998 SERIES A SERIES B
AND 1997 (UNAUDITED): PREFERRED STOCK PREFERRED STOCK
-------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------ -------- ------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1996 ........................ 213,200 $ -- -- $ --
Issuance of Series A preferred stock for compensation 3,500 7,000 -- --
Issuance of Series A preferred stock through a private
placement subject to rescission .................... 2,252,200 -- -- --
Issuance of Series B preferred stock through a private
placement subject to rescission .................... -- -- 345,236 --
Issuance of class A common stock from treasury subject
to rescission ...................................... -- -- -- --
Accrued dividends on preferred stock ................. -- -- -- --
Net Loss ............................................. -- -- -- --
---------- ------ -------- ------
BALANCE, at March 31, 1997 ........................... 2,468,900 $7,000 345,236 $ --
========== ====== ======== ======
BALANCE, at December 31, 1997 ........................ 108,500 $ -- 77,349 $ --
Issuance of Class A common stock in connection with
the purchase of minority interests ................. -- -- -- --
Issuance of Class A common on conversion of
Series A preferred stock ........................... (5,000) -- -- --
Issuance of Series B preferred stock through a private
placement subject to rescission .................... -- -- 33,333 --
Issuance of Class B common on conversion of Series B
preferred stock .................................... -- -- (3,333) --
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission ................ -- -- -- --
Purchase of treasury shares, Class B common stock .... -- -- -- --
Accrued dividends on preferred stock ................. -- -- -- --
Net loss ............................................. -- -- -- --
---------- ------ -------- ------
BALANCE, at March 31,1998 ............................ 103,500 $ -- 107,349 $ --
========== ====== ======== ======
</TABLE>
(1) Outstanding warrants consisted of the following at March 31:
1997 1998
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- ---------- --------
Class A common stock warrants 738,000 $ 191,880 1,249,000 $191,880
Class B common stock warrants -- -- 2,200,000 362,500
-------- ---------- ---------- --------
738,000 $ 191,880 3,449,000 $554,380
======== ========== ========== ========
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
<TABLE>
<CAPTION>
CLASS A CLASS B OUTSTANDING
COMMON STOCK COMMON STOCK WARRANTS (1) TREASURY STOCK
- ----------------------- -------------------- -------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SHARES AMOUNT TOTAL
- ---------- ---------- --------- -------- --------- -------- ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12,600,000 $1,644,720 -- $ -- 738,000 $191,880 $ (4,428,687) 85,000 $(272,000) $(2,864,087)
-- -- -- -- -- -- -- -- -- 7,000
-- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- (65,000) -- --
-- -- -- -- -- -- (71,054) -- -- (71,054)
-- -- -- -- -- -- (1,114,525) -- -- (1,114,525)
- ---------- ---------- --------- -------- --------- -------- ------------ -------- --------- -----------
12,600,000 $1,644,720 -- $ -- 738,000 $191,880 $ (5,614,266) 20,000 $(272,000) $(4,042,666)
========== ========== ========= ======== ========= ======== ============ ======== ========= ===========
19,770,165 $3,014,936 2,954,470 $700,000 3,449,000 $362,500 $(12,018,936) 419,233 $(727,000) $(8,668,500)
92,640 -- -- -- -- -- -- -- -- --
5,500 -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
-- -- 3,666 -- -- -- -- -- -- --
-- -- -- -- -- -- -- (60,000) 50,000 50,000
-- -- -- -- -- -- -- 18,041 -- --
-- -- -- -- -- -- (13,145) -- -- (13,145)
-- -- -- -- -- -- (817,143) -- -- (817,143)
- ---------- ---------- --------- -------- --------- -------- ------------ -------- --------- -----------
19,868,305 $3,014,936 2,958,136 $700,000 3,449,000 $362,500 $(12,849,224) 377,274 $(677,000) $(9,448,788)
========== ========== ========= ======== ========= ======== ============ ======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- ------------------------
1997 1996 1998 1997
------------ ----------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ...................................... $ (7,099,174) $(4,061,271) $(817,143) $(1,114,525)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............. 488,396 102,905 204,323 50,601
Loss on write-off of investments .......... -- 1,202,577 -- --
Loss on disposal of equipment ............. -- 3,630 -- --
Minority interest in net income
of consolidated subsidiaries ............ (139,186) (170,065) -- 18,600
Provision for bad debts ................... 245,638 37,000 21,201 8,420
Treasury stock issued for services ........ -- 5,000 -- --
Stock issued for compensation and services 266,999 550,000 -- 7,000
Stock rights and warrants issued for loan
costs and services ...................... 60,000 700,000 -- --
Changes in assets and liabilities:
Accounts receivable ..................... (390,602) (40,287) (188,367) (210,668)
Prepaid expenses and other assets ....... (1,397,627) (30,597) (64,928) (416,651)
Accounts payable and accrued expenses ... 582,055 366,653 247,378 (87,417)
------------ ----------- --------- -----------
Net cash used in operating activities ...... (7,383,501) (1,334,455) (597,536) (1,744,640)
------------ ----------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment ......... (3,413,758) (502,385) (127,871) (485,263)
Investment in multi-level marketing company -- (152,577) -- --
------------ ----------- --------- -----------
Net cash used in investing activities ...... (3,413,758) (654,962) (127,871) (485,263)
------------ ----------- --------- -----------
Cash flows from financing activities:
Issuance of preferred stock - Series A ..... 6,462,308 426,400 -- 4,463,700
Issuance of preferred stock - Series B ..... 5,266,623 -- 100,000 1,035,710
Issuance of common stock - Class A ......... -- 956,280 -- --
Issuance of common stock - Class B ......... 50,000 -- -- --
Dividends paid ............................. (248,128) -- -- (981)
Issuance of note payable to stockholder .... -- 75,000 -- --
Repayment of note payable to stockholder ... (59,680) (15,320) -- (59,680)
Issuance of note payable ................... -- 100,000 -- --
Purchase of treasury stock ................. (450,000) (277,000) (45,102) --
Sale of treasury stock ..................... 144,000 187,000 70,000 65,000
Issuance of minority interest member capital -- 761,645 -- --
Costs associated with issuance of minority
interest member capital .................. -- (67,670) -- --
------------ ----------- --------- -----------
Net cash provided by financing activities .. 11,165,123 2,146,335 124,898 5,503,749
------------ ----------- --------- -----------
Net increase (decrease) in cash ............ 367,864 156,918 (600,509) 3,273,846
Cash, beginning of period .................. 348,536 191,618 716,400 348,536
------------ ----------- --------- -----------
Cash, end of period ........................ $ 716,400 $ 348,536 $ 115,891 $ 3,622,382
============ =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
CyNet, Inc. and its 50% (prior to December 1, 1997) owned limited liability
companies ("LLC's"). Pursuant to a private placement memorandum, the Company
acquired the remaining 50% ownership in the LLCs as of December 1, 1997 (See
Note 7). CyNet, Inc.'s profit (loss) participation in the LLC's ranged from 50%
to 60% prior to the purchase of the minority interests in the LLCs and 100%
thereafter. All significant intercompany accounts and transactions have been
eliminated. CyNet, Inc. and the LLCs are referred to herein as the Company.
The Company is a provider of enhanced fax communications services. The
Company was formed in April 1995 to capitalize on the dramatic increase in the
usage of fax broadcast services. The Company has developed and is marketing its
fax broadcast service, called HYPERCAST, to businesses and individuals.
HYPERCAST effectively eliminates most long distance charges for the user, and
the Company believes that its enhanced fax communications services provides
users with a less expensive, faster, and more convenient alternative than
competitive services. Since inception, the Company has developed and is now
using its own proprietary user and operating software to operate and control its
own customized computer and communication equipment.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of March 31, 1998 and for the
three months ended March 31, 1998 and 1997 are unaudited. In the opinion of the
Company's management, such unaudited consolidated financial statements include
all adjustments necessary, which include only normal recurring items, to present
fairly the information set forth therein. Results for the interim periods are
not necessarily indicative of the results that may be expected for any other
interim period or a full year.
SUMMARY OF LLC REGULATIONS
The operations of the LLCs are governed by an agreement (the "LLC
Regulations") between CyNet, Inc. (the "Manager") and the individual members
(the "Member") of the respective LLC. The LLC Regulations provide for an initial
member capital contribution mutually agreed to between the parties and
subsequent capital contributions, if required, to enable the LLC to meet its
working capital requirements up to a maximum of that member's initial capital
contribution. CyNet, Inc. is not required to make an initial capital
contribution. The allocation of LLC income or loss, gain or deduction is based
on each Member's participating percentage, as defined. Liquidation of the LLC
may occur by a majority written consent of the Members, by decrees of judicial
dissolution or at the end of the 30 year term of the LLC. Upon dissolution, the
manager acts as liquidator and after satisfaction of any remaining LLC
obligations, will distribute any remaining funds to LLC members based on their
respective capital accounts. Effective December 1, 1997, the Company acquired
the remaining 50% ownership in the LLCs (see Note 7).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations as incurred.
The Company reviews property and equipment for impairment whenever events
or changes in circumstances indicate the carrying value of an asset may not be
fully recoverable.
F-8
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
INCOME TAXES
Deferred taxes result from temporary differences between the financial
statement and income tax basis of assets and liabilities (see Note 9). The
Company adjusts the deferred tax asset valuation allowance based on judgments as
to future realization of the deferred tax benefits supported by demonstrated
trends in the Company's operating results.
The LLCs are not subject to state and federal income taxes. Accordingly,
the operating results of each respective LLC are reported in the individual
state and federal tax returns of the member.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of telecommunication technology
as it relates to fax broadcasting and to various customer interface and
application needs are charged to expense as incurred. For the years ended
December 31, 1997 and 1996, such research and development expenditures were not
significant to the Company's results of operations.
REVENUE RECOGNITION
Fax broadcast revenues are recognized as services are performed.
LOSS PER COMMON SHARE
Effective for the year ended December 31, 1997, the Company was required
to adopt Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). In accordance with SFAS 128, the Company is required to
provide basic and dilutive earnings (loss) per common share information.
The basic net loss per common share is computed by dividing the net loss
applicable to common stockholders by the weighted average number of common
shares outstanding.
Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the years ended December 31, 1997 and 1996, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.
These securities at December 31, 1997 and 1996 were as follows:
1997 1996
--------- ---------
(shares) (shares)
Conversion of convertible debt - Class B ........ -- 400,000
Loan commitment fee - Class B ................... -- 400,000
Conversion of Series A preferred stock - Class A 119,350 255,840
Conversion of Series B preferred stock - Class B 85,084 --
Stock warrants outstanding - Class A ............ 1,249,000 738,000
Stock warrants outstanding - Class B ............ 2,200,000 --
--------- ---------
3,653,434 1,793,840
========= =========
The adoption of SFAS 128 had no effect on net loss per common share for
the year ended December 31, 1996. Accordingly, no restatement was necessary.
F-9
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants issued to employees in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. For financial statement disclosure purposes and issuance of
options and warrants to non-employees for services rendered, the Company follows
statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. From the Company's inception through December 31, 1997, no stock
options have been granted to employees or non-employees. See Note 8 for stock
warrants issued since inception and stock options issued subsequent to December
31, 1997.
RISKS AND UNCERTAINTIES
The Company is subject to the business risks inherent in the
telecommunications industry. These risks include, but are not limited to, a high
degree of competition within the telecommunications industry and continuous
technological advances. Future technological advances in the telecommunications
industry may result in the availability of new services or products that could
compete with the enhanced fax communications services currently provided by the
Company or decreases in the cost of existing products or services that could
enable the Company's established or potential customers to fulfill their own
needs for enhanced fax communications services more cost efficiently. There can
be no assurance that the Company would not be adversely affected in the event of
such technological change.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include accounts receivable, accounts
payable and notes payable. The fair market value of accounts receivable and
accounts payable approximates their carrying values because their maturities are
generally less than one year in duration. The carrying values of notes payable
approximate market values because the borrowing rates are similar to other
financial instruments with similar terms.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
The Company extends credit to its customers throughout the United States
and considers there to be no concentration of credit risk. At December 31, 1997,
the Company's cash in financial institutions exceeded the federally insured
deposit limit by $514,000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130), establishes standards for reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
F-10
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
SFAS 131, Disclosure about Segments of a Business Enterprise, establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of SFAS 130 and 131 are expected to
have no effect on the Company's financial statement disclosures.
In February 1998, the Financial Accounting Standards Board issued a new
disclosure standard. Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS
132"). The new standard standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Adoption of SFAS 132 is expected to have no effect on the Company's financial
statement disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the years ended December 31, 1997 and 1996, the Company incurred net
losses totaling $7,099,174 and $4,061,271, respectively, and at December 31,
1997 had a capital deficit of $8,668,500. Because of these recurring losses, the
Company will require additional working capital to develop and support its
technologies and business until the Company either (1) achieves a level of
revenues adequate to generate sufficient cash flows from operations; or (2)
receives additional financing necessary to support the Company's working capital
requirements.
During 1996, 1997 and 1998, the Company sold certain common and preferred
stock which were not registered pursuant to the federal and state securities
laws, but were sold in a series of four private placement offerings in reliance
upon the exemptions from registration afforded by (i) Sections 3(b) and 4(2) of
the Securities Act of 1933, as amended, and Regulation D promulgated thereunder,
and (ii) various state limited offering provisions, respectively. In addition,
the Company issued certain common and preferred stock and stock warrants for
services provided to the Company during the same period.
F-11
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
However, the Company has been advised that under the integration
provisions of Regulation D, the private placement offerings may be viewed by the
Securities and Exchange Commission as one continuous offering and, as such, may
not have been conducted in compliance with all applicable Regulation D limited
offering conditions. If the private placement offerings were not conducted in
compliance with the securities laws, the purchasers of the common and preferred
stock would have the right to have such securities repurchased by the Company
for an amount equal to the purchase price paid less any dividends received plus
interest, or if the common and preferred stock have been disposed of by the
holder at a loss, the difference between the purchase price and the price
received upon disposal less dividends received plus interest. In addition, the
Company has determined that certain issuances of common and preferred stock and
stock warrants issued for services are also subject to rescission for an amount
equal to the estimated value of services rendered to the Company. As a result,
the Company has elected to make a rescission offer to the holders of certain
issuances of common and preferred stock and stock warrants. The Company expects
the rescission offer to be effective by the fall of 1998, at which time the
offer will be outstanding for thirty days. The potential liability of the
Company, less dividends paid and excluding interest, for the proposed rescission
offer totaled $13,825,349 and $13,910,012 as of December 31, 1997 and March 31,
1998. It is management's opinion that substantially all the existing
stockholders and warrant holders subject to rescission will elect to retain
their stock ownership and stock warrants, and the proposed rescission offer will
not have a material adverse effect on the Company's financial position. See Note
14 for discussion regarding the status and proposed commitment for stand-by
investors.
The Company intends to file a registration statement with the Securities
and Exchange Commission that will contain the proposed rescission offer as
previously discussed and provide for the registration of the Company's common
stock and the resale of certain common stock by certain selling stockholders.
Additionally, the Company intends to raise additional working capital through
either private placements or public offerings.
There are no assurances that (1) the existing stockholders and warrant
holders subject to rescission will elect to retain their stock ownership and
stock warrants and (2) the Company will be able to raise additional working
capital through either private placements or public offerings. To the extent
that funds generated from operations and any private placements or public
offerings are insufficient, the Company will have to raise additional working
capital. No assurance can be given that additional financing will be available,
or if available, will be on terms acceptable to the Company. If adequate working
capital is not available the Company may be required to curtail its operations.
This condition raises substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - DEFERRED OFFERING COSTS
As of December 31, 1997, the Company has incurred expenses totaling
$2,078,825 in connection with the private placement transactions (See Note 8)
which have recorded as prepaid expenses. The amount consists of cash payments of
$1,296,305, of which $665,000 was paid to a company owned by a stockholder,
Class A common stock and Class B common stock warrants, with a value of $509,765
and $178,500, respectively, issued to a stockholder and $94,255 of various
expenses incurred prior to the year ended December 31, 1997.
These deferred offering costs are subject to adjustment pending the
outcome of the Company's rescission offer. Accordingly, for any portion of the
proposed rescission offer that is accepted by the stockholders, a pro-rata share
of these costs will be charged to operations upon the stockholders' election.
For any portion of the rescission offer that is rejected by the stockholders, a
pro-rata share of these costs will be reclassed as a reduction of capital.
F-12
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 1997 major classes of property and equipment consisted of
the following:
ESTIMATED
USEFUL
LIVES (YEARS) AMOUNT
-------------- ----------
Computer equipment ....................... 5 $1,474,063
Computer software ........................ 5 835,414
Furniture and fixtures ................... 7 793,506
Telephone equipment ...................... 5 718,628
Automobiles .............................. 5 181,578
Leasehold improvements ................... 5 157,993
----------
4,161,182
Less - accumulated depreciation and
amortization............................ (596,235)
----------
$3,564,947
==========
NOTE 5 - NOTES PAYABLE
During the year ended December 31, 1996, the Company entered into the
following note payable agreements which were converted into the Company's common
stock or repaid during the year ended December 31, 1997:
(a)The Company entered into a note agreement with an individual for
$100,000. The note was collateralized by 7,000,000 shares of the
Company's Class A common stock, bore interest at 12% and was due on
demand, or January 2, 1997. At the holder's option the note was
convertible into 400,000 shares of the Company's Class B common stock
during the term of the note. On January 2, 1997, the note payable was
converted pursuant to its terms. During the term of the note the
Company estimated the fair market value of its Class B common stock to
be approximately $1 per share, based on certain private placements of
its stock (See Note 8). Accordingly, the Company recorded additional
interest expense (non-cash) of $300,000 for the note's conversion
privilege during the year ended December 31, 1996.
(b)The Company entered into a note agreement with a stockholder and
officer of the Company for $75,000. The note bore interest at 8% and
was due on March 30, 1997. Interest expense for the years ended
December 31, 1997 and 1996 was minimal. During the year ended December
31, 1997, the note and accrued interest were repaid.
(c)The Company entered into a short-term note agreement for $100,000. The
loan was never funded. However, in accordance with the agreement, the
Company was obligated to issue 400,000 shares of the Company's Class B
common stock. As of December 31, 1996, the agreement had expired and
the Company accrued and expensed a $400,000 loan commitment fee based
on the Class B common stock value discussed in (a) above. The 400,000
shares of Class B common stock were issued in July 1997.
F-13
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS
Related party transactions for the year ended December 31, 1997 are as
follows:
(a)A stockholder received 500,000 shares of Class A common stock valued at
$500,000 and a warrant to purchase 1,050,000 shares of Class B common
stock valued at $178,500 for assistance with the private placements of
preferred stock. The warrant vests immediately, is exercisable at $1.00
per share and expires three years from the date of issuance.
(b)In December 1997, a company owned by a stockholder, received 200,000
shares of Class A common stock valued at $78,000 in consideration for
the termination of a distribution agreement.
(c)The Company paid consulting fees totaling $313,000 to a company owned
by a stockholder.
(d)A stockholder of the Company transferred certain intellectual property
rights to the Company for a one-time payment of $250,000.
(e)The Company paid $893,527 to a company owned by a stockholder and to
the individual for services rendered in connection with the private
placements and for other services provided.
(f)The Company purchased 450,000 shares of Class A common stock for $1.00
per share and recorded such amount as treasury stock.
(g)See Note 14 for discussions regarding certain related party
transactions subsequent to December 31, 1997.
Related party transactions for the year ended December 31, 1996 are as
follows:
(a)The Company purchased 277,000 shares of Class A common stock for $1.00
per share and recorded treasury stock.
(b)The Company issued warrants to purchase 738,000 shares of Class A
common stock, of which a warrant to purchase 145,500 shares was issued
to a stockholder of the Company, for assistance in raising capital for
the formation of the limited liability companies. The warrants vest
immediately and are exercisable at $1.00 per share and expire November
2001. The Company recorded Class A common stock warrants outstanding
for $191,880, representing the estimated fair market value of the stock
warrants at the date of issuance. These warrants are subject to the
proposed rescission offer.
(c)A stockholder of the Company received certain rights to receive a
warrant for 1,150,000 shares of Class B common stock for assistance in
raising capital for the formation of the limited liability companies.
The warrant vests immediately and is exercisable at $1.00 per share and
expires three years from issuance. At December 31, 1996, the Company
had recorded a liability to the stockholder for $184,000, the estimated
fair market value of the stock warrants. The warrants were issued in
1997.
(d)See Note 5 for discussions regarding a note payable with a stockholder.
(e)The Company paid $202,950 to a company owned by a stockholder and to
the individual for services rendered in connection with the formation
of the LLCs, private placements and for other services provided.
F-14
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
NOTE 7 - PURCHASE OF MINORITY INTEREST OF THE LIMITED LIABILITY COMPANIES
Effective December 1, 1997, pursuant to a private placement memorandum,
the Company acquired the remaining 50% ownership in the LLCs by issuance of
2,328,940 shares of the Company's Class A common stock. At the time of formation
of the LLCs, the holders of the minority interest paid approximately $1,941,000
for such interest which included a conversion feature of 1.2 shares of the
Company's Class A common stock for every dollar invested by the LLC member upon
certain events, as defined. Based on an independent third party appraisal of the
Company's Class A common stock, there was no additional consideration given
above the original conversion feature for the purchase of the minority interest.
Accordingly, the purchase of the minority interest of the LLCs was accounted for
at book value. Subsequent to December 31, 1997, the Company issued 92,640 shares
of Class A common stock in connection with the purchase of the minority interest
of the LLCs.
NOTE 8 - CAPITAL
COMMON STOCK
The Company is authorized to issue up to 60,000,000 shares of its no par
value common stock of which 40,000,000 shares have been designated as Class A
voting common stock and 20,000,000 shares have been designated as Class B
non-voting common stock. The holders of shares of Class A common stock are
entitled to one vote for each share on all matters submitted to a vote of
stockholders. Holders of Class B common Stock are entitled under the Texas
Business Corporation Act to vote in connection with the voluntary dissolution of
the Company but have no voting privileges with respect to other matters. The
holders of both Class A and Class B common stock are entitled to receive such
dividends, if any, as may be declared by the Board of Directors from time to
time out of legally available funds. Upon liquidation or dissolution of the
Company, the holders of both Class A and Class B common stock are entitled to
share ratably in all assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the priority rights of any holders of preferred stock then outstanding. Holders
of Class A and Class B common stock have no preemptive rights to acquire new
securities issued by the Company and have no rights to convert their common
stock into any other securities of the Company.
CLASS A COMMON STOCK
During the year ended December 31, 1996, the Company sold 956,280 shares
of Class A common stock for $1.00 per share for net cash proceeds of $956,280,
which are subject to the proposed rescission offer. During the years ended
December 31, 1997 and 1996, the Company purchased 450,000 and 277,000 shares,
respectively, of Class A common stock of which 114,500 and 187,000 shares,
respectively, were resold for net cash proceeds of $144,000 and $187,000
respectively, which are subject to the proposed rescission offer.
During the years ended December 31, 1997 and 1996, the Company issued
Class A common stock for certain services, rights and for the purchase of the
minority interest in the LLCs as follows:
(a)In December 1997, the Company issued 2,328,940 shares of Class A common
stock at the market value of $0.39 per share based on an independent
appraisal for the purchase of the minority interest of the LLCs. This
transaction was recorded at book value, see Note 7.
(b)In December 1997, the Company issued 110,000 shares of Class A common
stock valued at $42,900 to a sales consultant for services, which are
subject to the proposed rescission offer.
(c)In December 1997, the Company issued 200,000 shares of Class A common
stock valued at $78,000 as consideration for termination of a
distribution agreement.
(d)During 1997, the Company issued 500,000 shares of Class A common stock
valued at $500,000 to a stockholder for services in connection with
certain private placements of preferred stock.
F-15
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
(e)During 1996, the Company issued 43,720 shares of Class A common stock
valued at $43,720 for assistance in raising capital for the formation
of the limited liability companies, which are subject to the proposed
rescission offer.
(f)During 1996, the Company issued 1,050,000 shares of Class A common
stock valued at $1,050,000 for certain foreign network access rights.
(g)During 1996, the Company issued 500,000 shares of Class A common stock
valued at $500,000 to a consultant for financial services. During 1997,
the Company purchased 450,000 of these shares for $1.00 per share and a
stockholder purchased the remaining 50,000 shares at $1.00 per share.
(h)The Company issued 50,000 shares of Class A common stock valued at
$50,000 to an employee for services rendered, which are subject to the
proposed rescission offer.
CLASS B COMMON STOCK
During the year ended December 31, 1997, the Company sold 25,000 shares of
Class B common stock for $2.00 per share for net cash proceeds of $50,000, which
are subject to the proposed rescission offer.
During the year ended December 31, 1997, the Company issued Class B common
stock for services, conversion of notes payable and commitment fees as follows:
(a)The Company issued 400,000 shares of Class B common stock valued at
$400,000 for the conversion of a $100,000 note payable, of which the
original principal of $100,000 is subject to the proposed rescission
offer.
(b)The Company issued 400,000 shares of Class B common stock valued at
$400,000 for a loan commitment fee.
(c)The Company issued 100,000 shares of Class B common stock valued at
$100,000 for services rendered, which is subject to the proposed
rescission offer.
(d)Subsequent to March 31, 1998, the Company issued 154,000 shares of
Class B common stock with a value of $60,000, which was accrued for at
December 31, 1997 and March 31, 1998. These shares are subject to the
proposed rescission offer.
At December 31, 1997, the Company had common stock reserved for future
issuance as follows:
SHARES
---------
Conversion of Series A preferred stock to Class A ........ 119,350
Conversion of Series B preferred stock to Class B ........ 85,084
Stock rights - Class A ................................... 50,000
Stock rights - Class B ................................... 154,000
Incentive stock option plan - Class A .................... 1,000,000
Stock warrants outstanding - Class A ..................... 1,249,000
Stock warrants outstanding - Class B ..................... 2,200,000
---------
4,857,434
=========
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of no par value
preferred stock. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on a particular matter), preferences as
to dividends and liquidation, conversion, redemption rights and sinking fund
provisions.
F-16
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
SERIES A PREFERRED STOCK
The Company is authorized to issue a total of 3,600,000 shares of Series A
preferred stock. The preferred stock is non-voting, has a $2.00 per share stated
value and has an annualized dividend rate of $0.24 per share. Attributes of the
Series A preferred stock are discussed below:
RANKING. The Series A preferred stock is senior to the Company's common
and Series B preferred stock with respect to dividends and rights upon
liquidation or dissolution of the Company. As long as any Series A preferred
stock is outstanding, the Company will not be entitled to authorize or issue any
class of securities that is senior to or on parity with the Series A preferred
stock without the approval of holders of at least 66-2/3% of the Series A
preferred stock.
VOTING RIGHTS. Holders of Series A preferred stock are not entitled to
vote.
DIVIDEND RIGHTS. The holders of Series A preferred stock are entitled to
receive out of funds of the Company legally available, dividends at an annual
rate of $0.24 per share, payable semi-annually in arrears in two equal
installments of $0.12 in June and December of each year. Dividends accrue and
accumulate from the date of first issuance and are paid to holders of record as
they appear on the books of the Company as of the record date of the last day of
May and November in each year which immediately precedes each respective
dividend payment date. Accumulation of dividends does not bear interest. So long
as the Series A preferred stock is outstanding, the Company may not declare or
pay any dividends on the common stock or other stock unless the full cumulative
dividends on the Series A preferred stock have been paid in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series A preferred stock
are convertible by the holder at any time (a) on or after the date of issuance
and before November 1, 1997 into shares of Class A common stock at a conversion
rate of 1.2 shares of Class A common stock for each share of Series A preferred
stock tendered; and (b) after November 1, 1997 and before September 1, 1998 at a
conversion rate of 1.1 shares of Class A common stock for each share of Series A
preferred stock. Any accrued and unpaid dividends will be paid to holders of the
Series A preferred stock at the time of conversion. The Company at its sole
discretion and option has the right to require that holders of Series A
preferred stock to convert their shares to Class A common stock at any time on
or after January 1, 1999. In the event of this mandatory conversion election by
the Company, holders of Series A preferred stock will receive one share of Class
A common stock for each share of Series A preferred stock.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Series A
preferred stock are entitled to receive, out of the remaining net assets of the
Company available for distribution to stockholders before any distribution or
payment made to holders of common stock or Series B preferred stock other junior
capital stock, the Series A preferred stock stated value of $2.00 per share plus
any accrued and unpaid dividends. Upon payment of the full amount of the Series
A preferred stock stated value plus any unpaid dividends, the holders of Series
A preferred stock shall not be entitled to any further participation in any
distribution of assets of the Company.
During the years ended December 31, 1997 and 1996, the Company sold
3,251,154 and 213,200 shares, respectively, of Series A preferred stock for
prices between $1.43 and 2.00 per share for net cash proceeds of $6,462,308 and
$426,400, respectively, and issued 3,500 shares valued at $7,000 for
compensation. Of these shares, 3,359,354 shares were converted into 4,031,225
shares of Class A common stock during the year ended December 31, 1997 at a
conversion rate of 1.2 shares of Class A common stock for each share of Series A
preferred stock.
F-17
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
SERIES B PREFERRED STOCK
The Company is authorized to issue a total of 2,000,000 shares of Series B
cumulative convertible preferred stock. The preferred stock is non-voting, has a
$3.00 per share stated value and has an annualized dividend rate of $0.30 per
share. Attributes of the Series B preferred stock are discussed below:
RANKING. The Series B preferred stock is junior to the Series A preferred
stock and senior to the Company's common stock with respect to dividends and
rights upon liquidation or dissolution of the Company. As long as any Series B
preferred stock is outstanding, the Company will not be entitled to authorize or
issue any class of securities that is senior to or on parity with the Series B
preferred stock without the approval of holders of at least 66-2/3% of the
Series B preferred stock.
VOTING RIGHTS. Holders of Series B preferred stock are not entitled to
vote.
DIVIDEND RIGHTS. The holders of Series B preferred stock are entitled to
receive out of funds of the Company legally available, dividends at an annual
rate of $0.30 per share, payable semi-annually in arrears in two equal
installments of $0.15 in June and December of each year. Dividends accrue and
accumulate from the date of first issuance and are paid to holders of record as
they appear on the books of the Company as of the record date of the last day of
May and November in each year which immediately precedes each respective
dividend payment date. Accumulation of dividends will not bear interest. So long
as the Series A or B preferred stock is outstanding, the Company may not declare
or pay any dividend on the common stock or other capital stock unless the full
cumulative dividends on the Series A and Series B preferred stock have been paid
in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series B preferred stock
are convertible by the holder at any time (a) on or after the date of issuance
and before November 1, 1997 into shares of Class B non-voting common stock at a
conversion rate of 1.2 shares of such common stock for each share of Series B
preferred stock; and (b) after November 1, 1997 and before September 1, 1998 at
a conversion rate of 1.1 shares of Class B non-voting common stock for each
share of Series B preferred stock. Any accrued and unpaid dividends will be paid
to holders of the Series B preferred stock at the time of conversion. The
Company at its sole discretion and option has the right to require that holders
of Series B preferred stock to convert their shares to Class B non-voting common
stock at any time on or after January 1, 1999. In the event of this mandatory
conversion election by the Company, holders of Series B preferred stock will
receive one share of Class B non-voting common stock for each share of Series B
preferred stock.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts, other liabilities of the Company, and Series A preferred
shareholders, the holders of the Series B preferred stock are entitled to
receive, out of the remaining net assets of the Company available for
distribution to stockholders before any distribution or payment made to holders
of common stock or other junior capital stock, the Series B preferred stock
stated value of $3.00 per share plus any accrued and unpaid dividends. Upon
payment of the full amount of the Series B preferred stock stated value plus any
unpaid dividends, the holders of Series B preferred stock shall not be entitled
to any further participation in any distribution of assets of the Company.
During the year ended December 31, 1997, the Company sold 1,755,541 shares
of Series B preferred stock for $3.00 per share for net cash proceeds of
$5,266,623 and granted 13,033 shares valued at $39,099 as compensation. Of these
shares, 1,691,225 shares were converted into 2,029,470 shares of Class B common
stock during the year ended December 31, 1997 at a conversion rate of 1.2 shares
of Class B common stock for each share of Series B preferred stock.
F-18
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
PROPOSED RESCISSION OFFER
The Class A and Class B common stock and Series A and Series B preferred
stock issuances were sold in a series of private placement offerings in reliance
upon the exemptions from registration afforded by (i) Sections 3(b) and 4(2) of
the Securities Act of 1933, as amended, and Regulation D promulgated thereunder
and (ii) various state limited offering provisions, respectively. The stock
issuances were not registered pursuant to the federal and state securities laws.
In addition, the Company issued certain common and preferred stock and stock
warrants for services provided to the Company.
However, the Company has been advised that under the integration
provisions of Regulation D, the private placement offerings may be viewed by the
Securities and Exchange Commission as one continuous offering and, as such, may
not have been conducted in compliance with all applicable Regulation D limited
offering conditions. If the private placement offerings were not conducted in
compliance with the securities laws, the purchasers of the common and preferred
stock would have the right to have such securities repurchased by the Company
for an amount equal to the purchase price paid less any dividends received plus
interest, or if the common and preferred stock have been disposed of by the
holder at a loss, the difference between the purchase price and the price
received upon disposal less dividends received plus interest. In addition, the
Company has determined that certain issuances of common and preferred stock and
stock warrants issued for services are also subject to rescission for an amount
equal to the estimated value of services rendered to the Company. As a result,
the Company has elected to make a rescission offer to the holders of certain
issuances of common and preferred stock and stock warrants. The Company expects
the rescission offer to be effective by the fall of 1998, at which time the
offer will be outstanding for thirty days. Of the common stock and preferred
stock sold during 1997 and 1996 as discussed above, taking into consideration
the conversion of Series A and B preferred stocks, 5,284,805 and 2,038,830
shares of Class A and B common stock for net proceeds of $7,958,988 and
$5,084,576, respectively; 108,500 shares of Series A preferred stock for net
proceeds of $217,000; and 77,349 shares of Series B preferred stock for net
proceeds of $232,047 are subject to the proposed rescission offer as of December
31, 1997, less dividends paid on Series A and B preferred stock of $192,478 and
$55,650, respectively, prior to the conversion to common stock.
Regarding the common and preferred stock and stock warrants issued for
services in 1997 and 1996, as previously discussed; 214,187 shares of Class A
common stock valued at $149,887, taking into consideration the conversion of
Series A preferred stocks; 515,640 shares of Class B common stock valued at
$239,099 taking into consideration conversion of Series B preferred stock; and
799,000 Class A common stock warrants valued at $201,645, are subject to the
proposed rescission offer.
Subsequent to December 31, 1996, the Company determined of the above
securities issued for services; 98,720 shares of Class A common stock and
738,000 of Class A common stock warrants with a combined estimated value of
$290,600 which had been previously classified as not subject to the proposed
rescission offer would be included in the proposed rescission offer due to
changing circumstances. The Company has treated this as a change in the
estimated proposed rescission liability and accordingly, reclassified these
securities as subject to rescission during the year ended December 31, 1997.
In addition, of the 60,000 and 33,333 shares of Class A common stock
(treasury stock) and Series B preferred stock, respectively, sold subsequent to
December 31,1997 for net proceeds of $70,000 and $100,000, respectively, $20,000
and $100,000 are also subject to the proposed rescission offer. Also, subsequent
to December 31, 1997, the Company acquired 18,041 shares of Class B common stock
for $45,102 that was originally classified as subject to the proposed rescission
offer.
Accordingly, the Company is precluded from classifying these securities
and proceeds as capital until such time as the proposed rescission offer has
been completed. At which time the Company may classify as capital such
securities and proceeds to the extent the security holders elect to retain their
ownership in the Company. For security holders electing to rescind their
ownership, the rescission price will be paid in cash.
F-19
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
COMMON STOCK OPTIONS AND WARRANTS
During the year ended December 31, 1997, the Company issued warrants to
purchase 2,200,000 of Class B common stock for services rendered in connection
with raising of capital for the formation of the LLCs and certain private
placements. See Note 6 for discussions regarding these related party
transactions.
In May 1997, the Company issued 450,000 Class A common stock warrants to a
stockholder for consulting services rendered. The warrants vest immediately and
are exercisable at $2.00 per share and expire May 2002. The Company determined
that these warrants had no fair value at the date of issuance.
In April 1997, the Company issued 61,000 Class A common stock warrants to
an individual for consulting services rendered. The warrants vest immediately
and are exercisable at $1.00 per share and expire April 2000. The Company
determined that these warrants had minimal fair market value at the date of
issuance and are subject to the proposed rescission offer.
During the year ended December 31, 1996, the Company issued 738,000
warrants to purchase 738,000 shares of Class A common stock for services
rendered in connection with raising capital for the formation of the LLCs. See
Note 6 for discussion regarding the related party transaction.
During the year ended December 31, 1997, the Company's Board of Directors
approved and the Company adopted the 1997 Incentive Stock Option Plan (the
Plan). The Plan allows for the issuance of stock options to purchase up to
1,000,000 shares of the Company's Class A common stock which may be granted to
Directors and employees at an exercise price of at least market value of the
Class A common stock at the date of grant. As of December 31, 1997, no options
have been granted under the Plan.
Subsequent to December 31, 1997, the Company granted 1,245,000 stock
options under the Plan. The options granted have an exercise price of $.39 per
share, vest 25% annually from date of grant and are exercisable over a five year
period from date of grant. Also, the Company amended the plan whereby 2,000,000
stock options may be granted under the plan.
NOTE 9 - INCOME TAXES
Deferred taxes are determined based on the temporary differences between
the financial statement and income tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse.
The components of deferred income tax assets (liabilities) at December 31,
1997, were as follows:
AMOUNT
-----------
Net operating loss carryforward ......................... $ 2,767,000
Loss on write-off of investments ........................ 409,000
Property and equipment .................................. (139,000)
Other ................................................... 31,000
-----------
Gross deferred tax assets ............................... 3,068,000
Valuation allowance ..................................... (3,068,000)
-----------
Net deferred tax assets ................................. $ --
===========
At December 31, 1997, the Company provided a 100% valuation allowance for
the deferred tax asset because it could not determine whether it was more likely
than not that the deferred tax asset would be realized.
F-20
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
For the years ended December 31, 1997 and 1996, the income tax benefit
determined by applying the statutory income tax rate to pre-tax loss from
operations differs from the actual benefit as follows:
1997 1996
----------- -----------
Provision for income tax benefit at statutory rate $(2,414,000) $(1,381,000)
Deferred tax asset valuation allowance ............ 2,417,000 641,000
Gain on sale of equipment to LLC's ................ -- 302,000
Non-deductible interest/loan costs ................ -- 238,000
Non-deductible consulting fees .................... -- 187,000
Other ............................................. (3,000) 13,000
----------- -----------
$ -- $ --
=========== ===========
At December 31, 1997, the Company had a net operating loss carryforwards
for federal income tax purposes totaling approximately $8,139,000 which, if not
utilized, will expire as follows:
YEAR ENDED DECEMBER 31, AMOUNT
----------
2010........................................... $ 61,000
2011........................................... 888,000
2012........................................... 7,190,000
----------
$8,139,000
==========
Subsequent to December 31, 1997, the Company had a change in ownership
(see Note 14) which has resulted in the Company's net operating loss
carryforwards being subject to certain utilization limitations in the future.
NOTE 10 - LOSS ON INVESTMENTS
On June 16, 1996, the Company entered into strategic alliance agreement
with a non-related foreign company. The agreement allows the Company access to a
twenty-eight city fax network throughout Europe and a first right of refusal to
acquire all of the outstanding stock of the foreign company in exchange for
1,050,000 shares of the Company's common stock and providing the foreign company
access to the Company's United States faxing network at a reduced rate. In a
related agreement a stockholder of the Company agreed to personally sell 250,000
shares of the Company's Class A common stock at $1.00 per share to the foreign
company. This agreement requires, at the foreign company's option, the
stockholder to repurchase such shares for $1.50 a share if the Company does not
complete a public offering by June 28, 1999. If such option is exercised, the
agreement between the Company and foreign company is terminated and requires the
1,050,000 share of the Company's Class A common stock to be returned to the
Company, if the Company has not acquired the foreign company.
The Company has been unable to use the foreign fax network due to certain
technical problems. Management of the Company has also determined that the
network may not be sufficient for the Company's expected needs in Europe.
Accordingly, the Company has assigned no value to the access rights or the first
right of refusal to acquire the foreign company and has recorded a loss on
investment of $1,050,000 for the year ended December 31, 1996, based on a $1.00
per share based on the estimated market value of the Company's common stock.
During 1996, the Company invested $152,577 for a 5% interest in a
multi-level marketing company owned by a stockholder of the Company. The Company
anticipated marketing its services through this multi-level marketing company,
however, upon further analysis elected not to pursue this method of marketing.
Accordingly, as of December 31, 1996, the Company determined its investment to
be worthless and recorded a loss on investment of $152,577 for the year ended
December 31, 1996.
F-21
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
NOTE 11 - COMMITMENTS
The Company is obligated under a long-term non-cancelable operating lease
for office space expiring through the year 2000, at a minimum annual rent as
follows:
YEAR ENDED DECEMBER 31 AMOUNT
1998........................................... $155,851
1999........................................... 155,851
2000........................................... 38,963
--------
$350,665
========
Rent expense for the years ended December 31, 1997 and 1996 totaled
$255,156 and $184,300, respectively.
In March 1997, the former President of the Company, who is also a
stockholder, entered into an employment agreement. The agreement provided for a
three year employment term that automatically renewed annually with the first
year compensation set at $220,000, plus incentives and certain employee
benefits, as defined by the agreement. If the former President terminated his
employment for good reason or the Company terminated the President other than
for cause or disability, the former President was entitled to receive three
times his annual salary and bonus, as defined by the agreement, vesting of any
options and any such amounts credited to a qualified plan, continuation of
certain benefits for a year and any other amount due the former President. The
agreement also provided for a $50,000 signing bonus.
Subsequent to December 31, 1997, the former President of the Company
terminated his employment agreement and resigned as president with no additional
financial commitments by the Company under his original employment agreement.
See Note 14 for additional discussions regarding this event and the terms of his
new employment agreement.
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. Participants may elect to defer up to 15%
of their compensation annually based on certain limits established by the
Internal Revenue Code. The Company may elect a discretionary matching
contribution annually. Participants' salary deferral contributions are fully
vested when made and Company discretionary match contributions vest over a five
year period. The Company made no discretionary matching contributions for the
years ended December 31, 1997 and 1996.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1997, the Company had the following
non-cash transactions:
(a)The Company accrued dividends payable totaling $491,075.
(b)The Company issued 100,000 shares of Class B common stock valued at
$100,000 to a consultant for services rendered.
(c)The Company issued 3,500 shares of Series A preferred stock valued at
$7,000 to consultants for services rendered.
(d)The Company issued 800,000 shares of Class B common stock valued at
$800,000 on conversion of a $100,000 note payable and for commitment
fees.
F-22
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
(e)The Company issued a warrant to 1,050,000 Class B common stock and
500,000 shares of Class A common stock with a combined estimated fair
market value of $678,500, to a stockholder for services rendered in
association with certain private placements of the Company's Series A
and B convertible preferred stock. A company owned by the stockholder
was given 200,000 shares of Class A common stock valued at $78,000 as
consideration for the termination of a distribution agreement.
(f)A stockholder received 110,000 shares of Class A common stock valued at
$42,900 for services in connection with the sale of the Company's
services.
(g)The Company issued 13,033 shares of Series B preferred stock valued at
$39,099 for services.
(h)The Company granted rights to 154,000 shares of Class B common stock
valued at $60,000 for services.
(i)The Company issued 1,267 shares of Class A common stock (treasury
stock) with an estimated fair market value of $1,267 for art work.
(j)The Company issued 1,150,000 Class B common stock warrants with an
estimated fair market value of $184,000 for stock rights that had been
accrued for at December 31, 1996.
(k)The Company issued 2,328,940 shares of Class A common stock valued at
$885,936 for the purchase of the minority interest in the LLCs.
(l)The Company reclassified 98,720 shares of Class A common stock and
738,000 of Class A common stock warrants with a combined estimated
value of $290,600 as subject to the proposed rescission offer.
During the year ended December 31, 1996, the Company had the following
non-cash transactions:
(a)The Company issued 738,000 Class A common stock warrants, of which
145,500 were issued to a stockholder of the Company, for assistance in
raising capital for the formation of the limited liability companies at
an estimated fair market value of $191,880.
(b)The Company issued 500,000 and 50,000 shares of Class A common stock to
a consultant and employee, respectively, for services valued at an
$500,000 and $50,000, respectively.
(c)The Company issued 1,050,000 shares of Class A common stock valued at
$1,050,000 for network access rights, which were written-off as of
December 31, 1996.
(d)The Company granted stock rights valued at $700,000 to two individuals
in connection with providing borrowing facilities.
(e)The Company granted stock rights to a stockholder to receive 1,150,000
Class B common stock warrants for assistance in raising capital for the
formation of the limited liability companies at an estimated fair
market value of $184,000.
(f)The Company granted stock rights to an individual to receive 50,000
shares of Class A common stock valued at $50,000 for fundraising
activities.
(g)The Company issued 43,720 shares of Class A common stock at an
estimated fair market value of $1.00 per share for assistance in
raising capital for the formation of the limited liability companies.
(h)The Company accrued dividends payable totaling $3,850 as of December
31, 1996.
(i)The Company issued 5,000 shares of the Company's Class A common stock
valued at $5,000 from treasury stock for services rendered.
F-23
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
During the three months ended March 31, 1998, the Company had the
following non-cash transactions:
(a)The Company accrued dividends payable totaling $13,145.
(b)The Company issued an additional 92,640 shares of Class A common stock
for the purchase of the minority interests in the LLCs.
During the three months ended March 31, 1997, the Company had the
following non-cash transactions:
(a)The Company accrued dividends payable totaling $71,054.
(b)The Company granted rights to 500,000 shares of Class A common stock
and a 1,050,000 Class B common stock warrant with a combined estimated
fair market value of $678,500, to a stockholder for services rendered
in association with certain private placements of the Company's Series
A and B convertible preferred stock.
NOTE 14 - SUBSEQUENT EVENTS
On April 13, 1998, the former President of the Company terminated his
original employment agreement, resigned as president and sold his stock
ownership interest in the Company to an entity which is partially owned by
certain existing stockholders of the Company. In accordance with the agreement
the former president entered into a new five-year employment agreement which
provides for an annual salary $150,000, a 2,000,000 Class A common stock warrant
that vests immediately and is exercisable over a four year period at $1 per
share and participation in certain of the Company's employee benefit plans. The
agreement provides that the individual will devote approximately one-half of his
business time and attention to the business of the Company.
On February 1, 1998, the Company entered into an employment agreement with
the Chairman of the Board and Chief Executive Officer of the Company. The five
year agreement provides for an annual salary of $180,000, plus incentives and
certain employee benefits, as defined by the agreement. The agreement also
provides for a $30,000 signing bonus and an option under the Company's 1997
Incentive Stock Option Plan to purchase 100,000 shares of Class A common stock
at a price of $.39 per share which vests 25% annually and are exercisable over a
five year period.
On March 1, 1998, the Company entered into an employment agreement with
the Vice President of Operations of the Company. The four year agreement
provides for an annual salary of $150,000, plus incentives and certain employee
benefits, as defined by the agreement. The agreement also provides for a $30,000
signing bonus and an option under the Company's 1997 Incentive Stock Option Plan
to purchase 75,000 shares of Class A common stock at a price of $.39 per share
which vests 25% annually and are exercisable over a five year period.
On July 22, 1998, the Company entered into an employment agreement with
the Executive Vice President of the Company. The four year agreement provides
for an annual salary of $150,000, plus incentives and certain employee benefits,
as defined by the agreement. The agreement also provides for a $30,000 signing
bonus and an option under the Company's 1997 Incentive Stock Option Plan to
purchase 150,000 shares of Class A common stock at a price of $.39 per share
which vests 25% annually and are exercisable over a five year period.
On July 22, 1998, the Company entered into an employment agreement with
the Vice President, General Counsel and Secretary of the Company. The three year
agreement provides for an annual salary of $108,000, plus incentives and certain
employee benefits, as defined by the agreement. The agreement also provides for
a $30,000 signing bonus and an option under the Company's 1997 Incentive Stock
Option Plan to purchase 100,000 shares of Class A common stock at a price of
$.39 per share which vests over 25% annually and are exercisable over a five
year period.
F-24
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 IS UNAUDITED)
On June 1, 1998, the Company initiated discussions to acquire or enter
into a joint venture agreement with a manufacturer of specialized software based
in St. Laurent, Quebec, Canada. It is contemplated that the Company and the
Canadian company will not make a final decision on any transactions until such
time that the Company's registration statement is effective and the proposed
rescission offer has been completed. The Company expects to be completed with
that process by the fall of 1998 and complete the acquisition or joint venture
agreement in the fourth quarter of 1998, if an agreement can be reached with the
Canadian company.
In July 1998, the Company entered into a stock subscription agreement with
a related entity that beneficially owns approximately 53.5% of the Company's
Class A common stock to finance the Company's capital requirements. The
agreement allows the related entity to purchase up to 10,000,000 shares of the
Company's Class A common stock at a $1.00 per share and a five year warrant to
purchase up to 4,800,000 shares of Class A common stock at $1.00 per share for
$10. As of the signing of the agreement the related entity had purchased the
warrant and 926,000 shares of Class A common stock and is scheduled to purchase
an additional 250,000 shares within thirty days. Thereafter, the related entity
will purchase shares as the Company requires additional capital.
The Company is currently negotiating with an investment banking firm for
various financial advisory services, including a $9,000,000 commitment for
stand-by investors during the proposed rescission offer process. The Company
expects to finalize the details and execute the agreement in the near future.
F-25
<PAGE>
EXHIBIT A
RESCISSION ELECTION FORM
CYNET, INC.
ELECTION FOR RESCISSION
OR
AFFIRMATION OF SUBSCRIPTION AND RELEASE
THE RESCISSION OFFER WILL EXPIRE AT THE LATER OF (A) 12:00 MIDNIGHT,
HOUSTON TIME, ON ______________, 1998, OR (B) THIRTY DAYS AFTER THE DATE
ON WHICH THE UNDERSIGNED ACTUALLY RECEIVED THIS ELECTION FORM.
==============================================================================
Please complete and sign this document and return it to CyNet, Inc. at the
address set forth below, on or before midnight, Houston time, on
_______________, 1998, the Expiration Date of the Rescission Offer. Please
indicate your election by INITIALING either (i) the space immediately preceding
paragraph A below to ACCEPT the Rescission Offer or (ii) the space immediately
preceding paragraph B to REJECT the Rescission Offer and affirm your
subscription.
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Gentlemen:
The undersigned hereby acknowledges having received and carefully read the
rescission offer (the "Rescission Offer") described in the prospectus dated
_______________, 1998 (the "Prospectus"), by CyNet, Inc. (the "Company") to
repurchase the Subject Securities hereinafter identified which were previously
acquired by the undersigned from the Company (the "Securities"). Capitalized
terms not otherwise defined herein shall have the meanings given to them in the
Prospectus.
As indicated below, the undersigned hereby (i) elects to accept the
Rescission Offer and requests that the Company repurchase the Securities in
accordance with the terms of the Rescission Offer, or (ii) affirms the
undersigned's subscription for all of such Securities.
A. Acceptance of Rescission Offer; Request for Rescission
1. The undersigned hereby irrevocably elects to accept the Company's offer
to repurchase all of the Securities and to pay the undersigned an amount equal
to the consideration which the undersigned paid to the Company for the
Securities together with interest from the date of purchase to the date of
repayment at the rate specified by the undersigned's place of residence and/or
domicile, as the case may be, less, with respect to shares of Preferred Stock,
dividends paid.
2. The undersigned hereby encloses the certificates identified below,
representing all of the Securities that the undersigned acquired from the
Company, duly endorsed for transfer or accompanied by an assignment separate
from the applicable stock certificate in either case with the signature(s)
guaranteed by an eligible guarantor institution. The enclosed represents all,
and not less than all, of the Securities that the undersigned acquired from the
Company. The undersigned hereby represents that the undersigned is conveying all
interests in the Securities free and clear of all liens and encumbrances of any
kind, and that no such interest has been previously or concurrently transferred
in any manner to any other person or entity.
A-1
<PAGE>
<TABLE>
<CAPTION>
CLASS OF CERTIFICATE NUMBER OF CONSIDERATION DIVIDENDS RESCISSION
SECURITY NUMBER SHARES PAID INTEREST DUE PAID OFFER AMOUNT
- -------- ----------- --------- ------------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
B. Rejection of Rescission Offer; Affirmation of Subscription
The undersigned hereby affirms the undersigned's subscription or
subscriptions to purchase all Securities of the Company, and elects NOT to
accept the Company's offer to repurchase such Securities.
C. Release
In consideration of the offer to repurchase the undersigned's Securities,
the receipt and sufficiency of which is hereby acknowledged, the undersigned
hereby irrevocably releases, remises and discharges the Company and its past,
current and future officers, directors, employees, affiliates, representatives
and agents, of and from all claims which the undersigned and the undersigned's
successors and assigns have, ever had or might have in connection with the sales
and issuances by the Company of its Securities including, but not limited to,
any violation of federal and/or state security laws or regulations, to the
maximum extent permitted by applicable law.
SPACE INTENTIONALLY LEFT BLANK
A-2
<PAGE>
THE UNDERSIGNED:
____________________________________________
Print name of the undersigned and, (a) if
Securities are held by a partnership,
corporation, trust or entity, the name and
capacity of the individual signing on its
behalf, and (b) if Securities are held as
joint tenants or as community property,
name(s) of co-purchaser(s).
Dated: ________________, 1998 ____________________________________________
Signature
____________________________________________
Tax I.D./Soc. Sec. No.
Dated: ________________, 1998 ____________________________________________
Signature
____________________________________________
Tax I.D./Soc. Sec. No.
Residence Address:
Street Address: ____________________________________________
City, State and Zip Code ____________________________________________
____________________________________________
Mailing Address (if different from residence):
Street Address: ____________________________________________
City, State and Zip Code ____________________________________________
A-3
<PAGE>
EXHIBIT B
EXCERPTS FROM STATE SECURITIES LAWS
B-1
<PAGE>
NO DEALER, SALES PERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED HEREBY, OR AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO OR FROM ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
Prospectus Summary..........................................4
Risk Factors................................................7
Use of Proceeds............................................19
Dividend Policy............................................19
Capitalization.............................................20
Selected Financial Information.............................21
Management's Discussion and Analysis Of Financial
Condition and Results of Operations......................22
Business...................................................28
Management.................................................34
Principal Shareholders.....................................40
Description of Capital Stock...............................40
Plan of Distribution and Selling Shareholder...............43
Shares Eligible for Future Sales...........................43
Legal Matters..............................................44
Experts....................................................44
Additional Information ....................................44
Index to Financial Statements.............................F-1
Form of Election..........................................A-1
Excerpts from State Securities Laws.......................B-1
UNTIL , 1998 (90 DAYS FROM THE TRANSACTIONS IN THE REGISTERED
SECURITIES), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS.
==================================================================
CYNET, INC.
RESCISSION OFFER
--------------------------------
CLASS A COMMON STOCK
CLASS B COMMON STOCK
SERIES A PREFERRED STOCK
SERIES B PREFERRED STOCK
WARRANTS TO PURCHASE
CLASS A COMMON STOCK
PROSPECTUS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. Article 2.02A of the TBCA provides, in relevant part, as follows:
Subject to the provisions of Sections B and C of this Article,
each corporation shall have power:
(16) to indemnify directors, officers, employees, and agents
of the corporation and to purchase and maintain liability
insurance for those persons.
2. Article Twelve of the Articles of Incorporation of the Company (therein
referred to as the "Corporation") provides as follows: "The Corporation
shall indemnify all current and former directors and officers of the
Corporation to the fullest extent of the applicable law, including,
without limitation, Article 2.02-1 of the Texas Business Corporation
Act."
3. The Corporation may purchase and maintain insurance, at its expense, on
behalf of any indemnitee against any liability asserted against him and
incurred by him in such a capacity or arising out of his status as a
representative of the Corporation, whether or not the Corporation would
have the power to indemnify such person against such expense, liability
or loss under the TBCA.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
SEC Registration Fee.....................................$ 4,846
NASD Filing Fee.......................................... *
Legal Fees and Expenses.................................. *
Accounting Fees and Expenses............................. *
Blue Sky Fees and Expenses (including counsel fees)...... *
Federal Taxes............................................ *
State Taxes and Fees..................................... *
Printing and Engraving Expenses.......................... *
Transfer Agent Fees (and Expenses)....................... *
Expenses by Selling Shareholder.......................... *
--------
Miscellaneous............................................ *
--------
Total........................................... $*
========
- -----------------------
* To be provided by Amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
TRANSACTIONS SUBJECT TO RESCISSION OFFER
1. From August 1996 through December 1996, the Company issued (i) an
aggregate of 956,280 shares of Class A Common Stock to 124 individuals
at a purchase price of $1.00 per share and (ii) 43,720 shares of Class
A Common Stock to Keith Shaffner for services rendered valued at
$43,720 in connection with the offering. Mr.
II-1
<PAGE>
Shaffner directed the Company to issue 42,375 of such shares to nine
other individuals. At the time of the offering, the Company believed
that such transactions were exempt from registration under the
Securities Act pursuant to Section 3(b) thereof as an exempt offering
under Rule 504 of Regulation D promulgated thereunder.
2. From October 1996 through December 1997, the Company issued an
aggregate of (i) 3,397,854 shares of Series A Preferred Stock to 355
individuals at a purchase price of $2.00 per share and (ii) 70,000
shares of Series A Preferred Stock to two individuals at a purchase
price of $1.43 per share. At the time of the offering, the Company
believed that such transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as transactions not
involving a public offering.
3. From March 1997 through November 1997, the Company issued an aggregate
of 1,798,574 shares of Series B Preferred Stock to 324 individuals at a
purchase price of $3.00 per share. Subsequently, the Company
repurchased 18,041 shares of Class B Common Stock (following the
conversion of 15,034 shares of Series B Preferred Stock at a 1.2
conversion ratio) from certain individuals at a purchase price of $2.50
per share (equivalent to $3.00 per share of Series B Preferred Stock).
At the time of the offering the Company believed that such transactions
were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof as transactions not involving a public offering.
4. From October 1996 through April 1997, the Company issued an aggregate
of 272,000 shares of Class A Common Stock to 28 individuals at a
purchase price of $1.00 per share. At the time of the offering, the
Company believed that the transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act as a transaction not
involving a public offering.
5. In July 1996, the Company issued Cliff Crutchfield 50,000 shares of
Class A Common Stock as compensation for services rendered valued at
$50,000. At the time of the offering, the Company believed that the
transaction was exempt from registration pursuant to Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering.
6. In October 1996, the Company issued Boyd Jenkins 5,000 shares of Class
A Common Stock for services rendered valued at $5,000. At the time of
the offering, the Company believed that the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
7. In November 1996, the Company issued five-year warrants to 23
individuals entitling such individuals to purchase an aggregate of
738,000 shares of Class A Common Stock at an exercise price of $1.00
per share for services rendered valued at $191,880. At the time of the
offering, the Company believed that the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
8. In April 1997, the Company issued Antoine Albaut 100,000 shares of
Class B Common Stock for services rendered valued at $100,000. At the
time of the offering, the Company believed that the transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act
as a transaction by an issuer not involving a public offering.
9. In April 1997, the Company issued a three-year warrant to Dennis
Eagleeye entitling Mr. Eagleeye to purchase 61,000 shares of Class A
Common Stock at an exercise price of $1.00 per share for services
rendered at minimal value. At the time of the offering, the Company
believed that the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
10. In April 1997, the Company issued John Berg 400,000 shares of Class B
Common Stock in exchange for the conversion of a promissory note in the
amount of $100,000 payable to Mr. Berg. At the time of the offering,
the Company believed that the transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
II-2
<PAGE>
11. In May 1997, the Company issued Joe Flores 25,000 shares of Class B
Common Stock at a purchase price of $2.00 per share. At the time of the
offering, the Company believed that the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
12. In May 1997, the Company issued Alex Najoan 1,267 shares of Class A
Common Stock in exchange for furniture and fixtures valued at $1,267.
At the time of the Offering, the Company believed that the transaction
was exempt from registration pursuant to Section 4(2) of the Securities
Act as a transaction by an issuer not involving a public offering.
13. In July 1997, the Company issued Boyd Jenkins 15,000 shares of Class A
Common Stock at a purchase price of $2.00 per share. At the time of the
offering, the Company believed that the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction not involving a public offering.
14. In October 1997, the Company issued five individuals an aggregate of
14,500 shares of Class A Common Stock at a purchase price of $2.00 per
share. At the time of the offering, the Company believed that the
transaction was exempt from registration pursuant to Section 4(2) of
the Securities Act as a transaction not involving a public offering.
15. In December 1997, the Company issued Robert Horner 110,000 shares of
Class A Common Stock for services rendered valued at $42,900. At the
time of the offering, the Company believed that the transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act
as a transaction not involving a public offering.
16. In February 1998, the Company issued Elmer Krause 10,000 shares of
Class A Common Stock at a purchase price of $2.00 per share. At the
time of the offering, the Company believed that the transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act
as a transaction not involving a public offering.
17. In February 1998, the Company issued Valori Schoberg 3,333 shares of
Series B Preferred Stock at a purchase price of $3.00 per share
pursuant to claims by Ms. Schoberg that the Company had agreed to issue
such shares on such terms in 1997. At the time of the offering, the
Company believed that the transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act as a transaction not
involving a public offering.
18. In May 1998, the Company issued six limited partnerships an aggregate
of 154,000 shares of Class B Common Stock. These shares were issued in
satisfaction of certain claims by these partnerships that they were
entitled to receive such shares in exchange for providing services
valued at $60,000 to the Company during 1997. At the time of the
offering, the Company believed that the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction not involving a public offering.
19. In April 1998, the Company issued Michael R. Smith 3,333 shares of
Series B Preferred Stock at a purchase price for $3.00 per share
pursuant to claims by Mr. Smith that the Company had agreed to issue
such shares on such terms in 1997. At the time of the offering, the
Company believed that the transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act as a transaction not
involving a public offering.
TRANSACTIONS NOT SUBJECT TO RESCISSION OFFER:
1. In May 1995, the Company issued an aggregate of 1,000,000 shares of
Class A Common Stock which were issued to various trusts and a
partnership related to Ray C. Davis, the founder of the Company, for
$1,000. The Company believes that the transaction is exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
2. In August 1995, the Company issued an aggregate of 9,000,000 shares of
Class A Common Stock to various trusts and a partnership related to the
founder of the Company after giving effect to a 9 for 1 share dividend.
The Company believes that the transaction is exempt from registration
pursuant to Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
II-3
<PAGE>
3. Between May 1996 and July 1996, the Company issued Vickroy Stone an
aggregate of 500,000 shares of Class A Common Stock for services
rendered valued at $500,000. In February 1997, the Company repurchased
450,000 of such shares of Class A Common Stock from Mr. Stone at a
purchase price of $1.00 per share. In February 1997, Mr. Stone sold the
remaining 50,000 shares of Class A Common Stock to a partnership
related to Ray C. Davis, the founder of the Company, for $1.00 per
share.
4. In July 1996, the Company issued an aggregate of 1,050,000 of Class A
Common Stock to the principals of International Fax Corporation ("IFC")
and IMedia, S.A. of France ("IMedia") in connection with (i) an
agreement granting the Company a right of first refusal to acquire all
of the outstanding capital stock of IMedia, (ii) the right to utilize
IMedia's European network of fax broadcasting equipment and (iii) the
agreement of IMedia to use the Company's network for fax broadcast
traffic to the United States. The shares of Class A Common Stock were
valued by the Company at $1.00 per share. In connection with this
transaction, Mr. Davis caused the Davis Interests to sell Jean-David
Benichou, a principal of IFC and IMedia, 250,000 shares of Class A
Common Stock at a price of $1.00 per share. Subsequent to this series
of transactions, the Company wrote off the value of its investment.
5. In May, 1997, the Company issued a five-year warrant to Vickroy Stone
entitling Mr. Stone to purchase an aggregate of 450,000 shares of Class
A Common Stock at an exercise price of $2.00 per share. Inasmuch as the
exercise price of these warrants exceeded the fair market value of the
underlying Class A Common Stock, the Company determined that this
warrant had no value at the date of issuance. The Company believes that
the transaction is exempt from registration pursuant to Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering.
6. In July 1997, the Company issued Sam McKinley 400,000 shares of Class B
Common Stock in payment of a loan commitment fee. The Company
determined that it received no value in exchange for such shares. The
Company believes that the transaction is exempt from registration
pursuant to Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
7. In November 1997, the Company issued 2,328,940 shares of its Class A
Common Stock to 125 individuals in exchange for their net equity
interest ("Minority Interest") in certain affiliated limited liability
companies ("LLCs"). In January 1998, the Company issued an additional
92,640 shares of its Class A Common Stock to Sam McKinley incident to
the acquisition of the Minority Interest. The Company believes that the
transactions are exempt from registration pursuant to Section 4(2) of
the Securities Act as transactions by an issuer not involving a public
offering.
8. On November 14, 1997, the Company entered into a Settlement Agreement
and Mutual Release with Keith Shaffner for services rendered by him
during 1996 and 1997. In exchange for a complete release of all claims
by Mr. Shaffner and his affiliate, CyFax, Inc. ("CyFax"), against the
Company, the Company issued to Mr. Shaffner: (i) a warrant entitling
Mr. Shaffner to purchase 1,150,000 shares of Class B Common Stock at a
price of $1.00 per share, exercisable on or before August 30, 1999,
(ii) a warrant entitling Mr. Shaffner to purchase 1,050,000 shares of
Class B Common Stock at a price of $1.00 per share, exercisable on or
before February 28, 2000, (iii) 500,000 shares of Class A Common Stock
and (iv) $51,000 in cash. In addition, the Company issued 200,000
shares of Class A Common Stock to CyFax for the termination of an
exclusive agent management agreement with the Company. During 1996 and
1997, the Company paid Mr. Shaffner, individually, an aggregate of
$202,951 for services rendered and CyFax an aggregate of $893,527 for
services rendered.
9. In April 1998, the Company issued a five-year warrant entitling Ray
Davis to purchase an aggregate of 2,000,000 shares of Class A Common
Stock at an exercise price of $1.00 per share pursuant to Mr. Davis'
employment agreement with the Company. The Company believes that the
transaction is exempt from registration pursuant to Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public
offering.
10. In May 1998, the Company issued five-year warrants entitling certain
individuals and entities to purchase an aggregate of 348,954 shares of
Class B Common Stock at prices of $1.00 and $2.00 per share. Inasmuch
as the exercise prices of these warrants exceeded the fair market value
of the underlying Class B Common Stock, the Company determined that the
warrants had no value at the date of issuance.
II-4
<PAGE>
11. In July 1998 the Company entered into a Subscription Agreement with
CyNet Holdings, LLC ("Holdings"), pursuant to which Holdings is
committed to purchase up to 10,000,000 shares of Class A Common Stock
of the Company for $1.00 per share prior to December 31, 1998. As of
the date hereof, Holdings has purchased an aggregate of 926,000 shares
of Class A Common Stock pursuant to the Subscription Agreement. Also
pursuant to the Subscription Agreement, the Company (i) issued a
five-year warrant entitling Holdings to purchase an aggregate of
4,800,000 shares of Class A Common Stock at a price of $1.00 per share
and (ii) entered into a registration rights agreement granting Holdings
certain demand and piggy-back registration rights covering the
Company's securities held by Holdings. The Company believes that the
transaction is exempt from registration pursuant to Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public
offering.
ITEM 27. EXHIBITS.
(A)
*3.1 Amended and Restated Articles of Incorporation of the Company.
*3.2 Bylaws of the Company.
*4.1 Form of Certificate Representing Class A Common Stock.
*4.2 Form of Certificate Representing Class B Common Stock.
*4.3 Form of Certificate Representing Series A Preferred Stock.
*4.4 Form of Certificate Representing Series B Preferred Stock.
4.5 Amended and Restated Certificate of Designation, Preferences, Rights
and Limitations of Convertible Non-voting Series A Preferred Stock.
4.6 Certificate of Designation, Preferences, Rights and Limitations of
Convertible Non-voting Series B Preferred Stock.
*5.1 Opinion of Chamberlain, Hrdlicka, White, Williams & Martin.
10.1 Employment Agreement dated as of March 3, 1997, between the Company
and Ray C. Davis.
10.2 Assignment of Intellectual Property dated as of March 3, 1997, between
the Company and Ray C. Davis.
10.3 Consulting Agreement dated as of June 17, 1997, between the Company
and Vincent W. Beale, Sr.
10.4 Settlement Agreement and Mutual Release dated as of November 14, 1997,
among the Company, Keith Shaffner and CyFax, Inc.
*10.5 1997 Incentive Stock Option Plan.
10.6 Employment Agreement dated as of February 1, 1998, between the Company
and Vincent W. Beale, Sr.
10.7 Employment Agreement dated as of March 1, 1998, between the Company
and David R. Hearon, Jr.
10.8 Employment Agreement dated as of April 13, 1998, between the Company
and Ray C. Davis.
10.9 Warrant dated April 13, 1998 issued to Ray C. Davis.
10.10 Employment Agreement dated as of July 22, 1998, between the Company
and Bernard B. Beale.
10.11 Employment Agreement dated as of July 22, 1998, between the Company
and Samuel C. Beale.
10.12 Subscription Agreement dated as of July 22, 1998, between the Company
and CyNet Holdings, LLC.
10.13 Registration Rights Agreement dated as of July 22, 1998, between the
Company and CyNet Holdings, LLC.
10.14 Warrant dated July 22, 1998 issued to CyNet Holdings, LLC.
*21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
*23.2 Consent of Chamberlain, Hrdlicka, White, Williams & Martin (included
in Exhibit 5.1).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
- --------------------------
* To be filed by amendment.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
i. To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement; and
iii. To include any additional or changed material
information with respect to the plan of distribution.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
4. That, for the purpose of determining liability under the Securities
Act of 1933:
i. The information omitted from the form of prospectus
filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this
registration statement as of the time it was declared
effective.
ii. Each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering
thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on the 5th day of August, 1998.
CYNET, INC.
By:/s/VINCENT W. BEALE, SR.
Vincent W. Beale, Sr., Chairman of the Board
and Chief Executive Officer
Each individual whose signature appears below constitutes and appoints Vincent
W. Beale, Sr., Samuel C. Beale and Wayne Schroeder, and each of them, his true
and lawful attorneys-in-fact and agents with full power and substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sell any and all amendments (including post-effective amendments)
to this Registration Statement and any subsequent registration statements filed
by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which
relates to this Registration Statement, and to file same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisition and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or his or their substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- --------- --------
<S> <C> <C>
/s/ VINCENT W. BEALE, SR. Chairman of the Board of Directors August 5, 1998
Vincent W. Beale, Sr. and Chief Executive Officer
(Principal Executive Officer)
/s/ SAMUEL C. BEALE Vice President, General Counsel and August 5, 1998
Samuel C. Beale Secretary (Principal Financial
and Accounting Officer)
/s/ WAYNE SCHROEDER Director August 5, 1998
Wayne Schroeder
/s/ RAY C. DAVIS Director August 5, 1998
Ray C. Davis
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
No. DESCRIPTION OF EXHIBITS
- ------- -----------------------
*3.1 Amended and Restated Articles of Incorporation of the Company.
*3.2 Bylaws of the Company.
*4.1 Form of Certificate Representing Class A Common Stock.
*4.2 Form of Certificate Representing Class B Common Stock.
*4.3 Form of Certificate Representing Series A Preferred Stock.
*4.4 Form of Certificate Representing Series B Preferred Stock.
4.5 Amended and Restated Certificate of Designation, Preferences, Rights
and Limitations of Convertible Non-voting Series A Preferred Stock.
4.6 Certificate of Designation, Preferences, Rights and Limitations of
Convertible Non-voting Series B Preferred Stock.
*5.1 Opinion of Chamberlain, Hrdlicka, White, Williams & Martin.
10.1 Employment Agreement dated as of March 3, 1997, between the Company
and Ray C. Davis.
10.2 Assignment of Intellectual Property dated as of March 3, 1997, between
the Company and Ray C. Davis.
10.3 Consulting Agreement dated as of June 17, 1997, between the Company
and Vincent W. Beale, Sr.
10.4 Settlement Agreement and Mutual Release dated as of November 14, 1997,
among the Company, Keith Shaffner and CyFax, Inc.
*10.5 1997 Incentive Stock Option Plan.
10.6 Employment Agreement dated as of February 1, 1998, between the Company
and Vincent W. Beale, Sr.
10.7 Employment Agreement dated as of March 1, 1998, between the Company
and David R. Hearon, Jr.
10.8 Employment Agreement dated as of April 13, 1998, between the Company
and Ray C. Davis.
10.9 Warrant dated April 13, 1998 issued to Ray C. Davis.
10.10 Employment Agreement dated as of July 22, 1998, between the Company
and Bernard B. Beale.
10.11 Employment Agreement dated as of July 22, 1998, between the Company
and Samuel C. Beale.
10.12 Subscription Agreement dated as of July 22, 1998, between the Company
and CyNet Holdings, LLC.
10.13 Registration Rights Agreement dated as of July 22, 1998, between the
Company and CyNet Holdings, LLC.
10.14 Warrant dated July 22, 1998 issued to CyNet Holdings, LLC.
*21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
*23.2 Consent of Chamberlain, Hrdlicka, White, Williams & Martin (included
in Exhibit 5.1).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
- --------------------------
* To be filed by amendment.
EXHIBIT 4.5
AMENDED & RESTATED
CERTIFICATE OF DESIGNATION PREFERENCES,
RIGHTS AND LIMITATIONS OF
CONVERTIBLE NON-VOTING
SERIES A PREFERRED STOCK
OF
CYNET, INC
CYNET, INC., hereinafter called the "Corporation," a corporation organized
and existing under the laws of the State of Texas.
DOES HEREBY CERTIFY:
That pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation of the Corporation, and pursuant to the provisions of
Article 9.10A of the Texas Business Corporation Act, such Board of Directors by
the unanimous written consent of its members dated February 3, 1997 hereby
amends and restates the written consent of its members dated effective October
31, 1996 to increase the number of Convertible Non-Voting Series A Preferred
Stock, $2.00 stated value from 1,000,000 shares to 3,000,000 shares. The October
31, 1996 written consent of members adopted a resolution providing for the
issuance of a series of 1,000,000 shares of Convertible Non-Voting Series A
Preferred Stock, $2.00 stated value. On February 3,1997 the Board amended and
restated the Certificate of Designation dated October 31, 1996 to read as
follows:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation, the Convertible Non-Voting Series A
Preferred Stock, $2.00 stated value ("Preferred Stock"), is hereby authorized
and created, said series to consist of up to 3,000,000 shares. The voting
powers, preferences and relative, participating optional and other special
rights, and the qualifications, limitations or restrictions thereof shall be as
follows:
1. DIVIDENDS ON PREFERRED STOCK:
(a) Commencing with the date of issuance, the holders of the Preferred
Stock shall be entitled to receive, out of the funds of the Corporation legally
available therefor, cumulative cash dividends per share of an annual rate equal
to $0.24, payable semi-annually in arrears in equal installments of $0.12 per
share on the fifteenth day of June and December (unless such day is a
non-business day, in which event on the next business day) in each year,
commencing on the fifteenth day of December 1996, which shall be the dividend
payment dates. Dividends on each share of Preferred Stock shall begin to accrue
and shall cumulate pro rata from the date of issuance of the respective share,
whether or not declared, and shall be payable to the holder of such share on the
record date (as defined in Section 1(c) below). Dividends on account of arrears
for any past dividend periods may be declared and paid at any time, without
reference to any
1
<PAGE>
regular dividend payment date, to holders of record on a record date fixed for
such payment by the Board of Directors of the Corporation or by a committee of
such Board duly authorized to a such date by resolution designating such
committee.
(b) The Corporation shall not permit any Subsidiary (as defined below) to
purchase, redeem, retire or otherwise acquire for consideration any shares of
capital stock of the Corporation unless the Corporation could, pursuant to
Section 2(a) hereof purchase, redeem, retire or otherwise acquire such shares of
capital stock at such time and in such manner. As used herein, the term
"Subsidiary" shall mean a corporation, a majority of the outstanding voting
securities of which is owned, directly or indirectly, by the Corporation.
(c) Dividends on the Preferred Stock shall be payable to holders of record
as they appear on the books of the Corporation as of the close of business on
any record date for payment of dividends. The record dates for payment of
dividends shall be the last day of May and November in each year which
immediately precedes each respective dividend payment date.
(d) Dividends payable on the date of any conversion or redemption of the
Preferred Stock not occurring on a regular dividend payment date shall be
calculated on the basis of the actual number of days elapsed (including the date
of conversion or redemption) over a 365-day year.
(e) No dividends shall be declared or paid or set apart for payment on and
no payment shall be made on account of the purchase, redemption or retirement
of, any other series of capital stock of the Corporation, for any period unless
full cumulative dividends have been or contemporaneously are declared and paid
(or declared and a sum sufficient for the payment thereof set apart for such
payment) on the Preferred Stock for all dividend payment periods terminating on
or prior to the date of payment of dividends on such stock or other payment date
resulting from the repurchase or retirement of such stock. Accumulations of
dividends on the Preferred Stock shall not bear interest.
2. CONVERSION OF PREFERRED STOCK AT OPTION OF CORPORATION.
(a) Subject to the provisions of this Section 2, the Preferred Stock shall
be convertible in whole, or in part, at the sole option of the Corporation by
resolution of its Board of Directors at any time on or after January 1, 1999, at
the rate of one share of Common Stock for each share of Preferred Stock
surrendered. At the time of such conversion, the Corporation will pay all
dividends accrued and unpaid on such Preferred Stock up to the date fixed for
conversion upon giving the notice hereinafter provided.
(b) Not less than thirty nor more than sixty days prior to the date fixed
for conversion of the Preferred Stock, a notice in writing shall be given by
mail to the holders of record of Preferred Stock at their respective addresses
as the same shall appear on the stock books of the Corporation. Such notice
shall state: (i) the conversion date; (ii) the amount of dividends on the
Preferred Stock that will be accrued and unpaid to the date fixed for
conversion; (iii) the place or
2
<PAGE>
places where certificates for shares are to be surrendered for conversion to
certificates for shares of Common Stock; (iv) that the dividends on shares to be
converted will cease to accrue on such conversion dates; and (v) the number of
shares of the Common Stock issuable upon conversion of a share of Preferred
Stock at the time.
(c) The Preferred Stock may not be converted and the Corporation may not
purchase or otherwise acquire, other than by conversion at the election of the
holders, any shares of Preferred Stock unless full cumulative dividends on all
outstanding shares of Preferred Stock shall have been paid in full or
contemporaneously are declared and paid in full for all past dividend periods.
(d) All shares of Preferred Stock so converted shall have the status of
authorized but unissued preferred stock, but such shares so converted shall not
be reissued as shares of the series of Preferred Stock created hereby.
(e) No holder of shares of Preferred Stock shall have the right to require
the Corporation to redeem all or any portion of such shares.
3. CONVERSION OF PREFERRED STOCK INTO COMMON STOCK.
(a) At any time on or after the date of issuance but before September 1,
1998, each holder of shares of Preferred Stock may, at his option, convert any
or all such shares, plus all dividends accrued and unpaid on such Preferred
Stock up to the conversion date, on the terms and conditions set forth in this
Section 3, into fully paid and non-assessable shares of the Corporation's Common
Stock. The number of shares of Common Stock into which each share of Preferred
Stock may be converted (the "Conversion Rate") (i) on or after the date of
issuance and before November 1, 1997, shall be 1.2 shares of Common Stock for
each share of Series A Preferred Stock tendered; and (ii) on or after November
1, 1997, and before September 1, 1998 shall be 1.1 shares of Common Stock for
each share of Series A Preferred Stock tendered. On and after September 1, 1998,
the Conversion Rate shall be one share of Common Stock for each share of Series
A Preferred Stock tendered.
(b) To exercise his conversion privilege, the holder of any shares of
Preferred Stock shall surrender to the Corporation during regular business hours
at the principal executive offices of the Corporation or the offices of the
transfer agent for the Preferred Stock or at such other place as may be
designated by the Corporation, the certificate or certificates for the shares to
be converted, duly endorsed for transfer to the Corporation (if required by it),
accompanied by written notice stating that the holder irrevocably elects to
convert such shares. Conversion shall be deemed to have been effected on the
date when such delivery is made, and such date is referred to herein as the
"Conversion Date." Within three (3) business days after the date on which such
delivery is made, the Corporation shall issue and send (with receipt to be
acknowledged) to the holder thereof or the holder's designee, at the address
designated by such holder, a certificate or certificates for the number of full
shares of Common Stock to which the holder is entitled as a
3
<PAGE>
result of such conversion, and cash with respect to any fractional interest of a
share of Common Stock as provided in paragraph (c) of this Section 3. The holder
shall be deemed to have become a stockholder of record of the number of shares
of Common Stock into which the shares of Preferred Stock have been convened on
the applicable Conversion Date unless the transfer books of the Corporation are
closed on that date, in which event he shall be deemed to have become a
stockholder of record of such shares on the next succeeding date on which the
transfer books are open, but the Conversion Rate shall be that in effect on the
Conversion Date. Upon conversion of only a portion of the number of shares of
Preferred Stock represented by a certificate or certificates surrendered for
conversion, the Corporation shall within three (3) business days after the date
on which such delivery is made, issue and send (with receipt to be acknowledged)
to the holder thereof or the holder's designee, at the address designated by
such holder, a new certificate covering the number of shares of Preferred Stock
representing the unconverted portion of the certificate or certificates so
surrendered.
(c) No fractional shares of Common Stock or scrip shall be issued upon
conversion of shares of Preferred Stock. If more than one share of Preferred
Stock shall be surrendered for conversion at any one time by the same holder,
the number of full shares of Common Stock issuable upon conversion thereof shall
be computed on the basis of the aggregate number of shares of Preferred Stock so
surrendered. Instead of any fractional shares of Common Stock which would
otherwise be issuable upon conversion of any shares of Preferred Stock, the
Corporation shall make an adjustment in respect of such fractional interest
equal to the fair market value of such fractional interest, to the nearest
1/100th of a share of Common Stock, in cash at the Current Market Price (as
defined below) on the business day preceding the effective date of the
conversion. The "Current Market Price" of publicly traded shares of Common Stock
or any other class of Common Stock or other security of the Corporation or any
other issuer for any day shall be deemed to be the average of the daily "Closing
Prices" for the 10 consecutive trading days preceding the Conversion Date. The
"Current Market Price" of the Common Stock or any other class of capital stock
or securities of the Corporation or any other issuer which is not publicly
traded shall mean the fair value thereof as determined by an independent
investment banking or appraisal firm experienced in the valuation of such
securities or properties selected in good faith by the Board of Directors of the
Corporation or a committee thereof or, if no such investment banking or
appraisal firm is, in the good faith judgment of the Board of Directors of the
Corporation or such committee, available to make such determination, as
determined in good faith judgment of the Board of Directors of the Corporation
or such committee. The "Closing Price" shall mean the last reported sales price
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the National Association of Securities Dealers
Automated Quotations System, or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on the National
Association of Securities Dealers Automated Quotations System, the average of
the closing bid and asked prices in the over-the-counter market as furnished by
any New York Stock Exchange member firm selected from time to time by the
Corporation for that purpose.
4
<PAGE>
(d) The Corporation shall pay any and all issue and other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock on
conversion of Preferred Stock pursuant hereto. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the Preferred Stock so converted were registered, and
no such issue and delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of any such tax, or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
(e) The Corporation shall at all times reserve for issuance and maintain
available, out of its authorized but unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Stock, the full number of
shares of Common Stock deliverable upon the conversion of all Preferred Stock
from time to time outstanding. The Corporation shall from time to time (subject
to obtaining necessary director and stockholder action), in accordance with the
laws of the State of Texas, increase the authorized number of shares of its
Common Stock if at any time the authorized number of shares of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of all of
the shares of Preferred Stock at the time outstanding.
(f) If any shares of Common Stock to be reserved for the purpose of
conversion of shares of Preferred Stock require registration or listing with, or
approval of, any governmental authority, stock exchange or other regulatory body
under any federal or state law or regulation or otherwise, including
registration under the Securities Act of 1933, as amended, and appropriate state
securities laws, before such shares may be validly issued or delivered upon
conversion, the Corporation will in good faith and as expeditiously as possible
meet such registration, listing or approval, as the case may be.
(g) All shares of Common Stock which may be issued upon conversion of the
shares of Preferred Stock will upon issuance by the Corporation be validly
issued, fully paid and non-assessable and free from all taxes, liens and charges
with respect to the issuance thereof.
(h) In case the Company shall at any time after the date of this Agreement
(i) declare a dividend on the Common Stock in shares of its capital stock, (ii)
subdivide the outstanding shares of Common Stock, (iii) combine the outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (iv)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then in each case
the Conversion Rate, and the number of shares of Common Stock receivable upon
conversion, in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination, or reclassification shall be
proportionately adjusted so that the holder of any shares of Preferred Stock
converted after such time shall be entitled to receive the aggregate number of
shares of Common Stock which, if such shares of Preferred Stock had been
converted immediately prior to such record date, he would have owned upon such
conversion and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be
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made successively whenever any event listed above shall occur.
(i) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, share exchange, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of
paragraph 3(h) and in the taking of all such action as may be necessary, or
appropriate in order to protect the conversion rights of the holders of the
Preferred Stock against impairment.
(j) Upon the occurrence of each adjustment or readjustment of the
Conversion Rate pursuant to paragraph 3(h), the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Preferred Stock a certificate
signed by an officer of the Corporation setting forth (i) such adjustment or
readjustment, (ii) the Conversion Rate, at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such holder's shares.
(k) In case any shares of Preferred Stock shall be converted pursuant to
Section 3(g) hereof, or purchased or otherwise acquired by the Corporation, the
shares so converted, purchased or acquired shall be restored to the status of
authorized but unissued shares of preferred stock, without designation as to
class or series, and may thereafter be reissued, but not as shares of the series
of Preferred Stock created hereby.
4. VOTING.
(a) Except as otherwise required by law or set forth herein, the shares of
Preferred Stock shall not be entitled to vote, either on any matters presented
at any annual or special meeting of stockholders of the Corporation, or by
written consent.
5. LIQUIDATION RIGHTS.
(a) In the event of any voluntary or involuntary, liquidation, dissolution
or winding up of the Corporation, the holders of shares of Preferred Stock then
outstanding shall be entitled or receive out of assets of the Corporation
available for distribution to stockholders, before any distribution of assets is
made to holders of any other class of capital stock of the Corporation, an
amount equal to $2.00 per share, plus accumulated and unpaid dividends thereon
to the date fixed for distribution. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the amounts payable
with respect to the Preferred Stock and any other shares of stock of the
Corporation ranking as to any such distribution on a parity with the Preferred
Stock are not paid in full, the holders of the Preferred Stock and of such other
shares shall share ratably in any such distribution of assets of the Corporation
in proportion to the full respective preferential amounts to which they are
entitled. After payment of the full amount of the
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liquidating distribution to which they are entitled, the holders of shares of
Preferred Stock shall not be entitled to any further participation in any
distribution of assets by the Corporation.
(b) Neither the consolidation or merger of the Corporation with or into
any other corporation or corporations, nor the sale or lease of all or
substantially all of the assets of the Corporation shall be deemed to be a
liquidation, dissolution or a winding up of the Corporation within the meaning
of any of the provisions of this Section 5.
(c) In the event of a voluntary or involuntary liquidation, dissolution,
or winding up of the Corporation, the Corporation shall, within 10 days after
the date the Board of Directors approves such action, or within 20 days prior to
any stockholders' meeting called to approve such action, or within 20 days after
the commencement of any involuntary proceeding, whichever is earlier, give each
holder of shares of Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the material terms and
conditions of such proposed action, including a description of the stock, cash,
and property to be received by the holders of shares of Preferred Stock upon
consummation of the proposed action and the date of delivery thereof. If any
material change in the facts set forth in the initial notice shall occur, the
Corporation shall promptly give written notice to each holder of shares of
Preferred Stock of such material change. The Corporation shall not consummate
any voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of 30 days after the mailing of the initial
notice or 10 days after the mailing of any subsequent written notice, whichever
is later; provided, that any such 30-day or 10-day period may be shortened upon
the written consent of the holders of all of the outstanding shares of Preferred
Stock.
(d) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation which involves the distribution of assets other
than cash, the Corporation shall promptly engage competent independent
appraisers to determine the value of the assets to be distributed to the holders
of shares of Preferred Stock and the holders of shares of Common Stock. The
Corporation shall, upon receipt of such appraiser's valuation, give prompt
written notice to each holder of shares of Preferred Stock of the appraiser's
valuation.
6. LIMITATIONS.
(a) So long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote or the written consent of
the holders of at least 66-2/3% of the outstanding shares of Preferred Stock,
voting separately as a class:
(i) Create, authorize or issue shares of any class or series of
stock, or any security convertible into such class or series ranking prior
to or on parity with the Preferred Stock either as to payment of dividends
or as distributions in the event of a liquidation, dissolution or winding
up of the Corporation; or
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(ii) Amend, alter or repeal any provision of the Certificate of
Incorporation or Bylaws of the Corporation so as to affect adversely the
relative rights, preferences, qualifications, limitations or restrictions
of the Preferred Stock.
(b) The provisions of this paragraph 6 shall not in any way limit the
right and power of the Corporation to:
(i) Increase the total number of authorized shares of Common Stock
; or
(ii) Issue bonds, notes, mortgages, debentures, preferred stock
ranking junior to the terms of the Preferred Stock and other obligations,
and to incur indebtedness to banks and to other lenders.
IN WITNESS WHEREOF, CYNET, INC. has caused its corporate seal to be
hereunto affixed and this certificate to be signed by RAY DAVIS, its president,
this 3rd day of February, 1997,
CYNET, INC.
By:/s/ RAY DAVIS
Ray Davis, President
8
EXHIBIT 4.6
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS OF
CONVERTIBLE NON-VOTING
SERIES B PREFERRED STOCK
OF
CYNET, INC
CYNET, INC., hereinafter called the "Corporation," a corporation organized
and existing under the laws of the State of Texas,
DOES HEREBY CERTIFY:
That pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation of the Corporation, and pursuant to the provisions of
Article 9.10A of the Texas Business Corporation Act, such Board of Directors by
the unanimous written consent of its members dated March 3, 1997 adopted a
resolution providing for the issuance of a series of 2,000,000 shares of
Convertible Non-Voting Series B Preferred Stock, $3.00 stated value, which
resolution is as follows:
RESOLVED, that pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation, the Convertible Non-Voting Series B
Preferred Stock, $3.00 stated value ("Preferred Stock"), is hereby authorized
and created, said series to consist of up to 2,000,000 shares. The voting
powers, preferences and relative, participating, optional and other special
rights, and the qualifications limitations or restrictions thereof shall be as
follows:
1. DIVIDENDS ON PREFERRED STOCK:
(a) Commencing with the date of issuance, the holders of the Preferred
Stock shall be entitled to receive, out of the funds of the Corporation legally
available therefor, cumulative cash dividends per share of an annual rate equal
to $0.30, payable semi-annually in arrears in equal installments of $0.15 per
share on the fifteenth day of June and December (unless such day is a
non-business day, in which event on the next business day) in each year,
commencing on the fifteenth day of June 1997, which shall be the dividend
payment dates. Dividends on each share of Preferred Stock shall begin to accrue
and shall cumulate pro rata from the date of issuance of the respective share,
whether or not declared, and shall be payable to the holder of such share on the
record date (as defined in Section 1(c) below). Dividends on account of arrears
for any past dividend periods may be declared and paid at any time, without
reference to any regular dividend payment date, to holders of record on a record
date fixed for such payment by the Board of Directors of the Corporation or by a
committee of such Board duly authorized to a such date by resolution designating
such committee.
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(b) The Corporation shall not permit any Subsidiary (as defined below) to
purchase, redeem, retire or otherwise acquire for consideration any shares of
capital stock of the Corporation unless the Corporation could, pursuant to
Section 2(a) hereof purchase, redeem, retire or otherwise acquire such shares of
capital stock at such time and in such manner. As used herein, the term
"Subsidiary" shall mean a corporation, a majority of the outstanding voting
securities of which is owned, directly or indirectly, by the Corporation.
(c) Dividends on the Preferred Stock shall be payable to holders of record
as they appear on the books of the Corporation as of the close of business on
any record date for payment of dividends. The record dates for payment of
dividends shall be the last day of May and November in each year which
immediately precedes each respective dividend payment date.
(d) Dividends payable on the date of any conversion or redemption of the
Preferred Stock not occurring on a regular dividend payment date shall be
calculated on the basis of the actual number of days elapsed (including the date
of conversion or redemption) over a 365-day year.
(e) No dividends shall be declared or paid or set apart for payment on,
and no payment shall be made on account of the purchase, redemption or
retirement of, any other series of capital stock of the Corporation except for
issued and outstanding Series A Preferred Stock, for any period unless full
cumulative dividends have been or contemporaneously are declared and paid (or
declared and a sum sufficient for the payment thereof set apart for such
payment) on the Preferred Stock for all dividend payment periods terminating on
or prior to the date of payment of dividends on such stock or other payment date
resulting from the repurchase or retirement of such stock. Accumulations of
dividends on the Preferred Stock shall not bear interest.
2. CONVERSION OF PREFERRED STOCK AT OPTION OF CORPORATION.
(a) Subject to the provisions of this Section 2, the Preferred Stock shall
be convertible in whole, or in part, at the sole option of the Corporation by
resolution of its Board of Directors at any time on or after January 1, 1999, at
the rate of one share of Non-Voting Common Stock for each share of Preferred
Stock surrendered. At the time of such conversion, the Corporation will pay all
dividends accrued and unpaid on such Preferred Stock up to the date fixed for
conversion upon giving the notice hereinafter provided.
(b) Not less than thirty nor more than sixty days prior to the date fixed
for conversion of the Preferred Stock, a notice in writing shall be given by
mail to the holders of record of Preferred Stock at their respective addresses
as the same shall appear on the stock books of the Corporation. Such notice
shall state: (i) the conversion date; (ii) the amount of dividends on the
Preferred Stock that will be accrued and unpaid to the date fixed for
conversion; (iii) the place or places where certificates for shares are to be
surrendered for conversion to certificates for shares of Non-Voting Common
Stock; (iv) that the dividends on shares to be converted will cease to accrue on
such conversion dates; and (v) the number of shares of the Non-Voting Common
Stock issuable upon conversion of a share of Preferred Stock at the time.
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(c) The Preferred Stock may not be converted and the Corporation may not
purchase or otherwise acquire, other than by conversion at the election of the
holders, any shares of Preferred Stock unless full cumulative dividends on all
outstanding shares of Preferred Stock shall have been paid in full or
contemporaneously are declared and paid in full for all past dividend periods.
(d) All shares of Preferred Stock so converted shall have the status of
authorized but unissued preferred stock, but such shares so converted shall not
be reissued as shares of the series of Preferred Stock created hereby.
(e) No holder of shares of Preferred Stock shall have the right to require
the Corporation to redeem all or any portion of such shares.
3. CONVERSION OF PREFERRED STOCK INTO NON-VOTING COMMON STOCK.
(a) At any time on or after the date of issuance but before September 1,
1998, each holder of shares of Preferred Stock may, at his option, convert any
or all such shares, plus all dividends accrued and unpaid on such Preferred
Stock up to the conversion date, on the terms and conditions set forth in this
Section 3, into fully paid and non-assessable shares of the Corporation's
Non-Voting Common Stock. The number of shares of Non-Voting Common Stock into
which each share of Preferred Stock may be converted (the "Conversion Rate") (i)
on or after the date of issuance and before November 1, 1997, shall be 1.2
shares of Non-Voting Common Stock for each share of Series A Preferred Stock
tendered; and (ii) on or after November 1, 1997, and before September l, 1998
shall be 1.1 shares of Non-Voting Common Stock for each share of Preferred Stock
tendered. On and after September 1, 1998, the Conversion Rate shall be one share
of Non-Voting Common Stock for each share of Preferred Stock tendered.
(b) To exercise his conversion privilege, the holder of any shares of
Preferred Stock shall surrender to the Corporation during regular business hours
at the principal executive offices of the Corporation or the offices of the
transfer agent for the Preferred Stock or at such other place as may be
designated by the Corporation, the certificate or certificates for the shares to
be converted, duly endorsed for transfer to the Corporation (if required by it),
accompanied by written notice stating that the holder irrevocably elects to
convert such shares. Conversion shall be deemed to have been effected on the
date when such delivery is made, and such date is referred to herein as the
"Conversion Date." Within three (3) business days after the date on which such
delivery is made, the Corporation shall issue and send (with receipt to be
acknowledged) to the holder thereof or the holder's designee, at the address
designated by such holder, a certificate or certificates for the number of full
shares of Non-Voting Common Stock to which the holder is entitled as a result of
such conversion, and cash with respect to any fractional interest of a share of
Non-Voting Common Stock as provided in paragraph (c) of this Section 3. The
holder shall be deemed to have become a stockholder of record of the number of
shares of Non-Voting Common Stock into which the shares of Preferred Stock have
been convened on the applicable Conversion Date unless the transfer books of the
Corporation are closed on that date, in which event he shall
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be deemed to have become a stockholder of record of such shares on the next
succeeding date on which the transfer books are open, but the Conversion Rate
shall be that in effect on the Conversion Date. Upon conversion of only a
portion of the number of shares of Preferred Stock represented by a certificate
or certificates surrendered for conversion, the Corporation shall within three
(3) business days after the date on which such delivery is made, issue and send
(with receipt to be acknowledged) to the holder thereof or the holder's
designee, at the address designated by such holder, a new certificate covering
the number of shares of Preferred Stock representing the unconverted portion of
the certificate or certificates so surrendered.
(c) No fractional shares of Non-Voting Common Stock or scrip shall be
issued upon conversion of shares of Preferred Stock. If more than one share of
Preferred Stock shall be surrendered for conversion at any one time by the same
holder, the number of full shares of Non-Voting Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of Preferred Stock so surrendered. Instead of any fractional shares of
Non-Voting Common Stock which would otherwise be issuable upon conversion of any
shares of Preferred Stock, the Corporation shall make an adjustment in respect
of such fractional interest equal to the fair market value of such fractional
interest, to the nearest 1/100th of a share of Common Stock, in cash at the
Current Market Price (as defined below) on the business day preceding the
effective date of the conversion. The "Current Market Price" of publicly traded
shares of Common Stock or any other class of Common Stock or other security of
the Corporation or any other issuer for any day shall be deemed to be the
average of the daily "Closing Prices" for the 10 consecutive trading days
preceding the Conversion Date. The "Current Market Price" of the Common Stock or
any other class of capital stock or securities of the Corporation or any other
issuer which is not publicly traded shall mean the fair value thereof as
determined by an independent investment banking or appraisal firm experienced in
the valuation of such securities or properties selected in good faith by the
Board of Directors of the Corporation or a committee thereof or, if no such
investment banking or appraisal firm is, in the good faith judgment of the Board
of Directors of the Corporation or such committee, available to make such
determination, as determined in good faith judgment of the Board of Directors of
the Corporation or such committee. The "Closing Price" shall mean the last
reported sales price on the principal national securities exchange on which the
Common Stock is listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the National Association of
Securities Dealers Automated Quotations System, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or quoted on
the National Association of Securities Dealers Automated Quotations System, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm selected from time to time
by the Corporation for that purpose.
(d) The Corporation shall pay any and all issue and other taxes that may
be payable in respect of any issue or delivery of shares of Non-Voting Common
Stock on conversion of Preferred Stock pursuant hereto. The Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Non-Voting Common Stock
in a name other than that in which the Preferred Stock so converted
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were registered, and no such issue and delivery shall be made unless and until
the person requesting such issue has paid to the Corporation the amount of any
such tax, or has established, to the satisfaction of the Corporation, that such
tax has been paid.
(e) The Corporation shall at all times reserve for issuance and maintain
available, out of its authorized but unissued Non-Voting Common Stock, solely
for the purpose of effecting the conversion of the Preferred Stock, the full
number of shares of Non-Voting Common Stock deliverable upon the conversion of
all Preferred Stock from time to time outstanding. The Corporation shall from
time to time (subject to obtaining necessary director and stockholder action),
in accordance with the laws of the State of Texas, increase the authorized
number of shares of its Non-Voting Common Stock if at any time the authorized
number of shares of its Non-Voting Common Stock remaining unissued shall not be
sufficient to permit the conversion of all of the shares of Preferred Stock at
the time outstanding.
(f) If any shares of Non-Voting Common Stock to be reserved for the
purpose of conversion of shares of Preferred Stock require registration or
listing with, or approval of, any governmental authority, stock exchange or
other regulatory body under any federal or state law or regulation or otherwise,
including registration under the Securities Act of 1933, as amended, and
appropriate state securities laws, before such shares may be validly issued or
delivered upon conversion, the Corporation will in good faith and as
expeditiously as possible meet such registration, listing or approval, as the
case may be.
(g) All shares of Non-Voting Common Stock which may be issued upon
conversion of the shares of Preferred Stock will upon issuance by the
Corporation be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof.
(h) In case the Company shall at any time after the date of this Agreement
(i) declare a dividend on the Common Stock in shares of its capital stock, (ii)
subdivide the outstanding shares of Common Stock, (iii) combine the outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (iv)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then in each case
the Conversion Rate, and the number of shares of Common Stock receivable upon
conversion, in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination, or reclassification shall be
proportionately adjusted so that the holder of any shares of Preferred Stock
converted after such time shall be entitled to receive the aggregate number of
shares of Common Stock which, if such shares of Preferred Stock had been
converted immediately prior to such record date, he would have owned upon such
conversion and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(i) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, share exchange, dissolution, issue or
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sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of paragraph 3(h) and in the taking of all
such action as may be necessary, or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against impairment.
(j) Upon the occurrence of each adjustment or readjustment of the
Conversion Rate pursuant to paragraph 3(h), the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof, and prepare and furnish to each holder of Preferred Stock a certificate
signed by an officer of the Corporation setting forth (i) such adjustment or
readjustment, (ii) the Conversion Rate, at the time in effect, and (iii) the
number of shares of Non-Voting Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of such
holder's shares.
(k) In case any shares of Preferred Stock shall be converted pursuant to
Section 3(g) hereof, or purchased or otherwise acquired by the Corporation, the
shares so converted, purchased or acquired shall be restored to the status of
authorized but unissued shares of preferred stock, without designation as to
class or series, and may thereafter be reissued, but not as shares of the series
of Preferred Stock created hereby.
4. VOTING.
(a) Except as otherwise required by law or set forth herein, the shares of
Preferred Stock shall not be entitled to vote, either on any matters presented
at any annual or special meeting of stockholders of the Corporation, or by
written consent.
5. LIQUIDATION RIGHTS.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the holders of shares of Preferred Stock then
outstanding shall be entitled or receive out of assets of the Corporation
available for distribution to stockholders, after any distribution of assets
made to holders of Series A Preferred Stock, but before any distribution of
assets is made to holders of any other class of capital stock of the
Corporation, an amount equal to $3.00 per share, plus accumulated and unpaid
dividends thereon to the date fixed for distribution. If upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
amounts payable with respect to the Preferred Stock and any other shares of
stock of the Corporation ranking as to any such distribution on a parity with
the Preferred Stock are not paid in full, the holders of the Preferred Stock and
of such other shares shall share ratably in any such distribution of assets of
the Corporation in proportion to the full respective preferential amounts to
which they are entitled. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of Preferred
Stock shall not be entitled to any further participation in any distribution of
assets by the Corporation.
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(b) Neither the consolidation or merger of the Corporation with or into
any other corporation or corporations, nor the sale or lease of all or
substantially all of the assets of the Corporation shall be deemed to be a
liquidation, dissolution or a winding up of the Corporation within the meaning
of any of the provisions of this Section 5.
(c) In the event of a voluntary or involuntary liquidation, dissolution,
or winding up of the Corporation, the Corporation shall, within 10 days after
the date the Board of Directors approves such action, or within 20 days prior to
any stockholders' meeting called to approve such action, or within 20 days after
the commencement of any involuntary proceeding, whichever is earlier, give each
holder of shares of Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the material terms and
conditions of such proposed action, including a description of the stock, cash,
and property to be received by the holders of shares of Preferred Stock upon
consummation of the proposed action and the date of delivery thereof. If any
material change in the facts set forth in the initial notice shall occur, the
Corporation shall promptly give written notice to each holder of shares of
Preferred Stock of such material change. The Corporation shall not consummate
any voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of 30 days after the mailing of the initial
notice or 10 days after the mailing of any subsequent written notice, whichever
is later; provided, that any such 30-day or 10-day period may be shortened upon
the written consent of the holders of all of the outstanding shares of Preferred
Stock.
(d) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation which involves the distribution of assets other
than cash, the Corporation shall promptly engage competent independent
appraisers to determine the value of the assets to be distributed to the holders
of shares of Preferred Stock and the holders of shares of Non-Voting Common
Stock. The Corporation shall, upon receipt of such appraisers valuation, give
prompt written notice to each holder of shares of Preferred Stock of the
appraiser's valuation.
6. LIMITATIONS.
(a) So long as any shares of Series A and Series B Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote or the
written consent of the holders of at least 66-2/3% of the outstanding shares of
such Preferred Stock, voting separately as a class:
(i) Create, authorize or issue shares of any class or series of
stock, or any security convertible into such class or series ranking prior
to or on parity with the Preferred Stock either as to payment of dividends
or as distributions in the event of a liquidation, dissolution or winding
up of the Corporation; or
(ii) Amend, alter or repeal any provision of the Certificate of
Incorporation or Bylaws of the Corporation so as to affect adversely the
relative fights, preferences, qualifications, limitations or restrictions
of the
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Preferred Stock.
(b) The provisions of this paragraph 6 shall not in any way limit the
right and power of the Corporation to:
(i) Increase the total number of authorized shares of Common Stock;
or
(ii) Issue bonds, notes, mortgages, debentures, preferred stock
ranking junior to the terms of the Preferred Stock and other obligations,
and to incur indebtedness to banks and to other lenders.
IN WITNESS WHEREOF, CYNET, INC. has caused its corporate seal to be
hereunto affixed and this certificate to be signed by RAY DAVIS, its president,
this 1st day of March, 1997.
CYNET, INC.
By:/s/ RAY DAVIS
Ray Davis, President
8
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") is dated as of March 3,
1997 and is entered into by and between Ray Davis ("Executive") and CyNet, Inc.,
a Texas corporation ("CyNet").
RECITALS
CyNet considers it essential to the best interest of CyNet and its
shareholders that Executive be encouraged to remain with CyNet and continue to
devote full attention to CyNet's business notwithstanding the possibility,
threat or occurrence of a change in Control (as defined below) of CyNet. CyNet
believes that it is the best interest of CyNet and its shareholders to reinforce
and encourage the continued attention and dedication of Executive and to
diminish inevitable distractions arising from the possibility of a Change in
Control of CyNet. Accordingly, to assure CyNet that it will have Executive's
undivided attention and services notwithstanding the possibility, threat or
occurrence of a Change in Control of CyNet, and to induce Executive to remain in
the employ of CyNet, and for other good and valuable consideration, the Board of
Directors of CyNet has caused CyNet to enter into this Agreement.
TERMS AND CONDITIONS
Executive and CyNet hereby agree to the following terms and conditions:
1. TERM OF AGREEMENT. This Agreement shall be effective as of the date
first indicated above and shall expire on the third anniversary of such date;
provided however that on such third anniversary and on the anniversary of such
date in each year thereafter, such expiration date shall be extended for one
additional year, unless, at least 60 days prior to such expiration date, CyNet
shall have delivered to Executive or Executive shall have delivered to CyNet
written notice that such expiration date shall not be so extended.
2. EFFECTIVE DATE. The "Effective Date" shall mean the first date during
the term of this Agreement on which a Change of Control (as defined in Section
3) occurs; provided, however, that if a Change of Control occurs and if
Executive's employment with CyNet is terminated prior to the date on which the
Change of Control occurs, and if it is reasonably demonstrated by Executive that
such termination of employment (a) was at the request of a third party who has
taken steps reasonably calculated to effect a Change of Control or (b) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
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3. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of
Control" of CyNet shall mean the following:
(a) Approval by the stockholders of CyNet of the dissolution or
liquidation of CyNet;
(b) Approval by the stockholders of CyNet of an agreement to merge
or consolidate, or otherwise reorganize, with or into one or more entities
which are not subsidiaries, as a result of which less than 50% of the
outstanding voting securities of the surviving, purchasing or resulting
entity are, or are to be, owned by former stockholders of CyNet (excluding
from the term "former stockholders" a stockholder who is, or as a result
of the transaction in question becomes, an "affiliate", as that term is
used in the Securities and Exchange Act of 1934 and the Rules promulgated
thereunder, of any party to such merger, consolidation or reorganization);
(c) Approval by the stockholders of CyNet of the sale of
substantially all of CyNet's business and/or assets to a person or entity
which is not a subsidiary; or
(d) A Change in Control as defined in CyNet's By-Laws as of the date
first written above or as subsequently defined therein.
4. EMPLOYMENT PERIOD. CyNet hereby agrees to continue Executive in its
employ, and Executive hereby agrees to remain in the employ of CyNet subject to
the terms and conditions of this Agreement, for the period commencing on the
Effective Date and ending on the date which is the latest of the following:
(a) The date which is 15 days after the first anniversary of a
Change in Control;
(b) The date which is 15 days after the first anniversary of the
effective date of any merger, the approval of which constituted a Change
in Control; and
(c) December 31, 2006;
Such period shall hereinafter be referred to as the "Employment Period."
5. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES. During the Employment
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Period, (i) Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be
at least commensurate in all material respects with the most significant
of those held, exercised and assigned at any time during the 120-day
waiting period immediately preceding the Effective Date; and (ii)
Executive's services shall be performed at the location where Executive
was employed immediately preceding the Effective Date or any office or
location which is less than 35 miles further away from Executive's place
of residence.
(b) COMPENSATION AND BENEFITS. During the Employment Period, CyNet
shall pay Executive an annual base salary ("Annual Base Salary"), payable
in semi-monthly installments, which shall initially be at least equal to
twelve times the highest monthly base salary paid or payable, including
any base salary which has been earned but deferred, to Executive by CyNet
during the twelve-month period immediately preceding the month in which
the Effective Date occurs. CyNet may, in its discretion, periodically
increase Executives base salary. The term "Annual Base Salary" as used in
this Agreement shall refer to Annual Base Salary as so increased. CyNet
may not, however, reduce Executive's base salary during the Employment
Period. Executive shall be provided with incentives (annual and
long-term), retirement benefits, welfare benefits and fringe benefits no
less favorable in the aggregate than those in effect for Executive at any
time during the 120-day waiting period immediately preceding the Effective
Date, except for any reductions in benefits which apply generally to all
executives of CyNet. Executive shall receive a $50,000 signing bonus upon
execution of this agreement.
6. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. Executive's employment shall terminate
automatically upon Executive's death during the Employment Period. If
CyNet determines in good faith that the Disability of Executive has
occurred during the employment period (pursuant to the definition of
Disability set forth below), it may give to Executive written notice in
accordance with Section 17 of this Agreement of its intention to terminate
Executive's employment with CyNet. Executive's employment with CyNet shall
terminate effective on the 30th day after receipt of such notice by
Executive (the "Disability Effective Date"), provided that, within the 30
days after such receipt, Executive shall not have returned to full-time
performance of Executive's duties.
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For purposes of this Agreement, "Disability" shall mean the absence of
Executive from Executive's duties with CyNet on a full-time basis for 180
consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a
physician selected by CyNet or its insurers and acceptable to Executive or
Executive's legal representative.
(b) CAUSE. CyNet may terminate Executive's employment during the
Employment Period for cause. For purposes of this Agreement, "Cause" shall
mean:
(i) The willful and continued failure of Executive to perform
substantially Executive's duties with CyNet or one of its affiliates
(other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to Executive by the Board or the Chief
Executive Officer of CyNet which specifically identifies the manner
in which the Board or Chief Executive Officer believes that
Executive has not substantially performed Executive's duties, or
(ii) The willful engaging by Executive in illegal conduct or
gross misconduct which materially and demonstrably injures CyNet.
(c) GOOD REASON. Executive's employment may be terminated by
Executive for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean:
(i) The assignment to Executive of any duties inconsistent in
any respect with Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 5(a) of this Agreement,
or any other action by CyNet which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken
in bad faith and which is remedied by CyNet after receipt of notice
thereof given by Executive;
(ii) Any failure by CyNet to comply with any of the provisions
of Section 5(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by CyNet promptly after receipt of notice from
Executive;
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(iii) CyNet's requiring Executive to be based at any office or
location other than as provided in Section 5(a) hereof;
(iv) Any purported termination by CyNet of Executive's
employment otherwise than as expressly permitted by this Agreement;
or
(v) Any failure by CyNet to comply with and satisfy Section
12(c) of this Agreement.
For purposes of this Section 6(c), any good faith determination of "Good
Reason" made by Executive shall be conclusive. Anything in this Agreement
to the contrary notwithstanding, a termination by Executive for any reason
pursuant to a Notice of Termination delivered during the 15-day period
immediately following the latest of (i) the first anniversary of a Change
in Control, (ii) the first anniversary of the effective date of any merger
the approval of which constituted a Change in Control, or (iii) March 31,
1997 shall be deemed to be a termination for Good Reason for all purposes
of this Agreement, provided that Executive has given notice to CyNet
pursuant to Section 17 hereof at least 30 days prior to such termination.
(d) NOTICE OF TERMINATION. Any termination by CyNet for Cause, or by
Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 17 of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in
this Agreement relied upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis
for termination of Executive's employment under the provision so indicated
and (iii) subject to Section 6(c) (iii) and the last sentence of Section
6(c), if the Date of Termination (as defined below) is other than the date
of receipt of such notice, specifies the termination date (which date
shall be not more than thirty days after the giving of such notice). The
failure by Executive or CyNet to set forth in the Notice of Termination
any fact or circumstance which contributes to a showing of Good Reason or
Cause shall not waive any right of Executive or CyNet, respectively,
hereunder or preclude Executive or CyNet, respectively, from asserting
such fact or circumstance in enforcing Executive's or CyNet's rights
hereunder.
(e) DATE OF TERMINATION. "Date of Termination" means
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(i) if Executive's employment is terminated by CyNet for Cause, or by
Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be, (ii)
if Executive's employment is terminated by CyNet other than for Cause or
Disability, the Date of Termination shall be the date on which CyNet
notifies Executive of such termination and (iii) if Executive's employment
is terminated by reason of death or Disability, the Date of Termination
shall be the date of death of Executive or the Disability Effective Date,
as the case may be.
7. OBLIGATIONS OF CYNET UPON TERMINATION.
(a) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If CyNet shall
terminate Executive's employment other than for Cause or Disability during
the Employment Period or Executive shall terminate employment for Good
Reason pursuant to a Notice of Termination delivered during the Employment
Period, CyNet agrees to make the payments and provide the benefits
described below.
(i) CyNet shall pay to Executive in a lump sum in cash within
10 days after the Date of Termination an amount equal to the product
of (1) and (2), where (1) is three and (2) is the sum of Executive's
Annual Base Salary and the average of the last three annual
incentive bonuses actually paid to Executive by CyNet for any
calendar year before the Date of Termination (the "Average Annual
Bonus"); and
(ii) Upon Executive's Date of Termination, Executive shall be
100% vested in the amounts credited to any Qualified Plan in which
he is a participant.
(iii) Upon Executive's Date of Termination, Executive's awards
under any stock-based plan under which the Executive has been
granted stock or options to purchase such shall be accelerated as
follows:
(A) Each option and each related stock appreciation
right shall become immediately exercisable to the extent
theretofore not exercisable;
(B) Restricted stock shall immediately vest free of
restrictions; and
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(C) The number of shares covered by each performance
share award shall be issued to Executive;
provided, however, that awards shall not, in any event, be so
accelerated to a date less than one year after the date of grant or
award date if prohibited by the terms of the applicable Plan.
Acceleration of awards shall comply with applicable regulatory
requirements, including without limitation, Section 422 of the Code
and Rule 16b-3 promulgated by the Securities and Exchange Commission
pursuant to the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
(iv) For one year after Executive's Date of Termination, or
such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, CyNet shall continue
to provide welfare benefits and fringe benefits and other
perquisites to Executive and/or Executive's family at least equal to
those which would have been provided to them if Executive's
employment had not been terminated in accordance with the most
favorable plans, practices, programs or policies of CyNet and its
affiliated companies applicable generally to other peer executives
and their families immediately preceding the Date of Termination;
provided, however that if Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare
benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall be secondary to those
provoked under such other plan during such applicable period of
eligibility. For purposes of determining eligibility (but not the
time of commencement of benefits) of Executive for retiree benefits
pursuant to such plans, practices, programs and policies, Executive
shall be considered to have remained employed until one year after
the Date of Termination and to have retired on the last day of such
period.
(v) The sum of (A) the Executive's Annual Base Salary through
the Date of Termination to the extent due for services rendered but
not theretofore paid, (B) with respect to any Performance Period
under the CyNet, Inc. Long-Term Incentive Plan which has not been
completed as of the Date of Termination, an amount equal to (1)
multiplied by (2), where (1) is 150% of
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the Value (as defined in such plan) of the Participant's accrued
benefits on the Participant's Date of Termination, and (2) is a
fraction, the numerator of which is the number of full months
between the beginning of such Performance Period and the
Participant's Date of Termination and the denominator of which is
the total number of months in the Performance Period, and (C) any
compensation previously deferred by the Executive (together with any
accrued earnings or interest thereon) and any accrued vacation pay,
in each case to the extent not theretofore paid (the amount referred
to in clauses (A), (B) and (C) above being referred to as "Accrued
Obligations").
(vi) To the extent not theretofore paid or provided, CyNet
shall timely pay or provide Executive any other amounts or benefits
required to be paid or provided or which Executive is eligible to
receive under any plan, program, policy, practice, contract or
agreement of CyNet and its affiliated companies (such other amounts
and benefits being hereinafter referred to as "Other Benefits") in
accordance with the terms of such plan, program, policy, practice,
contract or agreement.
(b) DEATH. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal
representatives under this Agreement, other than for payment of Accrued
Obligations and the timely payment or provision of Other Benefits. Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 10 days of the Date of
Termination.
(c) DISABILITY. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive,
other than for payment of Accrued Obligations and the timely payment or
provision of Other Benefits. Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination.
(d) CAUSE; OTHER THAN FOR GOOD REASON. If Executive's employment
shall be terminated for Cause during the Employment Period or, if
Executive voluntarily terminates employment during the Employment Period,
excluding a termination for Good Reason, this Agreement shall terminate
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without further obligations to Executive (other than the obligation to pay
to Executive his Annual Base Salary earned through the Date of Termination
and any benefits payable to Executive under a plan policy, practice, etc.,
referred to in Section 8 below).
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in any plan, program,
policy or practice provided by CyNet or any of its affiliated companies and for
which Executive may qualify, nor, subject to Section 21, shall anything herein
limit or otherwise affect such rights as Executive may have under any contract
or agreement with CyNet or any of its affiliated companies. Amounts which are
vested benefits or which Executive is otherwise entitled to receive under any
plan, policy, practice or program of or any contract or agreement with CyNet or
any of its affiliated companies at or subsequent to the Date of Termination
shall be payable in accordance with such plan, policy, practice or program or
contract or agreement except as explicitly modified by this Agreement.
9. FULL SETTLEMENT. CyNet's obligation to make the payments provided for
in this Agreement and otherwise to perform its obligations hereunder shall not
be affected by any set-off, counterclaim, recoupment, defense or other claim,
right or action which CyNet may have against Executive or others. In no event
shall Executive be obligated to seek other employment or take any other action
by way of litigation of the amount payable to Executive under any of the
provisions of this Agreement and, except as provided in Section 7(a)(v), such
amounts shall not be reduced whether or not Executive obtains other employment.
CyNet agrees to pay, to the full extent permitted by law, all legal fees and
expenses which Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by CyNet, Executive or others of the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872 (f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code"). Notwithstanding the foregoing, CyNet shall not
be obligated to pay any legal fees or expenses of Executive in any contest by
Executive about the amount of any payment under this Agreement if it is
determined that CyNet did not breach this Agreement and Executive's claim was
not made in good faith.
10. CERTAIN ADDITIONAL PAYMENTS BY CYNET.
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(a) In the event that any payment or distribution by CyNet to or for
the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Section 10(a)) ("Payment") is determined to be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are
incurred by Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then CyNet shall pay to
Executive an additional payment (a "Gross-Up Payment") in an amount such
that after payment by Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without
limitation, any income taxes (any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 10(c), all determinations
required to be made under this Section 10, including whether and when a
Gross-Up payment is required and the amount of such Gross-Up payment and
the assumptions to be utilized in arriving at such determination, shall be
made by I-NET'S Certified Public Accountant or such other certified public
accounting firm as may be designated by Executive and which is
satisfactory to CyNet (the "Accounting Firm"), which shall provide
detailed supporting calculations both to CyNet and Executive within 15
business days of the receipt of request from Executive or CyNet. All fees
and expenses of the Accounting Firm shall be borne solely by CyNet. Any
Gross-Up Payment, as determined pursuant to this Section 10(b), shall be
paid by CyNet to Executive within five days of the receipt of the
Accounting Firm's determination. No such determination that a Gross-Up
Payment is required shall be made unless the Accounting Firm furnishes
CyNet with a written opinion that there is no reasonable basis for not
paying the Excise Tax. As a result of the uncertainty in the application
of Section 4999 of the code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by CyNet should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the
event that CyNet exhausts its remedies pursuant to Section 10(c) and
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by CyNet to or
for the benefit of Executive.
(c) Executive shall notify CyNet in writing of any claim by the
Internal Revenue Service that, if successful, would
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require the payment by CyNet of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business days
after Executive is informed in writing of such claim and shall apprise
CyNet of the nature of such claim and the date on which such claim is
requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such
notice to CyNet (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If CyNet notifies
Executive in writing prior to the expiration of such period that it
desires to contest such claim, Executive shall:
(i) Give CyNet any information reasonably requested by CyNet
relating to such claim,
(ii) Take such action in connection with contesting such claim
as CyNet shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by CyNet,
(iii) Cooperate with CyNet in good faith in order to contest
such claim effectively, and
(iv) Permit CyNet to participate in any proceedings relating
to such claim;
provided, however, that CyNet shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 10(c), CyNet shall
control all proceedings taken in connection with such contest and , at its
sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect
of such claim and may, at its sole option, either direct Executive to pay
the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such contest to a
determination before any administration tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as CyNet shall
determine; provided, however, that if CyNet directs Executive to pay such
claim and sue for a refund, CyNet shall advance the amount of such payment
to Executive, on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax
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basis, from any Excise Tax or income tax (including interest or penalties
with respect thereto) imposed with respect to such advance or with respect
to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Executive with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, CyNet's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder
and Executive shall be entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by Executive of an amount advanced by
CyNet pursuant to Section 10(c), Executive becomes entitled to receive any
refund with respect to such claim, Executive shall (subject to CyNet's
complying with the requirements of Section 10(c)) promptly pay to CyNet
the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by CyNet pursuant to Section 10(c), a
determination is made that Executive shall not be entitled to any refund
with respect to such claim and CyNet does not notify Executive in writing
of its intent to contest such denial of refund prior to the expiration of
30 days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
11. CONFIDENTIAL INFORMATION. Executive shall hold in fiduciary capacity
for the benefit of CyNet all secret or confidential information, knowledge or
data relating to CyNet or any of its affiliated companies, and their respective
businesses, which shall have been obtained by Executive during Executive's
employment by CyNet or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts by Executive or representatives of
Executive in violation of this Agreement). After termination of Executive's
employment with CyNet, Executive shall not, without the prior written consent of
CyNet or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than CyNet and
those designated by it. In no event shall an asserted violation of the
provisions of this Section 11 constitute a basis for deferring or withholding
any amounts otherwise payable to Executive under this Agreement.
12. SUCCESSORS.
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(a) This Agreement is personal to Executive and without the prior
written consent of CyNet shall not be assignable by Executive otherwise
than by will or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
CyNet and its successors and assigns.
(c) CyNet will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of CyNet to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that
CyNet would be required to perform it if no such succession had taken
place. As used in this Agreement, "CyNet" shall mean CyNet as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or
otherwise.
13. ARBITRATION.
(a) The Executive Officers Compensation and Development Committee of
the Board of Directors of CyNet (the "Administrator") shall administer
this Agreement. The Administrator (either directly or through its
designees) will have power and authority to interpret, construe, and
administer this Agreement; provided that, the Administrator's authority to
interpret this Agreement shall not cause the Administrator's decisions in
this regard to be entitled to a deferential standard of review in the
event that Executive seeks review of the Administrator's decision as
described below.
(b) Neither the Administrator nor its designee, shall be liable to
any person for any action taken or omitted in connection with the
interpretation and administration of this Agreement.
(c) Because it is agreed that time will be of the essence in
determining whether any payments are due to Executive under this
Agreement, Executive may, if he desires, submit any claim for payment
under this Agreement or dispute regarding the interpretation of this
Agreement to arbitration. This right to select arbitration shall be solely
that of Executive, and Executive may decide whether or not to arbitrate in
his discretion. The "right to select arbitration" is not mandatory on
Executive, and Executive may choose in lieu thereof to bring an action in
an appropriate civil court. Once an arbitration is
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commenced, however, it may not be discontinued without the mutual consent
of both parties to the arbitration procedure set forth in this section.
(d) Any claim for arbitration may be submitted as follows: If
Executive disagrees with the Administrator regarding the interpretation of
this Agreement and the claim is finally denied by the Administrator in
whole or in part, such claim may be filed in writing with an arbitrator of
Executive's choice who is selected by the method described in the next
three sentences. The first step of the selection shall consist of
Executive's submitting a list of five potential arbitrators to the
Administrator. Each of the five arbitrators must be either (1) a member of
the National Academy of Arbitrators located in the State of Texas or (2) a
retired Texas District Court or Appellate Court judge. Within one week
after receipt of the list, the Administrator shall select one of the five
arbitrators as the arbitrator for the dispute in question. If the
Administrator fails to select an arbitrator in a timely manner, Executive
shall then designate one of the five arbitrators as the arbitrator for the
dispute in question.
(e) The arbitration hearing shall be held within seven days (or as
soon thereafter as possible) after the picking of the arbitrator. No
continuance of said hearing shall be allowed without the mutual consent of
Executive and Administrator. Absence from or nonparticipation at the
hearing by either party shall not prevent the issuance of an award.
Hearing procedures which will expedite the hearing may be ordered at the
arbitrator's discretion, and the arbitrator may close the hearing in his
or her sole discretion when he or she decides he or she has heard
sufficient evidence to satisfy issuance of an award.
(f) The arbitrator's award shall be rendered as expeditiously as
possible and in no event later than one week after the close of the
hearing. In the event the arbitrator finds that CyNet has breached this
Agreement, he or she shall order CyNet to immediately take the necessary
steps to remedy the breach. In addition, he or she shall order CyNet to
pay Executive an additional amount equal to 10% of the amount actually in
dispute. This additional amount shall constitute damages and not a
penalty. The award of the arbitrator shall be final and binding upon the
parties. The award may be enforced in any appropriate court as soon as
possible after its rendition. If an action is brought to confirm the
award, both CyNet and Executive\e agree that no appeal shall be taken by
either party from any decision rendered in such action.
(g) The Administrator will be considered the
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prevailing party in a dispute if the arbitrator determines (1) that CyNet
has not breached this Agreement and (2) the claim by Executive was not
made in good faith. Otherwise, Executive will be considered the prevailing
party. In the event that CyNet is the prevailing party, the fee of the
arbitrator and all necessary expenses of the hearing (excluding any
attorney's fees incurred by CyNet) including stenographic reporter, if
employed, shall be paid by the Executive. In the event that Executive is
the prevailing party, the fee of the arbitrator and all necessary expenses
of the hearing (including all attorneys' fees incurred by the Executive in
pursuing his claim), including the fees of a stenographic reporter if
employed, shall be paid by CyNet.
14. GOVERNING LAW. The laws of Texas shall govern the validity and
interpretation of this Agreement, with regard to conflicts of laws.
15. CAPTIONS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
16. AMENDMENT. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or their respective
successors and legal representatives.
17. NOTICES. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to Executive:
Ray Davis
12777 Jones Road, Suite 400
Houston, Texas 77070
If to CyNet:
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
18. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
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19. WITHHOLDING TAXES. CyNet may withhold from any amounts payable under
this Agreement such Federal, state, local or foreign taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
20. NO WAIVER. Executive's or CyNet's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right Executive or CyNet may have hereunder, including, without limitation, the
right of Executive to terminate employment for Good Reason pursuant to Section
6(c) of this Agreement, shall not be deemed to be a waiver of such provision or
right of this Agreement.
21. AT-WILL EMPLOYMENT. Executive and CyNet acknowledge that, except as
may otherwise be provided under any other written agreement between Executive by
CyNet prior to the Effective Date is "at will" and, prior to the Effective Date,
Executive's employment may be terminated by either Executive or CyNet at any
time, in which case Executive shall have no further rights under this Agreement.
From and after the Effective Date this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof.
22. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
23. NO PROHIBITED PAYMENTS. Notwithstanding anything contained in this
Agreement to the contrary, CyNet shall not make any payment to Executive which,
according to the opinion of CyNet's outside counsel, would violate Section
2523(k) of the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer
Recovery Act of 1990 (codified at 12 U.S.C. 1828 (k)), or any rules or
regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first written above in
Houston, Texas.
EXECUTED: March 5, 1997
CyNet, INC.
By: /s/ RAY DAVIS By: /s/ RAY DAVIS
Ray Davis, President Ray Davis, Executive
By: /s/ JEFF NEWBERRY By: /s/ VICKROY STONE
Jeff Newberry, Executive VP Witness
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EXHIBIT 10.2
ASSIGNMENT OF INTELLECTUAL PROPERTY
-----------------------------------
1. For good and valuable consideration received from CYNET, INC.
("Assignee"), a Texas corporation, the receipt and sufficiency of which is
hereby acknowledged, RAY DAVIS ("Assignor"), an individual of Harris County,
Texas, does hereby transfer and assign to Assignee, its successors and assigns,
all of his rights, title and interest, in and to all of the intellectual
property in which he owns an interest. "Intellectual Property" means all (i)
patents, patent applications, patent disclosures, and all related continuation,
continuation-in-part, divisional, reissue, reexamination, utility, model,
certificate of invention and design patents, patent applications, registrations,
and application for registrations, (ii) trademarks, service marks, trade dress,
logos, trade names, and corporate names and registrations and applications for
registration thereof, (iii) copyrights and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, knowhow, manufacturing and
production processes and techniques, research and development information,
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information, (vii) other proprietary rights relating to any of the foregoing,
and (viii) copies of tangible embodiments thereof.
2. Assignor represents and warrants that he owns the intellectual property
transferred hereby free and clear of any and all liens, pledges, encumbrances,
and claims of any kind or nature whatsoever other than as set out in this
agreement and that Assignor has the full right to transfer such intellectual
property and such contracts.
3. The terms and provisions of this Assignment shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators and assigns. This Assignment shall be construed in
accordance with the laws of the State of Texas.
4. Assignee agrees to pay Assignor $250,000 upon execution of this
assignment agreement.
5. The effective date of this assignment is March 3, 1997.
ASSIGNEE:
CYNET, INC.
By: /s/ RAY DAVIS
Ray Davis, its President
ASSIGNOR:
/s/ RAY DAVIS
Ray Davis
/s/ VICKROY STONE
Witness
EXHIBIT 10.3
CONSULTING AGREEMENT
This agreement is made and entered into by and between VINCENT W. BEALE,
SR., 205 Grogan Point Road, The Woodlands, Texas 77380 (hereinafter referred to
as "Consultant") and CYNET, INC., 12777 Jones Road, Suite 400, Houston, Texas
77070 (hereinafter referred to as "Company"), this 17th day of June, 1997.
Witnesseth:
Whereas, Consultant has skills and experience in the area of finance,
business development and Investment Banking, and
Whereas, Company wishes to engage Consultant to assist Company in
fashioning its Investment Banking strategies especially with respect to an
Initial Public Offering and later Public Offerings of its stock and other
securities, mergers and acquisitions and Consultant is willing to accept such
employment:
Now, therefore, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
hereby agree as follows:
I. DUTIES
1.01 Company hereby engages Consultant, on a non-exclusive basis, to
advise Company and otherwise assist it in formulating its investment, merger and
acquisition strategies and in the formation of its Investment Banking
relationships.
II. COMPENSATION AND EXPENSES
2.01 Company agrees to compensate Consultant at an hourly rate fee of Two
Hundred Fifty and 00/100 Dollars ($250.00) per hour during the term of this
Agreement.
2.02 Company also agrees to pay Consultant for his reasonable expenses
incurred in connection with the performance of his duties under this Agreement.
2.03 Contemporaneous with the execution of this document, Company has
given to Consultant, and Consultant acknowledges receipt of, a retainer fee in
the amount of Fifty Thousand and 00/100 Dollars ($50,000.00) to cover
Consultant's reasonably anticipated initial expenses and fees in connection with
the performance of his duties set forth in this Agreement.
III. TERM
3.01 The term of this Agreement shall commence on June 16, 1997, and
continue for one (1) year from said date renewable annually at the option of
Company, and may be canceled by either party with a 30-day written notice.
IV. CONFIDENTIALITY OF INFORMATION
4.01 Whereas by virtue of this Agreement both Consultant and Company will
have
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access to certain confidential information of the other, both Consultant and
Company agree to hold all such confidential or proprietary information or trade
secrets ("Information"), in trust and confidence and to use such information
only for the express purpose set forth in this Agreement and not to disclose
such information to any other person.
4.02 At the conclusion of this Agreement, all information, including
written notes and memoranda, taken by either party shall be returned to the
other party. Consultant specifically represents that it will use its best
efforts to safeguard and protect all Company confidential information released
to it by Company and return same to Company upon the termination of this
Agreement.
4.03 It is understood that this section shall not apply to any information
known by either party or generally known within the industry prior to the date
of this agreement or which becomes common knowledge within the industry
thereafter.
V. GENERAL AND ADMINISTRATIVE PROVISIONS
5.01 Parties Bound. This Agreement shall be binding upon and inure to the
benefit of the Parties hereto and their respective heirs, executors,
administrators, legal representative, successors and assigns.
5.02 Assignment. Consultant shall have no right to transfer or assign his
interest in this Agreement without the prior written consent of the Company.
5.03 Corporate Authority. If any party hereto is a legal entity
(partnership, corporation, and/or trust), such party represents unto the other
that this Agreement, the transaction contemplated herein, and the execution and
delivery hereof, have been duly authorized by all necessary partnership,
corporate or trust proceedings and actions, including without limitation, the
action on the part of the directors, if the party is a corporation.
5.04 Time Limits. Time is of the essence in this Agreement and accordingly
all time limits shall be strictly construed and rigidly enforced.
5.05 No Waiver. The failure or delay of enforcement of the rights detailed
herein by either party shall not constitute a waiver of said rights or be
considered as a basis for estoppel.
5.06 Should any suit be commenced to enforce the Company's rights herein,
in the event the Company is successful, Company agrees to pay Company its
expenses incurred in connection with such action, including attorney's fees.
5.07 Paragraph Headings. The paragraph headings used herein are
descriptive only and shall have no legal force or effect whatever.
5.08 Use of Pronouns. The use of the neuter singular pronoun to refer to
the Parties described herein shall be deemed a proper reference even though the
Parties may be an
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individual, a partnership, a corporation, or group of two or more individuals,
partnerships or corporations. The necessary grammatical changes required to make
the provisions of this Agreement apply in the plural sense where there is more
than one party to this Agreement, and to either corporations, partnerships or
individuals, males or females, shall in all instances, be assumed as though in
each case fully expressed.
5.09 Texas Law. This Agreement shall be subject to and governed by the
laws of the State of Texas.
5.10 Severability. If any provision of this Agreement shall, for any
reason, be held violative of any applicable law, and so much of said Agreement
is held to be unenforceable, then the invalidity of such a specific provision
herein shall not be held to invalidate any other provisions herein, which other
provisions shall remain in full force and effect unless removal of said invalid
provisions destroys the legitimate purposes of this Agreement, in which event
this Agreement shall be canceled.
5.11 Entire Agreement. This Agreement shall represent the entire agreement
by and between the Parties hereto except as otherwise provided herein, and it
may not be changed except by written amendment duly executed by all parties
hereto.
Signed and accepted and agreed to this 17th day of June, 1997, by the
undersigned parties who hereby acknowledge that they have read and understand
this Agreement and hereby execute this legal document voluntarily and of their
own free will.
CYNET, INC. VINCENT W. BEALE
"COMPANY" "CONSULTANTS"
BY:/s/RAY DAVIS BY:/s/VINCENT W. BEALE
RAY DAVIS VINCENT W. BEALE
PRESIDENT & C.E.O.
EXHIBIT 10.4
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
1. PARTIES. This settlement agreement and mutual release ("Mutual Release") is
effective as of the date set forth below, by and between CyNet, Inc. ("CyNet"),
Ray Davis ("Davis"), Keith Shaffner ("Shaffner"), and CyFax, Inc. ("CyFax")
collectively referred to as the parties ("Parties").
2. FACTS.
2.1 In 1996 and 1997, Shaffner rendered various services to the Company
including assistance with the formation of the business, marketing, and
financial consulting. On January 1, 1996, CyNet and Keith Shaffner entered into
a financial advisory agreement. On September 15, 1996, CyNet entered into an
exclusive agent management agreement with CyFax and its president, Keith
Shaffner. These agreements and any other verbal or written agreements between
the Parties with respect to contractual or other arrangements with respect to
services to be rendered to CyNet by Shaffner or CyFax are hereinafter referred
to as "Agreements".
2.2 Pursuant to an August 31, 1996 letter ("August Correspondence"), CyNet
and Shaffner entered into an agreement whereby, among other arrangements, CyNet
agreed to grant Shaffner the rights to shares of CyNet stock to be issued in
grants, warrants or any way deemed mutually beneficial to CyNet and Shaffner. An
October 30, 1997 letter ("October Correspondence") from CyNet modified the
previous agreement by agreeing to pay to Shaffner different consideration.
Between the August Correspondence and the October Correspondence and thereafter,
various discussions and arrangements with respect to certain proposed stock
rights were discussed by the Parties and the August Correspondence, October
Correspondence, and other verbal and written discussions among the Parties are
hereinafter referred to as "CyNet Correspondence".
2.3 Pursuant to the CyNet Correspondence, CyNet agreed to issue Shaffner
and CyFax certain compensation through the issuance of certain CyNet securities
(the written and subsequent verbal discussions with respect to any and all
obligations or rights to issue CyNet securities and cash to Shaffner and/or
CyFax are hereinafter referred to as "Stock Rights").
2.4 The Parties have disagreed as to their respective obligations, rights
and benefits in connection with the CyNet Correspondence, Agreements and the
Stock Rights, but have agreed to settle any and all differences that may have
arisen in the relationship. CyNet and Davis understand that Shaffner and CyFax
will release CyNet and Davis from any liability with respect to the CyNet
Correspondence, Stock Rights and the Agreements on the terms and conditions set
forth herein. Shaffner and CyFax understand that CyNet and Davis will release
Shaffner and CyFax from any and all future, current and past obligations to
CyNet in rendering any services pursuant to the Agreements and CyNet
Correspondence.
<PAGE>
3. MUTUAL RELEASE.
3.1 In consideration of the agreements and covenants set forth hereinabove
and hereinbelow, the sufficiency of which Shaffner and CyFax hereby acknowledge
and confess, Shaffner and CyFax, for themselves, their agents, servants,
directors, officers, shareholders, representatives, successors, employees and
assigns, TO THE EXTENT LEGALLY ALLOWED, hereby covenant and agree as follows:
3.1.1 That Shaffner and CyFax hereby release, acquit and
forever discharge CyNet and Davis, their agents, servants,
representatives, successors, employees and assigns from any
and all rights, obligations, claims, demands and causes of
action, whether in contract or in tort, arising from or
relating to the CyNet Correspondence, Agreements and/or Stock
Rights, including all obligations arising therefrom, and
omissions and/or conduct of CyNet and Davis and/or their
agents, servants, representatives, successors, employees and
assigns, relating to the CyNet Correspondence, Agreements and
Stock Rights.
3.2 In consideration of the agreements and covenants set forth hereinabove
and hereinbelow, the sufficiency of which is hereby acknowledged and confessed,
CyNet and Davis, for themselves and their agents, servants, representatives,
successors, employees and assigns TO THE EXTENT LEGALLY ALLOWED, hereby covenant
and agree as follows:
3.2.1 That they hereby release, acquit and forever discharge
Shaffner and CyFax, their agents, servants, representatives,
successors, employees, directors, officers and assigns, from
any and all rights, obligations, claims, demands and causes of
action, whether in contract or in tort, arising from or
relating to the CyNet Correspondence and/or Agreements,
including obligations arising therefrom, and omissions and/or
conduct of CyNet and Davis relating to the CyNet
Correspondence and/or Agreements.
4. CONSIDERATION FOR SHAFFNER'S AND CYFAX'S RELEASE.As consideration for the
release by Shaffner and CyFax set forth in section 3.1 hereof, CyNet and Davis
agree that CyNet will issue (i) warrants to purchase an aggregate of 2,200,000
shares of Class B non-voting common stock ("Class B Common Stock") at $1 per
share to Shaffner, as evidenced in the forms attached hereto as Exhibit "A";
(ii) 500,000 shares of class A common stock ("Class A Common Stock") to Keith
Shaffner; (iii) 200,000 shares of Class A Common Stock to CyFax, Inc. for
termination of the exclusive agent management agreement; and (iv) payment in the
amount of $51,000 to Shaffner. The issuance of the warrants, the issuances of
the Class A Common Stock and the payment in the amount of $51,000 are
hereinafter referred to as "CyNet Consideration." In the event that the Company
converts Class B Common Stock to Class A Common Stock, the Company will adjust
the warrants to purchase Class B Common Stock accordingly. Shaffner and CyFax
acknowledge that they will receive substantial benefits from this.
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5. CONSIDERATION FOR CYNET'S AND DAVIS' RELEASES As consideration for the
releases by CyNet and Davis set forth in Section 3.2 hereof, Shaffner and CyFax
agree that they have no further obligation under the Agreements and/or CyNet
Correspondence. CyNet and Davis acknowledge that CyNet and Davis will receive
substantial benefits from this.
6. TERMINATION OF ALL PREVIOUS AGREEMENTS. All previous agreements among
Shaffner and CyFax, CyNet and Davis pertaining to the CyNet Correspondence,
Agreements and Stock Rights and any and all related agreements and obligations
are hereby terminated without further rights, obligations or liabilities of any
Party thereunder.
7. NO OTHER CAUSE OF ACTION. Neither Shaffner, CyFax, CyNet nor Davis are aware
of any claims not being released herein against Shaffner, CyFax, CyNet or Davis
arising from the CyNet Correspondence, Agreements or Stock Rights.
8. SECURITIES LAWS RESTRICTIONS. Shaffner and CyFax recognize that the issuance
of the Class A Common Stock and Class B Common Stock underlying the warrants
have not been registered under the Securities Act of 1933, as amended ("Act"),
nor under the securities laws of any state and, therefore, cannot be resold
unless the Class A and Class B Common Stock are registered under the Act or
unless an exemption from registration is available; no public agency has passed
upon the accuracy or adequacy of the sales of the shares; and Shaffner may not
sell the Class A and Class B Common Stock without registering them under the Act
and any applicable state securities laws unless exemptions from such
registration requirements are available with respect to any such sale.
"The securities represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of 1933,
as amended ("Act") or the securities laws of any state. Such securities
may not be sold, pledged hypothecated or otherwise transferred without the
consent of the Company, except upon registration or upon delivery to the
Company of an opinion of counsel satisfactory to the Company that such
registration is not required, or evidence is satisfactory to the Company,
that any such transfer will not violate the Act or the securities laws of
any state.
9. FURTHER CONTRACTUAL RESTRICTIONS. Shaffner and CyFax understand that the
following contractual restriction will also be placed on the Class A Common
Stock certificate issued to Shaffner and CyFax and Class B Common Stock to be
issued upon exercise of the warrants issued to Shaffner:
"The securities represented by this certificate may not be sold,
transferred, pledged, or otherwise hypothecated prior to February 1, 1999,
unless consented to in writing by CyNet, Inc."
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<PAGE>
In the event that contractual restrictions imposed upon the holders of
securities subject to the rescission offer that the Company will file with the
Securities and Exchange Commission, anticipated to be in December 1997 are less
onerous than the contractual restriction set forth above, the Company agrees to
modify this restriction so that this restriction imposed upon Shaffner and CyFax
will be no more onerous than that imposed upon all of the holders of stock
subject to the rescission offer, as set forth in the Prospectus filed with the
Securities and Exchange Commission.
10. CAPACITY. The Parties represent that they are lawfully authorized to execute
this Mutual Release. The Parties to this Mutual Release further represent that
they have read it in full before its execution and that they fully understand
the meaning, operation and effect of its terms.
11. PRIOR ASSIGNMENTS.Shaffner and CyFax represent that they have not assigned,
in whole or in part, any claims, demands and/or causes of action relating to the
CyNet Correspondence, Agreements or Stock Rights to any person or entity prior
to their execution of this Mutual Release. CyNet and Davis represent that they
have not assigned, in whole or in part, any claim, demand and/or causes of
action relating to the CyNet Correspondence or Agreements of Shaffner and CyFax
to any person or entity prior to its execution of this Mutual Release.
12. BINDING EFFECT. This Mutual Release shall be binding on and inure to the
benefit of the Parties and their respective heirs, successors, assigns, agents,
employees and personal representatives.
13. MODIFICATION. No modification or amendment of this Mutual Release shall be
effective unless such modification or amendment shall be in writing and signed
by all Parties hereto.
14. ENTIRE AGREEMENT. This Mutual Release constitutes the entire agreement
between the Parties pertaining to the subject matter hereof and supersedes all
prior and contemporaneous agreements, understandings, negotiations and
discussions, wether oral or written, of the Parties in connection with the
subject matter hereof.
15. INTERPRETATION. The interpretation, construction and performance of this
Mutual Release shall be governed by the laws of the State of Texas. Whenever
used herein, the singular number shall include the plural, the plural shall
include the singular and the use of any gender shall be applicable to all
genders.
16. EXECUTION. This Mutual Release may be executed in several counterparts, each
of which shall be deemed an original, and such counterparts taken together shall
constitute but one and the same Mutual Release. This Mutual Release shall be
effective on the day and year first above written.
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17. SEVERABILITY. Whenever possible, each provision of this Mutual Release will
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Mutual Release is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Mutual Release.
IN WITNESS WHEREOF, intending to be legally bound, the Parties hereto have
executed this Mutual Release as of the 14th day of November, 1997.
CYFAX, INC.
By: KEITH SHAFFNER
Its: President
CYNET, INC.
By: RAY DAVIS
Its: CEO
/s/ RAY DAVIS
RAY DAVIS
/s/ KEITH SHAFFNER
KEITH SHAFFNER
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<PAGE>
EXHIBIT "A"
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is made as of February 1,
1998 by CYNET, INC., a Texas corporation (the "EMPLOYER"), and VINCENT W. BEALE,
SR., an individual resident of the State of Texas (the "EXECUTIVE").
INTRODUCTION
Employer, directly or through one or more subsidiaries, is engaged in the
business of providing enhanced fax and related communication services. The
Employer desires to employ the Executive, and the Executive wishes to accept
such employment, upon the terms and conditions set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
Section 1. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1.
1.1 "AFFILIATE" or "AFFILIATES" -- any Person that, directly or
indirectly, controls, or is controlled by or under common control with, the
Employer, including the Employer. For the purposes of this definition, "CONTROL"
(including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
power to direct or cause the direction of the management and policies of any
Person, directly or indirectly, through ownership of voting securities, by
contract, or otherwise.
1.2 "AGREEMENT" -- this Employment Agreement, as amended from time to
time.
1.3 "BASIC COMPENSATION" -- Salary and Benefits.
1.4 "BENEFITS" -- as defined in Section 3.1(c).
1.5 "BOARD OF DIRECTORS" -- the board of directors of the Employer.
1.6 "CONFIDENTIAL INFORMATION" -- any and all:
(a) trade secrets concerning the business and affairs of Employer
or any Affiliate, product specifications, data, know-how,
formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current
and planned manufacturing or distribution methods and
processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans,
data bases, computer software and programs (including object
code and source code), computer software and database
technologies,
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systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret within the meaning of the common law of
the State of Texas; and
(b) information concerning the business and affairs of Employer or
any Affiliate (which includes historical financial statements,
financial projections and budgets, historical and projected
sales, marketing and customer data, capital spending budgets,
acquisition prospects and plans, the names and backgrounds of
key personnel, personnel training and techniques and
materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for any Affiliate containing or based,
in whole or in part, on any information included in the
foregoing.
1.7 "DISABILITY" -- as defined in Section 5.2.
1.8 "EFFECTIVE DATE" -- the date stated in the first paragraph of the
Agreement.
1.9 "EMPLOYEE INVENTION" -- any idea, invention, technique, modification,
process, or improvement (whether patentable or not), any industrial design
(whether registerable or not), any mask work, however fixed or encoded, that is
suitable to be fixed, embedded or programmed in a semiconductor product (whether
recordable or not), and any work of authorship (whether or not copyright
protection may be obtained for it) created, conceived, or developed by the
Executive, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer or the Affiliates, and any
such item created by the Executive, either solely or in conjunction with others,
following termination of the Executive's employment with the Employer, that is
based upon or uses Confidential Information.
1.10 "EMPLOYMENT PERIOD" -- the term of the Executive's employment under
this Agreement.
1.11 "FISCAL YEAR" -- the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
1.12 "FOR CAUSE" -- as defined in Section 5.3.
1.13 "INCENTIVE COMPENSATION" -- as defined in Section 3.2.
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1.14 "OPTION PLAN" -- the CyNet, Inc. Stock Incentive Option Plan.
1.15 "NONINCENTIVE COMPENSATION" -- as defined in Section 3.3.
1.16 "PERSON" -- any individual, general or limited partnership, joint
venture, corporation (including any non-profit corporation), limited liability
company, bank, estate, trust, association, entity, unincorporated organization,
or government body.
1.17 "POST-EMPLOYMENT PERIOD" -- as defined in Section 7.2.
1.18 "PROPRIETARY ITEMS" -- as defined in Section 6.2(a)(iv).
1.19 "SALARY" -- as defined in Section 3.1(a).
1.20 "SIGNING BONUS" -- as defined in Section 3.1(b).
Section 2. EMPLOYMENT TERMS AND DUTIES.
2.1 EMPLOYMENT. The Employer hereby employs the Executive, and the
Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2 TERM. Subject to the provisions of Section 5, the term of the
Executive's employment under this Agreement will be five (5) years, beginning on
the Effective Date and ending on the fifth anniversary of the Effective Date.
Thereafter, the term may continue for additional one (1) year periods upon the
mutual written agreement of the Executive and the Employer.
2.3 DUTIES. The Executive will have such duties as are assigned or
delegated to the Executive by the Board of Directors (which duties shall be of a
senior management or executive level) and will initially serve as Chairman of
the Board of Directors and Chief Executive Officer of the Employer, with overall
responsibility for Employer's operations. The Executive will devote
substantially all of his entire business time, attention, skill, and energy
exclusively to the business of the Employer, will use his best efforts to
promote the success of the Employer's business, and will cooperate fully with
the Board of Directors in the advancement of the best interests of the Employer.
Notwithstanding the foregoing, Executive shall be entitled to devote a
reasonable amount of time to personal investments, including the investments of
Bull & Bear Enterprises, LLC, CyNet Holdings, L.L.C. and its affiliates. For the
Executive's service as a director of the Employer or as a director or officer of
any of its Affiliates, the Executive will fulfill his duties as such director or
officer without additional compensation.
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Section 3. COMPENSATION.
3.1 BASIC COMPENSATION.
(a) SALARY. The Executive will be paid an annual salary of
$180,000.00, subject to adjustment as provided below (the
"SALARY"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly. The Salary
will be reviewed by the Board of Directors not less frequently
than annually, and may be adjusted upward or downward in the
sole discretion of the Board of Directors, but in no event
will the Salary be less than $180,000.00 per year.
(b) SIGNING BONUS. In order to induce the Executive to accept
employment with the Employer, the Employer agrees to pay the
Executive a bonus of $30,000.00 ("SIGNING BONUS"). Subject to
the Executive's employment by the Employer, such bonus shall
be paid to the Executive on the date he commences employment
hereunder unless Executive, at his sole discretion, grants
Employer an extension of time to pay the Signing Bonus.
(c) BENEFITS. The Executive will, during the Employment Period, be
permitted to participate in such pension, profit sharing,
bonus, life insurance, hospitalization, major medical, and
other employee benefit plans of the Employer that may be in
effect from time to time, to the extent the Executive is
eligible under the terms of those plans (collectively, the
"BENEFITS").
(d) LIFE INSURANCE. During the Employment Period, Employer, at the
Employer's expense, will purchase and maintain in effect one
or more life insurance policies on the life of Executive with
minimum coverage of $500,000. Such insurance shall include a
cash surrender value component and, upon Executive's death,
shall be payable to the beneficiary or beneficiaries
designated by Executive.
3.2 INCENTIVE COMPENSATION. As additional compensation (the "INCENTIVE
COMPENSATION") for the services to be rendered by the Executive pursuant to this
Agreement, the Executive will be entitled to receive such Incentive Compensation
as may be determined by the Board of Directors.
3.3 NONINCENTIVE COMPENSATION. As additional compensation (the
"NONINCENTIVE COMPENSATION") for the services to be rendered by the Executive
pursuant to this Agreement, the Executive shall be granted an incentive stock
option to purchase 100,000 shares of Class A Common Stock, at an exercise price
of $.39 per share, under the Option Plan.
3.4 VACATIONS AND HOLIDAYS. The Executive will be entitled to paid
vacation each Fiscal Year in accordance with the vacation policies of the
Employer in effect for its executive officers from
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time to time. Vacation must be taken by the Executive at such time or times as
approved by the Chairman of the Board of Directors. The Executive will also be
entitled to the paid holidays and other paid leave set forth in the Employer's
policies. Vacation days and holidays during any Fiscal Year that are not used by
the Executive during such Fiscal Year may not be used in any subsequent Fiscal
Year, but Executive shall be paid at the end of each Fiscal Year for any
vacation days which Executive was unable to use as a result of a request for
approval of a vacation having been denied by the Chairman of the Board of
Directors.
3.5 AUTOMOBILE. During the Employment Period, the Executive shall be
entitled to a monthly automobile allowance of $600.00. The Employer will
reimburse the Executive for reasonable expenses incurred by the Executive for
the operation, repair and maintenance of such automobile in the performance of
the Executive's duties pursuant to this Agreement, in accordance with the
Employer's employment policies, at a rate of $.35 per mile. The Executive shall
file expense reports with respect to such expenses in accordance with the
Employer's policies.
Section 4. FACILITIES AND EXPENSES. The Employer will furnish the
Executive office space, equipment, supplies, and such other facilities and
personnel as the Employer deems necessary or appropriate for the performance of
the Executive's duties under this Agreement and as are commensurate with
Executive's duties under Section 2.3. The Employer will pay the Executive's dues
in such professional societies and organizations as the Chairman of the Board of
Directors of the Employer deems appropriate, and will pay on behalf of the
Executive (or reimburse the Executive for) reasonable expenses incurred by the
Executive at the request of, or on behalf of, the Employer in the performance of
the Executive's duties pursuant to this Agreement, and in accordance with the
Employer's employment policies, including reasonable expenses incurred by the
Executive in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's policies.
Section 5. TERMINATION.
5.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic
Compensation, Incentive Compensation, Nonincentive Compensation, and any and all
other rights of the Executive under this Agreement or otherwise as an employee
of the Employer will terminate (except as otherwise provided in this Section 5):
(a) upon the death of the Executive;
(b) upon the Disability of the Executive (as defined in Section
5.2) immediately upon notice from either party to the other;
(c) For Cause (as defined in Section 5.3), immediately upon notice
from the Employer to the Executive, or at such later time as
such notice may specify; or
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(d) upon Executive's voluntary termination of employment, which
termination shall be effective thirty (30) days after
Employer's receipt of Executive's written resignation.
5.2 DISABILITY. For purposes of this Section 5, the Executive will be
deemed to have a "DISABILITY" if, for physical or mental reasons, the Executive
is unable to perform the Executive's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 5.2. The Disability of the Executive will be
determined by a medical doctor selected by written agreement of the Employer and
the Executive upon the request of either party by notice to the other. If the
Employer and the Executive cannot agree on the selection of a medical doctor,
each of them will select a medical doctor and the two medical doctors will
select a third medical doctor who will determine whether the Executive has a
Disability. The determination of the medical doctor selected under this Section
5.2 will be binding on both parties. The Executive must submit to a reasonable
number of examinations by the medical doctor making the determination of
Disability under this Section 5.2, and the Executive hereby authorizes the
disclosure and release to the Employer of such determination and all supporting
medical records. If the Executive is not legally competent, the Executive's
legal guardian or duly authorized attorney-in-fact will act on behalf of the
Executive, under this Section 5.2, for the purposes of submitting the Executive
to the examinations, and providing the authorization of disclosure, required
under this Section 5.2.
5.3 FOR CAUSE. For purposes of Section 5.1, the phrase "FOR CAUSE" means:
(a) the Executive's breach of a material provisions of this Agreement, which
breach is not substantially cured within thirty (30) days after receipt of
written notice thereof from Employer; (b) the Executive's repeated failure to
adhere to any written Employer policy and Executive's failure to cure such
noncompliance within thirty (30) days after receipt of written notice thereof
from Employer; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Employer, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Employer; (d) the misappropriation (or attempted misappropriation) of any of
the Employer's funds or property; or (e) the conviction of, the indictment for
(or its procedural equivalent), or the entering of a guilty plea or plea of no
contest with respect to, a felony or the equivalent thereof.
5.4 TERMINATION PAY. Effective upon the termination of this Agreement, the
Employer will be obligated to pay the Executive (or, in the event of his death,
his designated beneficiary as defined below) only such compensation as is
provided in this Section 5.4, and in lieu of all other amounts and in settlement
and complete release of all claims the Executive may have against the Employer
under this Agreement. For purposes of this Section 5.4, the Executive's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Executive may designate by notice to the Employer from time
to time or, if the Executive fails to give notice to the Employer of such a
beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the
Employer will have no duty, in any circumstances, to attempt to open an estate
on behalf of the Executive, to determine whether any beneficiary designated by
the Executive is alive or to ascertain the address of any such
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beneficiary, to determine the existence of any trust, to determine whether any
person or entity purporting to act as the Executive's personal representative
(or the trustee of a trust established by the Executive) is duly authorized to
act in that capacity, or to locate or attempt to locate any beneficiary,
personal representative, or trustee.
(a) TERMINATION BY THE EMPLOYER FOR CAUSE. If the Employer
terminates this Agreement For Cause, the Executive will be
entitled to receive his Salary and Benefits through the date
such termination is effective and the vested portion of any
Incentive Compensation and any Nonincentive Compensation.
(b) TERMINATION UPON DISABILITY. If this Agreement is terminated
by either party as a result of the Executive's Disability, as
determined under Section 5.2, the Employer will pay the
Executive his Salary and Benefits through the remainder of the
calendar month during which such termination is effective and
for the lesser of (i) six consecutive months thereafter, or
(ii) the period until Disability insurance benefits commence
under the Disability insurance coverage, if any, furnished by
the Employer to the Executive. The Executive shall be entitled
to the vested portions of his Incentive Compensation and
Nonincentive Compensation and to a pro rata portion of his
Incentive Compensation and Nonincentive Compensation for the
year during which such Disability occurs, but shall not be
entitled to any other Incentive Compensation or Nonincentive
Compensation. Executive shall be entitled to continue to
participate in Employer's group health insurance (if such
participation is permitted by the insurance company providing
such insurance coverage) after Disability occurs, provided
Executive reimburses Employer for the costs of such coverage.
Executive shall also be entitled to acquire from Employer any
life insurance policy in effect on Executive's life at the
date of Disability, provided Executive reimburses Employer the
cash surrender value, if any, accumulated in such life
insurance policy and assumes the obligation to make payments
to maintain such insurance policy in effect.
(c) TERMINATION UPON DEATH. If this Agreement is terminated
because of the Executive's death, the Executive will be
entitled to receive his Salary and Benefits through the end of
the calendar month in which his death occurs. The Executive
shall be entitled to receive the vested portions of his
Incentive Compensation and Nonincentive Compensation and to a
pro rata portion of his Incentive Compensation and
Nonincentive Compensation for the year during which the
Executive's death occurs, but shall not be entitled to any
other Incentive Compensation or Nonincentive Compensation for
or any subsequent year. Executive's family shall be entitled
to continue to participate in Employer's group health
insurance (if such participation is permitted by the insurance
company providing such insurance coverage) after Executive's
death
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occurs, provided Executive's family reimburses Employer for
the costs of such coverage.
(d) TERMINATION UPON RESIGNATION. If this Agreement is terminated
because of the voluntary resignation of the Executive
hereunder, the Executive shall be entitled to receive his
Salary and Benefits through the effective date of his
termination and any vested portions of his Incentive
Compensation or Nonincentive Compensation. The Executive shall
not be entitled to any other Incentive Compensation or to any
other Nonincentive Compensation.
(e) TERMINATION BY THE EMPLOYER NOT FOR CAUSE. If the Employer
terminates this Agreement not For Cause, the Executive, at the
option of the Executive, will be entitled to either: (i)
receive all of the compensation and Benefits provided by
Section 3.1, and the Incentive Compensation provided by
Section 3.2 and the Nonincentive Compensation provided by
Section 3.3 for the remainder of the Employment Term, and the
Executive shall be subject to the provisions of Section 7.2
hereof; or (ii) the Executive shall be entitled to receive all
of the compensation and Benefits provided by Section 3.1 and
the vested portions of any Incentive Compensation provided by
Section 3.2 and Nonincentive Compensation provided by Section
3.3 through the end of the calendar month in which such
termination occurs, and the Executive shall not be subject to
the provisions of Section 7.2.
(f) BENEFITS. The Executive's accrual of, or participation in
plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive
will be entitled to accrued Benefits pursuant to such plans
only as provided in such plans. The Executive will not
receive, as part of his termination pay pursuant to this
Section 5, any payment or other compensation for any vacation,
holiday, sick leave, or other leave unused on the date the
notice of termination is given under this Agreement.
(g) EXPIRATION OF EMPLOYMENT. Employer agrees to notify the
Executive not less than sixty (60) days prior to the
expiration of the initial term of this Agreement or any
subsequent continuation thereof as to whether Employer desires
to extend the Employment Period of this Agreement.
5.5 TERMINATION UPON BREACH BY EMPLOYER. This Agreement may be terminated
by Executive, by written notice to Employer, in the event of the Employer's
breach of a material provision of this Agreement, which breach is not
substantially cured within thirty (30) days after Employer's receipt of written
notice thereof from Executive. If this Agreement is terminated by Executive as a
result of Employer's breach, Executive shall not be subject to the provisions of
Section 7.2 hereof.
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5.6 TERMINATION UPON CHANGE OF CONTROL. Notwithstanding any other
provision of this Agreement, the Executive's employment under this Agreement may
be terminated during the Employment Period by the Executive if a "Change of
Control" (as defined below) of the Employer occurs without the consent of the
Executive. If Executive elects to terminate his employment as a result of a
Change of Control, Executive will be entitled to receive his salary and benefits
and the vested portions of his Incentive Compensation and Nonincentive
Compensation for a period of three (3) years after the effective date of such
termination. For purposes of this Agreement, a "Change of Control" of Employer
shall be deemed to have occurred if, after the Effective Date (a) any "person"
(as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Employer representing 50% or more of the
combined voting power of Employer's then outstanding securities, without the
prior approval of at least a majority of the members of the Board in office
immediately prior to such person obtaining such percentage interest; (b) there
occurs a proxy contest or a consent solicitation, or Employer is a party to a
merger, consolidation, sale of assets, plan of liquidation or other
reorganization not approved by at least a majority of the members of the Board,
as a consequence of which members of the Board in office immediately prior to
such transaction or event constitute less than a majority of the Board
thereafter; or (c) during any period of two consecutive years, other than as a
result of an event described in clause (b) of this Section 5.6, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election was approved by a vote of at least a
majority of the directors then in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of the
members of the Board.
Section 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS.
6.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that
during the Employment Period and as a part of his employment, the Executive will
be afforded access to Confidential Information; public disclosure of such
Confidential Information could have an adverse effect on the Employer and its
business; because the Executive possesses substantial technical expertise and
skill with respect to the Employer's business, the Employer desires to obtain
exclusive ownership of each Employee Invention, and the Employer will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and the provisions of this Section 6 are reasonable
and necessary to prevent the improper use or disclosure of Confidential
Information and to provide the Employer with exclusive ownership of all Employee
Inventions.
6.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation and
benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:
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(a) CONFIDENTIALITY.
(i) During and for a period of two (2) years following the
Employment Period, the Executive will hold in confidence
the Confidential Information and will not disclose it to
any person except with the specific prior written
consent of the Employer or except as otherwise expressly
permitted by the terms of this Agreement.
(ii) Any trade secrets of any Affiliate will be entitled to
all of the protections and benefits under the common law
of the State of Texas and any other applicable law. If
any information that the Employer deems to be a trade
secret is found by a court of competent jurisdiction not
to be a trade secret for purposes of this Agreement,
such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement.
The Executive hereby waives any requirement that the
Employer submit proof of the economic value of any trade
secret or post a bond or other security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that
the Executive demonstrates either (x) was known by
Executive prior to the date of his employment by the
Employer, (y) was or became generally available to the
public other than as a result of a disclosure by the
Executive, or (z) was made known to Executive on a
nonconfidential basis from a source other than Employer
or its representatives or agents, provided that such
source is not bound by a confidentiality agreement with,
or other obligation of secrecy to, Employer or another
party.
(iv) The Executive will not remove from the premises of the
Employer or any Affiliate (except to the extent such
removal is for purposes of the performance of the
Executive's duties at home or while traveling, or except
as otherwise specifically authorized by the Employer or
such Affiliate) any document, record, notebook, plan,
model, component, device, or computer software or code,
whether embodied in a disk or in any other form
(collectively, the "PROPRIETARY ITEMS"). The Executive
recognizes that, as between the Employer or any
Affiliate and the Executive, all of the Proprietary
Items, whether or not developed by the Executive, are
the exclusive property of the Employer or the
Affiliates. Upon termination of this Agreement by either
party, or upon the request of the Employer or any
Affiliate during the Employment Period, the Executive
will return to the Employer or the Affiliates all of the
Proprietary Items in the Executive's possession or
subject to the Executive's control, and the
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Executive shall not retain any copies, abstracts,
sketches, or other physical embodiment of any of the
Proprietary Items.
(b) EMPLOYEE INVENTIONS. Each Employee Invention will belong
exclusively to the Employer. The Executive acknowledges that
all of the Executive's writing, works of authorship, specially
commissioned works, and other Employee Inventions are works
made for hire and the property of the Employer, including any
copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works
are not works made for hire, the Executive hereby assigns to
the Employer all of the Executive's right, title, and
interest, including all rights of copyright, patent, and other
intellectual property rights, to or in such Employee
Inventions. The Executive covenants that he will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and
without additional compensation, all of the
Executive's right to the Employee Invention for
the United States and all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as
the Employer may request in order to apply for and
obtain patents or other registrations with respect
to any Employee Invention in the United States and
any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance in
support of the Employer's rights to any Employee
Invention.
6.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Executive, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
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Section 7. NON-COMPETITION AND NON-INTERFERENCE.
7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges and
agrees that the limitations set forth in this Section 7 are a necessary part of
and ancillary to the Executive's agreement not to disclose Confidential
Information, reasonable and do not impose a greater restraint on the activities
of the Executive than is necessary to protect the business interest of the
Employer. In the event that any such territorial, scope, or time limitation are
deemed to be unreasonable by a court of competent jurisdiction, the Executive
agrees to the reduction of the territorial, scope or time limitation to the
area, scope or time which such court shall have deemed reasonable.
7.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments by
the Executive, and in consideration of the compensation and benefits to be paid
or provided to the Executive by the Employer in the event this Agreement is
terminated pursuant to Section 5.4(a), 5.4(d) or 5.4(e), the Executive covenants
that he will not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period
(as defined below), engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management,
operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the
Executive's name or any similar name to, lend Executive's
credit to or render services or advice to, any business whose
products or activities compete in whole or in part with the
products or activities of the Employer or any Affiliate of
Employer anywhere within the geographic areas in which the
Employer or any such Affiliate now or hereafter conducts its
business; provided, however, that the Executive may purchase
or otherwise acquire up to (but not more than) one percent of
any class of securities of any enterprise (but without
otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional
securities exchange or have been registered under Section
12(g) of the Securities Exchange Act of 1934;
(b) whether for the Executive's own account or for the account of
any other person, at any time during the Employment Period and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer or any Affiliate
of Employer, from any person known by the Executive to be a
customer of the Employer or any such Affiliate, whether or not
the Executive had personal contact with such person during and
by reason of the Executive's employment with the Employer;
(c) whether for the Executive's own account or the account of any
other person at any time during the Employment Period and the
Post-Employment Period, (i) solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is or was an employee of the
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Employer or any Affiliate of Employer at any time during the
Employment Period or in any manner induce or attempt to induce
any employee of the Employer and any such Affiliate to
terminate his employment with the Employer; or (ii) interfere
with the Employer's or any Affiliate's relationship with any
person, including any person who at any time during the
Employment Period was an employee, contractor, supplier, or
customer of the Employer or any such Affiliate; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, directors, officers,
employees, or agents.
For purposes of this Section 7.2, the term "POST-EMPLOYMENT PERIOD" means
the two-year period beginning on the date of termination of the Executive's
employment with the Employer.
If any covenant in this Section 7.2 is held to be unreasonable, arbitrary,
or against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time, or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Executive.
The Executive will, while the covenant under this Section 7.2 is in
effect, give notice to the Employer, within ten days after accepting any other
employment, of the identity of the Executive's new employer. The Employer may
notify such new employer that the Executive is bound by this Agreement.
Notwithstanding the foregoing to the contrary, the Executive will not be
subject to any covenant under this Section 7.2 in the event:
(i) the term of the Executive's employment under this Agreement is not
renewed pursuant to Section 2.2; or
(ii) Employer voluntarily files a bankruptcy or insolvency proceeding (or
an involuntary bankruptcy or insolvency proceeding is filed against
Employer, which proceeding has not been dismissed within ninety (90)
days from the filing thereof).
Section 8. GENERAL PROVISIONS.
8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges
that the injury that would be suffered by the Employer as a result of a breach
of the provisions of this Agreement (including any provision of Sections 6 and
7) would be irreparable and that an award of monetary damages to the Employer
for such a breach would be an inadequate remedy. Consequently, the Employer will
have the right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this
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Agreement, and the Employer will not be obligated to post bond or other security
in seeking such relief. Any such remedy shall be in addition to any damages
which the Employer may be legally entitled to recover as a result of any breach
by the Employee of any provision of this Agreement. The Employer may pursue any
of the remedies described in this Section 8 concurrently or consecutively and in
any order as to such breach or violation, and the pursuit of any one of such
remedies at any time will not be deemed an election of remedies or a waiver of
the right to pursue any other available remedy.
8.2 ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Executive in
Sections 6 and 7 are essential elements of this Agreement supported by the
payment of $10.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Executive, and without the
Executive's agreement to comply with such covenants, the Employer would not have
entered into this Agreement or employed or continued the employment of the
Executive. The Employer and the Executive have independently consulted their
respective counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenants, with specific regard to the
nature of the business conducted by the Employer.
8.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive
represents and warrants to the Employer that the execution and delivery by the
Executive of this Agreement do not, and the performance by the Executive of the
Executive's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Executive; or conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Executive is a party or by which the Executive is or may be bound. The Executive
further represents and warrants to the Employer that no agreements or
understandings, whether written or oral, are currently in force and effect
between the Executive and the Employer, or any other Person concerning the
subject matter of this Agreement.
8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Executive's performance of the Executive's obligations
hereunder.
8.5 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
no claim or right arising out of this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; no waiver that may be given by a party will
be applicable except in the specific instance for which it is given; and no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
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8.6 NOTICES. All notices pertaining to this Agreement must be in writing,
must be sent to the addressee at the address set forth in this Section, or at
such other address as the addressee has designated by a notice given in the
manner set forth in this Section, and must be sent by telegram, telex,
facsimile, electronic mail, courier, or prepaid, certified U.S. Mail. Notices
will be deemed given when received, if sent by telegram, telex, electronic mail
or facsimile and if received between the hours of 8:00 a.m. and 5:00 p.m., local
time of the destination address, on a business day (with confirmation of
completed transmission sufficing as prima facie evidence of receipt of a notice
sent by telex, telecopy, electronic mail, or facsimile), and when delivered and
receipted for (or when attempted delivery is refused at the address where sent)
if sent by courier or by certified U.S. Mail. Notices sent by telegram, telex,
electronic mail, or facsimile and received between 12:01 a.m. and 7:59 a.m.,
local time of the destination address, on a business day will be deemed given at
8:00 a.m. on that same day. Notices sent by telegram, telex, electronic mail, or
facsimile and received at a time other than between the hours of 12:01 a.m. and
5:00 p.m., local time of the destination address, on a business day will be
deemed given at 8:00 a.m. on the next following business day after the day of
receipt. The addresses for notice are as follows:
If to Employer: CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: General Counsel
Facsimile No.: (281) 894-7952
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Attention: Mr. James J. Spring, III
Facsimile No.: (713) 658-2553
and
If to the Executive: Vincent W. Beale, Sr.
205 Grogan's Point Road
The Woodlands, Texas 77380
Facsimile No.: __________________
8.7 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Executive under this Agreement, being personal, may not be delegated.
8.8 INTERPRETATION. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. A determination that any
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provision of this Agreement is unenforceable or invalid shall not affect the
enforceability or validity of any other provision.
8.9 HEADINGS. The section headings appearing in this Agreement have been
inserted for convenience only and shall be given no substantive meaning or
significance whatever in construing the terms and provisions of this Agreement.
8.10 ENTIRE AGREEMENT. This Agreement constitutes the final and entire
agreement and understanding between the parties to this Agreement concerning the
subject matter of this Agreement, and this Agreement supersedes and replaces all
prior agreements and understandings, whether written or oral, between such
parties concerning the subject matter of this Agreement. No alleged
representation, warranty, promise, inducement, or statement of intention not
expressly set forth in this Agreement is binding on any party to this Agreement.
8.11 ACKNOWLEDGMENT AND RELEASE BY THE EXECUTIVE. By his execution of this
Agreement, the Executive acknowledges that this Agreement supersedes and
replaces all other agreements and understandings, whether written or oral,
between the Executive and any other Person concerning the subject matter of this
Agreement. In consideration for the rights and obligations arising under this
Agreement, the Executive hereby voluntarily, knowingly, fully, finally,
completely, and forever releases, relinquishes, and forever discharges the
Employer and its Affiliates, their officers, directors, employees, and agents,
from any and all claims, actions, demands, and causes of action of whatever kind
or character, whether known or unknown, joint or several, which the Executive
might have or might claim to have against the Employer for any and all injuries,
harm, damages, penalties, costs, losses, expenses, attorneys' fees, liabilities,
or other detriments, if any, whatsoever and whenever incurred, suffered, or
claimed by the Executive arising from any prior agreement or understanding,
whether written or oral, between the Executive and the Employer, or any other
Person concerning the subject matter of this Agreement.
8.12 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.
8.13 JURISDICTION. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Texas,
County of Harris, or, if it has or can acquire jurisdiction, in the United
States District Court for the District of Texas, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EMPLOYER:
CYNET, INC.
BY: /s/SAMUEL C. BEALE
SAMUEL C. BEALE, VICE PRESIDENT
AND GENERAL COUNSEL
EXECUTIVE:
BY: /s/VINCENT W. BEALE, SR.
VINCENT W. BEALE, SR.
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is made as of March 1, 1998
by CYNET, INC., a Texas corporation (the "EMPLOYER"), and DAVID R. HEARON, JR.,
an individual resident of the State of Texas (the "EXECUTIVE").
INTRODUCTION
Employer, directly or through one or more subsidiaries, is engaged in the
business of providing enhanced fax and related communication services. The
Employer desires to employ the Executive, and the Executive wishes to accept
such employment, upon the terms and conditions set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
Section 1. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1.
1.1 "AFFILIATE" or "AFFILIATES" -- any Person that, directly or
indirectly, controls, or is controlled by or under common control with, the
Employer, including the Employer. For the purposes of this definition, "CONTROL"
(including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
power to direct or cause the direction of the management and policies of any
Person, directly or indirectly, through ownership of voting securities, by
contract, or otherwise.
1.2 "AGREEMENT" -- this Employment Agreement, as amended from time to
time.
1.3 "BASIC COMPENSATION" -- Salary and Benefits.
1.4 "BENEFITS" -- as defined in Section 3.1(c).
1.5 "BOARD OF DIRECTORS" -- the board of directors of the Employer.
1.6 "CONFIDENTIAL INFORMATION" -- any and all:
(a) trade secrets concerning the business and affairs of Employer
or any Affiliate, product specifications, data, know-how,
formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current
and planned manufacturing or distribution methods and
processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans,
data bases, computer software and programs (including object
code and source code), computer software and database
technologies,
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systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret within the meaning of the common law of
the State of Texas; and
(b) information concerning the business and affairs of Employer or
any Affiliate (which includes historical financial statements,
financial projections and budgets, historical and projected
sales, marketing and customer data, capital spending budgets,
acquisition prospects and plans, the names and backgrounds of
key personnel, personnel training and techniques and
materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for any Affiliate containing or based,
in whole or in part, on any information included in the
foregoing.
1.7 "DISABILITY" -- as defined in Section 5.2.
1.8 "EFFECTIVE DATE" -- the date stated in the first paragraph of the
Agreement.
1.9 "EMPLOYEE INVENTION" -- any idea, invention, technique, modification,
process, or improvement (whether patentable or not), any industrial design
(whether registerable or not), any mask work, however fixed or encoded, that is
suitable to be fixed, embedded or programmed in a semiconductor product (whether
recordable or not), and any work of authorship (whether or not copyright
protection may be obtained for it) created, conceived, or developed by the
Executive, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer or the Affiliates, and any
such item created by the Executive, either solely or in conjunction with others,
following termination of the Executive's employment with the Employer, that is
based upon or uses Confidential Information.
1.10 "EMPLOYMENT PERIOD" -- the term of the Executive's employment under
this Agreement.
1.11 "FISCAL YEAR" -- the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
1.12 "FOR CAUSE" -- as defined in Section 5.3.
1.13 "INCENTIVE COMPENSATION" -- as defined in Section 3.2.
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1.14 "OPTION PLAN" -- the CyNet, Inc. Stock Incentive Option Plan.
1.15 "NONINCENTIVE COMPENSATION" -- as defined in Section 3.3.
1.16 "PERSON" -- any individual, general or limited partnership, joint
venture, corporation (including any non-profit corporation), limited liability
company, bank, estate, trust, association, entity, unincorporated organization,
or government body.
1.17 "POST-EMPLOYMENT PERIOD" -- as defined in Section 7.2.
1.18 "PROPRIETARY ITEMS" -- as defined in Section 6.2(a)(iv).
1.19 "SALARY" -- as defined in Section 3.1(a).
1.20 "SIGNING BONUS" -- as defined in Section 3.1(b).
Section 2. EMPLOYMENT TERMS AND DUTIES.
2.1 EMPLOYMENT. The Employer hereby employs the Executive, and the
Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2 TERM. Subject to the provisions of Section 5, the term of the
Executive's employment under this Agreement will be four (4) years, beginning
on the Effective Date and ending on the fourth anniversary of the Effective
Date. Thereafter, the term may continue for additional one (1) year periods upon
the mutual written agreement of the Executive and the Employer.
2.3 DUTIES. The Executive will have such duties as are assigned or
delegated to the Executive by the Board of Directors (which duties shall be of a
senior management or executive level) and will initially serve as Vice President
of Operations of the Employer. The Executive will devote substantially all of
his entire business time, attention, skill, and energy exclusively to the
business of the Employer, will use his best efforts to promote the success of
the Employer's business, and will cooperate fully with the Board of Directors in
the advancement of the best interests of the Employer. For the Executive's
service as a director of the Employer or as a director or officer of any of its
Affiliates, the Executive will fulfill his duties as such director or officer
without additional compensation.
Section 3. COMPENSATION.
3.1 BASIC COMPENSATION.
(a) SALARY. The Executive will be paid an annual salary of
$150,000.00, subject to adjustment as provided below (the
"SALARY"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices,
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but no less frequently than monthly. The Salary will be
reviewed by the Board of Directors not less frequently than
annually, and may be adjusted upward or downward in the sole
discretion of the Board of Directors, but in no event will the
Salary be less than $150,000.00 per year.
(b) SIGNING BONUS. In order to induce the Executive to accept
employment with the Employer, the Employer agrees to pay the
Executive a bonus of $30,000.00 ("SIGNING BONUS"). Subject to
the Executive's employment by the Employer, such bonus shall
be paid to the Executive on the date he commences employment
hereunder.
(c) BENEFITS. The Executive will, during the Employment Period, be
permitted to participate in such pension, profit sharing,
bonus, life insurance, hospitalization, major medical, and
other employee benefit plans of the Employer that may be in
effect from time to time, to the extent the Executive is
eligible under the terms of those plans (collectively, the
"BENEFITS").
3.2 INCENTIVE COMPENSATION. As additional compensation (the "INCENTIVE
COMPENSATION") for the services to be rendered by the Executive pursuant to this
Agreement, the Executive will be entitled to receive such Incentive Compensation
as may be determined by the Board of Directors.
3.3 NONINCENTIVE COMPENSATION. As additional compensation (the
"NONINCENTIVE COMPENSATION") for the services to be rendered by the Executive
pursuant to this Agreement, the Executive shall be granted an incentive stock
option to purchase 75,000 shares of Class A Common Stock, at an exercise price
of $.39 per share, under the Option Plan.
3.4 VACATIONS AND HOLIDAYS. The Executive will be entitled to paid
vacation each Fiscal Year in accordance with the vacation policies of the
Employer in effect for its executive officers from time to time. Vacation must
be taken by the Executive at such time or times as approved by the Chairman of
the Board of Directors. The Executive will also be entitled to the paid holidays
and other paid leave set forth in the Employer's policies. Vacation days and
holidays during any Fiscal Year that are not used by the Executive during such
Fiscal Year may not be used in any subsequent Fiscal Year, but Executive shall
be paid at the end of each Fiscal Year for any vacation days which Executive was
unable to use as a result of a request for approval of a vacation having been
denied by the Chairman of the Board of Directors.
Section 4. FACILITIES AND EXPENSES. The Employer will furnish the
Executive office space, equipment, supplies, and such other facilities and
personnel as the Employer deems necessary or appropriate for the performance of
the Executive's duties under this Agreement and as are commensurate with
Executive's duties under Section 2.3. The Employer will pay the Executive's dues
in such professional societies and organizations as the Chairman of the Board of
Directors of the Employer deems appropriate, and will pay on behalf of the
Executive (or reimburse the Executive for) reasonable expenses incurred by the
Executive at the request of, or on behalf of, the Employer in the
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performance of the Executive's duties pursuant to this Agreement, and in
accordance with the Employer's employment policies, including reasonable
expenses incurred by the Executive in attending conventions, seminars, and other
business meetings, in appropriate business entertainment activities, and for
promotional expenses. The Executive must file expense reports with respect to
such expenses in accordance with the Employer's policies.
Section 5. TERMINATION.
5.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic
Compensation, Incentive Compensation, Nonincentive Compensation, and any and all
other rights of the Executive under this Agreement or otherwise as an employee
of the Employer will terminate (except as otherwise provided in this Section 5):
(a) upon the death of the Executive;
(b) upon the Disability of the Executive (as defined in Section
5.2) immediately upon notice from either party to the other;
(c) For Cause (as defined in Section 5.3), immediately upon notice
from the Employer to the Executive, or at such later time as
such notice may specify; or
(d) upon Executive's voluntary termination of employment, which
termination shall be effective thirty (30) days after
Employer's receipt of Executive's written resignation.
5.2 DISABILITY. For purposes of this Section 5, the Executive will be
deemed to have a "DISABILITY" if, for physical or mental reasons, the Executive
is unable to perform the Executive's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 5.2. The Disability of the Executive will be
determined by a medical doctor selected by written agreement of the Employer and
the Executive upon the request of either party by notice to the other. If the
Employer and the Executive cannot agree on the selection of a medical doctor,
each of them will select a medical doctor and the two medical doctors will
select a third medical doctor who will determine whether the Executive has a
Disability. The determination of the medical doctor selected under this Section
5.2 will be binding on both parties. The Executive must submit to a reasonable
number of examinations by the medical doctor making the determination of
Disability under this Section 5.2, and the Executive hereby authorizes the
disclosure and release to the Employer of such determination and all supporting
medical records. If the Executive is not legally competent, the Executive's
legal guardian or duly authorized attorney-in-fact will act on behalf of the
Executive, under this Section 5.2, for the purposes of submitting the Executive
to the examinations, and providing the authorization of disclosure, required
under this Section 5.2.
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5.3 FOR CAUSE. For purposes of Section 5.1, the phrase "FOR CAUSE" means:
(a) the Executive's breach of a material provisions of this Agreement, which
breach is not substantially cured within thirty (30) days after receipt of
written notice thereof from Employer; (b) the Executive's repeated failure to
adhere to any written Employer policy and Executive's failure to cure such
noncompliance within thirty (30) days after receipt of written notice thereof
from Employer; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Employer, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Employer; (d) the misappropriation (or attempted misappropriation) of any of
the Employer's funds or property; or (e) the conviction of, the indictment for
(or its procedural equivalent), or the entering of a guilty plea or plea of no
contest with respect to, a felony or the equivalent thereof.
5.4 TERMINATION PAY. Effective upon the termination of this Agreement, the
Employer will be obligated to pay the Executive (or, in the event of his death,
his designated beneficiary as defined below) only such compensation as is
provided in this Section 5.4, and in lieu of all other amounts and in settlement
and complete release of all claims the Executive may have against the Employer
under this Agreement. For purposes of this Section 5.4, the Executive's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Executive may designate by notice to the Employer from time
to time or, if the Executive fails to give notice to the Employer of such a
beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the
Employer will have no duty, in any circumstances, to attempt to open an estate
on behalf of the Executive, to determine whether any beneficiary designated by
the Executive is alive or to ascertain the address of any such beneficiary, to
determine the existence of any trust, to determine whether any person or entity
purporting to act as the Executive's personal representative (or the trustee of
a trust established by the Executive) is duly authorized to act in that
capacity, or to locate or attempt to locate any beneficiary, personal
representative, or trustee.
(a) TERMINATION BY THE EMPLOYER FOR CAUSE. If the Employer
terminates this Agreement For Cause, the Executive will be
entitled to receive his Salary and Benefits through the date
such termination is effective and the vested portion of any
Incentive Compensation and any Nonincentive Compensation.
(b) TERMINATION UPON DISABILITY. If this Agreement is terminated
by either party as a result of the Executive's Disability, as
determined under Section 5.2, the Employer will pay the
Executive his Salary and Benefits through the remainder of the
calendar month during which such termination is effective and
for the lesser of (i) six consecutive months thereafter, or
(ii) the period until Disability insurance benefits commence
under the Disability insurance coverage, if any, furnished by
the Employer to the Executive. The Executive shall be entitled
to the vested portions of his Incentive Compensation and
Nonincentive Compensation and to a pro rata portion of his
Incentive Compensation and Nonincentive Compensation for the
year during which such Disability occurs, but shall not be
entitled to any other Incentive
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Compensation or Nonincentive Compensation. Executive shall be
entitled to continue to participate in Employer's group health
insurance (if such participation is permitted by the insurance
company providing such insurance coverage) after Disability
occurs, provided Executive reimburses Employer for the costs
of such coverage. Executive shall also be entitled to acquire
from Employer any life insurance policy in effect on
Executive's life at the date of Disability, provided Executive
reimburses Employer the cash surrender value, if any,
accumulated in such life insurance policy and assumes the
obligation to make payments to maintain such insurance policy
in effect.
(c) TERMINATION UPON DEATH. If this Agreement is terminated
because of the Executive's death, the Executive will be
entitled to receive his Salary and Benefits through the end of
the calendar month in which his death occurs. The Executive
shall be entitled to receive the vested portions of his
Incentive Compensation and Nonincentive Compensation and to a
pro rata portion of his Incentive Compensation and
Nonincentive Compensation for the year during which the
Executive's death occurs, but shall not be entitled to any
other Incentive Compensation or Nonincentive Compensation for
or any subsequent year. Executive's family shall be entitled
to continue to participate in Employer's group health
insurance (if such participation is permitted by the insurance
company providing such insurance coverage) after Executive's
death occurs, provided Executive's family reimburses Employer
for the costs of such coverage.
(d) TERMINATION UPON RESIGNATION. If this Agreement is terminated
because of the voluntary resignation of the Executive
hereunder, the Executive shall be entitled to receive his
Salary and Benefits through the effective date of his
termination and any vested portions of his Incentive
Compensation or Nonincentive Compensation. The Executive shall
not be entitled to any other Incentive Compensation or to any
other Nonincentive Compensation.
(e) TERMINATION BY THE EMPLOYER NOT FOR CAUSE. If the Employer
terminates this Agreement not For Cause, the Executive, at the
option of the Executive, will be entitled to either: (i)
receive all of the compensation and Benefits provided by
Section 3.1, and the Incentive Compensation provided by
Section 3.2 and the Nonincentive Compensation provided by
Section 3.3 for the remainder of the Employment Term, and the
Executive shall be subject to the provisions of Section 7.2
hereof; or (ii) the Executive shall be entitled to receive all
of the compensation and Benefits provided by Section 3.1 and
the vested portions of any Incentive Compensation provided by
Section 3.2 and Nonincentive Compensation provided by Section
3.3 through the end of the calendar month in which such
termination occurs, and the Executive shall not be subject to
the provisions of Section 7.2.
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(f) BENEFITS. The Executive's accrual of, or participation in
plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive
will be entitled to accrued Benefits pursuant to such plans
only as provided in such plans. The Executive will not
receive, as part of his termination pay pursuant to this
Section 5, any payment or other compensation for any vacation,
holiday, sick leave, or other leave unused on the date the
notice of termination is given under this Agreement.
(g) EXPIRATION OF EMPLOYMENT. Employer agrees to notify the
Executive not less than sixty (60) days prior to the
expiration of the initial term of this Agreement or any
subsequent continuation thereof as to whether Employer desires
to extend the Employment Period of this Agreement.
5.5 TERMINATION UPON BREACH BY EMPLOYER. This Agreement may be terminated
by Executive, by written notice to Employer, in the event of the Employer's
breach of a material provision of this Agreement, which breach is not
substantially cured within thirty (30) days after Employer's receipt of written
notice thereof from Executive. If this Agreement is terminated by Executive as a
result of Employer's breach, Executive shall not be subject to the provisions of
Section 7.2 hereof.
5.6 TERMINATION UPON CHANGE OF CONTROL. Notwithstanding any other
provision of this Agreement, the Executive's employment under this Agreement may
be terminated during the Employment Period by the Executive if a "Change of
Control" (as defined below) of the Employer occurs without the consent of the
Executive. If Executive elects to terminate his employment as a result of a
Change of Control, Executive will be entitled to receive his salary and benefits
and the vested portions of his Incentive Compensation and Nonincentive
Compensation for a period of two (2) years after the effective date of such
termination. For purposes of this Agreement, a "Change of Control" of Employer
shall be deemed to have occurred if, after the Effective Date (a) any "person"
(as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Employer representing 50% or more of the
combined voting power of Employer's then outstanding securities, without the
prior approval of at least a majority of the members of the Board in office
immediately prior to such person obtaining such percentage interest; (b) there
occurs a proxy contest or a consent solicitation, or Employer is a party to a
merger, consolidation, sale of assets, plan of liquidation or other
reorganization not approved by at least a majority of the members of the Board,
as a consequence of which members of the Board in office immediately prior to
such transaction or event constitute less than a majority of the Board
thereafter; or (c) during any period of two consecutive years, other than as a
result of an event described in clause (b) of this Section 5.6, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election was approved by a vote of at least a
majority of the directors then in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of the
members of the Board.
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Section 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS.
6.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that
during the Employment Period and as a part of his employment, the Executive will
be afforded access to Confidential Information; public disclosure of such
Confidential Information could have an adverse effect on the Employer and its
business; because the Executive possesses substantial technical expertise and
skill with respect to the Employer's business, the Employer desires to obtain
exclusive ownership of each Employee Invention, and the Employer will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and the provisions of this Section 6 are reasonable
and necessary to prevent the improper use or disclosure of Confidential
Information and to provide the Employer with exclusive ownership of all Employee
Inventions.
6.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation and
benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:
(a) CONFIDENTIALITY.
(i) During and for a period of two (2) years following the
Employment Period, the Executive will hold in confidence
the Confidential Information and will not disclose it to
any person except with the specific prior written
consent of the Employer or except as otherwise expressly
permitted by the terms of this Agreement.
(ii) Any trade secrets of any Affiliate will be entitled to
all of the protections and benefits under the common law
of the State of Texas and any other applicable law. If
any information that the Employer deems to be a trade
secret is found by a court of competent jurisdiction not
to be a trade secret for purposes of this Agreement,
such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement.
The Executive hereby waives any requirement that the
Employer submit proof of the economic value of any trade
secret or post a bond or other security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that
the Executive demonstrates either (x) was known by
Executive prior to the date of his employment by the
Employer, (y) was or became generally available to the
public other than as a result of a disclosure by the
Executive, or (z) was made known to Executive on a
nonconfidential basis from a source other than Employer
or its representatives or agents, provided that
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such source is not bound by a confidentiality agreement
with, or other obligation of secrecy to, Employer or
another party.
(iv) The Executive will not remove from the premises of the
Employer or any Affiliate (except to the extent such
removal is for purposes of the performance of the
Executive's duties at home or while traveling, or except
as otherwise specifically authorized by the Employer or
such Affiliate) any document, record, notebook, plan,
model, component, device, or computer software or code,
whether embodied in a disk or in any other form
(collectively, the "PROPRIETARY ITEMS"). The Executive
recognizes that, as between the Employer or any
Affiliate and the Executive, all of the Proprietary
Items, whether or not developed by the Executive, are
the exclusive property of the Employer or the
Affiliates. Upon termination of this Agreement by either
party, or upon the request of the Employer or any
Affiliate during the Employment Period, the Executive
will return to the Employer or the Affiliates all of the
Proprietary Items in the Executive's possession or
subject to the Executive's control, and the Executive
shall not retain any copies, abstracts, sketches, or
other physical embodiment of any of the Proprietary
Items.
(b) EMPLOYEE INVENTIONS. Each Employee Invention will belong
exclusively to the Employer. The Executive acknowledges that
all of the Executive's writing, works of authorship, specially
commissioned works, and other Employee Inventions are works
made for hire and the property of the Employer, including any
copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works
are not works made for hire, the Executive hereby assigns to
the Employer all of the Executive's right, title, and
interest, including all rights of copyright, patent, and other
intellectual property rights, to or in such Employee
Inventions. The Executive covenants that he will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and
without additional compensation, all of the
Executive's right to the Employee Invention for
the United States and all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as
the Employer may request in order to apply for and
obtain patents or other
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registrations with respect to any Employee
Invention in the United States and any foreign
jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance in
support of the Employer's rights to any Employee
Invention.
6.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Executive, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
Section 7. NON-COMPETITION AND NON-INTERFERENCE.
7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges and
agrees that the limitations set forth in this Section 7 are a necessary part of
and ancillary to the Executive's agreement not to disclose Confidential
Information, reasonable and do not impose a greater restraint on the activities
of the Executive than is necessary to protect the business interest of the
Employer. In the event that any such territorial, scope, or time limitation are
deemed to be unreasonable by a court of competent jurisdiction, the Executive
agrees to the reduction of the territorial, scope or time limitation to the
area, scope or time which such court shall have deemed reasonable.
7.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments by
the Executive, and in consideration of the compensation and benefits to be paid
or provided to the Executive by the Employer in the event this Agreement is
terminated pursuant to Section 5.4(a), 5.4(d) or 5.4(e), the Executive covenants
that he will not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period
(as defined below), engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management,
operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the
Executive's name or any similar name to, lend Executive's
credit to or render services or advice to, any business whose
products or activities compete in whole or in part with the
products or activities of the Employer or any Affiliate of
Employer anywhere within the geographic areas in which the
Employer or any such Affiliate now or hereafter conducts its
business; provided, however, that the Executive may purchase
or otherwise acquire up to (but not more than)
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one percent of any class of securities of any enterprise (but
without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under
Section 12(g) of the Securities Exchange Act of 1934;
(b) whether for the Executive's own account or for the account of
any other person, at any time during the Employment Period and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer or any Affiliate
of Employer, from any person known by the Executive to be a
customer of the Employer or any such Affiliate, whether or not
the Executive had personal contact with such person during and
by reason of the Executive's employment with the Employer;
(c) whether for the Executive's own account or the account of any
other person at any time during the Employment Period and the
Post-Employment Period, (i) solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is or was an employee of the Employer or any
Affiliate of Employer at any time during the Employment Period
or in any manner induce or attempt to induce any employee of
the Employer and any such Affiliate to terminate his
employment with the Employer; or (ii) interfere with the
Employer's or any Affiliate's relationship with any person,
including any person who at any time during the Employment
Period was an employee, contractor, supplier, or customer of
the Employer or any such Affiliate; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, directors, officers,
employees, or agents.
For purposes of this Section 7.2, the term "POST-EMPLOYMENT PERIOD" means
the two-year period beginning on the date of termination of the Executive's
employment with the Employer.
If any covenant in this Section 7.2 is held to be unreasonable, arbitrary,
or against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time, or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Executive.
The Executive will, while the covenant under this Section 7.2 is in
effect, give notice to the Employer, within ten days after accepting any other
employment, of the identity of the Executive's new employer. The Employer may
notify such new employer that the Executive is bound by this Agreement.
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Notwithstanding the foregoing to the contrary, the Executive will not be
subject to any covenant under this Section 7.2 in the event:
(i) the term of the Executive's employment under this Agreement is not
renewed pursuant to Section 2.2; or
(ii) Employer voluntarily files a bankruptcy or insolvency proceeding (or
an involuntary bankruptcy or insolvency proceeding is filed against
Employer, which proceeding has not been dismissed within ninety (90)
days from the filing thereof).
Section 8. GENERAL PROVISIONS.
8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges
that the injury that would be suffered by the Employer as a result of a breach
of the provisions of this Agreement (including any provision of Sections 6 and
7) would be irreparable and that an award of monetary damages to the Employer
for such a breach would be an inadequate remedy. Consequently, the Employer will
have the right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this Agreement, and the Employer will not
be obligated to post bond or other security in seeking such relief. Any such
remedy shall be in addition to any damages which the Employer may be legally
entitled to recover as a result of any breach by the Employee of any provision
of this Agreement. The Employer may pursue any of the remedies described in this
Section 8 concurrently or consecutively and in any order as to such breach or
violation, and the pursuit of any one of such remedies at any time will not be
deemed an election of remedies or a waiver of the right to pursue any other
available remedy.
8.2 ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Executive in
Sections 6 and 7 are essential elements of this Agreement supported by the
payment of $10.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Executive, and without the
Executive's agreement to comply with such covenants, the Employer would not have
entered into this Agreement or employed or continued the employment of the
Executive. The Employer and the Executive have independently consulted their
respective counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenants, with specific regard to the
nature of the business conducted by the Employer.
8.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive
represents and warrants to the Employer that the execution and delivery by the
Executive of this Agreement do not, and the performance by the Executive of the
Executive's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Executive; or conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Executive is a party or by which the Executive is or may be bound. The Executive
further represents and warrants to the Employer that no agreements or
understandings,
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whether written or oral, are currently in force and effect between the Executive
and the Employer, or any other Person concerning the subject matter of this
Agreement.
8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Executive's performance of the Executive's obligations
hereunder.
8.5 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
no claim or right arising out of this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; no waiver that may be given by a party will
be applicable except in the specific instance for which it is given; and no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
8.6 NOTICES. All notices pertaining to this Agreement must be in writing,
must be sent to the addressee at the address set forth in this Section, or at
such other address as the addressee has designated by a notice given in the
manner set forth in this Section, and must be sent by telegram, telex,
facsimile, electronic mail, courier, or prepaid, certified U.S. Mail. Notices
will be deemed given when received, if sent by telegram, telex, electronic mail
or facsimile and if received between the hours of 8:00 a.m. and 5:00 p.m., local
time of the destination address, on a business day (with confirmation of
completed transmission sufficing as prima facie evidence of receipt of a notice
sent by telex, telecopy, electronic mail, or facsimile), and when delivered and
receipted for (or when attempted delivery is refused at the address where sent)
if sent by courier or by certified U.S. Mail. Notices sent by telegram, telex,
electronic mail, or facsimile and received between 12:01 a.m. and 7:59 a.m.,
local time of the destination address, on a business day will be deemed given at
8:00 a.m. on that same day. Notices sent by telegram, telex, electronic mail, or
facsimile and received at a time other than between the hours of 12:01 a.m. and
5:00 p.m., local time of the destination address, on a business day will be
deemed given at 8:00 a.m. on the next following business day after the day of
receipt. The addresses for notice are as follows:
If to Employer: CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: General Counsel
Facsimile No.: (281) 894-7952
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With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Attention: Mr. James J. Spring, III
Facsimile No.: (713) 658-2553
and
If to the Executive: David R. Hearon, Jr.
12920 Steeple Way Boulevard, #18
Houston, Texas 77065
Facsimile No.: (281) 897-8795
8.7 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Executive under this Agreement, being personal, may not be delegated.
8.8 INTERPRETATION. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision.
8.9 HEADINGS. The section headings appearing in this Agreement have been
inserted for convenience only and shall be given no substantive meaning or
significance whatever in construing the terms and provisions of this Agreement.
8.10 ENTIRE AGREEMENT. This Agreement constitutes the final and entire
agreement and understanding between the parties to this Agreement concerning the
subject matter of this Agreement, and this Agreement supersedes and replaces all
prior agreements and understandings, whether written or oral, between such
parties concerning the subject matter of this Agreement. No alleged
representation, warranty, promise, inducement, or statement of intention not
expressly set forth in this Agreement is binding on any party to this Agreement.
8.11 ACKNOWLEDGMENT AND RELEASE BY THE EXECUTIVE. By his execution of this
Agreement, the Executive acknowledges that this Agreement supersedes and
replaces all other agreements and understandings, whether written or oral,
between the Executive and any other Person concerning the subject matter of this
Agreement. In consideration for the rights and obligations arising under this
Agreement, the Executive hereby voluntarily, knowingly, fully, finally,
completely, and forever releases, relinquishes, and forever discharges the
Employer and its Affiliates, their officers, directors, employees, and agents,
from any and all claims, actions, demands, and causes of action of whatever kind
or character, whether known or unknown, joint or several, which the Executive
might have or
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ight claim to have against the Employer for any and all injuries, harm,
damages, penalties, costs, losses, expenses, attorneys' fees, liabilities, or
other detriments, if any, whatsoever and whenever incurred, suffered, or claimed
by the Executive arising from any prior agreement or understanding, whether
written or oral, between the Executive and the Employer, or any other Person
concerning the subject matter of this Agreement.
8.12 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.
8.13 JURISDICTION. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Texas,
County of Harris, or, if it has or can acquire jurisdiction, in the United
States District Court for the District of Texas, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EMPLOYER:
CYNET, INC.
BY:/s/VINCENT W. BEALE, SR.
VINCENT W. BEALE, SR., PRESIDENT
EXECUTIVE:
BY:/s/DAVID R. HEARON, JR.
DAVID R. HEARON, JR.
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is made as of April 13, 1998,
by CYNET, INC, a Texas corporation (the "EMPLOYER"), and RAY C. DAVIS, an
individual resident of the State of Texas (the "EMPLOYEE").
INTRODUCTION
Employer, directly or through one or more subsidiaries, is engaged in the
business of providing enhanced fax and related communication services. The
Employer desires to continue the employment of the Employee, and the Employee
wishes to continue such employment, upon the terms and conditions set forth in
this Agreement.
The parties, intending to be legally bound, agree as follows:
Section 1. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1.
1.1 "AFFILIATE" or "AFFILIATES" -- any Person that, directly or
indirectly, controls, or is controlled by or under common control with, the
Employer, including the Employer. For the purposes of this definition, "CONTROL"
(including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
power to direct or cause the direction of the management and policies of any
Person, directly or indirectly, through ownership of voting securities, by
contract, or otherwise.
1.2 "AGREEMENT" -- this Employment Agreement, as amended from time to
time.
1.3 "BASIC COMPENSATION" -- Salary and Benefits.
1.4 "BENEFITS" -- as defined in Section 3.1(c).
1.5 "BOARD OF DIRECTORS" -- the board of directors of the Employer.
1.6 "CONFIDENTIAL INFORMATION" -- any and all:
(a) trade secrets concerning the business and affairs of Employer
or any Affiliate, product specifications, data, know-how,
formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current
and planned manufacturing or distribution methods and
processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans,
data bases, computer software and programs (including object
code and source code), computer software and database
technologies,
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systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret within the meaning of the common law of
the State of Texas; and
(b) information concerning the business and affairs of Employer or
any Affiliate (which includes historical financial statements,
financial projections and budgets, historical and projected
sales, marketing and customer data, capital spending budgets,
acquisition prospects and plans, the names and backgrounds of
key personnel, personnel training and techniques and
materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for any Affiliate containing or based,
in whole or in part, on any information included in the
foregoing.
1.7 "EMPLOYEE INVENTION" -- any idea, invention, technique, modification,
process, or improvement (whether patentable or not), any industrial design
(whether registerable or not), any mask work, however fixed or encoded, that is
suitable to be fixed, embedded or programmed in a semiconductor product (whether
recordable or not), and any work of authorship (whether or not copyright
protection may be obtained for it) created, conceived, or developed by the
Employee, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer or the Affiliates, and any
such item created by the Employee, either solely or in conjunction with others,
following termination of the Employee's engagement with the Employer, that is
based upon or uses Confidential Information.
1.8 "SALARY" -- as defined in Section 3.1(a).
1.9 "EMPLOYMENT PERIOD" -- the term of the Employee's engagement under
this Agreement.
1.10 "DISABILITY" -- as defined in Section 5.2.
1.11 "EFFECTIVE DATE" -- the date stated in the first paragraph of the
Agreement.
1.12 "FISCAL YEAR" -- the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
1.13 "FOR CAUSE" -- as defined in Section 5.3.
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1.14 "INCENTIVE COMPENSATION" -- as defined in Section 3.2.
1.15 "PERSON" -- any individual, general or limited partnership, joint
venture, corporation (including any non-profit corporation), limited liability
company, bank, estate, trust, association, entity, unincorporated organization,
or government body.
1.16 "POST-EMPLOYMENT PERIOD" -- as defined in Section 7.2.
1.17 "PROPRIETARY ITEMS" -- as defined in Section 6.2(a)(iv).
1.18 "WARRANT" -- as defined in Section 3.2.
Section 2. ENGAGEMENT TERMS AND DUTIES.
2.1 ENGAGEMENT. The Employer hereby employs the Employee, and the Employee
hereby accepts such employment by the Employer, upon the terms and conditions
set forth in this Agreement.
2.2 TERM. Subject to the provisions of Section 5, the term of the
Employee's employment under this Agreement will be five (5) years, beginning on
the Effective Date and ending on the fifth anniversary of the Effective Date.
Thereafter, the term may continue for additional one (1) year periods upon the
mutual written agreement of the Employee and the Employer.
2.3 DUTIES. The Employee will undertake such projects as are assigned or
delegated to the Employee by the President (which projects shall be of a senior
management or executive level) and will initially serve as Chief Technical
Advisor of the Employer. While Employee will not be expected to maintain regular
office hours on Employer's premises, the Employee will be available to devote at
lease one-half of his entire business time, attention, skill, and energy
exclusively to the business of the Employer, will use his best efforts to
promote the success of the Employer's business, and will cooperate fully with
the President and Board of Directors in the advancement of the best interests of
the Employer. For the Employee's service as a director of the Employer or as a
director or officer of any of its Affiliates, the Employee will fulfill his
duties as such director or officer without additional compensation.
Section 3. COMPENSATION.
3.1 BASIC COMPENSATION.
(a) FEE. The Employee will be paid an annual salary of
$150,000.00, subject to adjustment as provided below (the
"SALARY"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly. The Salary
will be reviewed by the Board of Directors not less frequently
than annually, and may be adjusted upward or
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downward in the sole discretion of the Board of Directors, but
in no event will the Salary be less than $150,000.00 per year.
(b) BENEFITS. The Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing,
bonus, life insurance, hospitalization, major medical, and
other employee benefit plans of the Employer that may be in
effect from time to time, to the extent the Employee is
eligible under the terms of those plans (collectively, the
"BENEFITS").
3.2 INCENTIVE COMPENSATION. As additional compensation (the "INCENTIVE
COMPENSATION") for the services to be rendered by the Employee pursuant to this
Agreement, the Employee will be entitled to participate in the following plans,
in the manner described below:
(a) The Employee will receive a warrant (the "WARRANT") to
purchase up to 2,000,000 shares of Class A Common Stock, no
par value per share, and will become eligible to exercise all
or any part of the Warrant on and after April 13, 1998,
provided the Employee exercises the Warrant prior to or on
April 13, 2002; and
(b) The Warrant will be exercisable at a price of $1.00 per share.
Section 4. FACILITIES AND EXPENSES. The Employer will furnish the Employee
office space, equipment, supplies, and such other facilities and personnel as
the Employer deems necessary or appropriate for the performance of the
Employee's duties under this Agreement and as are commensurate with Employee's
duties under Section 2.3.
Section 5. TERMINATION.
5.1 EVENTS OF TERMINATION. The Employment Period, the Employee's Salary,
Incentive Compensation, and any and all other rights of the Employee under this
Agreement or otherwise as an Employee to the Employer will terminate (except as
otherwise provided in this Section 5):
(a) upon the death of the Employee;
(b) upon the Disability of the Employee (as defined in Section
5.2) immediately upon notice from either party to the other;
(c) For Cause (as defined in Section 5.3), immediately upon notice
from the Employer to the Employee, or at such later time as
such notice may specify; or
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(d) upon Employee's voluntary termination of engagement, which
termination shall be effective thirty (30) days after
Employer's receipt of Employee's written resignation.
5.2 DISABILITY. For purposes of this Section 5, the Employee will be
deemed to have a "DISABILITY" if, for physical or mental reasons, the Employee
is unable to perform the Employee's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 5.2. The Disability of the Employee will be
determined by a medical doctor selected by written agreement of the Employer and
the Employee upon the request of either party by notice to the other. If the
Employer and the Employee cannot agree on the selection of a medical doctor,
each of them will select a medical doctor and the two medical doctors will
select a third medical doctor who will determine whether the Employee has a
Disability. The determination of the medical doctor selected under this Section
5.2 will be binding on both parties. The Employee must submit to a reasonable
number of examinations by the medical doctor making the determination of
Disability under this Section 5.2, and the Employee hereby authorizes the
disclosure and release to the Employer of such determination and all supporting
medical records. If the Employee is not legally competent, the Employee's legal
guardian or duly authorized attorney-in-fact will act on behalf of the Employee,
under this Section 5.2, for the purposes of submitting the Employee to the
examinations, and providing the authorization of disclosure, required under this
Section 5.2.
5.3 FOR CAUSE. For purposes of Section 5.1, the phrase "FOR CAUSE" means
any conduct or behavior by the Employee that, in the good faith judgment of the
Employer's Board of Directors, is materially detrimental to or materially
harmful to the business or reputation of the Employer including, without
limitation: (a) the Employee's breach of a material provisions of this
Agreement, which breach is not substantially cured within thirty (30) days after
receipt of written notice thereof from Employer; (b) the Employee's repeated
failure to adhere to any written Employer policy and Employee's failure to cure
such noncompliance within thirty (30) days after receipt of written notice
thereof from Employer; (c) the appropriation (or attempted appropriation) of a
material business opportunity of the Employer, including attempting to secure or
securing any personal profit in connection with any transaction entered into on
behalf of the Employer; (d) the misappropriation (or attempted misappropriation)
of any of the Employer's funds or property; or (e) the conviction of, the
indictment for (or its procedural equivalent), or the entering of a guilty plea
or plea of no contest with respect to, a felony or the equivalent thereof.
5.4 TERMINATION PAY. Effective upon the termination of this Agreement, the
Employer will be obligated to pay the Employee (or, in the event of his death,
his designated beneficiary as defined below) only such compensation as is
provided in this Section 5.4, and in lieu of all other amounts and in settlement
and complete release of all claims the Employee may have against the Employer
under this Agreement. For purposes of this Section 5.4, the Employee's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Employee may designate by notice to the Employer from time
to time or, if the Employee fails to give notice to the Employer of such a
beneficiary, the Employee's estate. Notwithstanding the preceding sentence, the
Employer will have
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no duty, in any circumstances, to attempt to open an estate on behalf of the
Employee, to determine whether any beneficiary designated by the Employee is
alive or to ascertain the address of any such beneficiary, to determine the
existence of any trust, to determine whether any person or entity purporting to
act as the Employee's personal representative (or the trustee of a trust
established by the Employee) is duly authorized to act in that capacity, or to
locate or attempt to locate any beneficiary, personal representative, or
trustee.
(a) TERMINATION BY THE EMPLOYER FOR CAUSE. If the Employer
terminates this Agreement For Cause, the Employee will be
entitled to receive his Salary and Benefits through the date
such termination is effective and the vested portion of any
Incentive Compensation.
(b) TERMINATION UPON DISABILITY. If this Agreement is terminated
by either party as a result of the Employee's Disability, as
determined under Section 5.2, the Employer will pay the
Employee his Salary and Benefits through the remainder of the
calendar month during which such termination is effective and
for the lesser of (i) six consecutive months thereafter, or
(ii) the period until Disability insurance benefits commence
under the Disability insurance coverage, if any, furnished by
the Employer to the Employee. The Employee shall be entitled
to the vested portions of his Incentive Compensation for the
year during which such Disability occurs, but shall not be
entitled to any other Incentive Compensation. Employee shall
be entitled to continue to participate in Employer's group
health insurance (if such participation is permitted by the
insurance company providing such insurance coverage) after
Disability occurs, provided Employee reimburses Employer for
the costs of such coverage. Employee shall also be entitled to
acquire from Employer any life insurance policy in effect on
Employee's life at the date of Disability, provided Employee
reimburses Employer the cash surrender value, if any,
accumulated in such life insurance policy and assumes the
obligation to make payments to maintain such insurance policy
in effect.
(c) TERMINATION UPON DEATH. If this Agreement is terminated
because of the Employee's death, the Employee will be entitled
to receive his Salary and Benefits through the end of the
calendar month in which his death occurs. The Employee shall
be entitled to receive the vested portions of his Incentive
Compensation for the year during which the Employee's death
occurs, but shall not be entitled to any other Incentive
Compensation for any subsequent year. Employee's family shall
be entitled to continue to participate in Employer's group
health insurance (if such participation is permitted by the
insurance company providing such insurance coverage) after
Employee's occurs, provided Employee's family reimburses
Employer for the costs of such coverage.
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(d) TERMINATION UPON RESIGNATION. If this Agreement is terminated
because of the voluntary resignation of the Employee
hereunder, the Employee shall be entitled to receive his
Salary and Benefits through the effective date of his
termination and any vested portions of his Incentive
Compensation. The Employee shall not be entitled to any other
Incentive Compensation.
(e) TERMINATION BY THE EMPLOYER NOT FOR CAUSE. If the Employer
terminates this Agreement not For Cause, the Employee will be
entitled to receive all of the compensation and Benefits
provided by Section 3.1, and the Incentive Compensation
provided by Section 3.2 through the effective date of such
termination and the Employee shall be subject to the
provisions of Section 7.2 hereof.
(f) BENEFITS. The Employee's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date
of the termination of this Agreement, and the Employee will be
entitled to accrued Benefits pursuant to such plans only as
provided in such plans. The Employee will not receive, as part
of his termination fee pursuant to this Section 5, any payment
or other compensation for any vacation, holiday, sick leave,
or other leave unused on the date the notice of termination is
given under this Agreement.
(g) EXPIRATION OF ENGAGEMENT. Employer agrees to notify the
Employee not less than sixty (60) days prior to the expiration
of the initial term of this Agreement or any subsequent
continuation thereof as to whether Employer desires to extend
the Consulting Period of this Agreement.
5.5 TERMINATION UPON BREACH BY EMPLOYER. This Agreement may be terminated
by Employee, by written notice to Employer, in the event of the Employer's
breach of a material provision of this Agreement, which breach is not
substantially cured within thirty (30) days after Employer's receipt of written
notice thereof from Employee.
Section 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS.
6.1 ACKNOWLEDGMENTS BY THE EMPLOYEE. The Employee acknowledges that during
the Consulting Period and as a part of his engagement, the Employee will be
afforded access to Confidential Information; public disclosure of such
Confidential Information could have an adverse effect on the Employer and its
business; because the Employee possesses substantial technical expertise and
skill with respect to the Employer's business, the Employer desires to obtain
exclusive ownership of each Employee Invention, and the Employer will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and the provisions of this Section 6 are reasonable
and necessary to prevent the improper use or disclosure of Confidential
Information and to provide the Employer with exclusive ownership of all Employee
Inventions.
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6.2 AGREEMENTS OF THE EMPLOYEE. In consideration of the compensation and
benefits to be paid or provided to the Employee by the Employer under this
Agreement, the Employee covenants as follows:
(a) CONFIDENTIALITY.
(i) During and for a period of three (3) years following the
Employment Period, the Employee will hold in confidence
the Confidential Information and will not disclose it to
any person except with the specific prior written
consent of the Employer or except as otherwise expressly
permitted by the terms of this Agreement.
(ii) Any trade secrets of Employer or any Affiliate will be
entitled to all of the protections and benefits under
the common law of the State of Texas and any other
applicable law. If any information that the Employer
deems to be a trade secret is found by a court of
competent jurisdiction not to be a trade secret for
purposes of this Agreement, such information will,
nevertheless, be considered Confidential Information for
purposes of this Agreement. The Employee hereby waives
any requirement that the Employer submit proof of the
economic value of any trade secret or post a bond or
other security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that
the Employee demonstrates either (x) was known by
Employee prior to the date of his original employment by
the Employer, (y) was or became generally available to
the public other than as a result of a disclosure by the
Employee, or (z) was made known to Employee on a
nonconfidential basis from a source other than Employer
or its representatives or agents, provided that such
source is not bound by a confidentiality agreement with,
or other obligation of secrecy to, Employer or another
party.
(iv) The Employee will not remove from the premises of the
Employer or any Affiliate (except to the extent such
removal is for purposes of the performance of the
Employee's duties at home or while traveling, or except
as otherwise specifically authorized by the Employer or
such Affiliate) any document, record, notebook, plan,
model, component, device, or computer software or code,
whether embodied in a disk or in any other form
(collectively, the "PROPRIETARY ITEMS"). The Employee
recognizes that, as between the Employer or any
Affiliate and the Employee, all of the Proprietary
Items, whether or not developed by the Employee, are the
exclusive property of the Employer or the Affiliates.
Upon termination of this Agreement by
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either party, or upon the request of the Employer or any
Affiliate during the Employment Period, the Employee
will return to the Employer or the Affiliates all of the
Proprietary Items in the Employee's possession or
subject to the Employee's control, and the Employee
shall not retain any copies, abstracts, sketches, or
other physical embodiment of any of the Proprietary
Items.
(b) EMPLOYEE INVENTIONS. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that
all of the Employee's writing, works of authorship, specially
commissioned works, and other Employee Inventions are works
made for hire and the property of the Employer, including any
copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works
are not works made for hire, the Employee hereby assigns to
the Employer all of the Employee's right, title, and interest,
including all rights of copyright, patent, and other
intellectual property rights, to or in such Employee
Inventions. The Employee covenants that he will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and
without additional compensation, all of the
Employee's right to the Employee Invention for the
United States and all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as
the Employer may request in order to apply for and
obtain patents or other registrations with respect
to any Employee Invention in the United States and
any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance in
support of the Employer's rights to any Employee
Invention.
6.3 DISPUTES OR CONTROVERSIES. The Employee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Employee, and
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their respective attorneys and experts, who will agree, in advance and in
writing, to receive and maintain all such information in secrecy, except as may
be limited by them in writing.
Section 7. NON-COMPETITION AND NON-INTERFERENCE.
7.1 ACKNOWLEDGMENTS BY THE EMPLOYEE. The Employee acknowledges and agrees
that the limitations set forth in this Section 7 are a necessary part of and
ancillary to the Employee's agreement not to disclose Confidential Information,
reasonable and do not impose a greater restraint on the activities of the
Employee than is necessary to protect the business interest of the Employer. In
the event that any such territorial, scope, or time limitation are deemed to be
unreasonable by a court of competent jurisdiction, the Employee agrees to the
reduction of the territorial, scope or time limitation to the area, scope or
time which such court shall have deemed reasonable.
7.2 COVENANTS OF THE EMPLOYEE. In consideration of the acknowledgments by
the Employee, and in consideration of the compensation and benefits to be paid
or provided to the Employee by the Employer in the event this Agreement is
terminated pursuant to Section 5.4(a), 5.4(d) or 5.4(e)(i), the Employee
covenants that he will not, directly or indirectly:
(a) during the Employment Period, except in the course of his
engagement hereunder, and during the Post-Employment Period
(as defined below), engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management,
operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the
Employee's name or any similar name to, lend Employee's credit
to or render services or advice to, any business whose
products or activities compete in whole or in part with the
products or activities of the Employer or any Affiliate of
Employer anywhere within the geographic areas in which the
Employer or any such Affiliate now or hereafter conducts its
business; provided, however, that the Employee may purchase or
otherwise acquire up to (but not more than) one percent of any
class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such
securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of
any other person, at any time during the Employment Period and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer or any Affiliate
of Employer, from any person known by the Employee to be a
customer of the Employer or any such Affiliate, whether or not
the Employee had personal contact with such person during and
by reason of the Employee's engagement with the Employer;
10
<PAGE>
(c) whether for the Employee's own account or the account of any
other person at any time during the Employment Period and the
Post-Employment Period, (i) solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is or was an employee of the Employer or any
Affiliate of Employer at any time during the Employment Period
or in any manner induce or attempt to induce any employee of
the Employer and any such Affiliate to terminate his
engagement with the Employer; or (ii) interfere with the
Employer's or any Affiliate's relationship with any person,
including any person who at any time during the Employment
Period was an employee, contractor, supplier, or customer of
the Employer or any such Affiliate; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, directors, officers,
employees, or agents.
For purposes of this Section 7.2, the term "POST-EMPLOYMENT PERIOD" means
the three-year period beginning on the date of termination of the Employee's
engagement with the Employer.
If any covenant in this Section 7.2 is held to be unreasonable, arbitrary,
or against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time, or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Employee.
The Employee will, while the covenant under this Section 7.2 is in effect,
give notice to the Employer, within ten days after accepting any other
employment, of the identity of the Employee's new employer. The Employer may
notify such new employer that the Employee is bound by this Agreement.
Section 8. GENERAL PROVISIONS.
8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Employee acknowledges
that the injury that would be suffered by the Employer as a result of a breach
of the provisions of this Agreement (including any provision of Sections 6 and
7) would be irreparable and that an award of monetary damages to the Employer
for such a breach would be an inadequate remedy. Consequently, the Employer will
have the right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this Agreement, and the Employer will not
be obligated to post bond or other security in seeking such relief. Any such
remedy shall be in addition to any damages which the Employer may be legally
entitled to recover as a result of any breach by the Employee of any provision
of this Agreement. The Employer may pursue any of the remedies described in this
Section 8 concurrently or consecutively and in any order as to such breach or
violation, and the pursuit of any one of such remedies at any
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time will not be deemed an election of remedies or a waiver of the right to
pursue any other available remedy.
8.2 ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Employee in
Sections 6 and 7 are essential elements of this Agreement supported by the
payment of $10.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Employee, and without the
Employee's agreement to comply with such covenants, the Employer would not have
entered into this Agreement or employed or continued the engagement of the
Employee. The Employer and the Employee have independently consulted their
respective counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenants, with specific regard to the
nature of the business conducted by the Employer.
If the Employee's engagement hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of the Employee in Sections 6 and 7.
8.3 REPRESENTATIONS AND WARRANTIES BY THE EMPLOYEE. The Employee
represents and warrants to the Employer that the execution and delivery by the
Employee of this Agreement do not, and the performance by the Employee of the
Employee's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Employee; or conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Employee is a party or by which the Employee is or may be bound. The Employee
further represents and warrants to the Employer that no agreements or
understandings, whether written or oral, are currently in force and effect
between the Employee and the Employer, or any other Person concerning the
subject matter of this Agreement.
8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Employee's performance of the Employee's obligations
hereunder.
8.5 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
no claim or right arising out of this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; no waiver that may be given by a party will
be applicable except in the specific instance for which it is given; and no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
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8.6 NOTICES. All notices pertaining to this Agreement must be in writing,
must be sent to the addressee at the address set forth in this Section, or at
such other address as the addressee has designated by a notice given in the
manner set forth in this Section, and must be sent by telegram, telex,
facsimile, electronic mail, courier, or prepaid, certified U.S. Mail. Notices
will be deemed given when received, if sent by telegram, telex, electronic mail
or facsimile and if received between the hours of 8:00 a.m. and 5:00 p.m., local
time of the destination address, on a business day (with confirmation of
completed transmission sufficing as prima facie evidence of receipt of a notice
sent by telex, telecopy, electronic mail, or facsimile), and when delivered and
receipted for (or when attempted delivery is refused at the address where sent)
if sent by courier or by certified U.S. Mail. Notices sent by telegram, telex,
electronic mail, or facsimile and received between 12:01 a.m. and 7:59 a.m.,
local time of the destination address, on a business day will be deemed given at
8:00 a.m. on that same day. Notices sent by telegram, telex, electronic mail, or
facsimile and received at a time other than between the hours of 12:01 a.m. and
5:00 p.m., local time of the destination address, on a business day will be
deemed given at 8:00 a.m. on the next following business day after the day of
receipt. The addresses for notice are as follows:
If to Employer: CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: General Counsel
Facsimile No.: (281) 894-7952
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Attention: James J. Spring, III
Facsimile No.: (713) 658-2553
and
If to the Employee: Ray C. Davis
11718 Knobcrest
Houston, Texas 77070
Facsimile No.: (281) 370-9017
8.7 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Employee under this Agreement, being personal, may not be delegated.
8.8 INTERPRETATION. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. A determination that any
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provision of this Agreement is unenforceable or invalid shall not affect the
enforceability or validity of any other provision.
8.9 HEADINGS. The section headings appearing in this Agreement have been
inserted for convenience only and shall be given no substantive meaning or
significance whatever in construing the terms and provisions of this Agreement.
8.10 ENTIRE AGREEMENT. This Agreement constitutes the final and entire
agreement and understanding between the parties to this Agreement concerning the
subject matter of this Agreement, and this Agreement supersedes and replaces all
prior agreements (including, specifically, the Executive Employment Agreement
dated as of March 3, 1997, between Employer and Employee) and understandings,
whether written or oral, between such parties concerning the subject matter of
this Agreement. No alleged representation, warranty, promise, inducement, or
statement of intention not expressly set forth in this Agreement is binding on
any party to this Agreement.
8.11 ACKNOWLEDGMENT AND RELEASE BY THE EMPLOYEE. By his execution of this
Agreement, the Employee acknowledges that this Agreement supersedes and replaces
all other agreements and understandings, whether written or oral, between the
Employee and any other Person concerning the subject matter of this Agreement.
In consideration for the rights and obligations arising under this Agreement,
the Employee hereby voluntarily, knowingly, fully, finally, completely, and
forever releases, relinquishes, and forever discharges the Employer and its
Affiliates, their officers, directors, employees, and agents, from any and all
claims, actions, demands, and causes of action of whatever kind or character,
whether known or unknown, joint or several, which the Employee might have or
might claim to have against the Employer for any and all injuries, harm,
damages, penalties, costs, losses, expenses, attorneys' fees, liabilities, or
other detriments, if any, whatsoever and whenever incurred, suffered, or claimed
by the Employee arising from any prior agreement or understanding, whether
written or oral, between the Employee and the Employer, or any other Person
concerning the subject matter of this Agreement.
8.12 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.
8.13 JURISDICTION. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Texas,
County of Harris, or, if it has or can acquire jurisdiction, in the United
States District Court for the District of Texas, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EMPLOYER:
CYNET, INC.
BY:/s/VINCENT W. BEALE, SR.
VINCENT W. BEALE, SR., PRESIDENT
EMPLOYEE:
BY:/s/RAY C. DAVIS
RAY C. DAVIS
15
EXHIBIT 10.9
CYNET, INC.
WARRANT AGREEMENT
Date: April 13, 1998
CyNet, Inc., a Texas corporation ("Company"), for value received, hereby
agrees to issue stock purchase warrants entitling Ray C. Davis to purchase an
aggregate of 2,000,000 shares of the Company's Class A common stock, no par
value ("Common Stock"). Such warrants are evidenced by warrant certificates in
the form attached hereto as Exhibit A (each such instrument being hereinafter
referred to as a "Warrant," and each Warrant and all instruments hereafter
issued in replacement, substitution, combination or subdivision thereof being
hereinafter collectively referred to as the "Warrants"). The Warrants are issued
as an inducement for you to enter into that certain Employment Agreement, of
even date herewith, between you and the Company. The number of shares of Common
Stock purchasable upon exercise of the Warrants is subject to adjustment as
provided in Section 5 below. The Warrants will be exercisable by you or any
other Warrant holder (as defined below) as to all or any lesser number of shares
of Common Stock covered thereby, at an initial Purchase Price of $1.00 per
share, subject to adjustment as provided in Section 5 below, for the exercise
period defined in Section 3(a) below. The term "Warrant holder" refers to the
person whose name appears on the signature page of this agreement and any
transferee or transferees of any of them permitted by Section 2(a) below.
1. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to you as follows:
(a) CORPORATE AND OTHER ACTION. The Company has all requisite power and
authority (corporate and other), and has taken all necessary corporate action,
to authorize, execute, deliver and perform this Warrant Agreement, to execute,
issue, sell and deliver the Warrants and a certificate or certificates
evidencing the Warrants, to authorize and reserve for issue and, upon payment
from time to time of the Purchase Price, to issue, sell and deliver, the shares
of the Common Stock issuable upon exercise of the Warrants ("Shares"), and to
perform all of its obligations under this Warrant Agreement and the Warrants.
The Shares, when issued in accordance with this Agreement, will be duly
authorized and validly issued and outstanding, fully paid and nonassessable and
free of all liens, claims, encumbrances and preemptive rights. This Warrant
Agreement and, when issued, each Warrant issued pursuant hereto, has been or
will be duly executed and delivered by the Company and is or will be a legal,
valid and binding agreement of the Company, enforceable in accordance with its
terms. No authorization, approval, consent or other order of any governmental
entity, regulatory authority or other third party is required for such
authorization, execution, delivery, performance, issue or sale.
(b) NO VIOLATION. The execution and delivery of this Warrant Agreement,
the consummation of the transactions herein contemplated and the compliance with
the terms and provisions of this Warrant Agreement and of the Warrants will not
conflict with, or result in a breach of, or constitute a default or an event
permitting acceleration under, any statute, the Articles of
<PAGE>
Incorporation or Bylaws of the Company or any indenture, mortgage, deed of
trust, note, bank loan, credit agreement, franchise, license, lease, permit, or
any other agreement, understanding, instrument, judgment, decree, order,
statute, rule or regulation to which the Company is a party or by which it is
bound.
2. TRANSFER; REGISTRATION RIGHTS.
(a) TRANSFERABILITY OF WARRANTS. You agree that the Warrants are being
acquired as an investment and not with a view to distribution thereof and that
the Warrants may not be transferred, sold, assigned or hypothecated except as
provided herein. You further acknowledge that the Warrants may not be
transferred, sold, assigned or hypothecated unless pursuant to a registration
statement that has become effective under the Securities Act of 1933, as amended
("Act"), setting forth the terms of such offering and other pertinent data with
respect thereto, or unless you have provided the Company with an acceptable
opinion from acceptable counsel that such registration is not required.
Certificates representing the Warrants shall bear an appropriate legend.
(b) TRANSFERABILITY OF SHARES. You agree not to make any sale or other
disposition of the Shares except pursuant to a registration statement which has
become effective under the Act, setting forth the terms of such offering, the
underwriting discount and commissions and any other pertinent data with respect
thereto, unless you have provided the Company with an acceptable opinion of
counsel acceptable to the Company that such registration is not required.
Certificates representing the Shares, which are not registered as provided in
Section 2, shall bear an appropriate legend and be subject to a "stop-transfer"
order.
(c) REGISTRATION RIGHTS. If, at any time after one year from the date
hereof, the Company shall file a registration statement under the Securities Act
(other than (i) on Form S-4 or S-8 or any successor or similar form, (ii) in
connection with an initial public offering of the Common Stock or before (but
not in connection with) an initial public offering, (iii) relating to any
capital stock of the Company under options, warrants or other rights to acquire
any such capital stock issued or to be issued primarily to directors, officers
or employees of the Company, or any of its subsidiaries or affiliates, (iv)
filed pursuant to Rule 145 under the Act or any successor or similar provision,
(v) relating to any employee benefit plan or interests therein, or (vi) relating
principally to preferred stock or debt securities of the Company), the Company
shall give written notice thereof to the Warrant holder. Upon written notice
from the Warrant holder, received by the Company within the time period (not
fewer than five (5) days) specified in such notice, that the holder desires that
the Company include the Shares in such registration statement (which request
shall specify the number of Shares which such holder desires to include in such
registration statement), the Company shall use its best efforts to include all
or a portion of the Shares in such registration statement, subject to such
conditions as may be determined by the Company. The Warrant holder shall be
permitted to withdraw all or any part of the Shares from such registration
statement prior to the effective date of such registration. If such registration
statement is filed in connection with an underwritten offering on behalf of the
Company (a "PRIMARY REGISTRATION"), the Warrant holder may sell, at the sole
discretion of the Company, all or part of the Shares included in the
registration statement on the same terms and conditions that apply to the other
securities being issued and sold by the Company. If such
WARRANT AGREEMENT PAGE 2
<PAGE>
registration statement is filed in connection with an underwritten secondary
registration on behalf of other holders of the Company's securities (a
"SECONDARY REGISTRATION"), the Warrant holder may sell, at the sole discretion
of the Company, all or part of the Shares included in the registration statement
on the same terms and conditions that apply to the securities being sold by the
person or persons who initiated the Secondary Registration. If, however, the
Company, in its sole discretion, concludes before the effectiveness of such
registration statement that to include all or part of the Shares requested by
the Warrant holder in any registration would be detrimental to any offering of
securities by the Company or otherwise not in the best interest of the Company,
the number of Shares to be included in the registration may be reduced (or
eliminated) to the extent deemed appropriate in the sole discretion of the
Company.
With respect to any registration of Shares under the Act
pursuant to of this Section 2(c), the Company shall pay all expenses incurred by
it in effecting such registration (including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company and expenses of special audits incident to or required
by any such registration); PROVIDED, HOWEVER, that the Company shall not be
required to pay (i) the fees and expenses of counsel or other advisors for the
Warrant holder, (ii) underwriting discounts and commissions relating to any of
the Shares to be registered or (iii) premiums on insurance required by any
underwriter insofar as such premiums relate to the offering of the Shares.
(d) INFORMATION. It shall be a condition precedent to the obligation of
the Company to take any action pursuant to this Section 2(c) that the holder of
the Shares to be registered under each such registration shall furnish to the
Company such information regarding the securities held by such holder and the
intended method of disposition thereof as the Company shall reasonably request
in connection with the action to be taken by the Company. In no event shall the
Company be required (i) to amend any registration statement filed pursuant to
Section 2(c) after it has become effective, or to amend or supplement any
prospectus to permit the continued disposition of the securities registered
under any registration statement, or (ii) to execute a general consent to
service in process or to qualify to do business in any state in connection with
the qualification of the Shares for sale under state securities laws.
(e) ADDITIONAL AGREEMENTS. The Warrant holder hereby covenants and agrees
with the Company as follows:
(i) The Warrant holder acknowledges being informed that this Warrant
or the Shares must held by the holder indefinitely unless the Warrants or
Shares are registered for sale by the Holder under the Act or an exemption
from such registration is available. The Warrant holder understands that
any routine sale of the Shares made in reliance upon Rule 144 promulgated
under the Act can be made only in limited amounts after the expiration of
a period of one year from the date of receipt of the Warrant and otherwise
in accordance with the terms and conditions of Rule 144, and further
understands that in the event that the exemption from registration
provided by Rule 144 is not available, compliance with some other
exemption under the Act will be required in the absence of registration.
WARRANT AGREEMENT PAGE 3
<PAGE>
(ii) The Company may instruct its transfer agents not to transfer
any of the Shares unless the transfer agents have been advised by the
Company or otherwise have been satisfied that the Warrant holder has
complied with the provisions above-described.
(iii) The Warrant holder understands that the Company has not
covenanted and is not obligated to furnish a registration statement under
the Act covering the Warrants or the Shares, to file a notification under
any regulations promulgated pursuant to the with respect to the Warrants
or the Shares, or to take any other action that would make available an
exemption from registration, except as set forth in Section 2(b). The
Company covenants and agrees that it will use its best efforts to make
publicly available, from time to time, such information as will permit the
Holder to comply with the requirements of Rule 144 relating to current
public information, that it will upon request furnish the Warrant holder a
written certificate relating to its compliance with the reporting
requirements of the Securities Exchange Act of 1934, as amended, and the
regulations and rules thereunder and that it will otherwise cooperate in
good faith with the Warrant holder in connection with any sale under Rule
144.
3. EXERCISE OF WARRANTS, PARTIAL EXERCISE.
(a) EXERCISE PERIOD. Subject to the terms of this Section 3(a), each
Warrant is exercisable at any time on or after the date hereof and shall expire
and all rights hereunder shall be extinguished upon the close of business on
April 13, 2003.
(b) EXERCISE IN FULL. Subject to Section 3(a), Warrants may be exercised
in full by the Warrant holder by surrender of the Warrants, with the form of
subscription at the end thereof duly executed by such Warrant holder, to the
Company at its principal office in Houston, Texas, Attention: President,
accompanied by payment as determined by 3(d) below, in the amount obtained by
multiplying the number of shares of the Common Stock represented by the
respective Warrant or Warrants by the Purchase Price per share (after giving
effect to any adjustments as provided in Section 5 below).
(c) PARTIAL EXERCISE. Subject to Section 3(a), each Warrant may be
exercised in part by the Warrant holder by surrender of the Warrant, with the
form of subscription at the end thereof duly executed by such Warrant holder, in
the manner and at the place provided in Section 3(b) above, accompanied by
payment as determined by 3(d) below, in amount obtained by multiplying the
number of shares of the Common Stock designated by the Warrant holder in the
form of subscription attached to the Warrant by the Purchase Price per share
(after giving effect to any adjustments as provided in Section 5 below). Upon
any such partial exercise, the Company at its expense will forthwith issue and
deliver to or upon the order of the Warrant holder a new Warrant of like tenor,
in the name of the Warrant holder subject to Section 2(a), calling in the
aggregate for the purchase of the number of shares of the Common Stock equal to
the number of such shares called for on the face of the respective Warrant
(after giving effect to any adjustment herein as provided in Section 5 below)
minus the number of such shares designated by the Warrant holder in the
aforementioned form of subscription.
WARRANT AGREEMENT PAGE 4
<PAGE>
(d) PAYMENT OF EXERCISE PRICE.
Payment of the Exercise Price may be made by any of the following, or a
combination thereof, at the election of Warrant holder:
(i) cash, certified check or cashier's check or wire transfer; or
(ii) surrender of the Warrants at the principal office of the
Company together with notice of election, in which event the Company shall issue
Holder a number of shares of Common Stock computed using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to
Holder (not to exceed the number of shares set forth on the
cover page of this Warrant Agreement, as adjusted pursuant to
the provisions of Section 5 of this Warrant Agreement).
Y = the number of shares of Common Stock for which the Warrant
is being exercised.
A = the Market Price of one share of Common Stock (for
purposes of this Section 3(d), the "Market Price" shall be
defined as the average closing price of the Common Stock (if
actual sales price information on any trading day is not
available, the closing bid price shall be used) for the five
trading days prior to the Date of Exercise of this Warrant
(the "Average Closing Bid Price"), as reported by the National
Association of Securities Dealers Automated Quotation System
("NASDAQ"), or if the Common Stock is not traded on NASDAQ,
the Average Closing Bid Price in the over-the-counter market;
provided, however, that if the Common Stock is listed on a
stock exchange, the Market Price shall be the Average Closing
Bid Price on such exchange; and, provided further, that if the
Common Stock is not quoted or listed by any organization, the
fair value of the Common Stock, as determined by the board of
directors of the Company, whose determination shall be
conclusive, shall be used).
B = the Exercise Price.
4. DELIVERY OF STOCK CERTIFICATES ON EXERCISE.
Any exercise of the Warrants pursuant to Section 3 shall be deemed to have
been effected immediately prior to the close of business on the date on which
the Warrants together with the subscription form and the payment for the
aggregate Purchase Price shall have been received by the Company. At such time,
the person or persons in whose name or names any certificate or certificates
WARRANT AGREEMENT PAGE 5
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representing the Shares or Other Securities (as defined below) shall be issuable
upon such exercise shall be deemed to have become the holder or holders of
record of the Shares or Other Securities so purchased. As soon as practicable
after the exercise of any Warrant in full or in part, and in any event within 10
business days thereafter, the Company at its expense (including the payment by
it of any applicable issue taxes) will cause to be issued in the name of, and
delivered to the purchasing Warrant holder, a certificate or certificates
representing the number of fully paid and nonassessable shares of Common Stock
or Other Securities to which such Warrant holder shall be entitled upon such
exercise, plus in lieu of any fractional share to which such Warrant holder
would otherwise be entitled, cash in an amount determined pursuant to Section
6(e). The term "Other Securities" refers to any stock (other than Common Stock),
other securities or assets (including cash) of the Company or any other person
(corporate or otherwise) which the holders of the Warrants at any time shall be
entitled to receive, or shall have received, upon the exercise of the Warrants,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of Common
Stock or Other Securities pursuant to Section 5 below or otherwise.
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES PURCHASABLE.
The Purchase Price and the number of Shares are subject to adjustment from
time to time as set forth in this Section 5.
(a) In case the Company shall at any time after the date of this Agreement
(i) declare a dividend on the Common Stock in shares of its capital stock, (ii)
subdivide the outstanding Shares, (iii) combine the outstanding Common Stock
into a smaller number of Common Stock, or (iv) issue any shares of its capital
stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then in each case the Purchase Price,
and the number and kind of Shares receivable upon exercise, in effect at the
time of the record date for such dividend or of the effective date of such
subdivision, combination, or reclassification shall be proportionately adjusted
so that the holder of any Warrant exercised after such time shall be entitled to
receive the aggregate number and kind of Shares which, if such Warrant had been
exercised immediately prior to such record date, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) No adjustment in the Purchase Price shall be required if such
adjustment is less than $.05; PROVIDED, HOWEVER, that any adjustments which by
reason of this subsection (b) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 5 shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(c) Upon each adjustment of the Purchase Price as a result of the
calculations made in subsection (a) of this Section 5, each Warrant outstanding
prior to the making of the adjustment in the Purchase Price shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
Shares (calculated to the nearest thousandth) obtained by (i) multiplying the
number of
WARRANT AGREEMENT PAGE 6
<PAGE>
Shares purchasable upon exercise of a Warrant immediately prior to adjustment of
the number of Shares by the Purchase Price in effect prior to adjustment of the
Purchase Price and (ii) dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.
6. FURTHER COVENANTS OF THE COMPANY.
(a) DILUTION OR IMPAIRMENTS. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger or dissolution, avoid or seek to avoid the observance or
performance of any of the terms of the Warrants or of this Warrant Agreement,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Warrant holders against dilution or other
impairment. Without limiting the generality of the foregoing, the Company:
(i) shall at all times reserve and keep available, solely for
issuance and delivery upon the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable upon the
exercise of the Warrants and shall take all necessary actions to ensure
that the par value per share, if any, of the Common Stock (or Other
Securities) is at all times equal to or less than the then effective
Purchase Price per share; and
(ii) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock or Other Securities upon the exercise
of the Warrants from time to time outstanding.
(b) TITLE TO STOCK. All shares of Common Stock delivered upon the exercise
of the Warrants shall be validly issued, fully paid and nonassessable; each
Warrant holder shall, upon such delivery, receive good and marketable title to
the Shares, free and clear of all voting and other trust arrangements, liens,
encumbrances, equities and claims whatsoever; and the Company shall have paid
all taxes, if any, in respect of the issuance thereof.
(c) EXCHANGE OF WARRANTS. Subject to Section 2(a) hereof, upon surrender
for exchange of any Warrant to the Company, the Company at its expense will
promptly issue and deliver to or upon the order of the holder thereof a new
Warrant or like tenor, in the name of such holder or as such holder (upon
payment by such Warrant holder of any applicable transfer taxes) may direct,
calling in the aggregate for the purchase of the number of shares of the Common
Stock called for on the face or faces of the Warrant or Warrants so surrendered.
The Warrants and all rights thereunder are transferable in whole or in part upon
the books of the Company by the registered holder thereof, subject to the
provisions of Section 2(a), in person or by duly authorized attorney, upon
surrender of the Warrant, duly endorsed, at the principal office of the Company.
(d) REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement reasonably satisfactory in form and
WARRANT AGREEMENT PAGE 7
<PAGE>
amount to the Company or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, the Company, at the expense of the Warrant holder,
will execute and deliver, in lieu thereof, a new Warrant of like tenor.
(e) FRACTIONAL SHARES. No fractional Shares are to be issued upon the
exercise of any Warrant, but the Company shall pay a cash adjustment in respect
of any fraction of a share which would otherwise be issuable in an amount as
determined by the Board of Directors.
7. OTHER WARRANT HOLDERS; HOLDERS OF SHARES.
The Warrants are issued upon the following terms, to all of which each
Warrant holder by the taking thereof consents and agrees: (a) any person who
shall become a transferee, within the limitations on transfer imposed by Section
2(a) hereof, of a Warrant properly endorsed shall take such Warrant subject to
the provisions of Section 2(a) hereof and thereupon shall be authorized to
represent himself as absolute owner thereof and, subject to the restrictions
contained in this Warrant Agreement, shall be empowered to transfer absolute
title by endorsement and delivery thereof to a permitted BONA FIDE purchaser for
value; (b) any person who shall become a holder or owner of Shares shall take
such shares subject to the provisions of Section 2(b) hereof; (c) each prior
taker or owner waives and renounces all of his equities or rights in such
Warrant in favor of each such permitted BONA FIDE purchaser, and each such
permitted BONA FIDE purchaser shall acquire absolute title thereto and to all
rights presented thereby; and (d) until such time as the respective Warrant is
transferred on the books of the Company, the Company may treat the registered
holder thereof as the absolute owner thereof for all purposes, notwithstanding
any notice to the contrary.
8. MISCELLANEOUS.
All notices, certificates and other communications from or at the request
of the Company to any Warrant holder shall be mailed by first class, registered
or certified mail, postage prepaid, to such address as may have been furnished
to the Company in writing by such Warrant holder, or, until an address is so
furnished, to the address of the last holder of such Warrant who has so
furnished an address to the Company, except as otherwise provided herein. This
Warrant Agreement and any of the terms hereof may be changed, waived, discharged
or terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. This
Warrant Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Texas. The headings in this Warrant
Agreement are for purposes of reference only and shall not limit or otherwise
affect any of the terms hereof. This Warrant Agreement, together with the forms
of instruments annexed hereto as exhibits, constitutes the full and complete
agreement of the parties hereto with respect to the subject matter hereof.
WARRANT AGREEMENT PAGE 8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Agreement to be
executed as of April 13, in Houston, Texas, by its proper corporate officers,
thereunto duly authorized.
CYNET, INC.
By:/s/VINCENT W. BEALE, SR.
VINCENT W. BEALE, SR., President
The above Warrant Agreement is confirmed
as of the date set forth above.
/s/RAY C. DAVIS
Ray C. Davis
WARRANT AGREEMENT PAGE 9
<PAGE>
EXHIBIT A
WARRANT
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER: (A) THE SECURITIES ACT OF 1933,
AS AMENDED, IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN
SECTIONS 3 AND 4 OF SUCH ACT AND REGULATION D PROMULGATED THEREUNDER; OR (B) ANY
STATE SECURITIES LAWS IN RELIANCE UPON APPLICABLE EXEMPTIONS THEREUNDER. THESE
WARRANTS MUST BE ACQUIRED FOR INVESTMENT ONLY FOR THE ACCOUNT OF THE INVESTOR,
AND NEITHER THE WARRANTS NOR THE UNDERLYING STOCK MAY BE TRANSFERRED OR
EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE SECURITIES AND OTHER LAWS.
Warrant No. _____ To Purchase
_____ Shares of
Common Stock
CYNET, INC.
Incorporated Under the Laws of Texas
This certifies that, for value received, the hereafter named registered
owner is entitled, subject to the terms and conditions of this Warrant, until
the expiration date, to purchase the number of shares set forth above of the
common stock ("Common Stock"), of CyNet, Inc. ("Corporation") from the
Corporation at the purchase price per share hereafter set forth, on delivery of
this Warrant to the Corporation with the exercise form duly executed and payment
of the purchase price (in cash or by certified or bank cashier's check payable
to the order of the Corporation) for each share purchased. This Warrant is
subject to the terms of the Warrant Agreement between the parties thereto dated
as of ____________, the terms of which are hereby incorporated herein. Reference
is hereby made to such Warrant Agreement for a further statement of the rights
of the holder of this Warrant.
Registered Owner: ____________________ Date: ____________
Purchase Price
Per Share: $___________________
Expiration Date Subject to Section 3(a) of the Warrant Agreement, 5:00 p.m.
Houston time on ____________.
WITNESS the signature of the Corporation's authorized officer:
CYNET, INC.
By: __________________________________
________________, President
A-1
<PAGE>
FORM OF SUBSCRIPTION
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
To CyNet, Inc.:
The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________* shares of Common Stock of CyNet, Inc. and
herewith makes payment of $_______________ therefor, and requests that the
certificate or certificates for such shares be issued in the name of and
delivered to the undersigned.
Dated:_______________
__________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the enclosed Warrant)
__________________________________________
(Address)
- ----------------------
(*) Insert here the number of shares called for on the face of the Warrant or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised, in either case without making any adjustment
for additional Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the
Warrant Agreement pursuant to which the Warrant was granted, may be
delivered upon exercise.
A-2
<PAGE>
FORM OF ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers
unto ______________________________ the right represented by the enclosed
Warrant to purchase _______________ shares of Common Stock of CyNet, Inc. to
which the enclosed Warrant relates, and appoints _______________________
Attorney to transfer such right on the books of CyNet, Inc.
with full power of substitution in the premises.
The undersigned represents and warrants that the transfer of the enclosed
Warrant is permitted by the terms of the Warrant Agreement pursuant to which the
enclosed Warrant has been issued, and the transferee hereof, by his acceptance
of this Agreement, represents and warrants that he is familiar with the terms of
said Warrant Agreement and agrees to be bound by the terms thereof with the same
force and effect as if a signatory thereto.
Dated:_______________
__________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the enclosed Warrant)
__________________________________________
(Address)
Signed in the presence of:
A-3
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is made as of July 22, 1998
by CYNET, INC., a Texas corporation (the "EMPLOYER"), and BERNARD B. BEALE, an
individual resident of the State of Texas (the "EXECUTIVE").
INTRODUCTION
Employer, directly or through one or more subsidiaries, is engaged in the
business of providing enhanced fax and related communication services. The
Employer desires to employ the Executive, and the Executive wishes to accept
such employment, upon the terms and conditions set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
Section 1. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1.
1.1 "AFFILIATE" or "AFFILIATES" -- any Person that, directly or
indirectly, controls, or is controlled by or under common control with, the
Employer, including the Employer. For the purposes of this definition, "CONTROL"
(including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
power to direct or cause the direction of the management and policies of any
Person, directly or indirectly, through ownership of voting securities, by
contract, or otherwise.
1.2 "AGREEMENT" -- this Employment Agreement, as amended from time to
time.
1.3 "BASIC COMPENSATION" -- Salary and Benefits.
1.4 "BENEFITS" -- as defined in Section 3.1(c).
1.5 "BOARD OF DIRECTORS" -- the board of directors of the Employer.
1.6 "CONFIDENTIAL INFORMATION" -- any and all:
(a) trade secrets concerning the business and affairs of Employer
or any Affiliate, product specifications, data, know-how,
formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current
and planned manufacturing or distribution methods and
processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans,
data bases, computer software and programs (including object
code and source code), computer software and database
technologies,
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systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret within the meaning of the common law of
the State of Texas; and
(b) information concerning the business and affairs of Employer or
any Affiliate (which includes historical financial statements,
financial projections and budgets, historical and projected
sales, marketing and customer data, capital spending budgets,
acquisition prospects and plans, the names and backgrounds of
key personnel, personnel training and techniques and
materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for any Affiliate containing or based,
in whole or in part, on any information included in the
foregoing.
1.7 "DISABILITY" -- as defined in Section 5.2.
1.8 "EFFECTIVE DATE" -- the date stated in the first paragraph of the
Agreement.
1.9 "EMPLOYEE INVENTION" -- any idea, invention, technique, modification,
process, or improvement (whether patentable or not), any industrial design
(whether registerable or not), any mask work, however fixed or encoded, that is
suitable to be fixed, embedded or programmed in a semiconductor product (whether
recordable or not), and any work of authorship (whether or not copyright
protection may be obtained for it) created, conceived, or developed by the
Executive, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer or the Affiliates, and any
such item created by the Executive, either solely or in conjunction with others,
following termination of the Executive's employment with the Employer, that is
based upon or uses Confidential Information.
1.10 "EMPLOYMENT PERIOD" -- the term of the Executive's employment under
this Agreement.
1.11 "FISCAL YEAR" -- the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
1.12 "FOR CAUSE" -- as defined in Section 5.3.
1.13 "INCENTIVE COMPENSATION" -- as defined in Section 3.2.
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1.14 "OPTION PLAN" -- the CyNet, Inc. Stock Incentive Option Plan.
1.15 "NONINCENTIVE COMPENSATION" -- as defined in Section 3.3.
1.16 "PERSON" -- any individual, general or limited partnership, joint
venture, corporation (including any non-profit corporation), limited liability
company, bank, estate, trust, association, entity, unincorporated organization,
or government body.
1.17 "POST-EMPLOYMENT PERIOD" -- as defined in Section 7.2.
1.18 "PROPRIETARY ITEMS" -- as defined in Section 6.2(a)(iv).
1.19 "SALARY" -- as defined in Section 3.1(a).
1.20 "SIGNING BONUS" -- as defined in Section 3.1(b).
Section 2. EMPLOYMENT TERMS AND DUTIES.
2.1 EMPLOYMENT. The Employer hereby employs the Executive, and the
Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2 TERM. Subject to the provisions of Section 5, the term of the
Executive's employment under this Agreement will be four (4) years, beginning on
the Effective Date and ending on the fourth anniversary of the Effective Date.
Thereafter, the term may continue for additional one (1) year periods upon the
mutual written agreement of the Executive and the Employer.
2.3 DUTIES. The Executive will have such duties as are assigned or
delegated to the Executive by the Board of Directors (which duties shall be of a
senior management or executive level) and will initially serve as Executive Vice
President of the Employer, with overall responsibility for Employer's
operations. The Executive will devote substantially all of his entire business
time, attention, skill, and energy exclusively to the business of the Employer,
will use his best efforts to promote the success of the Employer's business, and
will cooperate fully with the Board of Directors in the advancement of the best
interests of the Employer. For the Executive's service as a director of the
Employer or as a director or officer of any of its Affiliates, the Executive
will fulfill his duties as such director or officer without additional
compensation.
Section 3. COMPENSATION.
3.1 BASIC COMPENSATION.
(a) SALARY. The Executive will be paid an annual salary of
$150,000.00, subject to adjustment as provided below (the
"SALARY"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices,
3
<PAGE>
but no less frequently than monthly. The Salary will be
reviewed by the Board of Directors not less frequently than
annually, and may be adjusted upward or downward in the sole
discretion of the Board of Directors, but in no event will the
Salary be less than $150,000.00 per year.
(b) SIGNING BONUS. In order to induce the Executive to accept
employment with the Employer, the Employer agrees to pay the
Executive a bonus of $30,000 ("SIGNING BONUS"). Subject to the
Executive's employment by the Employer, such bonus shall be
paid to the Executive on the date he commences employment
hereunder unless Executive, at his sole discretion, grants
Employer an extension of time to pay the Signing Bonus.
(c) BENEFITS. The Executive will, during the Employment Period, be
permitted to participate in such pension, profit sharing,
bonus, life insurance, hospitalization, major medical, and
other employee benefit plans of the Employer that may be in
effect from time to time, to the extent the Executive is
eligible under the terms of those plans (collectively, the
"BENEFITS").
(d) LIFE INSURANCE. During the Employment Period, Employer, at the
Employer's expense, will purchase and maintain in effect one
or more life insurance policies on the life of Executive with
minimum coverage of $250,000. Such insurance shall include a
cash surrender value component and, upon Executive's death,
shall be payable to the beneficiary or beneficiaries
designated by Executive.
3.2 INCENTIVE COMPENSATION. As additional compensation (the "INCENTIVE
COMPENSATION") for the services to be rendered by the Executive pursuant to this
Agreement, the Executive will be entitled to receive such Incentive Compensation
as may be determined by the Board of Directors.
3.3 NONINCENTIVE COMPENSATION. As additional compensation (the
"NONINCENTIVE COMPENSATION") for the services to be rendered by the Executive
pursuant to this Agreement, the Executive shall be granted an incentive stock
option to purchase 150,000 shares of Class A Common Stock, at an exercise price
of $.39 per share, under the Option Plan.
3.4 VACATIONS AND HOLIDAYS. The Executive will be entitled to paid
vacation each Fiscal Year in accordance with the vacation policies of the
Employer in effect for its executive officers from time to time. Vacation must
be taken by the Executive at such time or times as approved by the Chairman of
the Board of Directors. The Executive will also be entitled to the paid holidays
and other paid leave set forth in the Employer's policies. Vacation days and
holidays during any Fiscal Year that are not used by the Executive during such
Fiscal Year may not be used in any subsequent Fiscal Year, but Executive shall
be paid at the end of each Fiscal Year for any vacation days which Executive was
unable to use as a result of a request for approval of a vacation having been
denied by the Chairman of the Board of Directors.
4
<PAGE>
3.5 AUTOMOBILE. During the Employment Period, the Executive shall be
entitled to a monthly automobile allowance of $600.00. The Employer will
reimburse the Executive for reasonable expenses incurred by the Executive for
the operation, repair and maintenance of such automobile in the performance of
the Executive's duties pursuant to this Agreement, in accordance with the
Employer's employment policies, at a rate of $.35 per mile. The Executive shall
file expense reports with respect to such expenses in accordance with the
Employer's policies.
Section 4. FACILITIES AND EXPENSES. The Employer will furnish the
Executive office space, equipment, supplies, and such other facilities and
personnel as the Employer deems necessary or appropriate for the performance of
the Executive's duties under this Agreement and as are commensurate with
Executive's duties under Section 2.3. The Employer will pay the Executive's dues
in such professional societies and organizations as the Chairman of the Board of
Directors of the Employer deems appropriate, and will pay on behalf of the
Executive (or reimburse the Executive for) reasonable expenses incurred by the
Executive at the request of, or on behalf of, the Employer in the performance of
the Executive's duties pursuant to this Agreement, and in accordance with the
Employer's employment policies, including reasonable expenses incurred by the
Executive in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's policies.
Section 5. TERMINATION.
5.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic
Compensation, Incentive Compensation, Nonincentive Compensation, and any and all
other rights of the Executive under this Agreement or otherwise as an employee
of the Employer will terminate (except as otherwise provided in this Section 5):
(a) upon the death of the Executive;
(b) upon the Disability of the Executive (as defined in Section
5.2) immediately upon notice from either party to the other;
(c) For Cause (as defined in Section 5.3), immediately upon notice
from the Employer to the Executive, or at such later time as
such notice may specify; or
(d) upon Executive's voluntary termination of employment, which
termination shall be effective thirty (30) days after
Employer's receipt of Executive's written resignation.
5.2 DISABILITY. For purposes of this Section 5, the Executive will be
deemed to have a "DISABILITY" if, for physical or mental reasons, the Executive
is unable to perform the Executive's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period,
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<PAGE>
as determined in accordance with this Section 5.2. The Disability of the
Executive will be determined by a medical doctor selected by written agreement
of the Employer and the Executive upon the request of either party by notice to
the other. If the Employer and the Executive cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two medical
doctors will select a third medical doctor who will determine whether the
Executive has a Disability. The determination of the medical doctor selected
under this Section 5.2 will be binding on both parties. The Executive must
submit to a reasonable number of examinations by the medical doctor making the
determination of Disability under this Section 5.2, and the Executive hereby
authorizes the disclosure and release to the Employer of such determination and
all supporting medical records. If the Executive is not legally competent, the
Executive's legal guardian or duly authorized attorney-in-fact will act on
behalf of the Executive, under this Section 5.2, for the purposes of submitting
the Executive to the examinations, and providing the authorization of
disclosure, required under this Section 5.2.
5.3 FOR CAUSE. For purposes of Section 5.1, the phrase "FOR CAUSE" means:
(a) the Executive's breach of a material provisions of this Agreement, which
breach is not substantially cured within thirty (30) days after receipt of
written notice thereof from Employer; (b) the Executive's repeated failure to
adhere to any written Employer policy and Executive's failure to cure such
noncompliance within thirty (30) days after receipt of written notice thereof
from Employer; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Employer, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Employer; (d) the misappropriation (or attempted misappropriation) of any of
the Employer's funds or property; or (e) the conviction of, the indictment for
(or its procedural equivalent), or the entering of a guilty plea or plea of no
contest with respect to, a felony or the equivalent thereof.
5.4 TERMINATION PAY. Effective upon the termination of this Agreement, the
Employer will be obligated to pay the Executive (or, in the event of his death,
his designated beneficiary as defined below) only such compensation as is
provided in this Section 5.4, and in lieu of all other amounts and in settlement
and complete release of all claims the Executive may have against the Employer
under this Agreement. For purposes of this Section 5.4, the Executive's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Executive may designate by notice to the Employer from time
to time or, if the Executive fails to give notice to the Employer of such a
beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the
Employer will have no duty, in any circumstances, to attempt to open an estate
on behalf of the Executive, to determine whether any beneficiary designated by
the Executive is alive or to ascertain the address of any such beneficiary, to
determine the existence of any trust, to determine whether any person or entity
purporting to act as the Executive's personal representative (or the trustee of
a trust established by the Executive) is duly authorized to act in that
capacity, or to locate or attempt to locate any beneficiary, personal
representative, or trustee.
(a) TERMINATION BY THE EMPLOYER FOR CAUSE. If the Employer
terminates this Agreement For Cause, the Executive will be
entitled to receive his Salary and
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Benefits through the date such termination is effective and
the vested portion of any Incentive Compensation and any
Nonincentive Compensation.
(b) TERMINATION UPON DISABILITY. If this Agreement is terminated
by either party as a result of the Executive's Disability, as
determined under Section 5.2, the Employer will pay the
Executive his Salary and Benefits through the remainder of the
calendar month during which such termination is effective and
for the lesser of (i) six consecutive months thereafter, or
(ii) the period until Disability insurance benefits commence
under the Disability insurance coverage, if any, furnished by
the Employer to the Executive. The Executive shall be entitled
to the vested portions of his Incentive Compensation and
Nonincentive Compensation and to a pro rata portion of his
Incentive Compensation and Nonincentive Compensation for the
year during which such Disability occurs, but shall not be
entitled to any other Incentive Compensation or Nonincentive
Compensation. Executive shall be entitled to continue to
participate in Employer's group health insurance (if such
participation is permitted by the insurance company providing
such insurance coverage) after Disability occurs, provided
Executive reimburses Employer for the costs of such coverage.
Executive shall also be entitled to acquire from Employer any
life insurance policy in effect on Executive's life at the
date of Disability, provided Executive reimburses Employer the
cash surrender value, if any, accumulated in such life
insurance policy and assumes the obligation to make payments
to maintain such insurance policy in effect.
(c) TERMINATION UPON DEATH. If this Agreement is terminated
because of the Executive's death, the Executive will be
entitled to receive his Salary and Benefits through the end of
the calendar month in which his death occurs. The Executive
shall be entitled to receive the vested portions of his
Incentive Compensation and Nonincentive Compensation and to a
pro rata portion of his Incentive Compensation and
Nonincentive Compensation for the year during which the
Executive's death occurs, but shall not be entitled to any
other Incentive Compensation or Nonincentive Compensation for
or any subsequent year. Executive's family shall be entitled
to continue to participate in Employer's group health
insurance (if such participation is permitted by the insurance
company providing such insurance coverage) after Executive's
death occurs, provided Executive's family reimburses Employer
for the costs of such coverage.
(d) TERMINATION UPON RESIGNATION. If this Agreement is terminated
because of the voluntary resignation of the Executive
hereunder, the Executive shall be entitled to receive his
Salary and Benefits through the effective date of his
termination and any vested portions of his Incentive
Compensation or
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Nonincentive Compensation. The Executive shall not be entitled
to any other Incentive Compensation or to any other
Nonincentive Compensation.
(e) TERMINATION BY THE EMPLOYER NOT FOR CAUSE. If the Employer
terminates this Agreement not For Cause, the Executive, at the
option of the Executive, will be entitled to either: (i)
receive all of the compensation and Benefits provided by
Section 3.1, and the Incentive Compensation provided by
Section 3.2 and the Nonincentive Compensation provided by
Section 3.3 for the remainder of the Employment Term, and the
Executive shall be subject to the provisions of Section 7.2
hereof; or (ii) the Executive shall be entitled to receive all
of the compensation and Benefits provided by Section 3.1 and
the vested portions of any Incentive Compensation provided by
Section 3.2 and Nonincentive Compensation provided by Section
3.3 through the end of the calendar month in which such
termination occurs, and the Executive shall not be subject to
the provisions of Section 7.2.
(f) BENEFITS. The Executive's accrual of, or participation in
plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive
will be entitled to accrued Benefits pursuant to such plans
only as provided in such plans. The Executive will not
receive, as part of his termination pay pursuant to this
Section 5, any payment or other compensation for any vacation,
holiday, sick leave, or other leave unused on the date the
notice of termination is given under this Agreement.
(g) EXPIRATION OF EMPLOYMENT. Employer agrees to notify the
Executive not less than sixty (60) days prior to the
expiration of the initial term of this Agreement or any
subsequent continuation thereof as to whether Employer desires
to extend the Employment Period of this Agreement.
5.5 TERMINATION UPON BREACH BY EMPLOYER. This Agreement may be terminated
by Executive, by written notice to Employer, in the event of the Employer's
breach of a material provision of this Agreement, which breach is not
substantially cured within thirty (30) days after Employer's receipt of written
notice thereof from Executive. If this Agreement is terminated by Executive as a
result of Employer's breach, Executive shall not be subject to the provisions of
Section 7.2 hereof.
5.6 TERMINATION UPON CHANGE OF CONTROL. Notwithstanding any other
provision of this Agreement, the Executive's employment under this Agreement may
be terminated during the Employment Period by the Executive if a "Change of
Control" (as defined below) of the Employer occurs without the consent of the
Executive. If Executive elects to terminate his employment as a result of a
Change of Control, Executive will be entitled to receive his salary and benefits
and the vested portions of his Incentive Compensation and Nonincentive
Compensation for a period of two (2) years after the Effective Date of such
termination. For purposes of this Agreement, a "Change
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of Control" of Employer shall be deemed to have occurred if, after the Effective
Date (a) any "person" (as such term is defined in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Employer representing 50% or
more of the combined voting power of Employer's then outstanding securities,
without the prior approval of at least a majority of the members of the Board in
office immediately prior to such person obtaining such percentage interest; (b)
there occurs a proxy contest or a consent solicitation, or Employer is a party
to a merger, consolidation, sale of assets, plan of liquidation or other
reorganization not approved by at least a majority of the members of the Board,
as a consequence of which members of the Board in office immediately prior to
such transaction or event constitute less than a majority of the Board
thereafter; or (c) during any period of two consecutive years, other than as a
result of an event described in clause (b) of this Section 5.6, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election was approved by a vote of at least a
majority of the directors then in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of the
members of the Board.
Section 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS.
6.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that
during the Employment Period and as a part of his employment, the Executive will
be afforded access to Confidential Information; public disclosure of such
Confidential Information could have an adverse effect on the Employer and its
business; because the Executive possesses substantial technical expertise and
skill with respect to the Employer's business, the Employer desires to obtain
exclusive ownership of each Employee Invention, and the Employer will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and the provisions of this Section 6 are reasonable
and necessary to prevent the improper use or disclosure of Confidential
Information and to provide the Employer with exclusive ownership of all Employee
Inventions.
6.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation and
benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:
(a) CONFIDENTIALITY.
(i) During and for a period of two (2) years following the
Employment Period, the Executive will hold in confidence
the Confidential Information and will not disclose it to
any person except with the specific prior written
consent of the Employer or except as otherwise expressly
permitted by the terms of this Agreement.
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(ii) Any trade secrets of any Affiliate will be entitled to
all of the protections and benefits under the common law
of the State of Texas and any other applicable law. If
any information that the Employer deems to be a trade
secret is found by a court of competent jurisdiction not
to be a trade secret for purposes of this Agreement,
such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement.
The Executive hereby waives any requirement that the
Employer submit proof of the economic value of any trade
secret or post a bond or other security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that
the Executive demonstrates either (x) was known by
Executive prior to the date of his employment by the
Employer, (y) was or became generally available to the
public other than as a result of a disclosure by the
Executive, or (z) was made known to Executive on a
nonconfidential basis from a source other than Employer
or its representatives or agents, provided that such
source is not bound by a confidentiality agreement with,
or other obligation of secrecy to, Employer or another
party.
(iv) The Executive will not remove from the premises of the
Employer or any Affiliate (except to the extent such
removal is for purposes of the performance of the
Executive's duties at home or while traveling, or except
as otherwise specifically authorized by the Employer or
such Affiliate) any document, record, notebook, plan,
model, component, device, or computer software or code,
whether embodied in a disk or in any other form
(collectively, the "PROPRIETARY ITEMS"). The Executive
recognizes that, as between the Employer or any
Affiliate and the Executive, all of the Proprietary
Items, whether or not developed by the Executive, are
the exclusive property of the Employer or the
Affiliates. Upon termination of this Agreement by either
party, or upon the request of the Employer or any
Affiliate during the Employment Period, the Executive
will return to the Employer or the Affiliates all of the
Proprietary Items in the Executive's possession or
subject to the Executive's control, and the Executive
shall not retain any copies, abstracts, sketches, or
other physical embodiment of any of the Proprietary
Items.
(b) EMPLOYEE INVENTIONS. Each Employee Invention will belong
exclusively to the Employer. The Executive acknowledges that
all of the Executive's writing, works of authorship, specially
commissioned works, and other Employee Inventions are works
made for hire and the property of the Employer, including any
copyrights, patents, or other intellectual property rights
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pertaining thereto. If it is determined that any such works
are not works made for hire, the Executive hereby assigns to
the Employer all of the Executive's right, title, and
interest, including all rights of copyright, patent, and other
intellectual property rights, to or in such Employee
Inventions. The Executive covenants that he will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and
without additional compensation, all of the
Executive's right to the Employee Invention for
the United States and all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as
the Employer may request in order to apply for and
obtain patents or other registrations with respect
to any Employee Invention in the United States and
any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance in
support of the Employer's rights to any Employee
Invention.
6.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Executive, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
Section 7. NON-COMPETITION AND NON-INTERFERENCE.
7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges and
agrees that the limitations set forth in this Section 7 are a necessary part of
and ancillary to the Executive's agreement not to disclose Confidential
Information, reasonable and do not impose a greater restraint on the activities
of the Executive than is necessary to protect the business interest of the
Employer. In the event that any such territorial, scope, or time limitation are
deemed to be unreasonable by a court of competent jurisdiction, the Executive
agrees to the reduction of the territorial, scope or time limitation to the
area, scope or time which such court shall have deemed reasonable.
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7.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments by
the Executive, and in consideration of the compensation and benefits to be paid
or provided to the Executive by the Employer in the event this Agreement is
terminated pursuant to Section 5.4(a), 5.4(d) or 5.4(e), the Executive covenants
that he will not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period
(as defined below), engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management,
operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the
Executive's name or any similar name to, lend Executive's
credit to or render services or advice to, any business whose
products or activities compete in whole or in part with the
products or activities of the Employer or any Affiliate of
Employer anywhere within the geographic areas in which the
Employer or any such Affiliate now or hereafter conducts its
business; provided, however, that the Executive may purchase
or otherwise acquire up to (but not more than) one percent of
any class of securities of any enterprise (but without
otherwise participating in the activities of such enterprise)
if such securities are listed on any national or regional
securities exchange or have been registered under Section
12(g) of the Securities Exchange Act of 1934;
(b) whether for the Executive's own account or for the account of
any other person, at any time during the Employment Period and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer or any Affiliate
of Employer, from any person known by the Executive to be a
customer of the Employer or any such Affiliate, whether or not
the Executive had personal contact with such person during and
by reason of the Executive's employment with the Employer;
(c) whether for the Executive's own account or the account of any
other person at any time during the Employment Period and the
Post-Employment Period, (i) solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is or was an employee of the Employer or any
Affiliate of Employer at any time during the Employment Period
or in any manner induce or attempt to induce any employee of
the Employer and any such Affiliate to terminate his
employment with the Employer; or (ii) interfere with the
Employer's or any Affiliate's relationship with any person,
including any person who at any time during the Employment
Period was an employee, contractor, supplier, or customer of
the Employer or any such Affiliate; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, directors, officers,
employees, or agents.
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For purposes of this Section 7.2, the term "POST-EMPLOYMENT PERIOD" means
the two-year period beginning on the date of termination of the Executive's
employment with the Employer.
If any covenant in this Section 7.2 is held to be unreasonable, arbitrary,
or against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time, or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Executive.
The Executive will, while the covenant under this Section 7.2 is in
effect, give notice to the Employer, within ten days after accepting any other
employment, of the identity of the Executive's new employer. The Employer may
notify such new employer that the Executive is bound by this Agreement.
Notwithstanding the foregoing to the contrary, the Executive will not be
subject to any covenant under this Section 7.2 in the event:
(i) the term of the Executive's employment under this Agreement is not
renewed pursuant to Section 2.2; or
(ii) Employer voluntarily files a bankruptcy or insolvency proceeding (or
an involuntary bankruptcy or insolvency proceeding is filed against
Employer, which proceeding has not been dismissed within ninety (90)
days from the filing thereof).
Section 8. GENERAL PROVISIONS.
8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges
that the injury that would be suffered by the Employer as a result of a breach
of the provisions of this Agreement (including any provision of Sections 6 and
7) would be irreparable and that an award of monetary damages to the Employer
for such a breach would be an inadequate remedy. Consequently, the Employer will
have the right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this Agreement, and the Employer will not
be obligated to post bond or other security in seeking such relief. Any such
remedy shall be in addition to any damages which the Employer may be legally
entitled to recover as a result of any breach by the Employee of any provision
of this Agreement. The Employer may pursue any of the remedies described in this
Section 8 concurrently or consecutively and in any order as to such breach or
violation, and the pursuit of any one of such remedies at any time will not be
deemed an election of remedies or a waiver of the right to pursue any other
available remedy.
8.2 ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Executive in
Sections 6 and 7 are essential elements of this Agreement supported by the
payment of $10.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by
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Executive, and without the Executive's agreement to comply with such covenants,
the Employer would not have entered into this Agreement or employed or continued
the employment of the Executive. The Employer and the Executive have
independently consulted their respective counsel and have been advised in all
respects concerning the reasonableness and propriety of such covenants, with
specific regard to the nature of the business conducted by the Employer.
8.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive
represents and warrants to the Employer that the execution and delivery by the
Executive of this Agreement do not, and the performance by the Executive of the
Executive's obligations hereunder will not, with or without the giving of notice
or the passage of time, or both: violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to the
Executive; or conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the
Executive is a party or by which the Executive is or may be bound. The Executive
further represents and warrants to the Employer that no agreements or
understandings, whether written or oral, are currently in force and effect
between the Executive and the Employer, or any other Person concerning the
subject matter of this Agreement.
8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Executive's performance of the Executive's obligations
hereunder.
8.5 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
no claim or right arising out of this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; no waiver that may be given by a party will
be applicable except in the specific instance for which it is given; and no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
8.6 NOTICES. All notices pertaining to this Agreement must be in writing,
must be sent to the addressee at the address set forth in this Section, or at
such other address as the addressee has designated by a notice given in the
manner set forth in this Section, and must be sent by telegram, telex,
facsimile, electronic mail, courier, or prepaid, certified U.S. Mail. Notices
will be deemed given when received, if sent by telegram, telex, electronic mail
or facsimile and if received between the hours of 8:00 a.m. and 5:00 p.m., local
time of the destination address, on a business day (with confirmation of
completed transmission sufficing as prima facie evidence of receipt of a notice
sent by telex, telecopy, electronic mail, or facsimile), and when delivered and
receipted for (or when attempted delivery is refused at the address where sent)
if sent by courier or by certified U.S. Mail. Notices sent by telegram, telex,
electronic mail, or facsimile and received between 12:01 a.m. and
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7:59 a.m., local time of the destination address, on a business day will be
deemed given at 8:00 a.m. on that same day. Notices sent by telegram, telex,
electronic mail, or facsimile and received at a time other than between the
hours of 12:01 a.m. and 5:00 p.m., local time of the destination address, on a
business day will be deemed given at 8:00 a.m. on the next following business
day after the day of receipt. The addresses for notice are as follows:
If to Employer: CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: General Counsel
Facsimile No.: (281) 894-7952
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Attention: Mr. James J. Spring, III
Facsimile No.: (713) 658-2553
and
If to the Executive: Bernard B. Beale
24702 Thayer Court
Katy, Texas 77494
Facsimile No.: ________________
8.7 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Executive under this Agreement, being personal, may not be delegated.
8.8 INTERPRETATION. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision.
8.9 HEADINGS. The section headings appearing in this Agreement have been
inserted for convenience only and shall be given no substantive meaning or
significance whatever in construing the terms and provisions of this Agreement.
8.10 ENTIRE AGREEMENT. This Agreement constitutes the final and entire
agreement and understanding between the parties to this Agreement concerning the
subject matter of this Agreement, and this Agreement supersedes and replaces all
prior agreements and understandings, whether written
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or oral, between such parties concerning the subject matter of this Agreement.
No alleged representation, warranty, promise, inducement, or statement of
intention not expressly set forth in this Agreement is binding on any party to
this Agreement.
8.11 ACKNOWLEDGMENT AND RELEASE BY THE EXECUTIVE. By his execution of this
Agreement, the Executive acknowledges that this Agreement supersedes and
replaces all other agreements and understandings, whether written or oral,
between the Executive and any other Person concerning the subject matter of this
Agreement. In consideration for the rights and obligations arising under this
Agreement, the Executive hereby voluntarily, knowingly, fully, finally,
completely, and forever releases, relinquishes, and forever discharges the
Employer and its Affiliates, their officers, directors, employees, and agents,
from any and all claims, actions, demands, and causes of action of whatever kind
or character, whether known or unknown, joint or several, which the Executive
might have or might claim to have against the Employer for any and all injuries,
harm, damages, penalties, costs, losses, expenses, attorneys' fees, liabilities,
or other detriments, if any, whatsoever and whenever incurred, suffered, or
claimed by the Executive arising from any prior agreement or understanding,
whether written or oral, between the Executive and the Employer, or any other
Person concerning the subject matter of this Agreement.
8.12 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.
8.13 JURISDICTION. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Texas,
County of Harris, or, if it has or can acquire jurisdiction, in the United
States District Court for the District of Texas, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EMPLOYER:
CYNET, INC.
BY:/s/VINCENT W. BEALE, SR.
VINCENT W. BEALE, SR., PRESIDENT
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EXECUTIVE:
/s/BERNARD B. BEALE
BERNARD B. BEALE
17
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is made as of July 22, 1998
by CYNET, INC., a Texas corporation (the "EMPLOYER"), and SAMUEL C. BEALE, an
individual resident of the State of Texas (the "EXECUTIVE").
INTRODUCTION
Employer, directly or through one or more subsidiaries, is engaged in the
business of providing enhanced fax and related communication services. The
Employer desires to employ the Executive, and the Executive wishes to accept
such employment, upon the terms and conditions set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
Section 1. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1.
1.1 "AFFILIATE" or "AFFILIATES" -- any Person that, directly or
indirectly, controls, or is controlled by or under common control with, the
Employer, including the Employer. For the purposes of this definition, "CONTROL"
(including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the
power to direct or cause the direction of the management and policies of any
Person, directly or indirectly, through ownership of voting securities, by
contract, or otherwise.
1.2 "AGREEMENT" -- this Employment Agreement, as amended from time to
time.
1.3 "BASIC COMPENSATION" -- Salary and Benefits.
1.4 "BENEFITS" -- as defined in Section 3.1(c).
1.5 "BOARD OF DIRECTORS" -- the board of directors of the Employer.
1.6 "CONFIDENTIAL INFORMATION" -- any and all:
(a) trade secrets concerning the business and affairs of Employer
or any Affiliate, product specifications, data, know-how,
formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current
and planned manufacturing or distribution methods and
processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans,
data bases, computer software and programs (including object
code and source code), computer software and database
technologies,
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systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret within the meaning of the common law of
the State of Texas; and
(b) information concerning the business and affairs of Employer or
any Affiliate (which includes historical financial statements,
financial projections and budgets, historical and projected
sales, marketing and customer data, capital spending budgets,
acquisition prospects and plans, the names and backgrounds of
key personnel, personnel training and techniques and
materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for any Affiliate containing or based,
in whole or in part, on any information included in the
foregoing.
1.7 "DISABILITY" -- as defined in Section 5.2.
1.8 "EFFECTIVE DATE" -- the date stated in the first paragraph of the
Agreement.
1.9 "EMPLOYEE INVENTION" -- any idea, invention, technique, modification,
process, or improvement (whether patentable or not), any industrial design
(whether registerable or not), any mask work, however fixed or encoded, that is
suitable to be fixed, embedded or programmed in a semiconductor product (whether
recordable or not), and any work of authorship (whether or not copyright
protection may be obtained for it) created, conceived, or developed by the
Executive, either solely or in conjunction with others, during the Employment
Period, or a period that includes a portion of the Employment Period, that
relates in any way to, or is useful in any manner in, the business then being
conducted or proposed to be conducted by the Employer or the Affiliates, and any
such item created by the Executive, either solely or in conjunction with others,
following termination of the Executive's employment with the Employer, that is
based upon or uses Confidential Information.
1.10 "EMPLOYMENT PERIOD" -- the term of the Executive's employment under
this Agreement.
1.11 "FISCAL YEAR" -- the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
1.12 "FOR CAUSE" -- as defined in Section 5.3.
1.13 "INCENTIVE COMPENSATION" -- as defined in Section 3.2.
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1.14 "OPTION PLAN" -- the CyNet, Inc. Stock Incentive Option Plan.
1.15 "NONINCENTIVE COMPENSATION" -- as defined in Section 3.3.
1.16 "PERSON" -- any individual, general or limited partnership, joint
venture, corporation (including any non-profit corporation), limited liability
company, bank, estate, trust, association, entity, unincorporated organization,
or government body.
1.17 "POST-EMPLOYMENT PERIOD" -- as defined in Section 7.2.
1.18 "PROPRIETARY ITEMS" -- as defined in Section 6.2(a)(iv).
1.19 "SALARY" -- as defined in Section 3.1(a).
1.20 "SIGNING BONUS" -- as defined in Section 3.1(b).
Section 2. EMPLOYMENT TERMS AND DUTIES.
2.1 EMPLOYMENT. The Employer hereby employs the Executive, and the
Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.
2.2 TERM. Subject to the provisions of Section 5, the term of the
Executive's employment under this Agreement will be three (3) years, beginning
on the Effective Date and ending on the third anniversary of the Effective Date.
Thereafter, the term may continue for additional one (1) year periods upon the
mutual written agreement of the Executive and the Employer.
2.3 DUTIES. The Executive will have such duties as are assigned or
delegated to the Executive by the Board of Directors (which duties shall be of a
senior management or executive level) and will initially serve as Vice
President, General Counsel and Secretary of the Employer. The Executive will
devote substantially all of his entire business time, attention, skill, and
energy exclusively to the business of the Employer, will use his best efforts to
promote the success of the Employer's business, and will cooperate fully with
the Board of Directors in the advancement of the best interests of the Employer.
Notwithstanding the foregoing, the Executive shall be entitled to devote a
reasonable amount of time to personal business including the operation of his
law firm, Samuel C. Beale, P.C., BNB Capital, CyNet Holdings, L.L.C. and its
affiliates. For the Executive's service as a director of the Employer or as a
director or officer of any of its Affiliates, the Executive will fulfill his
duties as such director or officer without additional compensation.
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Section 3. COMPENSATION.
3.1 BASIC COMPENSATION.
(a) SALARY. The Executive will be paid an annual salary of
$108,000.00, subject to adjustment as provided below (the
"SALARY"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly. The Salary
will be reviewed by the Board of Directors not less frequently
than annually, and may be adjusted upward or downward in the
sole discretion of the Board of Directors, but in no event
will the Salary be less than $108,000.00 per year.
(b) SIGNING BONUS. In order to induce the Executive to accept
employment with the Employer, the Employer agrees to pay the
Executive a bonus of $30,000.00 ("SIGNING BONUS"). Subject to
the Executive's employment by the Employer, such bonus shall
be paid to the Executive on the date he commences employment
hereunder unless Executive, at his sole discretion, grants
Employer an extension of time to pay the Signing Bonus.
(c) BENEFITS. The Executive will, during the Employment Period, be
permitted to participate in such pension, profit sharing,
bonus, life insurance, hospitalization, major medical, and
other employee benefit plans of the Employer that may be in
effect from time to time, to the extent the Executive is
eligible under the terms of those plans (collectively, the
"BENEFITS").
3.2 INCENTIVE COMPENSATION. As additional compensation (the "INCENTIVE
COMPENSATION") for the services to be rendered by the Executive pursuant to this
Agreement, the Executive will be entitled to receive such Incentive Compensation
as may be determined by the Board of Directors.
3.3 NONINCENTIVE COMPENSATION. As additional compensation (the
"NONINCENTIVE COMPENSATION") for the services to be rendered by the Executive
pursuant to this Agreement, the Executive shall be granted an incentive stock
option to purchase 100,000 shares of Class A Common Stock, at an exercise price
of $.39 per share, under the Option Plan.
3.4 VACATIONS AND HOLIDAYS. The Executive will be entitled to paid
vacation each Fiscal Year in accordance with the vacation policies of the
Employer in effect for its executive officers from time to time. Vacation must
be taken by the Executive at such time or times as approved by the Chairman of
the Board of Directors. The Executive will also be entitled to the paid holidays
and other paid leave set forth in the Employer's policies. Vacation days and
holidays during any Fiscal Year that are not used by the Executive during such
Fiscal Year may not be used in any subsequent Fiscal Year, but Executive shall
be paid at the end of each Fiscal Year for any vacation days which Executive was
unable to use as a result of a request for approval of a vacation having been
denied by the Chairman of the Board of Directors.
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Section 4. FACILITIES AND EXPENSES. The Employer will furnish the
Executive office space, equipment, supplies, and such other facilities and
personnel as the Employer deems necessary or appropriate for the performance of
the Executive's duties under this Agreement and as are commensurate with
Executive's duties under Section 2.3. The Employer will pay the Executive's dues
in such professional societies and organizations as the Chairman of the Board of
Directors of the Employer deems appropriate, and will pay on behalf of the
Executive (or reimburse the Executive for) reasonable expenses incurred by the
Executive at the request of, or on behalf of, the Employer in the performance of
the Executive's duties pursuant to this Agreement, and in accordance with the
Employer's employment policies, including reasonable expenses incurred by the
Executive in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's policies.
Section 5. TERMINATION.
5.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic
Compensation, Incentive Compensation, Nonincentive Compensation, and any and all
other rights of the Executive under this Agreement or otherwise as an employee
of the Employer will terminate (except as otherwise provided in this Section 5):
(a) upon the death of the Executive;
(b) upon the Disability of the Executive (as defined in Section
5.2) immediately upon notice from either party to the other;
(c) For Cause (as defined in Section 5.3), immediately upon notice
from the Employer to the Executive, or at such later time as
such notice may specify; or
(d) upon Executive's voluntary termination of employment, which
termination shall be effective thirty (30) days after
Employer's receipt of Executive's written resignation.
5.2 DISABILITY. For purposes of this Section 5, the Executive will be
deemed to have a "DISABILITY" if, for physical or mental reasons, the Executive
is unable to perform the Executive's duties under this Agreement for 120
consecutive days, or 180 days during any twelve month period, as determined in
accordance with this Section 5.2. The Disability of the Executive will be
determined by a medical doctor selected by written agreement of the Employer and
the Executive upon the request of either party by notice to the other. If the
Employer and the Executive cannot agree on the selection of a medical doctor,
each of them will select a medical doctor and the two medical doctors will
select a third medical doctor who will determine whether the Executive has a
Disability. The determination of the medical doctor selected under this Section
5.2 will be binding on both parties. The Executive must submit to a reasonable
number of examinations by the medical doctor making
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the determination of Disability under this Section 5.2, and the Executive hereby
authorizes the disclosure and release to the Employer of such determination and
all supporting medical records. If the Executive is not legally competent, the
Executive's legal guardian or duly authorized attorney-in-fact will act on
behalf of the Executive, under this Section 5.2, for the purposes of submitting
the Executive to the examinations, and providing the authorization of
disclosure, required under this Section 5.2.
5.3 FOR CAUSE. For purposes of Section 5.1, the phrase "FOR CAUSE" means:
(a) the Executive's breach of a material provisions of this Agreement, which
breach is not substantially cured within thirty (30) days after receipt of
written notice thereof from Employer; (b) the Executive's repeated failure to
adhere to any written Employer policy and Executive's failure to cure such
noncompliance within thirty (30) days after receipt of written notice thereof
from Employer; (c) the appropriation (or attempted appropriation) of a material
business opportunity of the Employer, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Employer; (d) the misappropriation (or attempted misappropriation) of any of
the Employer's funds or property; or (e) the conviction of, the indictment for
(or its procedural equivalent), or the entering of a guilty plea or plea of no
contest with respect to, a felony or the equivalent thereof.
5.4 TERMINATION PAY. Effective upon the termination of this Agreement, the
Employer will be obligated to pay the Executive (or, in the event of his death,
his designated beneficiary as defined below) only such compensation as is
provided in this Section 5.4, and in lieu of all other amounts and in settlement
and complete release of all claims the Executive may have against the Employer
under this Agreement. For purposes of this Section 5.4, the Executive's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as the Executive may designate by notice to the Employer from time
to time or, if the Executive fails to give notice to the Employer of such a
beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the
Employer will have no duty, in any circumstances, to attempt to open an estate
on behalf of the Executive, to determine whether any beneficiary designated by
the Executive is alive or to ascertain the address of any such beneficiary, to
determine the existence of any trust, to determine whether any person or entity
purporting to act as the Executive's personal representative (or the trustee of
a trust established by the Executive) is duly authorized to act in that
capacity, or to locate or attempt to locate any beneficiary, personal
representative, or trustee.
(a) TERMINATION BY THE EMPLOYER FOR CAUSE. If the Employer
terminates this Agreement For Cause, the Executive will be
entitled to receive his Salary and Benefits through the date
such termination is effective and the vested portion of any
Incentive Compensation and any Nonincentive Compensation.
(b) TERMINATION UPON DISABILITY. If this Agreement is terminated
by either party as a result of the Executive's Disability, as
determined under Section 5.2, the Employer will pay the
Executive his Salary and Benefits through the remainder of the
calendar month during which such termination is effective
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and for the lesser of (i) six consecutive months thereafter,
or (ii) the period until Disability insurance benefits
commence under the Disability insurance coverage, if any,
furnished by the Employer to the Executive. The Executive
shall be entitled to the vested portions of his Incentive
Compensation and Nonincentive Compensation and to a pro rata
portion of his Incentive Compensation and Nonincentive
Compensation for the year during which such Disability occurs,
but shall not be entitled to any other Incentive Compensation
or Nonincentive Compensation. Executive shall be entitled to
continue to participate in Employer's group health insurance
(if such participation is permitted by the insurance company
providing such insurance coverage) after Disability occurs,
provided Executive reimburses Employer for the costs of such
coverage. Executive shall also be entitled to acquire from
Employer any life insurance policy in effect on Executive's
life at the date of Disability, provided Executive reimburses
Employer the cash surrender value, if any, accumulated in such
life insurance policy and assumes the obligation to make
payments to maintain such insurance policy in effect.
(c) TERMINATION UPON DEATH. If this Agreement is terminated
because of the Executive's death, the Executive will be
entitled to receive his Salary and Benefits through the end of
the calendar month in which his death occurs. The Executive
shall be entitled to receive the vested portions of his
Incentive Compensation and Nonincentive Compensation and to a
pro rata portion of his Incentive Compensation and
Nonincentive Compensation for the year during which the
Executive's death occurs, but shall not be entitled to any
other Incentive Compensation or Nonincentive Compensation for
or any subsequent year. Executive's family shall be entitled
to continue to participate in Employer's group health
insurance (if such participation is permitted by the insurance
company providing such insurance coverage) after Executive's
death occurs, provided Executive's family reimburses Employer
for the costs of such coverage.
(d) TERMINATION UPON RESIGNATION. If this Agreement is terminated
because of the voluntary resignation of the Executive
hereunder, the Executive shall be entitled to receive his
Salary and Benefits through the effective date of his
termination and any vested portions of his Incentive
Compensation or Nonincentive Compensation. The Executive shall
not be entitled to any other Incentive Compensation or to any
other Nonincentive Compensation.
(e) TERMINATION BY THE EMPLOYER NOT FOR CAUSE. If the Employer
terminates this Agreement not For Cause, the Executive, at the
option of the Executive, will be entitled to either: (i)
receive all of the compensation and Benefits provided by
Section 3.1, and the Incentive Compensation provided by
Section 3.2 and the Nonincentive Compensation provided by
Section 3.3 for the remainder of
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the Employment Term, and the Executive shall be subject to the
provisions of Section 7.2 hereof; or (ii) the Executive shall
be entitled to receive all of the compensation and Benefits
provided by Section 3.1 and the vested portions of any
Incentive Compensation provided by Section 3.2 and
Nonincentive Compensation provided by Section 3.3 through the
end of the calendar month in which such termination occurs,
and the Executive shall not be subject to the provisions of
Section 7.2.
(f) BENEFITS. The Executive's accrual of, or participation in
plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive
will be entitled to accrued Benefits pursuant to such plans
only as provided in such plans. The Executive will not
receive, as part of his termination pay pursuant to this
Section 5, any payment or other compensation for any vacation,
holiday, sick leave, or other leave unused on the date the
notice of termination is given under this Agreement.
(g) EXPIRATION OF EMPLOYMENT. Employer agrees to notify the
Executive not less than sixty (60) days prior to the
expiration of the initial term of this Agreement or any
subsequent continuation thereof as to whether Employer desires
to extend the Employment Period of this Agreement.
5.5 TERMINATION UPON BREACH BY EMPLOYER. This Agreement may be terminated
by Executive, by written notice to Employer, in the event of the Employer's
breach of a material provision of this Agreement, which breach is not
substantially cured within thirty (30) days after Employer's receipt of written
notice thereof from Executive. If this Agreement is terminated by Executive as a
result of Employer's breach, Executive shall not be subject to the provisions of
Section 7.2 hereof.
5.6 TERMINATION UPON CHANGE OF CONTROL. Notwithstanding any other
provision of this Agreement, the Executive's employment under this Agreement may
be terminated during the Employment Period by the Executive if a "Change of
Control" (as defined below) of the Employer occurs without the consent of the
Executive. If Executive elects to terminate his employment as a result of a
Change of Control, Executive will be entitled to receive his salary and benefits
and the vested portions of his Incentive Compensation and Nonincentive
Compensation for a period of two (2) years after the effective date of such
termination. For purposes of this Agreement, a "Change of Control" of Employer
shall be deemed to have occurred if, after the Effective Date (a) any "person"
(as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Employer representing 50% or more of the
combined voting power of Employer's then outstanding securities, without the
prior approval of at least a majority of the members of the Board in office
immediately prior to such person obtaining such percentage interest; (b) there
occurs a proxy contest or a consent solicitation, or Employer is a party to a
merger, consolidation, sale of assets, plan of liquidation or other
reorganization not
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approved by at least a majority of the members of the Board, as a consequence of
which members of the Board in office immediately prior to such transaction or
event constitute less than a majority of the Board thereafter; or (c) during any
period of two consecutive years, other than as a result of an event described in
clause (b) of this Section 5.6, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election was approved by a vote of at least a majority of the directors then in
office who were directors at the beginning of such period) cease for any reason
to constitute at least a majority of the members of the Board.
Section 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS.
6.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that
during the Employment Period and as a part of his employment, the Executive will
be afforded access to Confidential Information; public disclosure of such
Confidential Information could have an adverse effect on the Employer and its
business; because the Executive possesses substantial technical expertise and
skill with respect to the Employer's business, the Employer desires to obtain
exclusive ownership of each Employee Invention, and the Employer will be at a
substantial competitive disadvantage if it fails to acquire exclusive ownership
of each Employee Invention; and the provisions of this Section 6 are reasonable
and necessary to prevent the improper use or disclosure of Confidential
Information and to provide the Employer with exclusive ownership of all Employee
Inventions.
6.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation and
benefits to be paid or provided to the Executive by the Employer under this
Agreement, the Executive covenants as follows:
(a) CONFIDENTIALITY.
(i) During and for a period of two (2) years following the
Employment Period, the Executive will hold in confidence
the Confidential Information and will not disclose it to
any person except with the specific prior written
consent of the Employer or except as otherwise expressly
permitted by the terms of this Agreement.
(ii) Any trade secrets of any Affiliate will be entitled to
all of the protections and benefits under the common law
of the State of Texas and any other applicable law. If
any information that the Employer deems to be a trade
secret is found by a court of competent jurisdiction not
to be a trade secret for purposes of this Agreement,
such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement.
The Executive hereby waives any requirement that the
Employer submit proof of the economic value of any trade
secret or post a bond or other security.
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(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information that
the Executive demonstrates either (x) was known by
Executive prior to the date of his employment by the
Employer, (y) was or became generally available to the
public other than as a result of a disclosure by the
Executive, or (z) was made known to Executive on a
nonconfidential basis from a source other than Employer
or its representatives or agents, provided that such
source is not bound by a confidentiality agreement with,
or other obligation of secrecy to, Employer or another
party.
(iv) The Executive will not remove from the premises of the
Employer or any Affiliate (except to the extent such
removal is for purposes of the performance of the
Executive's duties at home or while traveling, or except
as otherwise specifically authorized by the Employer or
such Affiliate) any document, record, notebook, plan,
model, component, device, or computer software or code,
whether embodied in a disk or in any other form
(collectively, the "PROPRIETARY ITEMS"). The Executive
recognizes that, as between the Employer or any
Affiliate and the Executive, all of the Proprietary
Items, whether or not developed by the Executive, are
the exclusive property of the Employer or the
Affiliates. Upon termination of this Agreement by either
party, or upon the request of the Employer or any
Affiliate during the Employment Period, the Executive
will return to the Employer or the Affiliates all of the
Proprietary Items in the Executive's possession or
subject to the Executive's control, and the Executive
shall not retain any copies, abstracts, sketches, or
other physical embodiment of any of the Proprietary
Items.
(b) EMPLOYEE INVENTIONS. Each Employee Invention will belong
exclusively to the Employer. The Executive acknowledges that
all of the Executive's writing, works of authorship, specially
commissioned works, and other Employee Inventions are works
made for hire and the property of the Employer, including any
copyrights, patents, or other intellectual property rights
pertaining thereto. If it is determined that any such works
are not works made for hire, the Executive hereby assigns to
the Employer all of the Executive's right, title, and
interest, including all rights of copyright, patent, and other
intellectual property rights, to or in such Employee
Inventions. The Executive covenants that he will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and
without additional
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compensation, all of the Executive's right to the
Employee Invention for the United States and all
foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as
the Employer may request in order to apply for and
obtain patents or other registrations with respect
to any Employee Invention in the United States and
any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance in
support of the Employer's rights to any Employee
Invention.
6.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Employer, the Executive, and their respective attorneys and experts, who will
agree, in advance and in writing, to receive and maintain all such information
in secrecy, except as may be limited by them in writing.
Section 7. NON-COMPETITION AND NON-INTERFERENCE.
7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges and
agrees that the limitations set forth in this Section 7 are a necessary part of
and ancillary to the Executive's agreement not to disclose Confidential
Information, reasonable and do not impose a greater restraint on the activities
of the Executive than is necessary to protect the business interest of the
Employer. In the event that any such territorial, scope, or time limitation are
deemed to be unreasonable by a court of competent jurisdiction, the Executive
agrees to the reduction of the territorial, scope or time limitation to the
area, scope or time which such court shall have deemed reasonable.
7.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments by
the Executive, and in consideration of the compensation and benefits to be paid
or provided to the Executive by the Employer in the event this Agreement is
terminated pursuant to Section 5.4(a), 5.4(d) or 5.4(e), the Executive covenants
that he will not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period
(as defined below), engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management,
operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the
Executive's
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name or any similar name to, lend Executive's credit to or
render services or advice to, any business whose products or
activities compete in whole or in part with the products or
activities of the Employer or any Affiliate of Employer
anywhere within the geographic areas in which the Employer or
any such Affiliate now or hereafter conducts its business;
provided, however, that the Executive may purchase or
otherwise acquire up to (but not more than) one percent of any
class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such
securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934;
(b) whether for the Executive's own account or for the account of
any other person, at any time during the Employment Period and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer or any Affiliate
of Employer, from any person known by the Executive to be a
customer of the Employer or any such Affiliate, whether or not
the Executive had personal contact with such person during and
by reason of the Executive's employment with the Employer;
(c) whether for the Executive's own account or the account of any
other person at any time during the Employment Period and the
Post-Employment Period, (i) solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is or was an employee of the Employer or any
Affiliate of Employer at any time during the Employment Period
or in any manner induce or attempt to induce any employee of
the Employer and any such Affiliate to terminate his
employment with the Employer; or (ii) interfere with the
Employer's or any Affiliate's relationship with any person,
including any person who at any time during the Employment
Period was an employee, contractor, supplier, or customer of
the Employer or any such Affiliate; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, directors, officers,
employees, or agents.
For purposes of this Section 7.2, the term "POST-EMPLOYMENT PERIOD" means
the two-year period beginning on the date of termination of the Executive's
employment with the Employer.
If any covenant in this Section 7.2 is held to be unreasonable, arbitrary,
or against public policy, such covenant will be considered to be divisible with
respect to scope, time, and geographic area, and such lesser scope, time, or
geographic area, or all of them, as a court of competent jurisdiction may
determine to be reasonable, not arbitrary, and not against public policy, will
be effective, binding, and enforceable against the Executive.
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The Executive will, while the covenant under this Section 7.2 is in
effect, give notice to the Employer, within ten days after accepting any other
employment, of the identity of the Executive's new employer. The Employer may
notify such new employer that the Executive is bound by this Agreement.
Notwithstanding the foregoing to the contrary, the Executive will not be
subject to any covenant under this Section 7.2 in the event:
(i) the term of the Executive's employment under this Agreement is not
renewed pursuant to Section 2.2; or
(ii) Employer voluntarily files a bankruptcy or insolvency proceeding (or
an involuntary bankruptcy or insolvency proceeding is filed against
Employer, which proceeding has not been dismissed within ninety (90)
days from the filing thereof).
Section 8. GENERAL PROVISIONS.
8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges
that the injury that would be suffered by the Employer as a result of a breach
of the provisions of this Agreement (including any provision of Sections 6 and
7) would be irreparable and that an award of monetary damages to the Employer
for such a breach would be an inadequate remedy. Consequently, the Employer will
have the right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this Agreement, and the Employer will not
be obligated to post bond or other security in seeking such relief. Any such
remedy shall be in addition to any damages which the Employer may be legally
entitled to recover as a result of any breach by the Employee of any provision
of this Agreement. The Employer may pursue any of the remedies described in this
Section 8 concurrently or consecutively and in any order as to such breach or
violation, and the pursuit of any one of such remedies at any time will not be
deemed an election of remedies or a waiver of the right to pursue any other
available remedy.
8.2 ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Executive in
Sections 6 and 7 are essential elements of this Agreement supported by the
payment of $10.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Executive, and without the
Executive's agreement to comply with such covenants, the Employer would not have
entered into this Agreement or employed or continued the employment of the
Executive. The Employer and the Executive have independently consulted their
respective counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenants, with specific regard to the
nature of the business conducted by the Employer.
8.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive
represents and warrants to the Employer that the execution and delivery by the
Executive of this Agreement do not, and the performance by the Executive of the
Executive's obligations hereunder will not, with or
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without the giving of notice or the passage of time, or both: violate any
judgment, writ, injunction, or order of any court, arbitrator, or governmental
agency applicable to the Executive; or conflict with, result in the breach of
any provisions of or the termination of, or constitute a default under, any
agreement to which the Executive is a party or by which the Executive is or may
be bound. The Executive further represents and warrants to the Employer that no
agreements or understandings, whether written or oral, are currently in force
and effect between the Executive and the Employer, or any other Person
concerning the subject matter of this Agreement.
8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer
hereunder, including its obligation to pay the compensation provided for herein,
are contingent upon the Executive's performance of the Executive's obligations
hereunder.
8.5 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by either
party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
no claim or right arising out of this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; no waiver that may be given by a party will
be applicable except in the specific instance for which it is given; and no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
8.6 NOTICES. All notices pertaining to this Agreement must be in writing,
must be sent to the addressee at the address set forth in this Section, or at
such other address as the addressee has designated by a notice given in the
manner set forth in this Section, and must be sent by telegram, telex,
facsimile, electronic mail, courier, or prepaid, certified U.S. Mail. Notices
will be deemed given when received, if sent by telegram, telex, electronic mail
or facsimile and if received between the hours of 8:00 a.m. and 5:00 p.m., local
time of the destination address, on a business day (with confirmation of
completed transmission sufficing as prima facie evidence of receipt of a notice
sent by telex, telecopy, electronic mail, or facsimile), and when delivered and
receipted for (or when attempted delivery is refused at the address where sent)
if sent by courier or by certified U.S. Mail. Notices sent by telegram, telex,
electronic mail, or facsimile and received between 12:01 a.m. and 7:59 a.m.,
local time of the destination address, on a business day will be deemed given at
8:00 a.m. on that same day. Notices sent by telegram, telex, electronic mail, or
facsimile and received at a time other than between the hours of 12:01 a.m. and
5:00 p.m., local time of the destination address, on a business day will be
deemed given at 8:00 a.m. on the next following business day after the day of
receipt. The addresses for notice are as follows:
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If to Employer: CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: General Counsel
Facsimile No.: (281) 894-7952
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Attention: Mr. James J. Spring, III
Facsimile No.: (713) 658-2553
and
If to the Executive: Samuel C. Beale
8419 Laurel Trail
Houston, Texas 77095
Facsimile No.: (713) 659-7933
8.7 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall
inure to the benefit of, and shall be binding upon, the parties hereto and their
respective successors, assigns, heirs, and legal representatives, including any
entity with which the Employer may merge or consolidate or to which all or
substantially all of its assets may be transferred. The duties and covenants of
the Executive under this Agreement, being personal, may not be delegated.
8.8 INTERPRETATION. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. A determination that any provision of this Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other provision.
8.9 HEADINGS. The section headings appearing in this Agreement have been
inserted for convenience only and shall be given no substantive meaning or
significance whatever in construing the terms and provisions of this Agreement.
8.10 ENTIRE AGREEMENT. This Agreement constitutes the final and entire
agreement and understanding between the parties to this Agreement concerning the
subject matter of this Agreement, and this Agreement supersedes and replaces all
prior agreements and understandings, whether written or oral, between such
parties concerning the subject matter of this Agreement. No alleged
representation, warranty, promise, inducement, or statement of intention not
expressly set forth in this Agreement is binding on any party to this Agreement.
8.11 ACKNOWLEDGMENT AND RELEASE BY THE EXECUTIVE. By his execution of this
Agreement, the Executive acknowledges that this Agreement supersedes and
replaces all other agreements and
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nderstandings, whether written or oral, between the Executive and any other
Person concerning the subject matter of this Agreement. In consideration for the
rights and obligations arising under this Agreement, the Executive hereby
voluntarily, knowingly, fully, finally, completely, and forever releases,
relinquishes, and forever discharges the Employer and its Affiliates, their
officers, directors, employees, and agents, from any and all claims, actions,
demands, and causes of action of whatever kind or character, whether known or
unknown, joint or several, which the Executive might have or might claim to have
against the Employer for any and all injuries, harm, damages, penalties, costs,
losses, expenses, attorneys' fees, liabilities, or other detriments, if any,
whatsoever and whenever incurred, suffered, or claimed by the Executive arising
from any prior agreement or understanding, whether written or oral, between the
Executive and the Employer, or any other Person concerning the subject matter of
this Agreement.
8.12 GOVERNING LAW. This Agreement will be governed by the laws of the
State of Texas without regard to conflicts of laws principles.
8.13 JURISDICTION. Any action or proceeding seeking to enforce any
provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the courts of the State of Texas,
County of Harris, or, if it has or can acquire jurisdiction, in the United
States District Court for the District of Texas, and each of the parties
consents to the jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on either party anywhere in the world.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EMPLOYER:
CYNET, INC.
BY:/s/VINCENT W. BEALE, SR.
VINCENT W. BEALE, SR., PRESIDENT
EXECUTIVE:
/s/SAMUEL C. BEALE
SAMUEL C. BEALE
16
EXHIBIT 10.12
SUBSCRIPTION AGREEMENT
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Gentlemen:
This subscription agreement (this "AGREEMENT") is intended to set forth
and confirm certain representations, covenants and agreements of the undersigned
("SUBSCRIBER") and CyNet, Inc., a Texas corporation (the "COMPANY"), with
respect to the offering for sale by the Company of a warrant and certain shares
of its Common Stock.
1. SUBSCRIPTION. Subject to the terms and conditions hereof, the
undersigned hereby irrevocably confirms its subscription for: (i) 10,000,000
shares of the Company's Class A Common Stock, no par value (the "CLASS A COMMON
STOCK"), at a price of $1.00 per share (the "SHARES"), and (ii) a five-year
warrant to purchase up to 4,800,000 shares of Class A Common Stock at $1.00 per
share (the "WARRANTS") at a price of $10.00 (the Shares and the Warrant
(including shares of Class A Common Stock issuable upon exercise of the Warrant)
are sometimes referred to herein collectively as the "SECURITIES").
(a) The subscription for the Shares shall be paid in installments in
the amount designated in each Installment Notice (defined below) delivered
by the Company to the Subscriber or in this Agreement. Subscriber has paid
an aggregate of $926,000 prior to the date hereof and has been issued
926,000 Shares. The next installment for 250,000 Shares shall be due and
payable within thirty (30) days after the date of this Agreement.
Thereafter, as needed to meet the capital requirements of the Company
(including those described in Section 4(h) hereof), the Company may from
time to time provide written notice (each, an "INSTALLMENT NOTICE") that
an additional installment is due within twenty (20) days after the date of
the Installment Notice; provided that in any event, all outstanding
installments for which no Installment Notice has been given will be due
and payable on or before December 31, 1998. In the event any such day
should not be a business day (which for purposes hereof shall be a
Saturday, Sunday or legal holiday recognized as such by the government of
the United States or the State of Texas) such installment's purchase shall
take place on the next succeeding business day.
(b) The subscription for the Warrant is being paid concurrently with
the execution of this Agreement.
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(c) In the event the undersigned should fail to timely fund any
installment purchase hereunder (i) the Company may exercise all rights and
remedies available to it, in law and in equity, to enforce that obligation
or receive damages as consequence of such breach by the undersigned and
(ii) the Company may, by written notice to the undersigned, deem the right
of the undersigned to purchase Shares to be forfeited. Notwithstanding
anything to the contrary in this Agreement, the undersigned may, at its
option and from time to time, elect at any time to purchase all or any
outstanding installments by providing written notice to the Company of
such election together with the required payment.
2. ACCEPTANCE OF SUBSCRIPTION; DELIVERY OF SECURITIES. The undersigned
understands and agrees that this subscription is made subject to the following
terms and conditions:
(a) The Company shall have the right to reject this subscription in
whole, but not in part, so that once accepted by the Company, the Company
irrevocably agrees to sell the Securities to the undersigned in accordance
with the terms and conditions of this Subscription Agreement;
(b) The subscription for Securities shall be deemed to be accepted
only when this Subscription Agreement has been accepted in writing by the
Company;
(c) The Securities to be issued and delivered on account of this
subscription will only be issued in the name of, and delivered to, the
undersigned, and the undersigned agrees to comply with the terms of this
Agreement; and
(d) The representations and warranties of the Company set forth
herein shall be true and correct as of the date that the Company accepts
this subscription.
3. REPRESENTATIONS AND WARRANTIES OF THE UNDERSIGNED. The undersigned
hereby represents and warrants to the Company as follows:
(a) The undersigned is acquiring the Securities for its own account,
for investment and not with a view to, or for resale in connection with,
any distribution or public offering thereof within the meaning of the
Securities Act of 1933, as amended (the "ACT"), and applicable state
securities laws.
(b) The undersigned understands that (A) the Securities (1) have not
been registered under the Act or any state securities laws, (2) will be
issued in reliance upon an exemption from the registration and prospectus
delivery requirements of the Act pursuant to Section 4(2) thereof and/or
Regulation D thereunder, (3) will be issued in reliance upon exemptions
from the registration and prospectus delivery requirements of state
securities laws which relate to private offerings and (4) must be held by
the undersigned indefinitely, and (B) the undersigned must therefore bear
the economic risk of such investment indefinitely unless
2
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a subsequent disposition thereof is registered under the Act and
applicable state securities laws or is exempt therefrom. The undersigned
further understands that such exemptions depend upon, among other things,
the BONA FIDE nature of the investment intent of the undersigned expressed
herein. Pursuant to the foregoing, the undersigned acknowledges that the
certificates representing the Securities acquired by the undersigned shall
bear a restrictive legend substantially as follows:
"The Securities represented by this certificate are subject to
restrictions on transfer under the Securities Act of 1933, as
amended, and state securities laws, and may not be offered for
sale, sold, assigned, transferred, pledged or otherwise
disposed of unless registered under the applicable securities
laws or until the Company has received advice of its counsel
that the Securities may be transferred without such
registration."
In addition, the Warrants shall bear a restrictive legend
substantially as follows:
"The Transfer of this Warrant and the Shares of Common Stock
issuable upon exercise hereof is subject to compliance with
the conditions specified in this Warrant, and no transfer of
this Warrant or such shares shall be valid until such
conditions have been satisfied."
(c) The undersigned has knowledge, skill and experience in
financial, business and investment matters relating to an investment of
this type and is capable of evaluating the merits and risks of such
investment and protecting the undersigned's interest in connection with
the acquisition of the Securities. The undersigned understands that the
acquisition of the Securities is a speculative investment and involves
substantial risks and that the undersigned could lose its entire
investment in the Securities. To the extent deemed necessary by the
undersigned, the undersigned has retained, at its own expense, and relied
upon, appropriate professional advice regarding the investment, tax and
legal merits and consequences of purchasing and owning the Securities. The
undersigned has the ability to bear the economic risks of its investment
in the Company, including a complete loss of the investment, and the
undersigned has no need for liquidity in such investment.
(d) The undersigned has been furnished by the Company all
information (or provided access to all information) regarding the business
and financial condition of the Company, its expected plans for future
business activities, the attributes of the Securities and the merits and
risks of an investment in the Securities which the undersigned has
requested or which is otherwise required to provide full disclosure of
material facts regarding an investment in the Securities. Such disclosures
include, without limitation, information concerning the Rescission Offer
(defined in Section 4(h) hereof) and the liabilities of the Company
associated therewith, as set forth in the draft dated July ___, 1998, of
the
3
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Company's Registration Statement on Form SB-2 (the "REGISTRATION
STATEMENT"), a copy of which has been received and reviewed by the
undersigned.
(e) In making the proposed investment decision, the undersigned is
relying solely on investigations made by the undersigned and the
undersigned's representatives. The offer to sell the Securities was
communicated to the undersigned in such a manner that the undersigned was
able to ask questions of and receive answers from the management of the
Company concerning the terms and conditions of the proposed transaction
and that at no time was the undersigned presented with or solicited by or
through any leaflet, public promotional meeting, television advertisement
or any other form of general or public advertising or solicitation.
(f) The undersigned acknowledges that the undersigned has been
advised that:
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF ANY REPRESENTATIONS BY THE COMPANY. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
IN MAKING AN INVESTMENT DECISION THE UNDERSIGNED MUST
RELY ON ITS OWN EXAMINATION OF THE COMPANY AND THE TERMS OF
THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE
SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE,
THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR
DETERMINED THE ADEQUACY OF ANY REPRESENTATION. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE UNDERSIGNED IS AWARE
THAT IT MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
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(g) The undersigned acknowledges and is aware that there has never
been any representation, guarantee or warranty made by the Company or any
officer, director, employee or agent or representative of the Company,
expressly or by implication, as to (i) the approximate or exact length of
time that the undersigned will be required to remain an owner of the
Securities; (ii) the amount of or type of consideration, profit or loss to
be realized, if any, as a result of this investment; or (iii) that the
past performance or experience of the Company, or any future expectations,
will in any way indicate predictable results of the ownership of
Securities or of the overall financial performance of the Company.
(h) The undersigned agrees to furnish the Company such other
information as the Company may reasonably request in order to verify the
accuracy of the information contained herein and agrees to notify the
Company immediately of any material change in the information provided
herein that occurs prior to the Company's acceptance of this subscription.
The foregoing representations and warranties and undertakings are made by
the undersigned and on behalf of the undersigned with the intent that they be
relied upon in determining its suitability as an investor and the undersigned
hereby agrees that such representations and warranties shall survive its
purchase of the Securities.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the undersigned as follows:
(a) The Company is duly incorporated, validly existing and in good
standing under the laws of its state of incorporation, and is duly
qualified to do business as a foreign corporation in all jurisdictions in
which the failure to be so qualified would materially and adversely affect
the business or financial condition, properties or operations of the
Company. The Company has all requisite corporate power and authority (i)
to own and lease the properties and assets it currently owns and leases
and it contemplates owning and leasing and (ii) to conduct its activities
as such activities are currently conducted and as currently contemplated
to be conducted.
(b) The Company has duly authorized the issuance and sale of the
Securities in accordance with the terms of this Agreement by all requisite
corporate action, including the authorization of the Company's Board of
Directors of the issuance and sale of the Securities in accordance
herewith, and the execution, delivery and performance of any other
agreements and instruments executed in connection herewith.
(c) The Securities, when issued and paid for in accordance with this
Agreement, will represent duly authorized, validly issued and fully paid
and nonassessable shares of Class A Common Stock of the Company, and the
issuance thereof will not conflict with the articles
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of incorporation or bylaws of the Company and will be in full compliance
with all federal and state securities laws applicable to such issuance and
sale.
(d) Except for matters relating to the Rescission Offer, there is no
litigation or governmental proceeding pending or threatened against the
Company which would materially and adversely affect the business or
financial condition, properties or operations of the Company. Except for
matters relating to the Recession Offer, the Company has complied with all
laws, rules, regulations and orders applicable to its business,
operations, properties, assets, products and services, and the Company has
all necessary permits, licenses and other authorizations required to
conduct its business as conducted, except in all cases (other than the
Rescission Offer) for those laws, rules, regulations and orders and those
permits, licenses and authorizations the failure to comply with or the
failure to hold or obtain would not have a material adverse effect on the
business or financial condition, properties or operations of the Company.
(e) Except as disclosed in the Registration Statement, the Company
is not in default in the performance of any obligation, agreement or
condition contained in any agreement of the Company or in any agreement by
which the Company or any of its property is bound, except for those
defaults which would not have a material adverse effect on the business or
financial condition, properties or operations of the Company.
(f) The execution and delivery of this Agreement, the fulfillment of
the terms set forth herein and the consummation of the transactions
contemplated hereby will not conflict with, or constitute a breach of or
default under, any agreement, indenture or instrument by which the Company
is bound or any law, administrative rule, regulation or decree of any
court or any governmental body or administrative agency applicable to the
Company.
(g) This Agreement and the information provided pursuant hereto do
not contain, as of the date hereof, an untrue statement of a material fact
and do not omit a material fact necessary to make the statements contained
therein not misleading. There is no fact which the Company has not
disclosed to the undersigned and of which the Company is aware which
materially and adversely affects or could, in the Company's reasonable
opinion, materially and adversely affect the business, prospects,
financial condition, operations, property or affairs of the Company.
(h) The Company intends to use the proceeds from the sale of the
Securities for various corporate purposes, including (i) working capital,
(ii) equipment purchases and other capital expenditures, (iii) the payment
of accrued but unpaid dividends payable on the Company's preferred stock
and (iv) the funding of the Company's obligations to repurchase certain of
its securities pursuant to a rescission offer (the "RESCISSION OFFER") to
be conducted by the Company after the date hereof.
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5. REGISTRATION RIGHTS AGREEMENT. Simultaneously with the acceptance of
the subscription for the Securities, the Company and Subscriber are entering
into a Registration Rights Agreement in the form attached hereto as Exhibit A.
6. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance
with the laws of Texas, notwithstanding principles of conflicts of laws.
(b) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof, and may be
amended only by a writing executed by all parties hereto.
(c) This Agreement and the representations and warranties contained
herein shall be binding upon the heirs, executors, legal representatives,
administrators, successors and permitted assigns of the undersigned.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of July
__, 1998.
CYNET HOLDINGS, LLC
By:/s/VINCENT W. BEALE, SR.
Vincent W. Beale, Sr., President
The Company hereby accepts the foregoing subscription subject to the terms and
conditions hereof as of July 22, 1998.
CYNET, INC.
By:/s/SAMUEL C. BEALE
Samuel C. Beale, Vice President
and General Counsel
7
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
July 22, 1998, by and between CyNet Inc., a Texas corporation (the "Company"),
and CyNet Holdings, LLC., a Nevada limited liability company (the "Holder").
INTRODUCTION
Concurrently with the execution and delivery of this Agreement, Holder has
entered into a Subscription Agreement, pursuant to which, among other things,
the Holder has agreed to purchase up to 10,000,000 shares of the Company's Class
A Common Stock, no par value (the "Common Stock") at a purchase price of $1.00
per share (the "Subscription Agreement"). In order to induce the Holder to
complete the transactions contemplated by the Subscription Agreement, the
Company has agreed to enter into this Registration Rights Agreement.
In consideration of the mutual promises and covenants hereinafter set
forth, the parties hereby agree as follows;
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall
have the following respective meanings:
"BEST LAWFUL EFFORTS" shall mean the efforts that a prudent
business person desirous of achieving a result would use under similar
circumstances to ensure that such result is achieved as expeditiously as
possible.
"COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"COMMON STOCK" means the Class A Common Stock, no par value,
of the Company.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the
time.
"REGISTRABLE SECURITIES" means any Common Stock of the Company
issued or issuable by the Company to the Holder pursuant to the
Subscription Agreement, including shares of the Common Stock issuable to
the Holder upon exercise of the Warrant (as defined below), and other
securities issued or issuable to the Holder in respect of the Subscription
Agreement or the Warrant upon any stock split, stock dividend,
recapitalization, or similar event; PROVIDED HOWEVER, that shares of
Common Stock or other securities shall no longer be treated as Registrable
Securities if (a) they have been sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction,
or (b) they have been sold within any three month period n the opinion of
counsel to the Company, in an open
<PAGE>
market transaction under Rule 144 of the Securities Act so that all
transfer restrictions and restrictive legends with respect thereto were or
could be removed upon the consummation of such sale (at which time the
registration rights hereunder shall terminate pursuant to Section 3.1).
The terms "REGISTER," "REGISTERED" AND "REGISTRATION" refer to
a registration effected by preparing and filing a registration statement
in compliance with the Securities Act, and the declaration or ordering of
the effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, other than
Selling Expenses (as defined below), incurred by the Company in complying
with Section 2.1 hereof, including, without limitation, all registration,
qualification and filing fees, exchange listing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky
fees and expenses, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of
regular employees of the Company which shall be paid in any event by the
Company).
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and all fees and disbursements of counsel for
any Holder.
"WARRANT" shall mean that certain warrant (subject to the
adjustment provisions therein) issued to the Holder pursuant to the
Subscription Agreement entitling the Holder to purchase up to $4,800,000
shares of the Common Stock at an exercise price of $1.00 per share on or
before July 22, 2003.
2. REGISTRATION RIGHTS.
2.1 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. Subject to the provisions of Section
__ hereof, in case the Company shall receive from the Holder a written request
that the Company effect any registration, qualification or compliance with
applicable registration provisions of the Securities Act with respect to shares
of Registrable Securities then outstanding, the Company will, as soon as
practicable, use its best lawful efforts to effect such registration,
qualification or compliance (including, without limitation, appropriate
qualification under applicable blue sky or other state
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securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or regulations)
as may be so requested and as may be reasonably required to permit or facilitate
the sale and distribution of all or such portion of such Registrable Securities
as are specified in such request; PROVIDED, HOWEVER, that the Company shall not
be obligated to take any action to effect any such registration, qualification
or compliance pursuant to this Section 2.1:
(i) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the
Company is already subject to service in such jurisdiction and except as
may be required by the Securities Act;
(ii) Prior to the first anniversary of the closing of the
transactions contemplated by the Subscription Agreement;
(iii) If the Company has effected one such registration
pursuant to this subparagraph 2.1(a) and such registration has been
declared or ordered effective provided, however, that in the event that
less than 80% of the shares requested to be registered by the Holder are
in fact registered and sold in connection with any registration, such
registration shall not be counted as the registration permitted by this
Section 2.1(a)(iii);
(iv) If the Company shall furnish to Holder a certificate
signed by the President or Chief Executive Officer of the Company stating
that in the good faith judgment of the Board of Directors of the Company
it would be seriously detrimental to the Company or its shareholders for a
registration statement to be filed in the near future, or that delay in
the filing of any registration statement is necessary in light of a
pending corporate development, then the Company's obligation to use its
best lawful efforts to register under this Section 2.1 shall be deferred
(with respect to any demand for registration hereunder) for a period not
to exceed one hundred twenty (120) days from the date of receipt of
written request from the Holder, provided that the Company cannot,
pursuant to this Section 2.1(a)(iv), delay implementation of a demand for
registration more than once in any twelve (12) month period or;
(v) If the registration or qualification requested does not
relate to at least fifty percent (50%) of all Registrable Securities held
by the Holder; or
Subject to the foregoing clauses (i) through (v), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request of the
Holder.
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(b) UNDERWRITERS. In the event that a registration pursuant to
Section 2.1 is for a registered public offering involving an underwriting, the
right of the Holder to registration pursuant to Section 2.1 shall be conditioned
upon the Holder's participation in the underwriting arrangements required by
this Section 2.1, and the inclusion of the Holder's Registrable Securities in
the underwriting to the extent requested shall be limited to the extent provided
herein.
The Company shall (together with the Holder and any other holders of
Company securities who have rights to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Holder, but subject
to the Company's reasonable approval. Notwithstanding anything herein to the
contrary, if the managing underwriter advises the Holder in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise the Holder that the number of
shares that may be included in the registration and underwriting shall be
limited according to the requirements of the managing underwriter, but only
after eliminating from such registration the securities held by other holders of
Company securities whose rights to distribute their securities through such
underwriting are junior to those of the Holder. No Registrable Securities
excluded from the underwriting by reason of the underwriter's marketing
limitation shall be included in such registration.
(c) ONE DEMAND. The Company is obligated to effect only one (1)
demand registration pursuant to this Section 2.1.
(d) JOINDER OF COMPANY AND OTHER SECURITY HOLDERS. In any
registration requested pursuant to this Section 2.1, the Company shall be
entitled to register securities for sale for its own account or for the account
of any other holder or holders of Company securities with rights to include
their securities in such registration, unless the underwriter shall indicate in
writing to the Holder that the inclusion of the shares to be sold for the
account of the Company will adversely affect the registration, the price of the
shares to be sold or the number of shares to be sold for the account of the
Holder. Without the consent of the Holder, the Company may not otherwise cause
any other registration of securities for sale for its own account (other than a
registration effected solely to implement a stock option plan or other employee
benefit plan or a transaction contemplated by Rule 145 of the Commission) to
become effective less than ninety (90) days after the effective date of any
registration requested pursuant to Section 2.1.
2.2 COMPANY REGISTRATION.
(a) NOTICE OF REGISTRATION. If at any time or from time to time the
Company shall determine to register on a form that permits the sale of
Registrable Securities an underwritten public offering of any of its securities
for cash, either for its own account or the account of a security holder or
holders, other than (i) on Form S-4 or S-8 or any successor or similar form,
(ii) relating to any
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capital stock of the Company under options, warrants or other rights to acquire
any such capital stock issued or to be issued primarily to directors, officers
or employees of the Company, or any of its subsidiaries or affiliates, (iii)
filed pursuant to Rule 145 under the Securities Act or any successor or similar
provision, (iv) relating to any employee benefit plan or interests therein, or
(v) relating principally to preferred stock or debt securities of the Company,
the Company will:
(A) promptly give the Holder written notice thereof, and
(B) use its best lawful efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), all the Registrable Securities specified in a written request
or requests, made within fifteen (15) days after receipt of such written
notice from the Company, by the Holder.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to Section 2.2(a)(i). In such event the right of the Holder's
participation in such underwriting, and the inclusion of Registrable Securities
in the underwriting shall be limited to the extent provided herein. The Holder
shall (together with the Company and the other holders distributing their
securities through such underwriting) enter into any underwriting agreement in
customary form with the managing underwriter selected for such underwriting by
the Company.
Notwithstanding anything herein to the contrary, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit some or all of
the Registrable Securities that may be included in the registration and
underwriting; provided, however, that the securities held by holders of Company
securities whose rights to distribute their securities through such underwriter
are junior to the Holder shall be cut back first in proportion to their
respective holdings to the extent required by such limitation.
If the Holder disapproves of the terms of any such underwriting, he
may elect to withdraw therefrom by written notice to the Company and the
managing underwriter, delivered not less than seven days before the effective
date. Any securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration, and shall be withdrawn from the market for a
period of one hundred twenty (120) days after the effective date of the
registration statement relating thereto, or such other shorter period of time as
the underwriters may require.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.1 prior to the effectiveness of such registration whether or not the
Holder has elected to include securities in such registration.
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2.3 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. The Company agrees and
covenants that it will not grant or allow any persons any registration rights
with respect to any securities of the Company which are superior to the rights
granted hereunder without the prior written consent of the Holder. In the event
that the Company authorizes registration rights which are superior in any way to
those granted herein to the Holder without such prior written consent, the
Holder shall be entitled to the same rights.
2.4 EXPENSES OF REGISTRATION. All Registration Expenses shall be borne by
the Company. Unless otherwise agreed by the Company, all Selling Expenses
relating to securities registered on behalf of the Holder shall be borne by the
Holder.
2.5 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement
the Company will keep the Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense, the Company will:
(a) Subject to Section 2.1(c), prepare and file with the Commission
a registration statement with respect to such securities and use its best lawful
efforts to cause such registration statement to become and remain effective for
at least ninety (90) days or until the distribution described in the
Registration Statement has been completed;
(b) Furnish to each underwriter such number of copies of a
prospectus, a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as such underwriter may reasonably
request in order to facilitate the public sale of the shares by such
underwriter, and promptly furnish to each underwriter and Holder notice of any
stop-order or similar notice issued by the Commission or any state agency
charged with the regulation of securities; and
(c) Use its best lawful efforts to cause all Registrable Securities
included in such registration to be listed or authorized for inclusion on each
securities exchange or similar trading system on which similar securities issued
by the Company are then listed or authorized for trading.
2.6 INDEMNIFICATION.
(a) To the extent permitted by law, the Company will indemnify the
Holder participating in a registration pursuant to this Agreement, each of its
officers and directors and partners, and each person controlling the Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter of the Company's securities covered by such a
registration and each
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person who controls such underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, to the extent such
expenses, claims, losses, damages or liabilities arise out of or are based on
any untrue statement (or alleged untrue statement) of a material fact contained
in any registration statement, prospectus, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances in which they were made, not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse the Holder, each of its officers and directors and partners, and each
person controlling the Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action; provided, however, that the indemnity
contained herein shall not apply to amounts paid in settlement of any claim,
loss, damage, liability or expense if settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld); and provided
further, that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission or alleged untrue statement or omission, made
in reliance upon and in conformity with written information furnished to the
Company by the Holder, controlling person or underwriter specifically for use
therein. Notwithstanding the foregoing, insofar as the foregoing indemnity
relates to any such untrue statement (or alleged untrue statement) or omission
(or alleged omission) made in a preliminary prospectus but eliminated or
remedied in the amended prospectus on file with the Commission at the time the
registration statement becomes effective or in the final prospectus filed with
the Commission pursuant to Rule 424 of the Commission, the indemnity agreement
herein shall not inure to the benefit of any underwriter if a copy of the final
prospectus filed pursuant to Rule 424 was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities owned by the Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, and each underwriter, of the
Company's securities covered by such a registration, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and the Holder, its officers and directors and partners and each
person controlling the Holder within the meaning of Section 15 of the Securities
Act, against all expenses, claims, losses, damages and liabilities (or actions
in respect thereof), including any of the foregoing incurred in settlement of
any litigation, commenced or threatened, to the extent such expenses, claims,
losses, damages or liabilities arise out of or are based on any untrue statement
(or alleged untrue statement) by the Holder of a
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material fact contained in any such registration statement, prospectus, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission by the Holder (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Holder of the Securities Act or any rule or regulation promulgated under the
Securities Act applicable to the Holder and relating to action or inaction
required of the Holder in connection with any such registration, qualification
or compliance, and the Holder will reimburse the Company, such directors,
officers, underwriters or control persons for any legal or other expenses
reasonably incurred in connection with defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, in reliance upon
and in conformity with written information furnished to the Company by the
Holder specifically for use therein; provided, however, that the indemnity
contained herein shall not apply to amounts paid in settlement of any claim,
loss, damage, liability or expense if settlement is effected without the consent
of the Holder from whom such payment is sought (which consent shall not be
unreasonably withheld). Notwithstanding the foregoing, the liability of the
Holder under this subsection (b) shall be limited to an amount equal to the net
proceeds from the sale of the shares sold by the Holder, unless such liability
arises out of or is based on intentional misstatements by the Holder. In
addition, insofar as the foregoing indemnity relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission) made
in a preliminary prospectus but eliminated or remedied in the amended prospectus
on file with the Commission at the time the registration statement becomes
effective or in the final prospectus filed pursuant to Rule 424 of the
Commission, the indemnity agreement herein shall not inure to the benefit of the
Company or any underwriter if a copy of the final prospectus filed pursuant to
Rule 424 was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnished is required by
the Securities Act.
(c) Each party entitled to indemnification under this Section 2.6
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate or different
defenses. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to the entry
of any judgment or enter into any settlement which does not include as an
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unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnified Party shall consent to entry of any judgment or enter
into any settlement without the consent of each Indemnifying Party.
(d) If the indemnification provided for in this Section 2.6 is
unavailable to an Indemnified Party in respect of any losses, claims, damages or
liabilities referred to herein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and all shareholders offering
securities in the offering (the "Selling Shareholders") on the other from the
offering of the Company securities, or (ii) if the allocation provided by the
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the Selling
Shareholders on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Selling Shareholders on the other shall be the net
proceeds from the offering (before deducting expenses) received by the Company
on the one hand and the Selling Shareholders on the other. The relative fault of
the Company on the one hand and the Selling Shareholders on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the Selling
Shareholders and the parties' relevant intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Selling Shareholders agree that it would not be just and equitable if
contribution pursuant to this Section 2.4(d) were based solely upon the number
of entities from whom contribution was requested or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 2.6(d). The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred to
above in this Section 2.6(d) shall be deemed to include any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
defending any such action or claim, subject to the provisions of Section 2.6(c)
hereof. Notwithstanding the provisions of this Section 2.6(d) or any other
provision of this Article 2, no Holder shall be required to contribute any
amount or make any other payments under this Agreement which in the aggregate
exceed the net proceeds received in the offering by such Holder. No person
guilty of fraudulent misrepresentation (within the meaning of the Securities
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(e) Notwithstanding the foregoing provisions of this Section 2.6, if
pursuant to an underwritten public offering of capital stock of the Company, the
Company, the Selling Shareholders and the underwriters enter into an
underwriting or purchase agreement relating to such offering which contains
provisions covering indemnification among the parties thereto in connection
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with such offering, the indemnification provisions of this Section 2.6, to the
extent they are in conflict therewith, shall be deemed inoperative for the
purpose of such offering, except as to any parties to this Agreement who are not
parties to such subsequent underwriting or purchase agreement.
2.7 CERTAIN INFORMATION.
(a) As a condition to exercising the registration rights provided
for herein, the Holder, with respect to any Registrable Securities included in
any registration, shall furnish the Company such information regarding the
Holder and the Registrable Securities as the Company may request in writing and
as shall be required in connection with any registration, qualification or
compliance referred to in Section 2.
(b) The Holder, with respect to any Registrable Securities included
in any registration, shall cooperate in good faith with the Company and its
underwriters, in connection with such registration, including placing such
shares in escrow or custody to facilitate the sale and distribution thereof.
(c) The Holder, with respect to any Registrable Securities included
in any registration, shall make no further sales or other dispositions, or
offers therefor, of such shares under such registration statement if, during the
effectiveness of such registration statement, the Holder is informed that an
intervening event has occurred which, in the opinion of counsel to the Company,
makes the prospectus included in such registration statement no longer comply
with the Securities Act until such time as such holder has received from the
Company copies of a new, amended or supplemented prospectus complying with the
Securities Act.
2.8 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best lawful efforts to:
(a) Make and keep public information available, as those terms are
defined in Rule 144 under the Securities Act, at all times that the Company is
subject to the reporting requirements of the Securities Act or the Exchange Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) So long as the Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of such Rule 144, and of
the Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
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Company and other information in the possession of or reasonably obtainable by
the Company as the Holder may reasonably request in order to comply with any
rule or regulation of the Commission allowing the Holder to sell any such
securities without registration.
2.9 TRANSFER OF REGISTRATION RIGHTS. The rights granted to the Holder
hereunder may be assigned to a transferee or assignee in connection with any
transfer or assignment of Registrable Securities by Holder provided that: (i)
such transfer is otherwise effected in accordance with applicable securities
laws, (ii) the Holder notifies the Company in writing prior to the transfer or
assignment and the assignee or transferee agrees in writing to be bound by the
provisions of this Agreement, and (iii) such transfer is not pursuant to a
registration statement under the Securities Act or Rule 144 promulgated under
the Securities Act.
2.9.1 STANDSTILL AGREEMENT. The Holder agrees upon request of the
underwriter(s) managing any underwritten public offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of or otherwise dispose of any equity securities of the Company (other
than those included in the registration) without the prior written consent of
such underwriter(s), for such period of time following the effective date of the
registration statement relating to each such underwritten public offering as may
be requested by the underwriter(s).
3. MISCELLANEOUS.
3.1 TERM. The registration rights granted pursuant to this Agreement shall
begin on the date of this Agreement and shall terminate at such time as all
Registrable Securities held by such Holder can be sold in any three month period
without compliance with the registration requirements of the Securities Act
pursuant to Rule 144 (including Rule 144(k)) promulgated thereunder.
3.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
3.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
3.4 ENTIRE AGREEMENT: AMENDMENT. This Agreement shall constitute the full
and entire understanding and agreement between the parties with regard to the
subject hereof. Except as expressly provided herein, this Agreement, or any
provision hereof may be amended, waived, discharged or terminated upon the
written consent of the Company and the Holder.
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3.5 NOTICES. ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
including Federal Express or similar courier service, addressed (a) if to the
Holder, at such Holder's address set forth on the signature pages hereof or at
such other address as such party shall have furnished to the Company in writing,
or (b) if to the Company, at 12777 Jones Road, Suite 400, Houston, Texas 77070,
ATTN: Corporate Secretary, or at such other address as the Company shall have
furnished to the Holder.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective upon receipt.
3.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or
omission to exercise any right, power, or remedy accruing to any party to this
Agreement shall impair any such right, power or remedy of such party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party to this Agreement, shall be cumulative and not alternative.
3.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which may be executed by less than all of the parties
hereto, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
3.8 VALIDITY. In the event that any provisions hereof are held to be
invalid, illegal or against public policy, the remaining provisions hereof shall
not be affected thereby. In such event, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible with respect to those provisions which were held
to be invalid, illegal or against public policy.
3.9 CONSTRUCTION. Each party to this Agreement has had the opportunity to
review this Agreement with legal counsel. This Agreement shall not be construed
or interpreted against any party on the basis that such party drafted or
authored a particular provision, parts of or the entirety of this Agreement.
3.10 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
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IN WITNESS WHEREOF, the undersigned or each of their respective duly
authorized officers or representatives have executed this Agreement effective as
of the date first set forth above.
"COMPANY"
CYNET, INC.
By:/s/BERNARD B. BEALE
Name: Bernard B. Beale
Title: EX. V.P.
"HOLDER"
CYNET HOLDINGS, LLC.
By:/s/VINCENT W. BEALE, SR.
Name: Vincent W. Beale, Sr.
Title: President
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EXHIBIT 10.14
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED OR OTHERWISE
TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON ADVICE TO THE
CORPORATION BY ITS COUNSEL THAT REGISTRATION IS NOT REQUIRED FOR SUCH
SALE, ASSIGNMENT OR TRANSFER.
THE TRANSFER OF THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF IS SUBJECT TO COMPLIANCE WITH THE CONDITIONS SPECIFIED
BELOW, AND NO TRANSFER OF THIS WARRANT OR SUCH SHARES SHALL BE VALID UNTIL
SUCH CONDITIONS HAVE BEEN FULFILLED.
CYNET INC.
COMMON STOCK PURCHASE WARRANT
No. 44
THIS IS TO CERTIFY THAT, for value received, CyNet Holdings, LLC (the
"HOLDER"), upon due exercise of this Warrant, is entitled to purchase from
CyNet, Inc., a Texas corporation (the "COMPANY") on or before the close of
business on July 22, 2003 (the "EXPIRATION DATE"), all or any part of 4,800,000
shares of fully paid and non-assessable Class A Common Stock, no par value, of
the Company (the "COMMON STOCK"), at a purchase price per share computed
pursuant to Section 1 below.
This Warrant is hereinafter called the "Warrant," and the shares of Common
Stock issuable upon exercise hereof are hereinafter called the "Warrant Shares."
The term "Warrant" shall also include other warrants granted by the Company on
the date of grant of this Warrant, and the term "Warrant Shares" shall also
include shares issuable upon exercise thereof.
1. PURCHASE PRICE. The Purchase Price per share of Common Stock under
this Warrant is $1.00 subject to adjustment pursuant to Section 5 below (the
"Purchase Price").
2. EXERCISE OF WARRANT. The Holder of this Warrant may, at any time on
or before the Expiration Date, exercise this Warrant in whole or in part from
time to time for the purchase of the shares of Common Stock which such Holder is
then entitled to purchase hereunder at the Purchase Price. In order to exercise
this Warrant in whole or in part, the Holder hereof shall deliver to the Company
(a) a written notice of such Holder's election to exercise this Warrant, which
notice shall specify the number of whole shares of Common Stock to be purchased,
(b) payment of the aggregate Purchase Price of the shares of Common Stock being
purchased in the manner provided herein, and (c) this Warrant; PROVIDED,
HOWEVER, that, in case the issuance of such shares shall not have been
CyNet, Inc./Class A Warrant - Page 1
<PAGE>
registered under the Securities Act of 1933, as amended (the "Securities Act"),
the Company may require that such Holder furnish to the Company a written
statement that such Holder is purchasing such shares for such Holder's own
account for investment and not with a view to the distribution thereof and that
none of such shares will be offered or sold in violation of the provisions of
the Securities Act or any applicable state securities laws. Upon receipt of the
notice of exercise, the payment and surrender of this Warrant, the Company
shall, as promptly as practicable, execute or cause to be executed and deliver
to such Holder a certificate or certificates representing the aggregate number
of shares of Common Stock specified in such notice. The stock certificate or
certificates so delivered shall be in the such denominations as may be specified
in such notice and shall be registered in the name of such Holder or, subject to
Section 4, such other name as shall be designated in such notice.
Payment of the Purchase Price may be made to the Company by any of the
following, or a combination thereof, at the election of Holder:
(i) cash, certified check or cashier's check or wire transfer;
or
(ii) surrender of the Warrant at the principal office of the
Company, in which event the Company shall issue Holder a number of shares of
Common Stock computed using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to
Holder (not to exceed the aggregate number of Warrant Shares,
as adjusted pursuant to the provisions of Section 5 hereof).
Y = the number of shares of Common Stock for which the Warrant
is being exercised as specified in the notice of the Holder's
election to exercise this Warrant.
A = the Market Price of one share of Common Stock (for
purposes of this Section 2, the "Market Price" shall be
defined as the average closing price of the Common Stock (if
actual sales price information on any trading day is not
available, the closing bid price shall be used) for the five
trading days prior to the effective date of the exercise of
this Warrant (the "Average Closing Bid Price"), as reported by
the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), or if the Common Stock is not
traded on NASDAQ, the Average Closing Bid Price in the
over-the-counter market; provided, however, that if the Common
Stock is listed on a stock exchange, the Market Price shall be
the Average Closing Bid Price on such exchange; and, provided
further, that if the Common Stock is not quoted or listed by
any organization, the fair value of the Common Stock, as
determined
CyNet, Inc./Class A Warrant - Page 2
<PAGE>
by the board of directors of the Company, whose determination
shall be conclusive, shall be used).
B = the Exercise Price.
No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant. If this Warrant shall have been exercised only in
part, the Company shall, at the time of delivery of such certificate or
certificates, deliver to such Holder a new warrant evidencing the rights of such
Holder to purchase the remaining shares of Common Stock called for by this
Warrant, which new warrant shall in all other respects be identical with this
Warrant, or, at the request of such Holder, appropriate notation may be made on
this Warrant and the same returned to such Holder.
The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, execution and delivery of stock certificates
under this Section, except that, in case such stock certificates are to be
registered in a name or names other than the name of the Holder of this Warrant,
all stock transfer taxes payable upon the execution and delivery of such stock
certificate or certificates shall be paid by the Holder hereof at the time of
delivering the notice of exercise mentioned above. In such case, the Holder
hereof shall deliver with such notice of exercise evidence, satisfactory to the
Company, that such taxes have been paid.
The Company represents, warrants and agrees that all shares of
Common Stock issuable upon any exercise of this Warrant shall be validly
authorized and issued, fully paid and nonassessable.
This Warrant shall not entitle the Holder hereof to any of the
rights of a stockholder of the Company.
3. TRANSFER, DIVISION AND COMBINATION. Subject to the provisions of
Section 4, this Warrant is transferable in the same manner and with the same
effect as in the case of a negotiable instrument payable to a specified person.
The Company, however, may treat the registered Holder hereof as the owner hereof
for all purposes until this Warrant shall have been surrendered for transfer as
hereinafter provided. Upon surrender of this Warrant at the principal office of
the Company, together with a written assignment of this Warrant duly executed by
the Holder hereof or his agent or attorney, the Company shall, subject to
Section 4, execute and deliver a new warrant or warrants in the name of the
assignee or assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled.
This Warrant may, subject to Section 4, be divided or combined with
other warrants upon presentation hereof at the principal office of the Company,
together with a written notice specifying the names and denominations in which
new warrants are to be issued signed by the Holder or his agent or attorney.
Subject to compliance with the preceding paragraph and with Section 4, as to any
transfer which may be involved in such division or combination, the Company
shall execute
CyNet, Inc./Class A Warrant - Page 3
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and deliver a new warrant or warrants in exchange for the warrant or warrants to
be divided or combined in accordance with such notice.
The Holder shall pay all expenses, taxes and other charges payable
in connection with the preparation execution and delivery of Warrants under this
Section 3.
4. RESTRICTIONS ON TRANSFER; COMPLIANCE WITH SECURITIES ACT.
(a) This Warrant and the related Warrant Shares shall not be
transferable except upon the conditions specified in this Section, which
conditions are intended, among other things, to ensure compliance with the
provisions of the Securities Act or any applicable state securities laws in
respect of the transfer of such Warrant or such Warrant Shares.
(b) By acceptance of this Warrant, the Holder of this Warrant
agrees, prior to any transfer or attempted transfer of such Warrant or the
related Warrant Shares, to give written notice to the Company of such Holder's
intention to effect such transfer. The notice shall describe the manner and
circumstances of the proposed transfer in detail and shall contain an
undertaking by the Holder to furnish such other information as may be required
to enable the Company's counsel to render the opinions referred to below, and
shall give the identity and address of the Holder's counsel. The Holder shall
submit a copy of the notice to the counsel designated in the notice and the
Company shall submit a copy thereof to its counsel, and the following provisions
shall apply:
(i) If, in the opinion of both the Company's and
the Holder's counsel, the proposed transfer of the Warrant or Warrant Shares may
be effected without registration of the Warrant or Warrant Shares under the
Securities Act, the Company shall, as promptly as practicable, so notify the
Holder who will then be entitled to transfer the Warrant or Warrant Shares in
accordance with the terms of the notice delivered by the Holder to the Company.
(ii) If, in the opinion of either the Company's or
the Holder's counsel, the proposed transfer of the Warrant or Warrant Shares may
not be effected without registration of the Warrant or Warrant Shares under the
Securities Act, the Company shall, as promptly as practicable, so notify the
Holder, and the Company shall not be obligated to effect the proposed transfer,
except pursuant to an offering registered under the Securities Act.
(c) Each certificate for Warrant Shares issued upon exercise of
this Warrant shall bear a legend to the effect that the Warrant Shares may not
be transferred except upon compliance with the provisions of this Section 4, and
each certificate for Warrant Shares transferred pursuant to Subsection (b)(i) of
this Section shall also bear such a legend unless, in the opinion of counsel for
the Company, such a legend is not required.
(d) The Holder hereby covenants and agrees with the Company as
follows:
CyNet, Inc./Class A Warrant - Page 4
<PAGE>
(i) The Holder acknowledges being informed that
this Warrant or the Warrant Shares must held by the Holder indefinitely unless
the Warrants or Warrant Shares are registered for sale by the Holder under the
Securities Act or an exemption from such registration is available. The Holder
understands that any routine sale of the Warrant Shares made in reliance upon
Rule 144 promulgated under the Securities Act can be made only in limited
amounts after the expiration of a period of one year from the date of receipt of
the Warrant and otherwise in accordance with the terms and conditions of Rule
144, and further understands that in the event that the exemption from
registration provided by Rule 144 is not available, compliance with some other
exemption under the Securities Act will be required in the absence of
registration.
(ii) The Company may instruct its transfer agents
not to transfer any of the Warrant Shares unless the transfer agents have been
advised by the Company or otherwise have been satisfied that the Holder has
complied with the provisions above-described.
(iii) The Holder understands that the Company has
not covenanted and is not obligated to furnish a registration statement under
the Securities Act covering the Warrants or the Warrant Shares, to file a
notification under any regulations promulgated pursuant to the Securities Act
with respect to the Warrants or the Warrant Shares, or to take any other action
that would make available an exemption from registration, except as set forth in
that certain Registration Right Agreement of even date herewith executed between
the Company and the Holder. The Company covenants and agrees that it will use
its best efforts to make publicly available, from time to time, such information
as will permit the Holder to comply with the requirements of Rule 144 relating
to current public information, that it will upon request furnish the Holder a
written certificate relating to its compliance with the reporting requirements
of the Securities Exchange Act of 1934, as amended, and the regulations and
rules thereunder and that it will otherwise cooperate in good faith with the
Holder in connection with any sale under Rule 144.
5. ADJUSTMENTS TO NUMBER OF SHARES PURCHASABLE UPON EXERCISE OF
WARRANTS.
(a) In case of any reclassification or recapitalization or other
change in the Common Stock or in case of any consolidation of the Company with
or the merger of the Company into another corporation or in the case of any
conveyance or transfer of all or substantially all of the properties of the
Company to another corporation entitled to acquire and operate the same, the
Company or such successor or acquiring corporation, as the case may be, shall
take all steps necessary to amend the terms and conditions of this Warrant so
that the Holder shall have the right to exercise the Warrant into the kind and
amount of shares of stock and other securities and property receivable upon such
reclassification, recapitalization, change, consolidation, merger, conveyance or
transfer by a holder of the number of shares of Common Stock of the Company for
which such Warrant might have been converted immediately prior to such
reclassification, recapitalization, change, consolidation, merger, conveyance or
transfer. Notice of the execution of an amendment hereto pursuant to this
Section 5(a) shall be given pursuant to Section 7 below.
CyNet, Inc./Class A Warrant - Page 5
<PAGE>
(b) Except as otherwise provided herein, the effective date of any
adjustment pursuant to this Section 5 shall be the effective date of the event
that causes such adjustment. The adjustments provided for in this Section 5
shall apply to each successive event specified herein that causes an adjustment.
6. SPECIAL AGREEMENTS OF THE COMPANY.
(a) The Company covenants and agrees that it will reserve and set
apart and have at all times, a number of shares of authorized but unissued
Common Stock deliverable upon the exercise of the Warrants or any other rights
or privileges provided for therein sufficient to enable it at any time to
fulfill all of its obligations thereunder; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the exercise of the Warrants at the Purchase Price then in effect, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
As a condition precedent to the taking of any action which
would cause an adjustment reducing the Purchase Price below the then par value,
if any, per share of the Common Stock issuable upon exercise of this Warrant,
the Company will take such corporate action as may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
its Common Stock at the Purchase Price upon conversion of this Warrant in
accordance with the provisions of this Section .
If any shares of the Company reserved or to be reserved for
the purpose of exercise of this Warrant require registration or qualification
with or approval of any governmental authority under any Federal or State law
before such shares may be validly issued upon exercise, then the Company
covenants that it will in good faith and as expeditiously as possible endeavor
to secure such registration or approval, as the case may be; PROVIDED, HOWEVER,
that this provision shall not require the Company to endeavor to secure such
registration, qualification or approval in order to enable any person to sell or
distribute this Warrant or any Common Stock received upon exercise of this
Warrant.
The Company covenants that all shares of Common Stock which
may be issued upon exercise of this Warrant will be, upon issuance, fully paid
and nonassessable and, except as set forth herein, the Company will pay all
taxes, liens and charges with respect to the issuance thereof.
(b) In case the Company proposes:
(i) to pay any stock dividend upon the Common
Stock, make any distribution (other than ordinary cash dividends payable out of
earnings) or offer any subscription or other rights to the holders of Common
Stock;
CyNet, Inc./Class A Warrant - Page 6
<PAGE>
(ii) to effect any capital reorganization or
reclassification of the Common Stock of the Company; or
(iii) to effect the consolidation, merger, sale of
all or substantially all of the assets, liquidation, dissolution or winding
up of the Company;
then the Company shall cause notice of any such intended action to be given to
the Holder of this Warrant not less than twenty (20) nor more than forty (40)
days prior to the date on which such capital reorganization, reclassification,
consolidation, merger, sale, liquidation, dissolution or winding up shall be
effected, as the case may be.
7. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder of this Warrant and the Warrant Shares shall be
sent by certified or registered mail to the address shown on this Warrant or
such other address as shall have been furnished to the Company in writing by
such Holder. Any notice or other document required or permitted to be given or
delivered to the Company shall be sent by certified or registered mail to the
principal office of the Company at 12777 Jones Road, Suite 400, Houston, Texas
77070, attention of the President, or such other address as shall have been
furnished to the Holder of Warrants and Holders of Warrant Shares by the
Company.
8. LIMITATION OF LIABILITY. No provision hereof, in the absence of
affirmative action by the Holder to purchase shares of Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of such Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its President and its Secretary.
CYNET INC.,
a Texas corporation
By: /s/ VINCENT W. BEALE, SR.
Vincent W. Beale, Sr., Chairman
of the Board and Chief
Executive Officer
ATTEST:
/s/ SAMUEL C. BEALE
Samuel C. Beale, Secretary
DATE: July 22, 1998
CyNet, Inc./Class A Warrant - Page 7
<PAGE>
ASSIGNMENT
TO BE EXECUTED BY THE REGISTERED HOLDER IF HE DESIRES TO
TRANSFER THE WARRANT
FOR VALUE RECEIVED, ________________________________________ hereby sells,
assigns and transfers unto ________________________ the right to purchase
__________________ shares evidenced by the within Warrant, and does hereby
irrevocably constitute and appoint __________________________________________
Attorney to transfer the said Warrant on the books of the Company, with full
power of substitution.
_______________________________
Signature
_______________________________
Print Name
_______________________________
_______________________________
Address
Dated: _______________, ______
In the presence of:
_______________________________
NOTICE
The signature of the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER IF HE DESIRES TO
EXERCISE THE WARRANT
The undersigned hereby exercises the right to purchase _______
____________________ shares covered by this Warrant according to the conditions
thereof and herewith makes payment of the Purchase Price for such in full.
_________________________________
Signature
_________________________________
Print Name
_________________________________
_________________________________
Address
Date: ___________________, _____
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CyNet, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part
of this Registration Statement of our report dated February 12, 1998, except for
footnotes 8 and 14, which are as of July 24, 1998, relating to the consolidated
financial statements of CyNet, Inc., which is contained in that Prospectus. Our
report contains an explanatory paragraph regarding the Company's ability to
continue as a going concern.
We also consent to the reference to us under the caption "Experts"
in the Prospectus.
BDO Seidman, LLP
Houston, Texas
August 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CYNET, INC. DEC-31-1996 YEAR END FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 801,181
<TOTAL-REVENUES> 801,181
<CGS> 872,418
<TOTAL-COSTS> 3,128,580
<OTHER-EXPENSES> 1,041,158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 692,714
<INCOME-PRETAX> (4,061,271)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,061,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,061,271)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINING SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CYNET, INC. MAR-31-97 THREE MONTHS ENDED FINANCIAL STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 874,767
<TOTAL-REVENUES> 874,767
<CGS> 647,410
<TOTAL-COSTS> 1,974,592
<OTHER-EXPENSES> 18,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,900)
<INCOME-PRETAX> (1,114,525)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,114,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,114,525)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CYNET, INC. DEC-31-97, YEARS END FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 716,400
<SECURITIES> 0
<RECEIVABLES> 357,809
<ALLOWANCES> (83,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,178,803
<PP&E> 4,161,182
<DEPRECIATION> (596,235)
<TOTAL-ASSETS> 6,770,373
<CURRENT-LIABILITIES> 1,603,759
<BONDS> 0
0
0
<COMMON> 2,987,936
<OTHER-SE> (11,656,436)
<TOTAL-LIABILITY-AND-EQUITY> 6,770,373
<SALES> 4,960,355
<TOTAL-REVENUES> 4,960,355
<CGS> 4,812,141
<TOTAL-COSTS> 12,255,536
<OTHER-EXPENSES> (130,659)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (65,348)
<INCOME-PRETAX> (7,099,174)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,099,174)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,099,174)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINING SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CYNET, INC. 3-31-98, THREE MONTHS ENDED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 115,891
<SECURITIES> 0
<RECEIVABLES> 544,975
<ALLOWANCES> (103,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,180,388
<PP&E> 4,289,053
<DEPRECIATION> (798,202)
<TOTAL-ASSETS> 6,325,506
<CURRENT-LIABILITIES> 1,864,282
<BONDS> 0
0
0
<COMMON> 3,037,936
<OTHER-SE> (12,486,724)
<TOTAL-LIABILITY-AND-EQUITY> 6,325,506
<SALES> 1,926,892
<TOTAL-REVENUES> 1,926,892
<CGS> 1,614,988
<TOTAL-COSTS> 2,746,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,360)
<INCOME-PRETAX> (817,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (817,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (817,143)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
