<PAGE>
As filed with the Securities and Exchange Commission on December 3, 1999.
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)
TEXAS 7370 76-0467099
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
OF INCORPORATION OR CODE NUMBER)
ORGANIZATION)
COPIES TO:
12777 JONES ROAD, JAMES J. SPRING, III SAMUEL C. BEALE
SUITE 400 CHAMBERLAIN, HRDLICKA, VICE PRESIDENT - GENERAL
HOUSTON, TEXAS 77070 WHITE, WILLIAMS & MARTIN COUNSEL
(281) 897-8317 1400 TWO ALLEN CENTER CYNET, INC.
(ADDRESS AND TELEPHONE 1200 SMITH STREET 12777 JONES ROAD,
NUMBER OF PRINCIPAL HOUSTON, TEXAS 77002 SUITE 400
EXECUTIVE OFFICES) PHONE (713) 658-1818 HOUSTON, TEXAS 77070
FACSIMILE (713) 658-2553 (281) 897-8317
(NAME, ADDRESS AND
TELEPHONE NUMBER OF
AGENT FOR SERVICE)
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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
Proposed
Amount Maximum Proposed Maximum Amount of
Title of Each Class of Securities To Be Offering Price Aggregate Registration
To Be Registered Registered(1) Per Unit Offering Price Fee(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock(2) 840,581 $1.37 $1,151,596 $304
================================================================================================================================
</TABLE>
(1) Pursuant to Rule 429, the prospectus contained in this registration
statement is a combined prospectus that relates and constitutes a
post-effective amendment to the registration statement on Form SB-2
(No. 333-60765), which was declared effective on October 18, 1999, and
registered (i) an aggregate of 9,164,126 shares of Class A Common Stock,
(ii) an aggregate of 2,719,733 shares of Class B Common Stock, (iii) an
aggregate of 103,500 shares of Series A Preferred Stock, (iv) an
aggregate of 77,349 shares of Series B Preferred Stock, (v) warrants to
purchase 799,000 shares of Class A Common Stock, and (vi) an aggregate
of 2,200,000 shares of Class B Common Stock underlying certain warrants.
A registration fee of $6,321 was previously paid with respect to such
registration statement.
(2) Represents securities to be issued in connection with the funding of the
rescission offer described in the prospectus which is a part of this
Registration Statement.
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 DECEMBER 3, 1999
PROSPECTUS
CYNET, INC.
____________________________________________________________________
SECURITIES SUBJECT TO RESCISSION OFFER TO PURCHASE:
5,514,491 SHARES OF CLASS A COMMON STOCK
2,719,733 SHARES OF CLASS B COMMON STOCK
103,500 SHARES OF SERIES A PREFERRED STOCK
77,349 SHARES OF SERIES B PREFERRED STOCK
WARRANTS TO PURCHASE 799,000 SHARES OF CLASS A COMMON STOCK
SECURITIES TO BE ISSUED TO RESCISSION UNDERWRITERS:
4,490,216 SHARES OF CLASS A COMMON STOCK
SECURITIES OFFERED BY SELLING SHAREHOLDERS:
2,200,000 SHARES OF CLASS B COMMON STOCK UNDERLYING WARRANTS
____________________________________________________________________
THIS PROSPECTUS RELATES TO THE RESCISSION OFFER DESCRIBED HEREIN AND CONTAINS
UPDATED INFORMATION WITH RESPECT TO THE COMPLETION AND FINANCING OF SUCH
RESCISSION OFFER. THE RESCISSION OFFER WAS MADE TO CERTAIN SHAREHOLDERS OF
CYNET, INC. PURSUANT TO A PROSPECTUS DATED OCTOBER 18, 1999. AS OF THE DATE OF
THIS PROSPECTUS, AN AGGREGATE OF $5,536,899 OF SECURITIES SUBJECT TO THE
RESCISSION OFFER WERE TENDERED FOR RESCISSION. IN ORDER TO COMPLETE THE FUNDING
OF THE RESCISSION OFFER, THE STANDBY RESCISSION UNDERWRITERS DESCRIBED IN THIS
PROSPECTUS HAVE AGREED TO PROVIDE CYNET, INC. AN ADDITIONAL $1,151,596 IN
RESCISSION FINANCING BY PURCHASING AN ADDITIONAL 840,581 SHARES OF ITS CLASS A
COMMON STOCK FOR A PURCHASE PRICE OF $1.37 PER SHARE. AS A RESULT OF THIS
ADDITIONAL RESCISSION FINANCING, THE NUMBER OF REGISTERED SHARES OF CLASS A
COMMON STOCK TO BE ISSUED AND SOLD TO THE RESCISSION UNDERWRITERS WILL BE
INCREASED FROM 3,649,635 SHARES TO AN AGGREGATE OF 4,490,216 SHARES FOR A
PURCHASE PRICE OF $1.37 PER SHARE IN ACCORDANCE WITH THE TERMS AND CONDITIONS
DESCRIBED IN THIS PROSPECTUS. THE CLOSING OF THE FUNDING OF THE RESCISSION
OFFER IS EXPECTED TO OCCUR IMMEDIATELY AFTER THE DATE OF THIS PROSPECTUS.
The date of this Prospectus is December , 1999.
1
<PAGE>
CyNet, Inc., a Texas corporation (the "Company"), has offered, upon the
terms and conditions set forth herein, to rescind the issuance or sale of an
aggregate of (i) 5,514,491 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)
2,719,733 shares of no par value Class B nonvoting common stock ("Class B
Common Stock"), including 2,058,803 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) 77,349 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 May 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 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 $14,198,137, 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 aggregate amount of accrued interest calculated
through October 31, 1999 is $2,455,149.39. The Company has offered 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 expired on the
later to occur of (x) November 22, 1999 or (y) 30 days after the date each
Offeree received the Rescission Offer prospectus (the "Expiration Date").
The Rescission Offer does not apply to any securities of the Company other
than the Subject Securities.
ALL OFFEREES ELECTING TO HAVE THEIR SHARES REPURCHASED BY THE COMPANY
HAVE COMPLETED THE RESCISSION ELECTION FORM ATTACHED HERETO AS EXHIBIT A BY
SELECTING OPTION A, ACCEPTANCE OF RESCISSION OFFER, AND RETURNING THE
RESCISSION ELECTION FORM TO THE COMPANY ACCORDING TO THE INSTRUCTIONS
DESCRIBED ON PAGES 3 AND 18 UNDER THE CAPTION "ACCEPTANCE OR REJECTION."
No insider or affiliate of the Company holds any of the shares subject
to the Rescission Offer, except that BNB Enterprises, LLC d/b/a Bull and Bear
Enterprises, a company that is presently under the sole management and
ownership of Vincent W. Beale, Sr., holds 25,000 shares of the Company's
Series A Preferred Stock for which it paid $50,000 cash to the Company in
April 1997.
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 in November 1997. Mr. Shaffner subsequently transferred
certain of the Shaffner Warrants to various individuals and entities
(collectively, the "Selling Shareholders"). The Company will receive gross
proceeds of $1.00 per share to the extent of cash exercises of the Shaffner
Warrants (a maximum amount of $2,200,000). See "Use of Proceeds" and "Plan
of Distribution and Selling Shareholders--Selling Shareholders."
This Prospectus also relates to the sale by the Company of up to
4,490,216 shares of Class A Common Stock at a price of $1.37 per share
($6,151,596 in the aggregate) to certain rescission underwriters pursuant to
the terms of underwriting agreements to provide $6,151,596 to fund the
Rescission Offer. See "Rescission Offer -- Funding the Rescission Offer."
The Rescission Underwriters will use and deliver this Prospectus in
connection with any resales of the shares of Class A Common Stock issued to
them pursuant to the Rescission Financing. See "Plan of Distribution and
Selling Shareholders -- Rescission Underwriters."
2
<PAGE>
INVESTMENT IN THE SUBJECT SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 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.
IN CONNECTION WITH THIS OFFERING OF CLASS A COMMON STOCK ISSUED TO THE
RESCISSION UNDERWRITERS AND 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 A COMMON STOCK
AND THE CLASS B COMMON STOCK IN ACCORDANCE WITH RULE 103 OF REGULATION
M. SEE "PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS."
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 OFFEREE
MUST MAKE HIS OWN DECISION AS TO WHETHER TO ACCEPT THE RESCISSION OFFER.
ACCEPTANCE OR REJECTION
All Offerees were 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 have been delivered to
the Company later than the Expiration Date. The Election should have been
completed to indicate whether the Offeree accepts or rejects the Rescission
Offer. Offerees accepting the Rescission Offer were required to 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 had not delivered a
completed Election by the Expiration Date was conclusively deemed to have
rejected the Rescission Offer, except to the extent applicable state laws
provide otherwise. The Election and the stock certificates or other
instruments representing the Subject Securities could have been delivered to
the Company by hand or courier service, or by mail. The method of delivery
of all documents was at the election and risk of the Offeree. If an Offeree
used the mails to deliver a completed Election to the Company, delivery was
deemed to have occurred on the date the Election is postmarked. Moreover, if
using the mails, the Company recommended registered mail or certified mail,
return receipt requested, that was properly insured.
EFFECT OF REJECTION
For purposes of applicable federal and state securities laws, Offerees
who rejected the Rescission Offer now 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.
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.
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 OPERATIONS; 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. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS ASSUMES THAT NO OFFEREE RECEIVING THE RESCISSION OFFER EXERCISES
HIS RIGHT TO RESCIND.
THE COMPANY
CyNet, Inc. (the "Company") is an Internet business solutions provider.
The Company's products and services are offered through MESSAGING which
includes fax, data, voice, e-mail and mobile messaging, and INTERNET SERVICES
which includes custom application development, e-commerce development, web
content creation, web hosting and Internet access.
The Company is a Texas corporation and was founded in 1995 to provide
fax services for business-to-business communication. The Company capitalized
on the dramatic increase in the usage of third-party fax services and created
a niche market for itself with its HYPERCAST fax broadcast desktop client
software and related services. In 1997, the Company introduced HYPERLINE,
its point-to-point desktop software and fax service in order to expand its
fax service.
In response to the rapid growth and popularity of e-mail and the
Internet as a primary communications medium, the Company set out to become a
full service Internet messaging provider. In 1998, the Company added to its
product offering HYPERWEB, its Internet-to-fax service; HYPERMAIL, its
fax-to-e-mail service; WEBCAST, its e-mail broadcast service; TELECAST, its
voice broadcast service; and HYPERCOMM, its teleconferencing service. To
further enhance its messaging services, the Company, through its subsidiary,
Worldwide Marketing Services, Inc., added enhancement services such as list
procurement, full-service graphic design and copy development services for
its customers. These additional services enabled the Company to provide its
customers with complete messaging solutions with "end-to-end" control of the
solutions.
In July 1999, the Company began offering Internet-based services by
acquiring Cynet Interactive, LLC ("Cynet Interactive"), a wholly-owned
subsidiary of Cynet Holdings, LLC. The acquisition of Cynet Interactive
allowed the Company to expand its messaging and broadcast enhancement
services to include web site design, Internet application development for
e-commerce and other Internet-based applications, and web site hosting.
Through a series of projects, the Company has integrated its messaging
services with Internet applications, creating more effective solutions for
its customers. The Company's current Internet projects include the
development of on-line shopping malls, integrated procurement centers, energy
trading applications and Internet web-based magazines for customers. In July
1999, the Company entered into a strategic alliance with IXC Communications,
Inc. ("IXC Communications") to enable the Company to further expand its
products and services to include Internet access for business customers. The
Company expects this alliance with IXC Communications will enable the Company
to provide complete, "end-to-end" Internet business solutions just as it is
able to provide complete, "end-to-end" messaging business solutions. The
Company's solutions selling approach allows the Company to effectively
deliver its customers' messages irrespective of the transmission medium.
4
<PAGE>
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 www.cynetinc.com. Information contained in the Company's web site
shall not be deemed a part of this Prospectus.
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% to 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
were 100% owned by the Company. From December 1997 through January 1998, the
Company exchanged 2,421,580 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 became the owner of 100% of the equity interest in the
LLCs. In 1998, the Company dissolved each of the LLCs.
From August 1996 through December 31, 1997, the Company raised
approximately $15.3 million of additional capital through a series of private
offerings ("Offerings"), including $14,198,137 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 products and services, expand the communications network and for
working capital.
In July 1998, the Company entered into a Subscription Agreement (the
"Holdings Subscription Agreement") with Cynet Holdings, LLC ("Cynet
Holdings"), pursuant to which Cynet Holdings committed to purchase up to
10,000,000 shares of Class A Common Stock for $1.00 per share. As of
November 30, 1999, Cynet Holdings had contributed $4,106,000 in cash to the
Company, and the Company had issued 4,106,000 shares of its Class A Common
Stock to Cynet Holdings. In addition, Cynet Holdings transferred all of the
outstanding membership interests of Cynet Interactive to the Company. See
"Management -- Certain Transactions."
Since August 1999, Cynet Holdings has provided the Company additional
short-term financing of $933,472. Those borrowings are unsecured,
non-interest bearing and are due on demand. See "Management -- Certain
Transactions."
THE RESCISSION OFFER AND RESCISSION FINANCING
The Company has, subject to the terms and conditions of the Rescission
Offer, conducted an offering to rescind the issuance of the Subject
Securities to the Offerees. The Company has also completed the Rescission
Financing with the Rescission Underwriters to fund the repurchase of the
Subject Securities from Offerees who accept the Rescission Offer. The
following table sets forth information regarding the Rescission Offer and the
Rescission Financing:
<TABLE>
<CAPTION>
CLASS OF STOCK NUMBER OF SHARES SUBJECT TO RESCISSION
OUTSTANDING(1) OFFER
<S> <C> <C>
Class A Common Stock(2) . . . . . . . . 26,665,198 5,514,491
Class B Common Stock . . . . . . . . . 2,187,862 2,719,733
Series A Preferred Stock . . . . . . . 66,000 103,500
Series B Preferred Stock . . . . . . . 50,832 77,349
Warrants to Purchase Class A Common
Stock(3) . . . . . . . . . . . . . . . 8,462,600 799,000
Warrants to Purchase Class B Common
Stock . . . . . . . . . . . . . . . . . 2,550,954 -0-
</TABLE>
5
<PAGE>
No Proceeds from Rescission Offer . . . No proceeds will be received by
the Company from the Rescission
Offer. However, the Company will
receive proceeds (i) to the
extent of cash exercises of the
Shaffner Warrants to purchase
Class B Common Stock (see "Plan
of Distribution" and "Selling
Shareholders") and (ii) from the
Rescission Financing (see "Use of
Proceeds").
No Market . . . . . . . . . . . . . . . The holders of Subject Securities
who rejected the Rescission Offer
and the Rescission Underwriters
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."
Risk Factors . . . . . . . . . . . . . An investment in the Company
involves a high degree of risk.
See "Risk Factors."
_________________
(1) Shares outstanding as of November 30, 1999, based on the current number of
acceptances of the Rescission Offer and assuming the completion of the
full amount of the Rescission Financing and the Rescission Offer.
(2) Includes 4,490,216 shares to be issued to the Rescission Underwriters, but
excludes 1,885,307 shares underlying options outstanding as of September
30, 1999 under the Company's 1997 Restated Stock Option Plan.
(3) Includes a warrant to purchase 413,600 shares to be issued pursuant to a
consulting agreement between the Company and the Houston Economic
Opportunity Fund, L.P. ("HEOF") (see "Financing of Rescission Liabilities"
below) upon the completion of the Rescission Offer.
FINANCING OF RESCISSION LIABILITIES
The Company has entered into Underwriting Agreements (each, an
"Underwriting Agreement" and collectively, the "Underwriting Agreements")
with a group of underwriters (the "Rescission Underwriters") to provide
$6,151,596 (the "Rescission Financing") to fund the Rescission Offer. The
Rescission Underwriters include, among others, HEOF, a limited partnership
whose general partner is HEOF Management Corp., an affiliate of Enron
Economic Development Corporation, a wholly-owned subsidiary of Enron
Corporation, a Houston, Texas-based Fortune 500 energy company. Subject to
the terms and conditions of the Underwriting Agreements, the Company has
agreed to sell and the Rescission Underwriters have agreed to purchase an
aggregate of 4,490,216 shares of Class A Common Stock at a price of $1.37 per
share. The Underwriting Agreements provide, among other things, that the
obligation of the Rescission Underwriters to purchase such shares of Class A
Common stock is subject to the successful completion of the Rescission Offer.
For purposes of this Prospectus, the Rescission Offer will be deemed
successfully completed if less than $6,151,596 is needed to fund the
Rescission Offer.
As additional consideration for its participation in the Rescission
Financing, the Company has agreed to grant HEOF the right to require the
Company to repurchase the shares of Class A Common Stock issued to HEOF
pursuant to its Underwriting Agreement at a price of $1.51 per share (the
"HEOF Put Option"). The HEOF Put Option will have a term of one year from the
closing of the Rescission Financing. In the event that the HEOF Put Option
is exercised, the Company's shareholder equity may be reduced by up to
$2,667,299.
As of the date of this Prospectus, the funds comprising the Rescission
Financing have been deposited into an interest-bearing escrow account with
First Bank Texas, N.A. of Houston, Texas, and will be disbursed as needed to
satisfy the Company's rescission liability to Offerees who accept the
Rescission Offer.
6
<PAGE>
The proceeds from the Rescission Financing will be used to fund $6,151,596
of the Rescission Offer. While the Company believes the Rescission Financing
will be sufficient to repurchase the Subject Securities from Offerees who
accepted the Rescission Offer, in the event that funds in excess of $6,151,596
are needed, the Company shall have the right, on or before the Expiration Date,
to either (i) with the consent of the Rescission Underwriters, secure additional
financing through the issuance of equity securities or the sale of assets in
amounts sufficient to satisfy the Company's rescission liabilities and complete
the Rescission Offer, or (ii) declare the entire Rescission Offer ineffective
and return all completed Elections, together with the certificates or other
instruments representing the Subject Securities, to the Offerees who accepted
the Rescission Offer. Any unused proceeds of the Rescission Financing remaining
after the funding of the Rescission Offer which are not returned to the
Rescission Underwriters will be used by the Company for general corporate
purposes. See "Risk Factors -- Lack of Sufficient Capital to Fund Rescission
Offer; Potential Rescission Liability" and "Use of Proceeds."
SUMMARY OF 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, 1998 and 1997 and (ii) from the unaudited financial
statements of the Company for the nine months ended September 30, 1999 and
September 30, 1998. 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1997 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 8,947,732 $ 4,960,355 $ 6,501,849 $ 6,778,197
Loss from operations..................... (4,230,362) (7,958,870) (4,245,637) (3,323,773)
Net loss applicable to common
shareholders............................. (4,396,883) (8,502,067) (4,450,065) (3,454,593)
Net loss per common share................ $ (0.19) $ (0.60) $ (0.17) $ (0.15)
Weighted average number of common
shares outstanding....................... 23,109,154 14,086,177 25,514,211 22,770,299
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
DECEMBER 31, SEPTEMBER 30, 1999
1998 1999 PRO FORMA(1)
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)(2)........ $ (885,068) $ (870,283) $ (2,114,713)
Total assets........................ 5,297,713 5,092,147 3,628,019
Stock and warrants subject to
rescission.......................... 13,980,009 13,950,009 -
Capital deficit..................... (12,218,072) (12,391,094) (2,352,814)
</TABLE>
- ------------------------
(1) Pro forma balance sheet data gives effect to the results of the Rescission
Offer as if it had been completed as of September 30, 1999.
(2) Includes $2,078,825 of deferred offering costs prior to the completion
of the Rescission Offer. See Note 3 of the Notes to the Consolidated
Financial Statements.
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RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. OFFEREES AND
OTHER PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS, IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
HISTORY OF OPERATING LOSSES; ACCOUNTANTS' EXPLANATORY PARAGRAPH
The Company commenced business in April 1995 and has incurred operating
losses since inception. Revenue from the sale of messaging and Internet
services will be the Company's primary source of cash flow during 1999.
Although the Company continues to obtain significant numbers of new accounts and
revenue continues to increase, 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.
The Company's independent certified public accountants included an
explanatory paragraph in their opinion with respect to the Company's 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,
therefore, relied upon external equity financing to continue its operations.
From inception through September 30, 1999, the Company incurred significant
operating losses and at September 30, 1999, the Company had a capital deficit of
$12,250,346. Until the Company can obtain monthly sales levels of approximately
$1,200,000, 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 into
the first quarter of 2000, at which time the Company's operating revenues are
expected to be 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 the 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.
POTENTIAL RESCISSION LIABILITY; LACK OF SUFFICIENT CAPITAL TO FUND RESCISSION
OFFER
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 $14,198,137 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 October 31, 1999, the
aggregate accrued interest (on the total liability of $14,198,137) was
$2,455,149.39 and continues to accrue, assuming the full liability is incurred,
at the rate of approximately $3,500 per day. The Company has executed
Underwriting Agreements with the Rescission Underwriters to provide $6,151,596
to the Company for the Rescission Financing. In the event that funds in excess
of $6,151,596 are needed to fund the Company's rescission liability, the Company
will be required, with the consent of the Rescission Underwriters, to seek
additional capital through 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 or that the Rescission Underwriters will consent to the Company
obtaining such additional financing or completing the Rescission Offer. In
addition, the Company shall also have the right (but not the obligation) to
declare the entire Rescission Offer ineffective. See "Rescission Offer --
Funding the Rescission Offer." If the Company is unable to obtain additional
financing to complete the Rescission Offer or declares the entire Rescission
Offer ineffective, the Company will continue to be subject to claims from the
Offeree holding the Subject Securities for possible violations of applicable
state and federal securities laws. Any unused proceeds of the Rescission
Financing
8
<PAGE>
remaining after the funding of the Rescission Offer which are not returned to
the Rescission Underwriters will be used by the Company for general corporate
purposes. See "Use of Proceeds."
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 the
Offerees or 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 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. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Rescission Offer -- Effect of Rescission Offer" and Note 8 of the Notes to
Consolidated Financial Statements.
NEED FOR ADDITIONAL CAPITAL AND CAPITAL REQUIREMENTS
The Company's efforts to develop and introduce its messaging and
Internet 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 the fourth quarter of 1999. During the first
quarter of 2000, the Company expects its operating revenues will be
sufficient to cover operating costs and provide positive cash flow. However,
there can be no assurance that the Company will meet these expectations and
generate positive cash flow in the foreseeable future. As a result, the
Company expects it will need to raise additional capital in future periods.
The Company currently does not have sufficient capital to meet its cash flow
requirements over the next 12 months. The Company expects to satisfy its cash
flow shortages with (i) the sale of additional shares of Class A Common Stock
to Cynet Holdings pursuant to the Holdings Subscription Agreement, (ii)
approximately $615,000 in excess proceeds of the Rescission Financing if the
aggregate amount required to fund the Rescission Offer is less than
$6,151,596 and (iii) the proceeds of a mezzanine debt facility which the
Company is presently seeking with one of the Rescission Underwriters and
other unaffiliated lenders. If the Company experiences greater than
anticipated capital requirements, or 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 or lease financing when needed or on
terms that the Company finds acceptable. Any additional equity financing may
cause immediate and 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."
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 concerns regarding potential violations
of securities laws 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 concerns raised by the
Commission in its inquiry. While there can be no assurance that such concerns
or other issues will not be raised or that the Rescission
9
<PAGE>
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.
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," "Management's Discussion and
Analysis of Financial Condition and Results of Operation,"and "Management."
MARKET GROWTH OF MESSAGING AND INTERNET SERVICES
The market and demand for business-to-business messaging services and
Internet application services is growing rapidly. While the Company believes
the market and demand for such 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 messaging and Internet services, there can be no assurance
that customers will elect to use service providers, such as the Company, to
fulfill their messaging and Internet application services needs. If the use of
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 service
areas. The Company's current and potential competitors fall into the following
categories: (i) telecommunications companies and resellers, (ii) Internet
service providers, (iii) enhanced fax service providers, (iv) unified Internet
messaging providers and (v) various web design and electronic commerce
providers. The Company is unaware of any other entity that combines Messaging
and Internet products and services in a unified service offering as does the
Company. However, because of the high rate at which other established and new
companies are entering the various business segments, there can be no assurance
that additional competitors will not enter markets the Company currently serves.
Many of these competitors may possess significantly greater financial,
marketing, technical and other resources than the Company. There can be no
assurance that additional competitors will not enter markets that the Company
presently serves or plans to serve or that the Company will be able to compete
effectively. In addition, there can be no assurance that potential customers
will not elect to use their own equipment to fulfill their needs for messaging
and Internet services or that they will not elect to use alternatives to the
Company's messaging and Internet services. See "Business -- Competition."
COMPANY SYSTEM FAILURE
The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its telecommunications system infrastructure. Within
90 days from the date of this Prospectus, the Company will expand its disaster
recovery plan to include one or more redundant network switching centers. 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, unauthorized entry, computer viruses, and
similar events beyond the Company's control. 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
10
<PAGE>
of any of the foregoing risks could have a material adverse effect on the
Company's business, financial condition and results of operations.
LONG DISTANCE CARRIERS
The foundation of the Company's telephony network infrastructure depends on
the Company's 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 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 actively pursues longer term contracts with customers, the Company's
existing 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."
THE PRICING FOR SERVICES IS UNCERTAIN
Prices for messaging and Internet services have fallen historically. The
Company expects prices in the messaging and Internet industry in general to
continue to fall, and prices for the Company's existing and future services may
fall correspondingly. Accordingly, there can be no assurance that the Company's
current pricing schedule will prove to be viable, demand for Company services
will materialize at the prices it would like to charge, or the Company will be
able to sustain adequate future pricing levels as competitors introduce
competing services.
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 its
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 five 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 Growth;
Recent Management Changes and New Information Systems" and "Management --
Directors and Officers" and "Management -- Employment Agreements."
TECHNOLOGICAL CHANGE
The messaging and Internet services industries are characterized by rapid
and continuous technological change, evolving industry standards, emerging
competition and frequent new service and other product introductions. Future
technological advances in the messaging and Internet services industries may
result in the availability of new services that could compete with the 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 messaging and Internet services needs 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
11
<PAGE>
products, services or technologies developed by others will not render the
Company's products, services or technologies noncompetitive or obsolete.
SOFTWARE AND HARDWARE DEFECTS; POSSIBILITY OF DEVELOPMENT DELAYS
Software-based services and equipment, such as the Company's, may contain
undetected errors or failures when introduced or when new versions are released.
The hardware, software, and network systems the Company has developed are
relatively new and, therefore, have not withstood the demands of the larger
volume associated with its 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 the Company
needs to be profitable. Furthermore, there can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in the Company's software after commercial release, or that the Company
will not experience development delays, resulting in delays in market
acceptance. Any of these circumstances could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
ABILITY TO OBTAIN TELEPHONE NUMBERS
The Company's future success will depend on its ability to procure large
quantities of telephone numbers in the United States and foreign countries,
including telephone numbers in area codes that its customers demand. The
Company's ability to procure telephone numbers depends on applicable
regulations, the practices of telecommunications carriers that provide telephone
numbers and the level of demand for new telephone numbers. Failure to obtain
these numbers in a timely and cost-effective manner may prevent the Company from
entering some foreign markets or hamper the Company's growth in domestic
markets, and may have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
THE INTERNET AS AN INFORMATION TRANSMISSION MEDIUM
The Company's future success will depend on its ability to route its
customers' traffic through the Internet and through dedicated and/or partially
dedicated data network bandwidth. The Company depends on the viability of the
Internet and other bandwidth as a medium for the transmission of information in
various forms. To date, the Company has transmitted a limited amount of
customer traffic as compared to its growth projections. There can be no
assurance that these will prove to be viable communications media or that
information transmission will be reliable. There also can be no assurance
against the development of capacity constraints that might inhibit efficient
information transmission.
CONTINUED GROWTH IN THE USE OF THE INTERNET
The Company's future success is dependent upon continued growth in the use
of the Internet in order to support the sale and use of the Company's services
and products. There can be no assurance that the number of Internet users will
continue to grow. As is typical in the case of a new and rapidly evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. The Internet may not prove
to be a viable avenue to transmit communications for a number of reasons. These
reasons include (i) lack of acceptable security technologies, (ii) lack of
access and ease of use, (iii) traffic congestion, (iv) inconsistent quality or
speed of service, (v) potentially inadequate development of the necessary
infrastructure, (vi) excessive governmental regulation, (vii) uncertainty
regarding intellectual property ownership, or (viii) lack of timely development
and commercialization of performance improvements, including high-speed modems.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's current international operations consist of providing
messaging and Internet services to locations outside the United States. The
Company is planning to increase service offerings 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 AND COPYRIGHTS
The Company has developed much of its own operating system and user
software and expects to continue to improve existing applications and develop
new applications in the future. As of the date of this Prospectus, 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 Company intends
to pursue available patent, copyright, trademark and service mark protection for
its business processes, software, and Internet content. 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 messaging processes. 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 intends, in the future, to pursue opportunities 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. See "Business --
Strategic Relationships." The Company currently does not have any acquisitions
or negotiations pending. Any future acquisitions, investments or strategic
alliances will be financed with either equity or debt securities of the Company,
and 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 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,
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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.
The Company is subject to federal and state laws regulating the unsolicited
transmission of fax and e-mail transmissions for advertisement purposes. The
Company has adopted a policy to refrain from transmitting fax and e-mail
advertisements except to the Company's own customers and other recipients who
have expressed an interest in receiving the transmitted information or otherwise
have given their permission to receive such transmissions. The Company
encourages its customers to familiarize themselves with the relevant laws and to
conduct their businesses in accordance with applicable laws.
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 to 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. Management
will attempt to develop a public market in the Class A and Class B Common Stock
immediately after the closing of the Rescission Offer by means of the OTC
Bulletin Board Service ("OTCBB") by engaging market makers in the shares in such
a manner that will permit trading. Assuming the successful completion of the
Rescission Offer and the Rescission Financing, the Company intends to take the
necessary actions to allow its Class A Common Stock to be traded by means of the
Nasdaq National Market System ("NMS"). However, there can be no assurance that
a market for the Company's Class A or Class B Common Stock will ever develop on
the OTCBB or the NMS. 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 the NMS,
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
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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.
CONTINUED CONTROL BY CERTAIN SHAREHOLDERS
Based on the current number of acceptances of the Rescission Offer and
assuming completion of the full amount of the Rescission Financing, Cynet
Holdings will own approximately 51.9% 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, 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.
See "Description of Capital Stock." Assuming the successful completion of the
Rescission Offer and the Rescission Financing, the Company intends to (i) offer
the holders of the Class B Common Stock the right to exchange their shares of
Class B Common Stock for an equal number of shares of Class A Common Stock and
(ii) increase the number of authorized shares of its Common Stock to 100 million
shares at a special meeting of the Company's shareholders. See "Description of
Capital Stock."
FLUCTUATION IN STOCK PRICE
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, including (i)
the rate at which the Company is able to add customers and up-sell additional
usage-based services to existing customers, (ii) the amount and timing of
expenditures to enhance sales and marketing and to expand the Company's
infrastructure, or other costs, as it expands its network, (iii) the
announcement or introduction of new or enhanced services by the Company's
competitors, (iv) technical difficulties or network downtime, and (v)
economic and competitive conditions specific to the Internet and messaging
industries. As a result, it is likely that in some future periods the
Company's operating results will be below the expectations of securities
analysts and investors. If this happens, the trading price of the Company's
Common Stock would likely be materially adversely affected.
DETERMINATION OF PRICE OF OFFERINGS
The offering prices and assigned values relating to the issuances of the
Subject Securities and the Rescission Financing 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 Offerees rejecting the Rescission Offer will be able to sell in
the future, if at all, the Subject Securities for a price higher than the
original offering price.
15
<PAGE>
NEED TO MAINTAIN A CURRENT PROSPECTUS
The Company must maintain a current prospectus in order for the Selling
Shareholders 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 Shareholders may be unable to resell their 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
The Company reviewed for Year 2000 compliance the computer hardware and
software systems used in the delivery and support of its products and services
and brought all systems into compliance and readiness. However, the ability of
third parties with whom the Company transacts business to adequately address
their Year 2000 issues is outside the Company's control. Therefore, there can
be no assurance that the failure of such third parties to adequately address
their respective Year 2000 issues will not have an 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."
RESCISSION OFFER
BACKGROUND
From August 1996 through May 1998, the Company raised $14,198,137 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, (iii) the
aggregate amount of Subject Securities issued by the Company, (iv) the aggregate
amount of accrued interest calculated through October 31, 1999, (v) the amount
of dividends paid on Preferred Stock and (vi) the aggregate amount of liability
calculated through October 31, 1999.
<TABLE>
<CAPTION>
Amount Dividends
Statutory Subject to Accrued Paid on Aggregate
State or Territory Rate Rescission Interest Preferred Stock Liability
------------------ --------- ---------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Arizona 10% $669,899.00 $156,276.06 $2,381.04 $823,794.02
Arkansas 6% $30,000.00 $3,610.00 $0.00 $33,610.00
California 7% $1,212,451.00 $217,458.61 16,929.71 $1,412,979.90
Colorado 8% $152,000.00 $21,592.75 $1,320.98 $172,271.77
Connecticut 6% $8,000.00 $1,383.51 $0.00 $9,383.51
District of Columbia 6% $16,600.00 $2,498.90 $318.00 $18,780.90
Florida 10% $201,500.00 $51,107.40 $2,774.78 $249,832.62
Georgia 6% $17,001.00 $2,740.62 $382.19 $19,359.43
16
<PAGE>
<CAPTION>
Amount Dividends
Statutory Subject to Accrued Paid on Aggregate
State or Territory Rate Rescission Interest Preferred Stock Liability
------------------ --------- ---------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Hawaii 10% $13,000.00 $3,719.93 $263.01 $16,456.92
Illinois 10% $153,000.00 $40,834.14 $1,837.81 $191,996.33
Indiana 8% $1,332,962.00 $282,916.77 $16,365.08 $1,599,513.69
Idaho 6% $40,000.00 $6,889.77 $0.00 $46,889.77
Iowa (1) $60,000.00 $11,151.00 $263.01 $70,887.99
Kansas 15% $22,500.00 $8,967.18 $793.42 $30,673.76
Kentucky 6% (2) $50,000.00 $9,521.19 $0.00 $59,521.19
Louisiana (3) $36,500.00 $7,028.27 $0.00 $43,528.27
Maryland 10% $480,450.00 $102,183.48 $6,703.40 $575,930.08
Massachusetts 6% $76,250.00 $12,013.38 $2,061.79 $86,201.59
Maine 8% $2,000.00 $429.44 $86.79 $2,342.65
Michigan 6% $2,808,042.00 $448,129.82 $84,063.17 $3,172,108.65
Minnesota 6% $446,060.00 $66,209.56 $9,465.98 $502,803.58
Mississippi 6% $51,000.00 $7,748.00 $608.19 $58,139.81
Missouri 8% $35,000.00 $6,147.40 $0.00 $41,147.40
Nevada (4) $76,000.00 $3,824.66 $104.94 $79,719.72
New Hampshire 10% $5,000.00 $1,328.01 $143.67 $6,184.34
New Jersey 5.5% $26,000.00 $3,798.72 $723.29 $29,075.43
New York 9% $146,667.00 $36,062.25 $7,339.56 $175,389.69
North Carolina 8% $27,500.00 $6,800.85 $258.90 $34,041.95
Ohio (5) $85,002.00 $0.00 $3,853.18 $81,148.82
Oklahoma 10% $7,500.00 $1,834.56 $26.71 $9,307.85
Oregon 9% $6,000.00 $1,474.50 $238.68 $7,235.82
South Carolina 6% $43,000.00 $6,455.70 $452.06 $49,003.64
Pennsylvania 6% $79,200.00 $13,356.68 $764.96 $91,791.72
Tennessee 10% $809,988.00 $214,483.77 $18,577.48 $1,005,894.29
Texas 6% $4,398,425.00 $643,788.91 $64,330.41 $4,977,883.50
Utah 12% $30,000.00 $8,700.00 $0.00 $38,700.00
Vermont 12% $30,000.00 $9,420.00 $608.22 $38,811.78
Virginia 6% $46,401.00 $7,330.09 $1,461.33 $52,269.76
Washington 8% $3,000.00 $492.45 $0.00 $3,492.45
Wisconsin 5% $201,239.00 $25,441.01 $1,837.28 $224,842.73
Canada (6) $30,000.00 $0.00 $0.00 $30,000.00
England (6) $33,000.00 $0.00 $0.00 $33,000.00
France (6) $100,000.00 $0.00 $0.00 $100,000.00
Saudi Arabia (6) $10,000.00 $0.00 $0.00 $10,000.00
Taiwan (6) $90,000.00 $0.00 $789.04 $89,210.96
Total $14,198,137.00 $2,455,149.34 $248,128.06 $16,405,158.28
</TABLE>
(1) Set monthly at the 52-week Treasury Bill rate plus 2%. As of August
31,1999, the rate was 6%.
(2) Effective 7/15/98, the statutory rate for rescission offers is equal to the
"legal rate," which is currently 12%.
(3) In 1996 the rate was 9.75%, from 1/97 through 7/97 the rate was 9.25%, from
8/97 through 12/97 the rate was 7.9% and for 1998 the rate is 7.3%.
(4) From 1/97 through 6/97 the rate was 8.25%, from 7/97 to the date of this
Prospectus the rate was 8.5%.
(5) The applicable statute does not require the payment of interest in an offer
of rescission.
(6) No applicable statute; interest will be paid at 6%.
17
<PAGE>
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 $14,198,137 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
Under the terms of the Rescission Offer, 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
18
<PAGE>
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 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. Nevertheless, in the event the aggregate amount necessary
to fund the Rescission Offer exceeds $6,151,596 the Company shall have the
right (but not the obligation) to declare the Rescission Offer ineffective
and return the certificates or other instruments representing the Subject
Securities to the Offerees who have accepted the Rescission Offer.
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 is conclusively deemed to have rejected the Rescission Offer, except to the
extent applicable state laws provide otherwise. See "-- State Law Notices To
Certain Offerees" and "EXHIBIT B" attached to this Prospectus.
The Election and the stock certificates or other instruments representing
the Subject Securities could have been delivered by hand or courier service, or
by mail. The method of delivery of all documents was at the election and risk
of the Offeree. If delivery was by mail, delivery is 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 has entered into Underwriting Agreements with the Rescission
Underwriters to provide the Rescission Financing to fund the Rescission Offer.
The Rescission Underwriters include, among others, HEOF, a limited partnership
whose general partner is HEOF Management Corp., an affiliate of Enron Economic
Development Corporation, a wholly-owned subsidiary of Enron Corporation, a
Houston, Texas-based Fortune 500 energy company. Subject to the terms and
conditions of the Underwriting Agreements, the Company has agreed to sell and
the Rescission Underwriters have agreed to purchase the number of shares of
Class A Common Stock set forth opposite their respective names in the table
below, at a price of $1.37 per share.
<TABLE>
<CAPTION>
RESCISSION UNDERWRITER NUMBER OF
---------------------- SHARES
-----------
<S> <C>
Houston Economic Opportunity Fund, L.P.................................. 1,766,423
Northern Neck Enterprises, Inc.......................................... 860,142
Cress Brothers Investments, L.L.C....................................... 674,453
Leonard Childress....................................................... 411,672
TKNET Investments, LLC.................................................. 119,708
Nancy Monthofer......................................................... 72,993
Cynet Holdings, LLC..................................................... 584,825
-----------
Total................................................. 4,490,216
===========
</TABLE>
19
<PAGE>
The Underwriting Agreements provide, among other things, that the
obligation of the Rescission Underwriters to purchase such shares of Class A
Common Stock is subject to the successful completion of the Rescission Offer.
For purposes of this Prospectus, the Rescission Offer will be successfully
completed if less than $6,151,596 is needed to fund the Rescission Offer. As of
the date of this Prospectus, the funds comprising the Rescission Financing have
been deposited into an interest-bearing escrow account with First Bank Texas,
N.A. of Houston, Texas, and will be disbursed as needed to Offerees who accepted
the Rescission Offer. In addition, the Company will deposit such additional
amounts required to be held in escrow under Texas law, which requires a minimum
escrow deposit equal to the amount of the Rescission Offer being made to Texas
residents including accrued interest. As of October 31, 1999, the minimum
escrow balance required was $4,977,889.25 and will continue to increase at a
rate of $733.39 per day thereafter.
The proceeds from the Rescission Financing will be used to fund $6,151,596
of the Rescission Offer. In the event that funds in excess of $6,151,596 are
needed to fund the Rescission Offer, the Company shall have the right, on or
before the Expiration Date, to either (i) with the consent of the Rescission
Underwriters, secure additional financing through the issuance of equity
securities or the sale of assets in amounts sufficient to satisfy the Company's
rescission liabilities and complete the Rescission Offer, or (ii) declare the
entire Rescission Offer ineffective and return all completed Elections, together
with the certificates or other instruments representing the Subject Securities,
to the Offerees who accepted the Rescission Offer and direct the escrow agent to
return all of the funds comprising the Rescission Financing to the Rescission
Underwriters. Subject to the foregoing, any unused proceeds of the Rescission
Financing remaining after the funding of the Rescission Offer will be, with the
consent of the Rescission Underwriters, paid to the Company for additional
shares of Class A Common Stock and used by the Company for general corporate
purposes. See "Risk Factors -- Lack of Sufficient Capital to Fund Rescission
Offer; Potential Rescission Liability," "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
As additional consideration for its participation in the Rescission
Financing, the Company has agreed to grant HEOF the HEOF Put Option, requiring
the Company to repurchase the shares of Class A Common Stock issued to HEOF
pursuant to its Underwriting Agreement at a price of $1.51 per share. The HEOF
Put Option will have a duration of one year from the closing of the Rescission
Financing. In the event that the HEOF Put Option is exercised, the Company's
shareholders' equity may be reduced by up to $2,667,299.
In the event the Company is required to pay more than $6,151,596 to fund
the Rescission Offer, but nevertheless elects to complete the Rescission Offer,
there can be no assurance that sufficient financing can be obtained or that the
Rescission Underwriters will consent to the Company obtaining such additional
financing or completing the Rescission Offer. 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 proceeds from the Rescission Financing will be used to fund the
Rescission Offer. The Company will cancel all of the Subject Securities as to
which the Rescission Offer has been properly accepted.
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, except to the extent applicable state laws provide
otherwise.
Neither the Company, nor its officers and directors, have made any
recommendations to any holders of the Subject Securities with respect to the
Rescission Offer.
20
<PAGE>
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 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
21
<PAGE>
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 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: (i) results in a "complete
redemption" of the Offeree's interest in the Company; (ii) is "substantially
disproportionate" with respect to the Offeree; or (iii) 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 an 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: (i) the percentage of the voting stock of the
Company owned by the
22
<PAGE>
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; (ii) 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 (iii) 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 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 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) or 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 "Management -- Certain
Transactions." At the time of the offering, the Company believed such
founding shareholders were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believes 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.
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 "Management --
Certain Transactions." At the time of the offering, the Company believed
Mr. Stone was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company believes
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.
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
23
<PAGE>
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
"Management -- Certain Transactions." At the time of the offering, the
Company believed such principals were sophisticated investors and received
adequate information concerning an investment in the Company. As a
result, the Company believes 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.
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 "Management -- Certain
Transactions." At the time of the offering, the Company believed Mr. Stone
was a sophisticated investor and received adequate information concerning
an investment in the Company. As a result, the Company believes 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.
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. At the
time of the offering, the Company believed Mr. McKinley was a sophisticated
investor and received adequate information concerning an investment in the
Company. As a result, the Company believes 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. From December 1997 through January 1998, the Company issued 2,421,580
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. At the time of the offering, the Company
believed such investors were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believes 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. 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 (which the Company has agreed to
extend until November 4, 2001), (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 (which the Company has
agreed to extend until November 4, 2001), (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 "Management -- Certain Transactions." Mr. Shaffner
subsequently assigned his right to receive such warrants to certain
individuals and entities. See "Plan of Distribution and Selling
Shareholders." At the time of these offerings, the Company believed Mr.
Shaffner was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company believes
the transactions were exempt from registration pursuant to Section 4(2) of
the Securities Act as transactions by an issuer not involving a public
offering.
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 "Management -- Employment Agreements" and
24
<PAGE>
"Management -- Certain Transactions." Mr. Davis subsequently assigned this
warrant to certain individuals. See "Principal Shareholders." At the time
of the offering, the Company believed Mr. Davis was a sophisticated
investor and received adequate information concerning an investment in the
Company. As a result, the Company believes 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 May 1998 the Company issued five-year warrants entitling certain
individuals and entities to purchase an aggregate of 350,954 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. At the time of the offering, the
Company believed such individuals and entities were sophisticated investors
and received adequate information concerning an investment in the Company.
As a result, the Company believes 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 July 1998, the Company entered into the Holdings Subscription Agreement,
pursuant to which Cynet Holdings 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. The Holdings Subscription Agreement was subsequently
amended to extend the duration of the agreement to December 31, 1999. As
of November 30, 1999, Cynet Holdings has purchased an aggregate of
4,106,000 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 Cynet Holdings
to purchase an aggregate of 4,800,000 shares of Class A Common Stock at a
price of $1.00 per share. See "Management -- Certain Transactions." At
the time of the offering, the Company believed Cynet Holdings was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believes 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.
11. In September 1999, the Company agreed to issue a warrant entitling Michael
Silvert to purchase 100,000 shares of Class B Common Stock at a price of
$1.00 per share. This warrant will be issued upon the completion of the
Rescission Offer in satisfaction of certain claims by Mr. Silvert that he
was entitled to receive such warrant in exchange for providing services to
the Company during 1997. At the time Mr. Silvert performed such services
in 1997, the Company believed Mr. Silvert was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believes 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.
STATE LAW NOTICES TO CERTAIN OFFEREES
NOTICE TO ARIZONA RESIDENTS
THESE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT OF ARIZONA, BUT
THE FACT OF THE REGISTRATION IS NOT TO BE DEEMED A FINDING BY THE ARIZONA
CORPORATION COMMISSION OR THE DIRECTOR OF THE SECURITIES DIVISION THAT THIS
PROSPECTUS IS TRUE OR ACCURATE, NOR DOES THE REGISTRATION MEAN THAT THE
COMMISSION OR THE DIRECTOR HAS PASSED ON THE MERITS OF OR OTHERWISE APPROVED
THE SECURITIES DESCRIBED IN THIS PROSPECTUS.
NOTICE TO CALIFORNIA RESIDENTS
THIS OFFER OF REPURCHASE HAS BEEN APPROVED BY THE CALIFORNIA COMMISSIONER
OF CORPORATIONS IN ACCORDANCE WITH SECTION 25507(b) OF THE CORPORATE SECURITIES
LAW OF 1968 ONLY AS TO ITS FORM. SUCH APPROVAL DOES NOT IMPLY A FINDING BY THE
COMMISSIONER THAT ANY STATEMENTS MADE HEREIN OR IN ANY ACCOMPANYING
25
<PAGE>
DOCUMENTS ARE TRUE OR COMPLETE NOR DOES IT IMPLY A FINDING THAT THE AMOUNT
OFFERED BY THE SELLER IS EQUAL TO THE AMOUNT RECOVERABLE BY THE BUYER OF
THE SECURITY IN ACCORDANCE WITH SECTION 25503 IN A SUIT AGAINST THE
SELLER, AND THE COMMISSIONER DOES NOT ENDORSE THE OFFER AND MAKES NO
RECOMMENDATION AS TO ITS ACCEPTANCE OR REJECTION.
The Company may have incurred liability under Section 25503 by failing to
qualify the Subject Securities under Section 25110. If the Company violated
Section 25110, it is liable to the purchasers of such securities for an amount
equal to the consideration paid with interest thereon at the legal rate, less
the amount of any income received therefrom, upon tender of such security. The
Company's liability, if any, may be terminated by this Rescission Offer under
Section 25507(b).
An Offeree's right of action, if any, under Sections 25500, 25501 and 25502
and under common law, is not necessarily foreclosed by acceptance or rejection
of the Rescission Offer.
Under Section 25534, if the Commissioner determines that the Subject
Securities were offered or sold in violation of Section 25110, the Commissioner
may, by written order to the Company and the holders of such securities, require
certificates evidencing such securities to have stamped or printed prominently
on their face a legend, in the form prescribed by rule of the Commissioner,
restricting the transfer of such securities.
The complete text of the foregoing sections of the Corporate Securities Law
of 1968 is set forth in EXHIBIT B attached hereto.
NOTICE TO HAWAII RESIDENTS
NEITHER THIS PROSPECTUS NOR THE SECURITIES DESCRIBED HEREIN HAVE BEEN
APPROVED OR DISAPPROVED BY THE COMMISSIONER OF SECURITIES OF THE STATE OF HAWAII
NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.
NOTICE TO ILLINOIS RESIDENTS
From August 1996 through April 1997, 65,000 shares of Class A Common Stock,
17,000 shares of Convertible Non-Voting Series A Preferred Stock (which were
subsequently converted into 20,400 shares of Class A Common Stock) and 18,000
shares of Convertible Non-Voting Series B Preferred Stock (which were
subsequently converted into 21,600 shares of Class B Common Stock) were offered
and sold to residents of the State of Illinois for an aggregate price of
$153,000.
The sale of these securities may not have been in compliance with the
Illinois Securities Law of 1953 (the "1953 Act"), in which case the sale is
voidable at the buyer's option in accordance with the provisions of Section 13
of the 1953 Act. Therefore, the Company hereby offers to rescind and set aside
such sales, to release each buyer from all contractual obligations the Company
required each buyer to undertake in order to effectuate such sales and to refund
the full amount paid for the securities, plus interest at the rate of 10% per
annum from the date of payment for the securities to the date of refund. This
sum will be reduced by any income or other amount received due to ownership of
such securities.
Should you decide to accept this offer of rescission, please offer, in
writing, to return the securities or return the securities to the Company
together with a written notice of your election to accept such offer of
rescission. The election form attached hereto as EXHIBIT A may be used to
indicate your acceptance of this offer. Upon receipt of these materials, the
amount paid for the securities, plus interest, will be refunded to you and you
will be released from any and all contractual obligations the Company required
that you undertake in order to effectuate the sale.
This Rescission Offer is only good for thirty (30) days after your receipt
of this Prospectus. If you fail to accept this offer within that period, your
rights to recover under the 1953 Act may be extinguished.
You should also note that any decision to reject this offer is not binding until
thirty (30) days have elapsed from the date of receipt of this Prospectus.
However, failure to accept this offer within thirty (30) days of receipt shall
constitute a non-acceptance of this offer.
The complete text of Section 13 of the 1953 Act is set forth in EXHIBIT B
attached hereto.
26
<PAGE>
NOTICE TO INDIANA RESIDENTS
Pursuant to Order No. 90-0019 of the Indiana Securities Commission, failure
to respond to this Rescission Offer will be deemed an ACCEPTANCE of the offer.
NOTICE TO IOWA RESIDENTS
THIS IS A RESCISSION OFFER MADE PURSUANT TO SECTION 502.504(4) OF THE IOWA
UNIFORM SECURITIES ACT AND A COPY IS ON FILE WITH THE IOWA SECURITIES BUREAU.
THE BUREAU MAKES NO RECOMMENDATION AS TO WHETHER THE OFFER SHOULD BE ACCEPTED OR
REJECTED NOR HAS THE BUREAU PASSED UPON THE ADEQUACY OF THIS OFFER.
The Company may have incurred liability under Section 502.501 of the Iowa
Uniform Securities Act by failing to register the Subject Securities in
accordance with Section 502.201. An Offeree purchasing such securities may sue
under Section 502.501 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the security, upon tender of the securities.
An Offeree's right to sue under Section 502.501 may be lost unless the Offeree
accepts the Rescission Offer within 30 days after receipt thereof.
The complete text of the foregoing sections of the Iowa Uniform Securities
Act is set forth in EXHIBIT B attached hereto.
NOTICE TO LOUISIANA RESIDENTS
THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES COMMISSIONER OF
THE STATE OF LOUISIANA. THE SECURITIES COMMISSIONER, BY ACCEPTING REGISTRATION,
DOES NOT IN ANY WAY ENDORSE OR RECOMMEND THE PURCHASE OF ANY OF THESE
SECURITIES.
NOTICE TO MARYLAND RESIDENTS
Failure to respond to this Rescission Offer will be deemed an ACCEPTANCE of
the Rescission Offer.
NOTICE TO MICHIGAN RESIDENTS
As required by Section 410(e) of the Michigan Uniform Securities Act, the
entire text of Section 410(e) is included in EXHIBIT B attached hereto.
NOTICE TO MISSISSIPPI RESIDENTS
The Company may have incurred liability under Section 75-71-717 of the
Mississippi Securities Act by failing to register the Subject Securities in
accordance with Section 75-71-401. A buyer of such securities may sue under
Section 75-71-717 to recover the consideration paid for the securities, together
with interest at eight percent (8%) from the date of payment, less the amount of
any income received on the securities, upon tender of the securities.
A buyer's right to sue under Section 75-71-717 may be lost if, before suit
is commenced, the buyer receives a written offer (i) to repurchase such
securities for cash payable on delivery of the securities equal to the
consideration paid, together with interest at six percent (6%) from the date of
payment, less the amount of any income received on the securities, (ii) stating
that the offer may be accepted by the buyer at any time within thirty (30) days
of its receipt and (iii) the buyer fails to accept such offer in writing within
the specified period.
The complete text of the foregoing sections of the Mississippi Securities
Act is set forth in EXHIBIT B attached hereto.
NOTICE TO NEVADA RESIDENTS
The Company may have incurred liability under Section 90.660 of the Nevada
Uniform Securities Act by failing to register the Subject Securities in
accordance with Section 90.460. An Offeree purchasing such securities may sue
under Section 90.660 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the securities.
An Offeree's
27
<PAGE>
right to sue under Section 90.660 may be lost unless the Offeree accepts
the Rescission Offer within 30 days after receipt thereof.
The complete text of the foregoing sections of the Nevada Uniform
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO NEW HAMPSHIRE RESIDENTS
The Company may have incurred liability under NH RSA 421-B:25 of the New
Hampshire Uniform Securities Act by failing to register the Subject Securities
in accordance with NH RSA 421-B:11. An Offeree purchasing such securities may
sue under NH RSA 421-B:25 to recover the consideration paid for the securities,
together with interest at 10% from the date of payment, less the amount of any
income received on the securities, upon tender of the securities.
Only Class A Common Stock previously sold to New Hampshire investors is
being registered in order to effect the Rescission Offer. None of the Class B
Common Stock, Series A Preferred Stock, Series B Preferred Stock, Warrants to
Purchase Class A Common Stock and none of the shares of Class B Common Stock to
be sold by the Selling Shareholders are being registered for sale or offered for
sale in New Hampshire.
The complete text of NH RSA 421-B:25 of the New Hampshire Uniform
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO NORTH CAROLINA RESIDENTS
The Company may have incurred liability under Section 78a-56 of the North
Carolina Securities Act by failing to register the Subject Securities in
accordance with Section 78a-24. An Offeree purchasing such securities may sue
under Section 78a-56 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the securities.
An Offeree's right to sue under Section 78a-56 may be lost unless the Offeree
accepts the Rescission Offer within 30 days after receipt thereof.
The complete text of the foregoing sections of the North Carolina
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO OKLAHOMA RESIDENTS
Under Section 301 of the Oklahoma Securities Act, it is unlawful for any
person to offer or sell any securities in the State of Oklahoma unless (i) it is
registered under the Oklahoma Securities Act, or (ii) it is a federal covered
security. The Company may have incurred liability under Section 408 of the
Oklahoma Securities Act by failing to register the Subject Securities in
accordance with Section 301. An Offeree purchasing such securities may sue
under Section 408 to recover the consideration paid for the securities, together
with interest at ten percent (10%) from the date of payment, less the amount of
any income received on the securities, upon tender of the securities, or for
damages if he no longer owns the securities. An Offeree's right to sue under
Section 408 may be lost if the Offeree received a written offer, before suit and
at a time when he owned the security, to refund the consideration paid together
with interest at ten percent (10%) per year from the date of payment, less the
amount of any income received on the security, and such Offeree failed to accept
the offer within 30 days of its receipt.
The complete text of Sections 301 and 408 of the Oklahoma Securities Act is
set forth in EXHIBIT B attached hereto.
NOTICE TO OREGON RESIDENTS
Under Section 59.125 of the Oregon Securities Law, an Offeree's right to
sue under Section 59.115 may be lost unless (i) the Offeree accepts the
Rescission Offer within 30 days after receipt thereof and has not been paid the
full amount offered or (ii) the Offeree no longer owns the Subject Securities
and gives the Company written notice of the inability to tender such securities
to the Company.
The complete text of the foregoing sections of the Oregon Securities Law is
set forth in EXHIBIT B attached hereto.
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<PAGE>
NOTICE TO PENNSYLVANIA RESIDENTS
From September 1996 through December 1997, 42,500 shares of Class A Common
Stock, 5,000 shares of Convertible Non-Voting Series A Preferred Stock (which
were subsequently converted into 6,000 shares of Class A Common Stock) and 8,900
shares of Convertible Non-Voting Series B Preferred Stock (which were
subsequently converted into 10,680 shares of Class B Common Stock) were offered
and sold to residents of the Commonwealth of Pennsylvania. It appears as if the
provisions of Section 201 of the Pennsylvania Securities Act of 1972 ("1972
Act") relating to registration of securities may not have been complied with in
connection with the offer or sale of these securities. Accordingly, the Company
is offering to repurchase these securities from you for your purchase price for
cash plus 6% interest from the date of purchase less any dividends, interest
payment or cash distributions paid to date. The enclosed disclosure materials
should be reviewed carefully before deciding whether to accept or reject the
offer to repurchase your securities. This Rescission Offer remains open for 30
days from the date you received this Notice. During such time you may either
accept or reject the offer.
If you no longer own the securities which are the subject of this offer to
repurchase, the Company offers to pay you, upon acceptance of the offer, an
amount in cash equal to the damages, if any, computed in accordance with Section
502 of the 1972 Act as more fully described in the accompanying disclosure
materials.
If you affirmatively REJECT the offer or fail to affirmatively ACCEPT the
offer within 30 days in the manner described in the accompanying disclosure
materials, any rights you may have with respect to any failure to comply with
Section 201 of the 1972 Act will be terminated.
The complete text of the foregoing sections of the 1972 Act is set forth in
EXHIBIT B attached hereto.
NOTICE TO TENNESSEE RESIDENTS
The Company may have incurred liability under Section 48-2-122 of the
Tennessee Securities Act of 1980 by failing to register the Subject Securities
in accordance with Section 48-2-104. An Offeree purchasing such securities may
sue under Section 48-2-122 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the securities.
Unless the Rescission Offer is accepted within 30 days after receipt thereof,
the offer of rescission will be deemed to have been rejected.
Offerees may wish to consult with independent counsel before deciding to
accept or reject the Rescission Offer so as to be fully informed about the risks
and the consequences attached to either choice.
The complete text of the foregoing sections of the Tennessee Securities Act
of 1980 is set forth in EXHIBIT B attached hereto.
NOTICE TO TEXAS RESIDENTS
The Company may have incurred liability under Section 33 of the Texas
Securities Act of 1957 by failing to register the Subject Securities in
accordance with Section 7A. An Offeree purchasing such securities may sue under
Section 33 to recover the consideration paid for the securities, together with
interest at the legal rate from the date of payment, less the amount of any
income received on the securities, upon tender of the securities.
AN OFFEREE'S RIGHT TO SUE WILL BE LOST UNLESS THE OFFEREE (i) ACCEPTS THE
OFFER BUT DOES NOT RECEIVE THE AMOUNT OF THE OFFER, IN WHICH CASE HE MAY SUE
WITHIN THE TIME ALLOWED BY SECTION 33H(1)(a) OR 33H(2)(a) OR (b), AS APPLICABLE;
OR (ii) REJECTS THE OFFER IN WRITING WITHIN 30 DAYS OF ITS RECEIPT AND EXPRESSLY
RESERVES IN THE REJECTION HIS RIGHT TO SUE, IN WHICH CASE HE MAY SUE WITHIN ONE
YEAR AFTER HE SO REJECTS.
The name and address of the bank where the amount of the Rescission Offer
will be paid is First Bank Texas, N.A., 8820 Westheimer Road, Houston, Texas.
Offerees accepting the Rescission Offer will receive the amount of the offer not
later than 30 days after receipt by First Bank Texas, N.A., in a form reasonably
acceptable to the Company, and in compliance with the instructions herein, of
the security, if the Offeree still owns it, or evidence of the fact and date of
disposition if the Offeree no longer owns it.
The complete text of the foregoing sections of the Texas Securities Act of
1957 is set forth in EXHIBIT B attached hereto.
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<PAGE>
NOTICE TO WISCONSIN RESIDENTS
The Company may have incurred liability under Section 551.59 of the
Wisconsin Uniform Securities Law by failing to register the Subject Securities
in accordance with Section 551.21. An Offeree purchasing such securities may
sue under Section 551.59 to recover the consideration paid for the securities,
together with interest at the legal rate under Section 138.04 from the date of
payment, less the amount of any income received on the securities, upon tender
of the securities. An Offeree's right to sue under Section 551.59 may be lost
unless the Offeree accepts the Rescission Offer within 30 days after receipt
thereof.
The complete text of Sections 551.21 and 551.59 of the Wisconsin Uniform
Securities Law is set forth in EXHIBIT B attached hereto.
30
<PAGE>
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 cash exercises of the Shaffner Warrants to purchase shares of Class
B Common Stock will result in gross proceeds to the Company up to a maximum
amount of $2,200,000. See "Plan of Distribution and Selling Shareholders." The
Company will use the proceeds, if any, from the exercise of the Shaffner
Warrants for general corporate purposes.
The proceeds to be received by the Company from the Rescission Financing
are $6,151,596. The Company will use the proceeds of the Rescission Financing
to fund $6,151,596 of the Rescission Offer. To the extent funds in excess of
$6,151,596 are needed to fund the Rescission Offer, the Company shall have the
right (but not the obligation) to (i) with the consent of the Rescission
Underwriters, secure additional financing through the issuance of equity
securities or the sale of assets in amounts sufficient to satisfy the Company's
rescission liabilities and complete the Rescission Offer, or (ii) declare the
entire Rescission Offer ineffective and return all completed Elections, together
with the certificates or other instruments representing the Subject Securities,
to the Offerees who accepted the Rescission Offer and direct the escrow agent to
return the funds comprising the Rescission Financing to the Rescission
Underwriters. Any unused proceeds of the Rescission Financing remaining after
the funding of the Rescission Offer which are not returned to the Rescission
Underwriters 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 September 30, 1999, the Company had accrued, but
unpaid, dividends of $374,689 on its Series A Preferred Stock and $198,946 on
its Series B Preferred Stock. During the fiscal year ended December 31, 1998,
the Company has not paid any dividends on its Series A or Series B Preferred
Stock since June 1997. As of the completion of the Rescission Offer, the
Company's liability for accrued but unpaid dividends shall be reduced to
$353,937 in the aggregate. The Company intends to exercise its rights to
convert the outstanding shares of its Series A and Series B Preferred Stock
within 60 days after the completion of the Rescission Offer. See "Description
of Capital Stock -- Preferred Stock."
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of September 30, 1999, and as adjusted to reflect $4,781,699 acceptance of
the Rescission Offer, plus $858,018 of interest expense, less $102,818 of
dividends paid.
<TABLE>
<CAPTION>
SEPTEMBER 30, $4,781,699
1999 ACCEPTANCE(1),(3)
------------- -----------------
<S> <C> <C>
Assets:
Cash ............................. $ 39,782 $ 654,479
Deferred offering costs (2) ...... 2,078,825 -
------------ ------------
$ 2,118,607 $ 654,479
============ ============
Liabilities:
Accrued stock rights ............. $ 115,748 $ 115,748
Dividends payable ................ 573,635 353,937
------------ ------------
$ 689,383 $ 469,685
============ ============
Stock and warrants subject to
rescission:
Preferred stock - Series A ....... 201,265 -
Preferred stock - Series B ....... 229,923 -
Common stock - Class A ........... 7,952,134 -
Common stock - Class B ........... 5,365,047 -
Common stock warrants - Class A .. 201,640 -
------------ ------------
$ 13,950,009 $ -
============ ============
Redeemable voting Class A Common
Stock, 1,766,423 shares valued
at $1.37 per share, subject to a
put option valid at $1.51 per
share, valid through one year
from effective date of
rescission offer .......................... $ - $ 2,667,299
============= ============
Capital deficit: (3)
Cumulative convertible
preferred stock:
Series A ...................... $ - $ 109,997
Series B ...................... 30,000 126,240
Common stock:
Class A ....................... 6,711,703 15,185,605
Class B ....................... 700,000 3,199,119
Additional paid-in capital ....... 308,039 308,039
Outstanding warrants ............. 1,706,504 1,888,437
Deficit .......................... (21,529,573) (23,170,251)
Treasury stock - Class B
common stock ..................... (317,767) -
------------ ------------
Total Capitalization (4) ......... $(12,391,094) $ (2,352,814)
============ ============
</TABLE>
_____________________
(1) The table assumes that the Rescission Underwriters elect to acquire
4,490,216 shares of Class A Common Stock pursuant to the terms of the
Rescission Financing for a total funding of $6,151,596.
(2) See Note 3 in 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.
(3) The following pro forma adjustments are needed to properly reflect the
effect of the rescission offer on total capitalization of the Company.
32
<PAGE>
(a) Adjustment to shares and amount of stock subject to rescission:
<TABLE>
<CAPTION>
Rescission
Offer Rescission
Shares Subject Amount Subject Accepted Offer Accepted Shares Amounts
to Rescission to Rescission Shares Amount Reclassified Reclassified
-------------- -------------- --------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash ........................................ n/a n/a n/a n/a n/a $ 614,697
To record issuance of 1,766,423 Redeemable
voting Class A shares at $1.37 per share,
subject to a put option valid at $1.51 per
share, valid through one year from effective
date of rescission offer issued in connection
with the financing of the rescission offer .. n/a n/a n/a n/a 1,766,423 $2,420,000
To record issuance of 2,723,793 shares of
voting Class A common stock issued in
connection with the financing of rescission
liability .................................... n/a n/a n/a n/a 2,723,793 $3,731,596
Cumulative convertible preferred stock:
Series A ............................ 103,500 $ 201,265 37,500 $ 75,000 66,000 $ 126,265
Series B ............................ 77,349 $ 229,923 36,517 $ 109,550 40,832 $ 120,373
Common stock:
Class A ............................. 5,514,491 $7,952,134 1,390,090 $2,220,150 4,124,401 $5,731,984
Class B ............................. 2,719,733 $5,365,047 949,941 $2,376,999 1,769,792 $2,988,048
Outstanding warrants ......................... 799,000 $ 201,640 - $ - 799,000 $ 201,640
<CAPTION>
Amount
----------
<S> <C>
(b) Record reclassification of amounts
recorded in treasury stock that are no longer
subject to rescission ........................ $(317,767)
==========
(c) Adjustment recording cost of capital:
<CAPTION>
September 30, Reclassification Reclassification
1999 to to Cost
Amount Expense of Capital
------ ------- ----------
<S> <C> <C> <C>
Cumulative convertible preferred stock:
Series A ............................ $ 29,928 $ 10,258 $ 19,670
Series B ............................ 38,651 13,249 25,402
Common stock:
Class A ............................. 1,182,480 405,323 777,157
Class B ............................. 797,781 273,459 524,322
Outstanding warrants ......................... 29,985 10,278 19,707
---------- ---------- ----------
$2,078,825 $ 712,567 $1,366,258
========== ========== ==========
<CAPTION>
Amount
--------
<S> <C>
(d) Recording of interest expense: .......... $ 858,018
=========
<CAPTION>
Amount
--------
<S> <C>
(e) Adjustment recognizing deferred offering
costs as expense: ............................ $ 712,567
=========
<CAPTION>
(f) Adjustment reclassifying dividends paid September 30, Applied to Reclassified
recorded as a reduction of rescission liability: 1999 Rescission to Capital
Amount Liability Deficit
---------- ------------ ------------
<S> <C> <C> <C>
Cumulative convertible preferred stock:
Series A ........................... $ 5,735 $ 2,333 $ 3,402
Series B ........................... 2,124 885 1,269
Common stock:
Class A ............................ 186,743 81,497 105,246
Class B ............................ 53,526 18,133 35,393
-------- -------- --------
$248,128 $102,818 $145,310
======== ======== ========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
(g) Adjustment reclassifying dividends September 30, Remaining Reclassified
payable that are no longer due 1999 Dividends to Capital
Amount Payable Deficit
---------- ---------- ------------
<S> <C> <C> <C>
Cumulative convertible preferred stock:
Series A ......................... $374,689 $249,379 $125,310
Series B ......................... 198,946 104,558 94,388
Common Stock:
Class A .......................... - - -
Class B .......................... - - -
-------- -------- --------
$573,635 $353,937 $219,698
======== ======== ========
<CAPTION>
Amount
------
<S> <C>
(h) Adjustment to accrete the put option: $ 247,299
=========
(4) Outstanding stock and warrants subsequent
to proposed rescission offer
<CAPTION>
Shares
------
<S> <C>
Cumulative convertible preferred stock:
Series A ........................... 66,000
Series B ........................... 50,832
Common stock:
Class A ............................ 26,665,198
Class B ............................ 2,187,862
Outstanding warrants
Class A (1) ........................ 8,462,600
Class B ............................ 2,550,954
</TABLE>
___________________
(1) Includes 413,600 of Class A common stock warrants issued to a Rescission
Underwriter.
34
<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, 1998 and 1997 and (ii) from the unaudited
financial statements of the Company for the nine months ended September 30,
1999 and 1998. 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 NINE MONTHS ENDED
---------- -----------------
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1998 1997 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .................................................... $ 8,947,732 $ 4,960,355 $ 6,501,849 $ 6,778,197
Loss from operations ........................................ (4,230,362) (7,958,870) (4,245,637) (3,323,773)
Net loss applicable to common shareholders .................. (4,396,883) (8,502,067) (4,450,065) (3,454,593)
Net loss per common share ................................... $ (0.19) $ (0.60) $ (0.17) $ (0.15)
Weighted average number of common shares outstanding ........ 23,109,154 14,086,177 25,514,211 22,770,299
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
DECEMBER 31, September 30, 1999
1998 1999 PRO FORMA(1)
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)(2) ................... $ (885,068) $ (870,283) $ (2,114,713)
Total assets ................................... 5,297,713 5,092,147 3,628,019
Stock and warrants subject to rescission ....... 13,980,009 13,950,009 -
Capital deficit ................................ (12,218,072) (12,391,094) (2,352,814)
</TABLE>
- ----------
(1) Pro forma balance sheet data gives effect to the results of the Rescission
Offer as if it had been completed as of September 30, 1999.
(2) Includes $2,078,825 of deferred offering costs prior to the completion
of the Rescission Offer. See Note 3 of the Notes to the Consolidated
Financial Statements.
35
<PAGE>
BUSINESS
SERVICES
The Company is an Internet business solutions provider. The Company's
products and services are offered through MESSAGING which includes fax, data,
voice, e-mail and mobile messaging, and INTERNET SERVICES which includes
custom application development, e-commerce development, web content creation,
web hosting and Internet access.
The Company is a Texas corporation and was founded in 1995 to provide
fax services for business-to-business communication. The Company capitalized
on the dramatic increase in the usage of third-party fax services and created
a niche market for itself with its HYPERCAST fax broadcast desktop client
software and related services. In 1997, the Company introduced HYPERLINE,
its point-to-point desktop software and fax service in order to expand its
fax service.
In response to the rapid growth and popularity of e-mail and the
Internet as a primary communications medium, the Company has set out to
become a full service Internet messaging provider. In 1998, the Company
added to its product offering HYPERWEB, its Internet-to-fax service;
HYPERMAIL, its fax-to-e-mail service; WEBCAST, its e-mail broadcast service;
TELECAST, its voice broadcast service; and HYPERCOMM, its teleconferencing
service. To further enhance its messaging services, the Company, through its
subsidiary, Worldwide Marketing Services, Inc., added enhancement services
such as list procurement, full-service graphic design and copy development
services for its customers. These additional services enabled the Company to
provide its customers with complete messaging solutions with "end-to-end"
control of the solutions.
In July 1999, the Company began offering Internet-based services by
acquiring Cynet Interactive, a wholly-owned subsidiary of Cynet Holdings.
The acquisition of Cynet Interactive allowed the Company to expand its
messaging and broadcast enhancement services to include web site design,
Internet application development for e-commerce and other Internet-based
applications, and web site hosting. Through a series of projects, the
Company has integrated its messaging services with Internet applications,
creating more effective solutions for its xcustomers. The Company's current
Internet projects include the development of on-line shopping malls,
integrated procurement centers, energy trading applications and Internet
web-based magazines for customers. In July 1999, the Company entered into a
strategic alliance with IXC Communications to enable the Company to further
expand its products and services to include Internet access for business
customers. The Company expects its alliance with IXC Communications will
enable the Company to provide complete, "end-to-end" Internet business
solutions just as it is able to provide complete, "end-to-end" messaging
business solutions. The Company's solutions selling approach allows the
Company to effectively deliver its customers' messages irrespective of the
transmission medium.
STRATEGY
The Company's objective is to become a "hypergrowth" company providing
high quality Internet business solutions to corporate clients. Among other
things, the Company's strategy to achieve its objective includes (i)
diversifying its product line through the continued introduction of new
technology in the areas of messaging and Internet services, (ii) merging, to
the extent possible, the features and functions of messaging and Internet
solutions to make the Company's products and services easier to use, (iii)
expanding and reorganizing the Company's sales force to develop vertical
value-added markets in large corporate accounts and (iv) pursuing
acquisitions and strategic alliances that will allow the Company to compete
more effectively with larger, more diversified companies and to respond more
readily to dynamic changes in the messaging and Internet services industries.
36
<PAGE>
CURRENT MESSAGING AND INTERNET MARKETS
THE INTERNET
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation, a leading technology research firm ("IDC"),
estimates that there were over 51 million web users in the United States and
over 97 million worldwide at the end of 1998. IDC projects these numbers to
increase to over 135 million web users in the United States and over 319
million worldwide by the end of 2002. Internet-based businesses have emerged
to offer a variety of products and services over the Internet. Advances in
online security and payment mechanisms have also prompted more businesses and
consumers to engage in electronic commerce. IDC estimates that the value of
purchases of goods and services, excluding fund transfers and stock
transfers, on the Internet will grow from $32.4 billion worldwide in 1998 to
$425.7 billion worldwide in 2002.
TRENDS IN INTERNET MESSAGING
E-mail is the most widely adopted Internet application, ranging from a
personal messaging tool to a strategic business tool. According to
Electronic Mail & Messaging Systems, an Internet publication, there were
approximately 325 million e-mail accounts in operation at the end of 1998.
E-mail messages have increased in volume and functionality, and this trend is
expected to continue. For example, e-mail is expected to become a major
vehicle for e-commerce transactions. Forrester Research predicts that the
typical online consumer will participate in eight to ten commerce-related
exchanges via e-mail per week by 2001. The e-mail box as a locating and
delivery device has become the platform for additional applications such as
directory services, scheduling and document sharing. Furthermore, the e-mail
box can function as a central repository to receive, send, forward, organize
and prioritize voice mail, fax and e-mail messages, thus creating unified
messaging.
With continuing developments in modern technology, the various message
media are currently in the process of converging. Communication channels are
becoming interchangeable as consumers can send the same message through
e-mail, voice mail and fax. With the unification of these functions,
consumers increasingly value messaging services that are
"device-independent." Consumers appreciate the ability to send and retrieve
messages in any form and in the most convenient manner - e-mail, voice mail
or fax - with the telephone, personal computer, traditional fax machine or
through web access.
As e-mail continues to grow and a portion of fax traffic migrates to the
Internet, industry analysts are predicting rapid growth of services that
unify and simplify the messaging and communications needs of e-mail users.
IDC defines unified messaging as a "single 'in-box' for voice, e-mail and fax
messages that is accessible by both telephone and PC." IDC predicts that the
market for unified messaging will grow from approximately 90,000 unified
messaging mailboxes in 1998 to over 12.9 million boxes in 2002 in the United
States alone with each generating $20 million in unified messaging revenue
per month.
TRENDS IN FAXING
The fax machine is a valuable tool for communication for businesses and
individuals. Although e-mail traffic is growing rapidly, faxing continues to
grow because telephone rates continue to decrease and computer-based fax
facilitates broadcast fax and fax-enabled applications. IDC estimates that
worldwide fax transmissions will increase from 395 billion minutes in 1998 to
647 billion minutes in 2002. According to IDC, fax transmissions generated
estimated revenues of $92 billion in 1998 and are projected to generate $103
billion in 2002.
The transmission of faxes over the Internet has become an increasingly
popular tool and provides a low cost method to send and receive faxes. In
addition to Internet faxing, users are increasingly faxing documents directly
from their computers over traditional phone lines, thereby growing less
dependent on traditional fax machines. IDC estimates
37
<PAGE>
that the share of faxes sent using a fax machine in the United States was 82%
in 1997 and is projected to be 58% in 2002.
Recent advances in technology allow users to send and receive faxes from
their computers using e-mail to transmit data over the Internet. Internet
faxing using e-mail reduces labor costs associated with traditional faxing by
allowing users to send, receive and manage faxes from their computers, and
reduces carrier costs because of the use of the Internet rather than
telephone lines as the transmission medium.
INTERNET COMMERCE
The Company believes the worldwide Internet commerce application market
is growing at significant rates. According to IDC's Internet Commerce
Software Applications Market Review and Forecast, revenues soared 154% to
$444 million in 1998 and are expected to increase another 280% to
approximately $1.7 billion in 1999. The Company believes many companies will
be developing e-commerce sites over the next two years as e-commerce presents
vendors with sales opportunities.
The proliferation of Internet Service Providers (ISPs) has enabled more
vendors to utilize the Internet as a marketing and sales tool. As vendors
shift marketing strategies toward on-line buyers, the Company believes they
will seek single service providers who are able to meet all of their business
marketing needs, including high priority messaging, in addition to web
hosting and Internet content development.
NEED FOR COST-EFFECTIVE SOLUTIONS
The Company believes businesses are constantly seeking to
cost-effectively manage expanding and increasingly sophisticated
communications systems making it preferable for them to utilize third parties
to manage their messaging and Internet needs. Moreover, the Company believes
businesses often find it difficult to implement state-of-the-art technology
in their own infrastructure as individuals with the appropriate expertise are
scarce and costly to hire, train and retain. Consequently, the Company
believes organizations, in an effort to lower costs and reduce time-to-market
with complex technologies, will look to Internet-based solutions to outsource
non-core competencies.
The Company provides businesses convenient, cost-effective and reliable
Internet-based messaging and communications services. The Company provides a
commercially available Internet-based messaging service that supports
business fax, e-mail, voice mail, and supporting services. The Company
deploys an integrated Internet and Public Switched Telephone Network solution
based on economy and reliability. The Company also provides a host of
electronic commerce solutions as well as Internet content support and ISP
services. The Company believes that by providing a fully integrated suite of
products and services, its customers are able to minimize complexity in
messaging and e-commerce services and maximize productivity.
OPERATIONS
The Company's operations are comprised of forwarding customer messages and
delivering Internet services. The Messaging services are customer driven using
Microsoft Windows-TM- based desktop client software to electronically transfer
to the Company the customer's message document and delivery instructions (fax
telephone numbers, e-mail addresses, voice mail telephone numbers, and merge
fields for personalizing the message). The customer elects whether to transfer
the document and instructions to the Company by way of the Internet (e-mail) or
direct dial (modem-to-modem) connection. The Company receives the document and
instructions in an electronic format and automatically executes those
instructions without the necessity of human intervention. The Company's
operation software connects the delivery instructions with the customer's
document, organizes the packets of data and transmits the information to the
destination telephone numbers or e-mail addresses as designated. The Company's
technical staff monitors the job queue on a 24 hour, 7 day per week basis to
ensure that the system is efficiently delivering customer jobs. The Company's
customer service staff is available on a 24 hour, 7 day per week basis to assist
customers with questions they
38
<PAGE>
may have concerning the submission of jobs, the status of the jobs or any
problems needing resolution. After any customer job has been executed, the
customer may electronically view a detailed log showing the document delivery
status for each intended recipient.
Internet access, transmission, co-location and related Internet services
are directly handled by IXC Communications. Web site hosting services are
monitored by the Company's technical staff who are also monitoring the
messaging job queues. Other Internet services are handled by the Company's
production staff which accepts the specifications on customer projects,
interfaces with the customer and determines which of the Company's resources
are needed to meet customer requirements.
The Company's operations include Network Operations (technical staff to
monitor the servers and messaging queues), Customer Service, Engineering
(developers for custom messaging and Internet application development),
Graphics (document, web site and web content design), and Copy (writing for
document, web site and web content).
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 developed safeguards to minimize the impact of power
outages and other operational problems. It 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 local utility services. The Company has not suffered any
material interruption in its business due to power outages or similar
problems. As the Company grows, it intends to add another primary computer
center hub for back-up and expansion.
CYNET SERVICES
FAX BROADCAST
HYPERCAST is the Company's automated fax broadcasting service. It
allows the Company's customers to mass-distribute business documents over
broad geographical areas in specified periods of time. After the customer
submits a batch order for a broadcast, the Company's system automatically
generates and delivers a complete report that details information about the
order, such as destination cities, area codes, number of pages and all costs
associated with transmission. After the Company has completed the broadcast,
customers can access a detailed report, which can be used for monitoring
results, updating phone lists and other external applications.
POINT TO POINT FAX
HYPERLINE is the Company's point-to-point enhanced fax service. This
service allows customers to fax directly from their desktops to recipients
utilizing the Company's system. HYPERLINE can be fully customized to each
customer's individual faxing needs. The features include (i) customized
cover pages, (ii) implemented accounting codes, (iii) development of a
control center that maintains and manages faxes, (iv) delivery and
non-delivery reports via e-mail, and (v) daily journal production.
39
<PAGE>
FAX TO E-MAIL
HYPERMAIL is the Company's fax-to-email service, which provides
customers an automated, easy-to-use desktop solution that interfaces with
most Internet e-mail services. This service is ideal for professionals
performing high-volume sales and marketing operations or operating inbound
call centers. HYPERMAIL customers are assigned a toll-free or local virtual
fax number which is linked to their e-mail address as well as the Company's
fax viewer software. The HYPERMAIL program receives inbound faxes and sends
them directly to the customer's desktop as e-mail. This service allows a
customer to receive, view, store, forward and print confidential inbound
faxes from any location where they have e-mail access.
INTERNET TO FAX
HYPERWEB integrates traditional e-mail with point-to-point fax
capabilities. This service allows customers to transmit high volume,
web-generated documents to other e-mail addresses, telex addresses and fax
numbers simultaneously. This service allows any merchant to do e-commerce
with or without a PC. Additionally, customers receive delivery confirmation
reports either by e-mail or fax. An added feature is the ability to include
custom logos and to insert automatic headers into outgoing messages.
HYPERWEB can also be customized for customers to assign individual billing
codes and tracking reference numbers on faxes and telexes for easy
recordkeeping.
E-MAIL TO E-MAIL
WEBCAST gives customers the ability to broadcast e-mail messages to any
number of recipients simultaneously. The Company's service is unmatched in
terms of speed, having the capability to deliver approximately 200 e-mail
messages per second or 720,000 per hour. To utilize this service, the
customer simply forwards an e-mail address list to the Company. The customer
then submits a message. The Company's systems automatically broadcast the
message to the addresses electronically over the Internet. Added features of
WEBCAST are (i) the ability to attach documents, (ii) a special e-mail
address for forwarding outbound messages and (iii) delivery priority options:
InstaMail for immediate delivery or Scheduled for a specific time.
IMAGE RESOLUTION/DOCUMENT ENHANCEMENT
HYPERRES is an image resolution service that can be used in conjunction
with any of the Company's messaging services. To utilize this service, the
customer submits graphics, photos, brochure layouts, catalogs with pictures
and artwork or any other type of document before transmission. The Company's
graphics technicians and engineers then enhance the document to ensure top
quality output to any receiver.
CELL/MODEM
The Company's CELL/MODEM is an all-in-one cellular phone and fax card.
Designed to fit any laptop or portable computer equipped with a PCMCIA Type
III Slot, this cellular fax card contains its own cell phone. The CELL/MODEM
also fits into a standard RJ-11 jack for landline use, thereby completely
eliminating the need for a stand-alone cellular telephone. A miniature
combination in-ear speaker and microphone allows customers to place and
receive phone calls simply and easily. The back bone of VIRTUAL OFFICE, the
Company's bundled hardware and software product, CELL/MODEM can be used to
access the Internet, exchange important data, send and receive e-mail,
retrieve voice mail, send and receive faxes, and make phone calls from any
place at any time.
40
<PAGE>
VOICE BROADCAST
The Company's TELECAST service gives customers voice broadcast
capabilities without having to navigate through various types of telephone
PBX systems. Once an account has been established, the customer is given a
toll free access number to call to record a message for broadcast. The
customer then submits name and voice number lists in digital format to
schedule the broadcast delivery time. The Company's live operators navigate
the requisite auto-attendant systems and drop the messages into the voice
mail boxes the customer specifies. This service results in a 90% delivery
rate.
VOICE TELECONFERENCING
HYPERCOMM offers two distinct conference-calling services. The first
service, "Meet Me," is a conference call scheduling service. Customers
provide to the Company the names and numbers of all parties desired for a
conference call and the Company's live operators relay the date, time and
call-in phone number to all specified parties before the scheduled date. The
second service, "Dial Out," allows customers to have the Company's operators
dial out and connect all parties at the scheduled meeting time. These
services are ideal for business, medical, educational and political
organizations that frequently engage in conference calls.
ISP SERVICES
The Company offers full-service ISP capabilities, providing its business
customers with Internet connectivity in addition to e-commerce and messaging
services. This service includes 150 hours of monthly usage, 56K Flex and X2
modem support, 24-hour technical support, national ISDN access, 800 number
access while traveling away from home or office territory, personalized home
page service, 6MB of storage for e-mail messages and web site content, one
e-mail account, online news services and online viewing of monthly usage.
INTERNET SOLUTIONS
As a result of the acquisition of Cynet Interactive, the Company
provides its customers with advanced Internet solutions, including web
content, graphic and copy design, application development and web hosting.
The Company's current Internet projects include on-line shopping malls,
integrated procurement centers, live auctions and Internet Web-based
magazines.
MARKETING SOLUTIONS
Worldwide Marketing Services is a subsidiary of the Company. Worldwide
specializes in providing verified list, graphics and copy writing services.
The list services are expansive and may be ordered to fill simple marketing
specifications or highly customized requirements for sophisticated clients
requiring specialized data. Worldwide's services include corporate logo
design, brochures, letterhead and stationery design and a variety of related
items.
EQUIPMENT SAFEGUARDS AND SUPPLIERS
The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its messaging and Internet system infrastructure.
Within 90 days from the date of this Prospectus, the Company will have in
place 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.
41
<PAGE>
CUSTOMERS
Historically, the Company's customers consisted of small and
medium-sized businesses with messaging services needs. Those customers
purchased messaging products and services from the Company pursuant to
specific purchase orders and other short-term arrangements. Presently, the
Company targets medium-sized to large corporate clients, establishing
customer relationships with Fortune 500 and middle tier companies seeking
full service Internet business solutions. Although the Company actively
pursues long term contracts with its present customers and prospects, no
single customer accounted for more than 4% of the Company's revenues during
1998 or during the nine months ended September 30, 1999.
SALES AND MARKETING
From inception through 1997, the Company marketed its products and
services almost exclusively through a telephone sales program. The basis of
the Company's marketing strategy was price-based selling and the Company
sought to acquire customers by providing the lowest cost service in the
messaging industry. Beginning in 1998, the Company underwent a fundamental
shift away from price-based selling to solution-based selling and increased
its offerings to include more value-added services.
To enhance the promotion and sale of its solution-based suite of
products and services, the Company has expanded and reorganized its sales
force during 1999 with the goal of developing and maintaining a professional
sales team consisting of individuals with specialized and technical
knowledge. As of November 30, 1999, the Company employed a team of 52 sales
and support personnel in its Houston office, six in its Yorba Linda,
California location and four in Portland, Oregon. The Company's sales
personnel are trained to target large and middle tier corporate accounts with
the charge to build vertical value-added markets for the Company's
Internet-based products and services.
The Company expects to continue to employ significant telephone contact
as part of its marketing efforts. In addition, the Company now engages, and
expects to continue to engage, in more direct contact with customers and
prospects. The Company also actively seeks to forge major strategic
alliances to enable the Company to market its products and services through
alternate distribution channels. The Company expects to include, as part of
its marketing campaign (i) advertisements in trade journals, (ii) television
and radio promotions, (iii) concentrated marketing through large reseller
channels, (iv) Internet-based advertising and promotions, (v) Internet
business solutions seminars and (vi) participation in trade shows.
STRATEGIC RELATIONSHIPS
The Company is actively pursing strategic relationships that the Company
expects will complement its existing services or increase the amount and variety
of services it currently offers. The service providers with whom the Company
engages in strategic transactions generally have pre-existing relationships with
their customers who, typically, require messaging and Internet services the
Company provides. Consequently, the Company expects these strategic
relationships will provide the Company with access to likely consumers for its
services.
The following is a summary of certain of the strategic relationships
which the Company has established or is currently pursuing. All strategic
transactions into which the Company enters are subject to a variety of risks
and conditions, including conditions beyond the Company's control.
Furthermore, most of these relationships are in the early stages of
development and have not been finalized. Although the Company believes that
individually none of these relationships is material to its business, the
Company considers its strategic alliances in their entirety to be important
to future success. See "Risk Factors -- Risks Associated With Acquisitions,
Investments and Strategic Alliances."
BROOKTROUT TECHNOLOGY, INC. ("BROOKTROUT"). The Company is currently
conducting certain joint marketing and technology sharing efforts with
Brooktrout. The Company expects that (i) the Company and Brooktrout will
synergize marketing efforts at trade shows, (ii) the Company will continue to be
a Beta Testing customer for new
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Brooktrout technology pertaining to faxing, unified messaging and other
related technology, and (iii) the Company and Brooktrout will have regular
joint technology round table discussions with their respective research and
development, engineering and software development teams, which discussions
could result in additional technology agreements and understandings.
TELESYSTEMS MARKETING, INC. ("TELESYSTEMS"). The Company has entered
into a joint marketing alliance with Telesystems, pursuant to which
Telesystems provides its e-mail broadcast, voice broadcast and conference
calling to the Company for resale under the Company's private brand. In
consideration for the foregoing, the Company provides Telesystems its full
suite of messaging products for resale. The agreement also provides for the
mutual promotion and marketing of respective products and services.
IXC COMMUNICATIONS. IXC Communications currently provides Internet
access to the Company's business customers. In August 1999, the Company
entered into a Strategic Alliance Agreement with IXC Communications providing
a framework under which the Company and IXC Communications can complete
additional collaboration projects. In addition to providing Internet access,
the Company expects IXC Communications will provide web hosting, co-location,
bandwidth and related products and services to the Company for resale under
the Company's private brand. The Company also expects IXC Communications
will utilize its approximately 300 salespersons in the promotion and resale
of the Company's products and services.
GLOBEWAVE, INC. ("GlobeWave"). The Company has entered into an alliance
agreement with GlobeWave pursuant to which GlobeWave has appointed the
Company as its exclusive sales agent for the sale of its CELL/MODEM units in
the United States from October 1999 through January, 2000 (which the Company
expects will be extended). In consideration for the foregoing, the Company
has agreed to purchase 1,000 of GlobeWave's CELL/MODEM units for resale by
the Company.
COMPETITION
The market and demand for business-to-business messaging services and
Internet application services is highly competitive and growing rapidly and
the Company faces a high degree of competition in each of its service areas.
The Company believes there are no dominant market leaders in the industries
in which the Company competes. The Company's ability to compete successfully
depends on a number of factors, including (i) market presence, (ii) the
capacity, reliability and security of the Company's network infrastructure,
(iii) the pricing policies of the Company's competitors and suppliers, (iv)
the timing of the introduction of new services and service enhancements, and
(v) how the industry responds to general economic trends.
Due to the changing messaging industry and the explosive growth in the
Internet services industry, the Company is unable to identify direct competitors
except with respect to the Company's specific product and service offerings.
The Company's current and potential competitors fall into the following
categories:
(1) Telecommunications companies and resellers (e.g., AT&T, MCI
Worldcom);
(2) Internet Service Providers (e.g., Uunet Technologies, NETCOM
On-Line Communications Services, Inc.);
(3) Enhanced fax service providers (e.g., Netmoves (formerly FaxSav,
Inc.), Premiere Technologies, Inc.);
(4) Unified Internet messaging providers (Jfax.com. FaxNet Corp.);
and
(5) Various web design and electronic commerce service providers.
The Company is unaware of any other entity that combines Messaging and
Internet products and services in a unified service offering as does the
Company. Nevertheless, the Company believes that its current business
strategy will be emulated by competitors in the future and such competitors
will enter the markets served by the Company. Some
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of those competitors may possess significantly greater financial, marketing,
technical and other resources than the Company. However, the Company
believes its software and product development and sales approach
distinguishes it from its competitors. The Company's internal software
development team enables it to develop and introduce new products and react
to changes in customer requirements more quickly than many of its
competitors. In addition, the Company offers pricing policies that result in
competitive cost-saving solutions for its customers. The Company's sales
personnel are trained to utilize selling techniques aimed at specific
customer needs.
Although the Company will continue to offer competitive products and
services and seek to maintain and enlarge its market share, there can be no
assurance that additional competitors will not enter markets that the Company
plans to serve or that the Company will be able to compete successfully.
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.
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 burdensome regulatory
requirements that would have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company is subject to federal and state laws regulating the unsolicited
transmission of fax and e-mail transmissions for advertisement purposes. The
Company has adopted a policy to refrain from transmitting fax and e-mail
advertisements except to its own customers and other recipients who have
expressed an interest in receiving the transmitted information or otherwise have
given their permission to receive such transmissions. The Company encourages
its customers to familiarize themselves with the relevant laws and to conduct
their businesses in accordance with applicable laws. Nevertheless, the Company
believes it is not responsible or liable for customer transmissions in violation
of governmental regulations.
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
As of November 30, 1999, the Company employed 120 persons, substantially
all of whom are full-time employees, and none of whom are now covered by a
collective bargaining arrangement. The majority of the Company's employees are
located at the Company's headquarters in Houston, Texas. The Company also has
employees in Yorba Linda, California and Portland, Oregon. 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 CYNET, 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
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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 21,000 square feet of leased space in Houston,
Texas. The lease on the Houston facility expires in March 2000. The Company
also has approximately 1,000 square feet of leased space in Yorba Linda,
California and 900 square feet of leased space in Portland, Oregon. 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 believes its
insurance coverage is adequate.
LEGAL PROCEEDINGS
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."
The Company and Cynet Interactive have been named as defendants in a
suit filed November 19, 1999 in the District Court of Harris County, Texas,
61 Judicial District (Casue No. 1999-57579) by Bank & Estate Liquidators,
Inc., a former customer of Cynet Interactive. The plaintiff alleges, among
other things, that Cynet Interactive failed to complete the design and
development of an Internet Live Auction project in accordance with alleged
contract terms and conditions and is seeking to recover actual and treble
damages. The Company has retained counsel to vigorously defend the matter.
Although the Company has not had time to complete its investigation of the
claims asserted by the plaintiff in this matter, the Company does not believe
that this suit will have a material adverse effect on the Company. The
Company is not a party to any other legal proceedings which the Company
believes could have a material adverse effect on the Company.
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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, 1998 and 1997 and
the nine months ended September 30, 1999 and 1998. 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 messaging and Internet technologies. From the Company's
inception through early 1996, the Company obtained approximately $1.9 million
of start-up capital to develop its fax broadcasting network and install nodes
in selected locations throughout the United States. Between August 1996 and
December 31, 1997, the Company obtained additional capital in the amount of
approximately $15.3 million which includes $14,198,137 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 sale of the Subject Securities created potential
securities law liabilities which resulted in the Company's need to make the
Rescission Offer. Since December 1997, Cynet Holdings has contributed
additional capital by way of cash infusions in the amount of $4,106,000 in
exchange for the issuance of 4,106,000 shares of the Company's Class A Common
Stock. In addition, Cynet Holdings transferred all of the outstanding
membership interests of Cynet Interactive to the Company. See "Management --
Certain Transactions."
While undergoing rapid development and internal expansion, the Company
experienced weak and deteriorating financial performance, which was further
hampered by the need to conduct the Rescission Offer. In January 1998, the
Company underwent a change of control and management. The new management
team substantially improved the Company's financial performance, diversified
the Company's products and services and reorganized and expanded the
Company's sales efforts. In 1999, the Company transitioned itself from a
messaging company (delivering fax, e-mail, voice and data between businesses)
to an Internet solutions provider incorporating full messaging and Internet
capabilities.
The Company derives its operating revenues from providing messaging and
Internet services to business customers. Although the Company generally does
not have long-term contractual service agreements with its customers, the
Company believes its superior delivery and customer service encourages its
customers to continue using the Company's products and services. As a
result, the Company expects its operating results will benefit from recurring
monthly revenues and transaction fees from such customers. The Company also
receives revenues from the sale of its specialized software to its customers.
STATE OF THE COMPANY AT THE CHANGE OF MANAGEMENT
From its inception until the January 28, 1998 change of management, the
Company was a fax broadcast service provider that developed its own client
interface software featuring ease of use and expanded connectivity. The
Company provided its client interface software free of charge and the
Company"s service offerings were discounted below its competitors' prices.
The Company projected the image of a technology leader in fax broadcasting
with the lowest price for delivery. The Company incurred heavy losses each
year of operation because of its commodity pricing strategy coupled with the
ordinary and usual start-up, administrative, sales, marketing and development
costs. The Company prematurely expended its available capital, leaving the
Company in substantial debt to its trade vendors. In January 1998, the
Company was in poor financial condition and its working capital deficits
raised serious doubts about the Company's ability to continue as a going
concern. The Company required a substantial investment in research and
development and capital equipment to stabilize the fax broadcasting system,
lower operating costs, and diversify the product and service lines to keep
pace with industry and market changes. The Company needed a professional
management team capable
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of executing a turnaround strategy transitioning it from a start-up to a
hypergrowth company. In addition, the Company's potential securities law
liabilities effectively prevented the Company from attracting institutional
investors. In effect, the Company's business life cycle was headed to an
abrupt end.
In 1997, the year preceding a change in management, the Company's
financial performance was as follows: (i) revenues of $4,960,355, (ii) gross
margins of 9%, (iii) pre-tax net loss of $7,762,863 and (iv) cash flow
(EBITDA and other non-cash non-recurring expenses) losses of $6,850,078. In
December 1997, the Company had more than 850 shareholders and approximately
26.8 million shares issued (calculated on a fully diluted basis giving effect
to outstanding warrants); the financial condition of the business had
deteriorated and the Company had more than $14,000,000 in potential
rescission liability.
WHAT NEW MANAGEMENT ACCOMPLISHED IN 1998
Pursuant to an agreement with the Company's founder, then Chief
Executive Officer and major shareholder, Ray C. Davis ("Davis"), in January
1998 Cynet Holdings acquired all of Davis' ownership in the Company. As a
result, Vincent W. Beale, Sr., the President and major shareholder of Cynet
Holdings assumed control of the management of the Company. Mr. Beale
immediately installed a professional management team that included, among
others, Bernard B. Beale as Executive Vice President, Samuel C. Beale as Vice
President and General Counsel, and David R. Hearon, Jr. as Vice President of
Operations. In August 1998, R. Greg Smith joined the management team as the
Chief Financial Officer. See "Management." The management team's immediate
tasks were (i) to reduce operating losses, (ii) assess the true state of the
Company, (iii) identify the necessary steps to rebuild the Company, (iv) turn
the Company toward profitability and a more competitive position, (v) resolve
the rescission liability issue, and (vi) take the Company into the public
capital markets in order to fuel growth and enhance shareholder value.
With limited resources, the management team increased the Company's
revenues by 80% from $4,960,355 in 1997 to $8,947,732 in 1998. Cost of
revenues were decreased such that gross margins increased from 9% in 1997 to
32% in 1998 with each calendar quarter showing a significant improvement over
the preceding quarter. Pre-tax net losses were reduced from $7,762,863 in
1997 to $4,396,883 in 1998. Cash flow losses were reduced from $6,850,078 in
1997 to $3,251,857 in 1998. The Company's base product and service (fax
broadcasting) was stabilized and greatly improved, products and services were
diversified from one product and service in 1997 to more than a dozen
products and services in 1998 covering a complete range of messaging
solutions. The Company raised its prices as it created more value-added
services, reconstructed its client base to include larger and more successful
clients, and changed from commodity priced selling to solution selling of
value-added products and services. Cynet Holdings infused $1,511,000 cash
into the Company's capital. The Company filed its initial registration
statement with the SEC to begin the final part of the complete turnaround of
the Company. In 1998, the Company was unable to attract a significant
financial partner while in the shadow of the 1997 financial performance and
under the cloud of the potential rescission liability.
WHAT MANAGEMENT HAS ACCOMPLISHED TO DATE IN 1999
In 1999, the Company expects its financial performance to continue to
improve as compared to its 1998 performance. Specifically, the Company
expects to achieve continued improvements in its gross margins, cash flow and
net income excluding the effect of $1,344,000 in one time non-cash charges
taken in the third quarter of 1999. Toward that end, the Company achieved a
52% increase in its gross margins in the nine months ended September 30, 1999
as compared to the nine months ended September 30, 1998. The Company's gross
margins increased to 45% for the nine months ended September 30, 1999 from
28% for the nine months ended September 30, 1998. The Company's projected
performance improvements are based upon realizing the benefits of the 1998
improvements in the business, the transition of the Company from a fax
company to an Internet services company with a full complement of messaging
and Internet solutions, the expansion of strategic alliance partners, the
reorganization of the sales force, and the change in marketing strategy.
Nevertheless, there can be no assurance that the Company will be able to
achieve its performance objectives.
The factors contributing to the Company's current success are the trends
in the Internet services and telecommunications industries. Deregulations in
the telecommunications industry have spawned numerous
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telecommunications providers delivering parts of the overall
telecommunications solution (local telephone, long distance telephone, mobile
telephone, data transmission, Internet access, web hosting and web content).
Business customers find this multiplicity to be inefficient and confusing.
The Company's strategy is to position itself as a one-stop-shop for the
messaging and Internet services solutions. It proposes to coordinate the
delivery and support these diverse but related services through a series of
seamless strategic alliances connecting through the Company's core products
and services. The Company's sales efforts are being refocused to target
large corporate (and Fortune 500) and medium-sized companies with a unified
service solution. This sales effort should be further enhanced by the
vertical market segmentation of the Company's sales force. With a vertical
market focused sales force, the Company expects to better interface with a
number of strategic alliance and reseller agent sales persons who sell the
Company's products and services. See "Business -- Strategic Relationships."
FUTURE PLANS AND PROSPECTS
The Company expects to expand existing alliances and form new alliances
that will enable the Company to (i) increase revenues, (ii) continue to
expand and diversify products and services to meet market demand, (iii)
accelerate research and development to deploy new technology and (iv)
increase financial resources to execute the Company's merger and acquisition
plans. In future public offerings, the Company expects to finance its growth
and expansion plans such that the Company becomes a hypergrowth company.
However, there can be no assurance that the Company will be able to realize
these plans and objectives.
CERTAIN ACCOUNTING POLICIES
Revenues from messaging and Internet services are recognized as services
are performed. Revenues from sales of customer lists and other related
services are recognized when the list is provided, or the other services are
performed. Expenditures for research and development of telecommunication
technology as it relates to messaging and Internet application services
needs are charged to expense as incurred. For the years ended December 31,
1998 and 1997, research and development expenditures were approximately
$398,000 and $419,000, respectively.
Deferred taxes result from temporary differences between the financial
statement and income tax bases 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.
ACCOUNTING PRONOUNCEMENTS
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, 2000. 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, 2001 to affect its financial statements.
Effective for all fiscal years beginning after December 31, 1998, SOP
98-5, "Reporting on the Costs of Start-up Activities," requires all start-up
and organizational costs to be expensed as incurred. It also requires all
remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. The Company adopted SOP 98-5 in the first
quarter of 1999 and it did not have a material effect on its financial
statements.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues decreased to $6,501,849 for the nine months ended September 30,
1999 from $6,778,197 for the nine months ended September 30,1998. The
decrease of $276,349 or 4% was due primarily to a decrease in sales of the
Company's fax broadcasting product offering.
Cost of revenues decreased to $3,592,920 for the nine months ended
September 30,1999 from $4,864,570 for the nine months ended September
30,1998. The decrease of $1,271,650 or 26% was attributable primarily to the
decrease in telephone charges resulting from more advantageous pricing from
the Company's primary telephone carriers. Gross margins increased to 45% for
the nine months ended September 30,1999 from 28% for the nine months ended
September 30,1998 due to the decrease in telecommunication costs. Management
expects additional telephone rate reductions along with the delivery of
higher gross margin value added products and services to further improve
gross margins.
Selling, and general and administrative expenses increased to $6,457,362
for the nine months ended September 30, 1999 from $4,415,953 for the nine
months ended September 30, 1998. The increase of $2,041,409 or 46% was
attributable to (i) a non-cash charge of $1,344,000 due to the Company's
agreement to extend the expiration date of the Shaffner Warrants until
November 4, 2001, (ii) an increase of $530,000 in personnel costs and related
expenses from an expansion of the Company's sales force and (iii) an increase
of $144,000 in general and administrative expenses.
Depreciation and amortization increased to $697,204 for the nine months
ended September 30,1999 from $549,490 for the nine months ended September
30,1998. The increase was attributable primarily to additional equipment
acquired in 1999, including equipment acquired in the expansion of the
Company's messaging infrastructure.
During the nine months ended September 30, 1998, the Company had a
write-down of long-lived assets of $271,957 due to obsolete computer
equipment and certain other assets. There were no write-downs of long-lived
assets during the nine months ended September 30, 1999.
Other expense totaled $165,960 for the nine months ended September 30,
1999 compared to other expense of $103,440 for the nine months ended
September 30, 1998. The increase in other expense was primarily attributable
to (i) an increase in interest expense of $78,482 on a revolving accounts
receivable lending agreement and (ii) a decrease in other expense of $18,442.
The Company had a net loss of $4,411,597 for the nine months ended
September 30,1999 compared to a net loss of $3,427,213 for the nine months
ended September 30,1998. The decrease in net loss is due to the factors
discussed above.
Net loss per common share increased to $0.17 from $0.15 for the nine
months ended September 30,1999 compared to the nine months ended September
30,1998.
YEAR ENDED DECEMBER 31,1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased to $8,947,732 for the year ended December 31, 1998
from $4,960,355 for the year ended December 31, 1997. The increase of
$3,987,377 or 80% was primarily attributable to (i) market share gains for
the Company's messaging products, (ii) increased customer awareness and
expansion of the size of the customer base, (iii) expansion of the Company's
sales force and (iv) the introduction of the Company's lists and database
services product offerings.
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Cost of revenues increased to $6,069,184 for the year ended December 31,
1998 from $4,490,505 for the year ended December 31, 1997. The cost of
revenues as a percentage of revenues decreased to 68% for the period ended
December 31, 1998 as compared to 91% for the period ended December 31, 1997.
The decrease in cost of revenues as a percentage of revenues was primarily
attributable to (i) a decrease in the Company's telecommunications rates,
(ii) more favorable pricing of the Company's products resulting from value
added services, (iii) introduction of ancillary messaging products yielding
higher gross margins, (iv) increased efficiency gains resulting from a
implementation of new communications technologies and (v) fixed costs being
spread over a larger revenue base.
Selling, and general and administrative expenses decreased to $6,107,978
for the year ended December 31, 1998 from $7,517,935 for the year ended
December 31, 1997. The decrease in expenses was primarily attributable to
(i) a reduction of the Company's advertising and promotional costs of
approximately $1,100,000, (ii) a reduction of external consulting fees of
approximately $1,000,000, (iii) a reduction of the Company's legal and
accounting fees of approximately $100,000, (iv) increases in personnel costs
of approximately $600,000, and (v) increases in bad debt expenses of
approximately $100,000.
Depreciation and amortization increased to $728,975 for the year ended
December 31, 1998 from $414,652 for the year ended December 31, 1997. The
increase was attributable primarily to additional equipment acquired in 1997,
including equipment acquired in the expansion of the Company's messaging
infrastructure.
Impairment loss on long lived assets decreased to $271,957 for the year
ended December 31, 1998 from $496,133 for the year ended December 31, 1997.
In the third quarter of 1998, the Company under its new management, reviewed
its operations and equipment and determined certain computer equipment was
not being used in the operations of the business prior to December 31, 1997,
and had no salvage value. Accordingly, the Company restated its 1997
financial statements and wrote off $496,133 of computer and telephone
equipment during the year ended December 31, 1997. During 1998, the Company
acquired telecommunications equipment that is more efficient and has a higher
fax transmission capacity than certain of its existing equipment. The
Company determined that its nodes, which is primarily computer equipment that
is located in various cities throughout the United States, were cost
prohibitive. The computer equipment from the nodes was implemented in the
Company's operations to the extent possible. Accordingly, the Company
recorded a write-down of property and equipment of $163,079 for the year
ended December 31, 1998 for property and equipment that is not currently
being utilized.
In addition, during 1998 the Company wrote-down certain art work and
artifacts to their estimated market value based on an independent appraisal
and recorded an impairment loss of $108,878.
Other expense totaled $126,278 for the year ended December 31, 1998
compared to other income of $56,821 for the year ended December 31, 1997.
The increase in other expense was primarily attributable to (i) interest
expense of $66,877 on a revolving accounts receivable lending agreement and
(ii) a reduction of interest income totaling $64,532.
Minority interest in net loss of consolidated subsidiaries decreased to
zero for the year ended December 31, 1998 compared to $139,186 for the year
ended December 31, 1997 due to the Company acquiring the minority interest in
the LLCs in December 1997. See Note 7 in the Notes to the Consolidated
Financial Statements.
The Company incurred a net loss of $4,356,640 for the year ended
December 31, 1998 compared to a net loss of $7,762,863 for the year ended
December 31, 1997. The decrease in net loss was due to the factors discussed
above.
Net loss per common share decreased to $0.19 from $0.60 for the year
ended December 31, 1998 compared to the year ended December 31, 1997.
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 the demand for the Company's services, the
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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 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
$15.3 million). At September 30, 1999 on a pro forma basis giving effect to
the Rescission Offer, the Company had a cash position of $654,479 and a
working capital deficit of $2,114,713.
Net cash used in operating activities was $1,783,793 and $7,624,801 for
the years ended December 31, 1998 and 1997, respectively. The decrease in
net cash used in operating activities for the year ended December 31, 1998
was primarily due to a reduction in the net operating loss of the Company.
Net cash used in operating activities was $2,768,339 and $1,500,297 for the
nine-month periods ended September 30, 1999 and 1998, respectively. The
increase in net cash used in operations for the nine-month period ended
September 30, 1999 was primarily due to the decrease in accounts payable and
accrued expenses.
Net cash used in investment activities was $812,585 and $3,172,458 for
the years ended December 31, 1998 and 1997, respectively. Net cash used in
investment activities was $198,939 and $769,684 for the periods ended
September 30, 1999 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 $1,934,985 and $11,165,123
for the years ended December 31, 1998 and 1997, respectively. Net cash
provided by financing activities was $2,952,053 and $1,654,486 for the
periods ended September 30, 1999 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 $21.4 million from these issuances of which $14,198,137 is
subject to the pending 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, 1998, 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 $1,200,000, 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 currently does not have sufficient capital to meet its cash
flow requirements over the next 12 months. As a result, the Company expects
to satisfy cash flow shortages with (i) the sale of additional shares of
Class A Common Stock to Cynet Holdings pursuant to the Holdings Subscription
Agreement, (ii) approximately $615,000 in excess proceeds of the Rescission
Financing and (iii) the proceeds of a mezzanine debt facility which the
Company is presently seeking with one of the Rescission Underwriters and
other unaffiliated lenders.
51
<PAGE>
There can be no assurances that the Company will either (i) achieve a
level of revenues adequate to generate sufficient cash flow from operations,
or (ii) receive additional debt or equity financing necessary to support the
Company's working capital requirements. To the extent that funds generated
from operations and any additional financings 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.
The Company has reached agreements with the Rescission Underwriters to
provide the Rescission Financing to fund the Rescission Offer. The
Rescission Financing will be completed prior to the date of this Prospectus.
The Company has also secured a commitment from Cynet Holdings pursuant to
which Holdings will provide up to $10,000,000 ("Holdings Commitment") of
equity capital to the Company prior to December 31, 1999. As of November 30,
1999, Cynet Holdings had contributed to the Company $4,106,000 in cash in
exchange for 4,106,000 shares of the Company's Class A Common Stock. In
addition, Cynet Holdings transferred all of the outstanding membership
interests in Cynet Interactive to the Company. As of November 30, 1999, Cynet
Holdings has also provided the Company additional non-interest bearing
advances totaling $933,472. See "Management -- Certain Transactions." The
proceeds from the Holdings Commitment will be used primarily for the
Company's working capital, expansion and acquisitions needs. The proceeds
from the Rescission Financing will be used to fund $6,151,596 the Rescission
Offer. In the event that funds in excess of $6,151,596 needed to fund the
Rescission Offer, the Company shall have the right to either (i) with the
consent of the Rescission Underwriters, secure additional financing through
the issuance of equity securities or the sale of assets in amounts sufficient
to satisfy the Company's rescission liabilities and complete the Rescission
Offer, or (ii) declare the entire Rescission Offer ineffective and return all
completed Elections, together with the certificates or other instruments
representing the Subject Securities, to the Offerees who accepted the
Rescission Offer and direct the escrow agent to return the funds comprising
the Rescission Financing to the Rescission Underwriters. Subject to the
foregoing, any unused proceeds of the Rescission Financing remaining after
the funding of the Rescission Offer will be used by the Company, for general
corporate purposes. See "Risk Factors -- Need for Additional Capital and
Capital Requirements" and "-- Lack of Sufficient Capital to Fund Rescission
Offer; Potential Rescission Liability" and "Use of Proceeds."
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.
The Company instituted a Year 2000 compliance plan and schedule in
September 1998. The Company has incorporated a compliance standard with rules
and definitions into its operations systems. The Company's compliance plan is
to ensure all of its software, hardware, information systems, products and
services are Year 2000 compatible. The Company has also structured its plan
to incorporate all identifiable vendors from whom it obtains services. In
addition to its internally developed software, the Company utilizes software,
hardware and other services from third party vendors. To the extent possible,
the Company has tested such third-party software and hardware to determine
Year 2000 compliance. In addition, the Company has received written
assurances from key vendors that their systems are Year 2000 compliant. Based
upon an initial evaluation of its broader list of vendors, the Company
believes that all of these providers are in the process of reviewing and
implementing their own Year 2000 compliance programs. The Company will work
with these providers to address the Year 2000 issue and to continue to seek
assurances that their systems are Year 2000 compliant.
As of July 1, 1999, the Company successfully completed its Year 2000
compliance test plan and determined that all of its systems are Year 2000
compliant. The Company has not incurred any significant expenses for Year
2000 remediation efforts. The Company conducted an independent audit of its
software and upgraded the bios and clocks in its hardware. The Company does
not anticipate that any future costs associated with this project will be
material.
52
<PAGE>
However, if the Company, its customers, its providers of hardware
and software or other third parties with whom the Company does business fail
to remedy any Year 2000 issues, the Company's services could be interrupted
and it could experience a material loss of revenues that could have a
material, adverse effect on its business, prospects, results of operations
and financial condition. The Company is unable to reasonably estimate the
duration and extent of any such interruption, or quantify the effect it may
have on future revenues.
53
<PAGE>
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 November 30, 1999):
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------- --- ----------------------------
<S> <C> <C>
Vincent W. Beale, Sr. 51 Chairman of the Board, Chief
Executive Officer, President
and Director
Bernard B. Beale 42 Executive Vice President and
Chief Operating Officer
David R. Hearon, Jr. 62 Vice President, Chief
Technical Officer
Samuel C. Beale 44 Vice President, General
Counsel and Secretary
R. Greg Smith 40 Vice President, Chief
Financial Officer
Wayne Schroeder 57 Director
</TABLE>
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, 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 investment banking 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 and Chief
Operating Officer of the Company. Prior to joining the Company, Mr. Beale was
employed by The Equitable Company, a financial services firm, and certain other
investment banking firms from 1985 to 1998. From 1979 to 1986, he was employed
in various positions including accounting, human resources and project
management with Western Electric and AT&T. Mr. Beale holds a Master of Science
degree in Business Management from Aurora University, Aurora, Illinois, and a
Bachelor of Arts degree from Oakwood College, Huntsville, Alabama.
DAVID R. HEARON, JR. was employed by the Company in March 1998 as Vice
President and Chief Technical Officer. From July 1996 until joining the
Company, Mr. Hearon was President of Hearon & Associates, an 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.
SAMUEL C. BEALE became Vice President, General Counsel and Secretary of the
Company in May 1998. Mr. Beale was an attorney engaged in private law practice
for eight years prior to joining the Company. 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 manager
to sales. Mr. Beale holds a Juris Doctor degree from the Ohio State University
College of Law and a Bachelor of Arts degree from Harvard University.
R. GREG SMITH joined the Company in August 1998 as Vice President and Chief
Financial Officer. Mr. Smith was employed for more than 12 years in the health
care information systems industry prior to joining the Company. Mr. Smith was
most recently employed by ADAC Healthcare Information Systems ("ADAC") as Vice
President Finance and
54
<PAGE>
Chief Financial Officer from 1995 until joining the Company. In 1996, ADAC
became the first health care manufacturer to receive the Malcolm Baldridge
National Quality Award. Prior to joining ADAC, Mr. Smith held numerous
financial management positions from 1985 through 1995 for Community Health
Computing, Inc. ("CHC"), including Vice President Finance and Chief Financial
Officer from 1994 through 1995. ADAC acquired CHC in 1995 and retained Mr.
Smith as the Chief Financial Officer for their combined health care
information systems businesses. Mr. Smith holds a Bachelor of Business
Administration degree in Finance from Sam Houston State University.
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 do not receive
any compensation for serving as directors. All directors are 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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
- ----------------------------- ------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Vincent W. Beale, Sr. 1998 $133,693 $30,000 -- 100,000 shares --
President and Chief
Executive Officer
(since 1/98)
Ray C. Davis, President and 1998 $110,287 -- -- -- $188,326(2)
Chief Executive Officer 1997 $198,430 $50,000 $7,500(3) -- $250,000 (4)
(until 1/98) 1996 $116,923 -- -- --
55
<PAGE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
- ----------------------------- ------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bernard B. Beale 1998 $131,696 -- -- 150,000 shares --
Executive Vice President,
Chief Operating Officer
(since 1/98)
David R. Hearon, Jr. 1998 $122,226 $30,000 -- 75,000 shares --
Vice President, Chief
Technical Officer
(since 3/98)
Samuel C. Beale 1998 $90,845 -- -- 100,000 shares --
Vice President, General
Counsel and Secretary
(since 3/98)
Wayne Schroeder 1998 $40,385 -- -- 100,000 shares --
Chief Financial Officer and
Secretary
(10/97 to 4/98)
R. Greg Smith 1998 $42,308 -- -- 100,000 shares --
Vice President, Chief
Financial Officer
(since 8/98)
Vickroy Stone 1997 -- -- --(5) -- --
Chief Financial Officer 1996 -- -- $617,401(6) -- --
(9/95 to 2/97)
John Kim 1997 $262,302 $6,000 -- -- --
Vice President, Sales 1996 $34,854 $31,450 -- -- --
(4/96 to 2/98)
56
<PAGE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
- ----------------------------- ------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Keith Shaffner 1997 $9,231 -- -- -- $1,976,663(7)
Vice President
(6/97 to 11/97)
</TABLE>
- ------------------------
(1) Refers to incentive stock options to purchase shares of Class A Common
Stock at a purchase price of $0.39 per share granted to Vincent W. Beale,
Sr., Bernard B. Beale, David R. Hearon, Jr., Samuel C. Beale and R. Greg
Smith under the 1997 Restated Stock Option Plan in accordance with their
respective employment agreements with the Company. (See "-- Employment
Agreements" and "-- Stock Option Plan" below).
(2) Represents (i) a $121,043 account receivable owed by Mr. Davis to the
Company which was forgiven in exchange for the termination of Mr. Davis'
employment agreement pursuant to the Settlement Agreement and Mutual
Release in Full executed between the Company and Mr. Davis. See
"--Employment Agreements" below and (ii) $67,283 of property transferred to
Mr. Davis as compensation for services rendered. See "-- Certain
Transactions."
(3) Represents the value of providing Mr. Davis the use of an automobile owned
by the Company.
(4) Represents consideration paid to Mr. Davis in exchange for his assignment
to the Company of all of his "intellectual property." See "-- Certain
Transactions."
(5) Excludes (i) the repurchase by the Company of 450,000 shares of Class A
Common Stock from Mr. Stone for $450,000 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."
(6) 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."
(7) 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, 1998.
See "-- Employment Agreements" below for information regarding the current
compensation of certain of the Company's directors and officers.
57
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Number of Percent Of Total
Securities Options/SARS
Underlying Granted To
Options/SARs Employees In Fiscal Exercise of
Name Granted (1) Year Base Price Expiration Date
---------------------- -------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Vincent W. Beale, Sr. 100,000 shares 6.8% $0.39 per share January 31, 2003
Bernard B. Beale 150,000 shares 10.2% $0.39 per share July 21, 2003
David C. Hearon, Jr. 75,000 shares 5.1% $0.39 per share February 28, 2003
Samuel C. Beale 100,000 shares 6.8% $0.39 per share July 21, 2003
Wayne Schroeder 100,000 shares 6.8% $0.39 per share March 31, 2003
R. Greg Smith 100,000 shares 6.8% $0.39 per share August 25, 2003
</TABLE>
- ------------------------
(1) See "-- Employment Agreements" for information regarding the vesting of
these options. Mr. Schroeder's options are 100% vested as of the date
granted.
None of the Company's executive officers exercised any options during the
fiscal year ended December 31, 1998. The Company has not issued any SARs during
the fiscal year ended December 31, 1998.
None of the Company's executive officers were granted awards under any
long-term incentive plan during the fiscal year ended December 31, 1998.
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 Amended and Restated Stock
Option Plan to purchase 100,000 shares of Class A Common Stock at a price of
$0.39 per share which vests immediately when granted 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,
58
<PAGE>
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 Amended and
Restated 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.
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 had an initial term of five years, and
provided 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 provided that
Mr. Davis 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 became the property of the Company and the Company is not required to
compensate Mr. Davis for any such inventions or improvements. The employment
agreement also contained 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 August 31, 1998, Mr. Davis
resigned from the Company, and the Company and Mr. Davis entered into a
Settlement Agreement and Mutual Release in Full (the "Davis Settlement"),
providing for (i) the termination of Mr. Davis' employment agreement with the
Company, (ii) the Company's forgiveness and release of $121,043.14 in
indebtedness owed by Mr. Davis to the Company, and (iii) Mr. Davis' release of
claims against the Company with respect to his employment agreement. See "--
Certain Transactions."
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 Amended and Restated Stock Option Plan to
purchase 150,000 shares of Class A Common Stock at a price of $0.39 per share
which vests immediately when granted 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,
59
<PAGE>
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 Amended and Restated Stock Option
Plan to purchase 100,000 shares of Class A Common Stock at a price of $0.39
per share which vests immediately when granted 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 August 26, 1998, the Company entered into an employment
agreement with R. Greg Smith pursuant to which Mr. Smith serves as the Vice
President Finance and Chief Financial Officer 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. Smith and the Company, and requires Mr.
Smith 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. Smith is
entitled to (i) receive an annual salary, commencing August 26, 1998, of
$125,000 (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 Amended and Restated 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 three-year period and (v) participate in the Company's
other employee benefit plans. Mr. Smith'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. Smith's right to compete with the Company during the term of the
employment agreement and for two years after his termination of employment.
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 Stock Option Plan, which
plan was restated effective July 31, 1999 (the "1997 Plan").
The 1997 Plan provides for the granting of stock options ("Options") to key
employees of the Company. Within certain limitations provided by the 1997 Plan,
such Options may include provisions regarding vesting, exercise price, the
amount of each grant and other terms as shall be approved by the Board of
Directors or by a committee designated by the Board of Directors. Options
granted under the 1997 Plan may be either options that qualify as "incentive
stock options," within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended ("Incentive Options"), or those that do not qualify as such
"incentive stock options" ("Non-qualified Options"). The 1997 Plan, which
permits up to 2,000,000 shares of the Company's Class A Common Stock to be
issued, terminates on October 19, 2007.
The 1997 Plan is administered by the Board or by a Compensation Committee
of the Board of Directors, which committee, to the extent required to qualify
for certain exemptions under Rule 16b-3 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, to satisfy the requirements of Section
162(m) of the Code, will at all times consist of at least two non-employee
directors. Subject to the terms of the 1997 Plan, the Board of Directors or a
Compensation Committee determines the persons to whom Options are granted and
the terms and the number of shares covered by each Option. The term of each
Option may not exceed ten years from the date the option is granted, or five
years in the case of an Incentive Option granted to a holder of more than 10% of
the fully-diluted capital stock of the Company. Non-qualified Options and
Incentive Options may become exercisable six months after the date of grant and
may continue to be exercisable, in whole or in part, up to ten years after the
date of grant, as determined by the Board of Directors or the Compensation
Committee.
The 1997 Plan provides that all Incentive Options and Non-qualified Options
which are not exercisable on the date of termination of an option holder's
employment generally expire when the optionee ceases to be employed by the
Company; however, the Board of Directors or the Compensation Committee may, in
its discretion, permit the holder to exercise unvested options upon such
termination. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The 1997 Plan
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<PAGE>
provides that each stock option agreement with respect to any Non-qualified
Option or Incentive Option shall specify the effects of termination of
employment on exercisability of such options.
The 1997 Plan contains a provision accelerating the exerciseablity of
Options upon the occurrence of specified events, including a merger,
consolidation, dissolution or liquidation of the Company. The acceleration of
vesting of the Options in the event of a merger or other similar event may have
the effect of discouraging a proposal for merger, a takeover attempt or other
efforts to gain control of the Company.
Incentive Options to purchase shares of the Class A Common Stock have been
granted to Vincent W. Beale, Sr., Bernard B. Beale, David R. Hearon, Jr., Samuel
C. Beale and R. Greg Smith under the 1997 Plan in accordance with their
respective employment agreements described in "-- Employment Agreements" above
as follows: 100,000 shares to Vincent W. Beale, Sr. which vest immediately on
the date of grant, 150,000 shares to Bernard B. Beale which vest immediately on
the date of grant, 100,000 shares to Samuel C. Beale which vest immediately on
the date of grant, 75,000 shares to David R. Hearon, Jr. which vest ratably over
a four-year period, 100,000 shares to Wayne Schroeder which vest immediately on
the date of grant, and 100,000 shares to R. Greg Smith which vest ratably over a
three-year period. Each of these stock options has an exercise price of $0.39
per share.
CONSULTING SERVICES
Pursuant to the terms of the Rescission Financing, the Company will enter
into a Consulting Agreement (the "Enron Advisory Agreement") with HEOF, a
Rescission Underwriter and an affiliate of Enron Corporation, pursuant to which
HEOF will agree to provide certain business advisory services to the Company.
Pursuant to the Enron Advisory Agreement, the Company will issue a warrant
entitling HEOF to purchase up to 413,600 shares of Class A Common Stock at a
purchase price of $2.00 per share upon the completion of the Rescission
Financing. The warrant will be exercisable, in whole or in part, at any time
during the three-year period beginning on the date of issuance.
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 benefitted 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.
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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 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.
In April 1998, the Company transferred certain property having a net
book value of $67,283 to Mr. Davis and recorded such transfers as
compensation. This amount is in addition to compensation paid to Mr. Davis
under his employment agreements. See Note 6 of the Notes to Consolidated
Financial Statements.
Effective August 31, 1998, Mr. Davis resigned as a director, officer and
employee of the Company and the Company and Mr. Davis entered into the Davis
Settlement providing for (i) the termination of Mr. Davis' employment
agreement with the Company, (ii) the Company's forgiveness and release of
claims of $121,043 in indebtedness owed by Mr. Davis to the Company, and
(iii) Mr. Davis' release of claims against the Company with respect to his
employment agreement.
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.
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<PAGE>
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
(which the Company has agreed to extend until November 4, 2001), valued at
$184,000 at the time of issuance, (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 (which the Company has agreed to extend until
November 4, 2001), valued at $178,500 at the time of issuance, (iii) 500,000
shares of Class A Common Stock, valued at $500,000 at the time of issuance,
and (iv) $51,000 in cash. The extension of these warrants requires the
Company to recognize a non-cash charge of approximately $1,300,000 during the
third quarter of 1999. See Note 15 of the Notes to Consolidated Financial
Statements. 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, Cynet
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 Cynet Holdings to purchase such shares were generated from Cynet
Holdings' equity capital. Vincent W. Beale, Sr. is the President and
majority owner of Cynet Holdings. In July 1998 the Company entered into a
Holdings Subscription Agreement with Cynet Holdings, pursuant to which Cynet
Holdings 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. The
Subscription Agreement was subsequently amended to extend the duration of the
Agreement to December 31, 1999 and (ii) permit the issuance of Class B Common
Stock to the extent that no authorized Class A Common Stock is available. As
soon as practicable after the completion of the Rescission Offer, the Company
intends to offer the holders of the Class B Common Stock the right to
exchange their shares of Class B Common Stock for an equal number of shares
of Class A Common Stock. In addition, the Company intends to increase the
number of authorized shares of its Common Stock to 100 million shares at a
special meeting of the Company's shareholders. As of November 30, 1999,
Cynet Holdings had contributed to the Company $4,106,000 in cash in exchange
for 4,106,000 shares of Class A Common Stock. In 1998, 250,000 shares of
Class A Common Stock purchased by Cynet Holdings were pledged to an
unaffiliated financial institution and subsequently foreclosed upon. Also
pursuant to the Holdings Subscription Agreement, the Company (i) issued a
five-year warrant entitling Cynet 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 Cynet Holdings
certain registration rights covering the Company's securities held by Cynet
Holdings. Cynet Holdings has also entered into an Underwriting Agreement with
the Company pursuant to which Cynet Holdings will purchase 584,825 shares of
Class A Common Stock for $1.37 per share as a Rescission Underwriter in the
Rescission Financing.
In July 1999, the Company entered into a Purchase and Sale Agreement
with Cynet Holdings (the "Cynet Interactive Agreement"), pursuant to which
Cynet Holdings transferred all of the outstanding membership interests of
Cynet Interactive to the Company, resulting in Cynet Interactive becoming a
wholly-owned subsidiary of the Company. In consideration for this transfer,
the Company forgave a $118,936 account receivable due from Cynet Interactive.
Since August 1999, Cynet Holdings has provided the Company additional
short-term financing of $933,472. These borrowings are unsecured,
non-interest bearing and are due on demand.
EXECUTIVE EMPLOYMENT AGREEMENTS. In 1998 the Company entered into
employment agreements with each of Vincent W. Beale, Sr., Bernard B. Beale,
David P. Hearon, Jr., Samuel C. Beale and R. Greg Smith. See "-- Employment
Agreements."
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<PAGE>
CYNET INTERACTIVE. On July 31, 1999, the Company acquired from Cynet
Holdings all of the outstanding membership interests of Cynet Internactive, a
wholly-owned subsidiary of Cynet Holdings, pursuant to the terms of the Cynet
Interactive Agreement between the Company and Cynet Holdings. Cynet
Interactive is a Houston, Texas-based Internet content provider, whose
services include graphic and copy design, application development and web
hosting services. Pursuant to the Cynet Interactive Agreement, the Company
acquired all of the membership interests of Cynet Interactive from Cynet
Holdings in exchange for the Company's forgiveness of a $118,936 account
receivable due from Cynet Interactive. As a result of the acquisition of
Cynet Interactive, Cynet Interactive became a wholly-owned subsidiary of the
Company. The acquisition of Cynet Interactive was approved by the
disinterested members of the Company's Board of Directors.
COMPANY POLICY
Any future transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will be made or
entered into on terms that are no less favorable to the Company than those
that could be obtained from an unaffiliated third party. Any such
transactions will be approved in advance by a majority of the disinterested
members of the Board of Directors.
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<PAGE>
PRINCIPAL SHAREHOLDERS
Based on the current number of acceptances of the Rescission Offer and
assuming completion of the full amount of the Rescission Financing, the
following table sets forth, as of November 30, 1999, 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 18,713,825 shares(2) 51.9%
Vincent W. Beale, Sr. 20,523,825 shares(3) 56.9%
Houston Economic Opportunity Fund, L.P. 2,180,023 shares(4) 6.0%
Bernard B. Beale 150,000 shares(5) *
David R. Hearon, Jr. 18,750 shares(5) *
Samuel C. Beale 100,000 shares(5) *
Wayne Schroeder 100,000 shares(5) *
R. Greg Smith 33,333 shares(5) *
All directors and executive officers
as a group (6 people) 20,925,908 shares(6) 58.0%
</TABLE>
__________________________
* Less than one percent.
(1) Percentages shown are based upon (i) 26,665,198 shares of Class A Common
Stock presently outstanding, (ii) warrants to purchase 8,462,600 shares of
Class A Common Stock and (iii) 957,500 shares subject to vested stock
options.
(2) Includes (i) 9,473,000 shares purchased from the Davis Interests, (ii)
4,106,000 shares purchased pursuant to the Holdings Subscription Agreement,
(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, and (iv)
584,825 shares to be purchased as part of the Rescission Financing. See
"Management -- Certain Transactions". The amount excludes 250,000 shares
which were pledged to an unaffiliated financial institution in 1998 and
subsequently foreclosed upon.
(3) Represents (i) 18,713,825 shares of Class A Common Stock beneficially owned
of record by Cynet Holdings, of which Mr. Beale is the President and
majority owner, (ii) 1,710,000 shares subject to warrants which Mr. Beale
received from Ray C. Davis in July 1998 and (iii) 100,000 shares subject to
vested stock options.
(4) Represents (i) 1,766,423 shares to be purchased as part of the Rescission
Financing and (ii) 413,600 shares which may be purchased upon exercise of a
warrant to be issued pursuant to the Enron Advisory Agreement.
(5) Represents shares subject to vested stock options.
(6) Includes an aggregate of 7,425,683 shares of Class A Common Stock that such
persons have the right to acquire within 60 days pursuant to warrants and
options 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.
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<PAGE>
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, based on the current acceptances of the
Rescission Offer and assuming the completion of the full amount of the
Rescission Financing, 26,665,198 shares of Class A Common Stock and 2,187,862
shares of Class B Common Stock will be outstanding. In addition, warrants to
purchase 8,462,600 shares of Class A Common Stock and warrants to purchase
2,550,954 shares of Class B Common Stock will be 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. 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.
As of the date of this Prospectus, based on the current acceptances of
the Rescission Offer and assuming the completion of the full amount of the
Rescission Financing, an aggregate of 116,832 shares of Preferred Stock are
outstanding. 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, based on the
current acceptances of the Rescission Offer and assuming the completion of the
full amount of the Rescission Financing, 66,000 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
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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. The Company intends to exercise
its rights to convert the Series A Preferred Stock within 60 days after the
completion of the Rescission Offer.
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.
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, based on the
current acceptances of the Rescission Offer and assuming the completion of the
full amount of the Rescission Financing, 50,832 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. The Company intends to exercise
its rights to convert the Series B Preferred Stock within 60 days after the
completion of the Rescission Offer.
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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 8,462,600
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 2,550,954 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 Common Stock and Class
B Common Stock is American Securities Transfer & Trust, Inc.
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<PAGE>
PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS
RESCISSION UNDERWRITERS
This Prospectus also relates to the issuance of 4,490,216 shares of Class A
Common Stock to the Rescission Underwriters pursuant to the terms of the
Rescission Financing. The Rescission Underwriters will use and deliver this
Prospectus in connection with any resales of the shares of Class A Common Stock
issued to them pursuant to the Rescission Financing. The table below sets forth
certain information concerning the issuance and resale of shares of Class A
Common Stock to be issued to the Rescission Underwriters.
SHARES TO BE ISSUED TO THE
RESCISSION UNDERWRITERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Recission Underwriter Shares Held Maximum Shares Held Percentage
Before Number of Price Per After Held After
Rescission Shares to be Share Rescission Rescission
Offer Issued Offer Offer(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEOF -0- 1,766,423 $ 1.37 1,766,423 6.0%
- --------------------------------------------------------------------------------------------------------
Northern Neck Enterprises, Inc. -0- 860,142 1.37 860,142 2.4%
- --------------------------------------------------------------------------------------------------------
Cress Brothers Investments, L.L.C. -0- 674,453 1.37 674,453 1.9%
- --------------------------------------------------------------------------------------------------------
Leonard Childress -0- 411,672 1.37 411,672 1.1%
- --------------------------------------------------------------------------------------------------------
TKNET Investments, LLC -0- 119,708 1.37 119,708 .33%
- --------------------------------------------------------------------------------------------------------
Nancy Monthofer -0- 72,993 1.37 72,993 .20%
- --------------------------------------------------------------------------------------------------------
Cynet Holdings, LLC(3) 18,129,000 584,825 1.37 18,713,825 51.9%
- --------------------------------------------------------------------------------------------------------
</TABLE>
______________
(1) Percentages shown are based upon (i) 26,665,198 shares of Class A Common
Stock presently outstanding, (ii) warrants to purchase 8,462,600 shares
of Class A Common Stock and (iii) 957,500 shares subject to vested stock
options.
(2) Share information excludes 413,600 shares subject to the warrant to be
issued pursuant to the Enron Advisory Agreement.
(3) Cynet Holdings has been a controlling shareholder of the Company since
January 1998.
The Company will bear the costs incidental to the registration of these
shares, except that each Rescission Underwriter will bear his proportional share
of underwriting discounts, selling commissions, any applicable stock transfer
taxes and the costs of any separate counsel retained.
SELLING SHAREHOLDERS
This Prospectus also relates to the resale of up to 2,200,000 shares of
Class B Common Stock by Keith Shaffner and his assignees (collectively, the
"Selling Shareholders") upon exercise of the Shaffner Warrants to purchase up to
2,200,000 shares of Class B Common Stock.
69
<PAGE>
The table below sets forth information concerning the resale by the Selling
Shareholders of shares of Class B Common Stock subject to the Shaffner Warrants.
RESALE OF CLASS B COMMON STOCK
UNDERLYING WARRANTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Percentage
Held After
Shares Subject to Amount Offered (assuming Shares Subject to Rescission
Warrant Holder Warrants Before Resale all shares are sold) Warrants After Resale Offer
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemah Partners Ltd 50,000 50,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Lifestyle Foods Inc. 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ramnet Trust Jerry O. and
family Garfield 85,000 85,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Leonard J. Miller or Yvonne L.
Miller 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Kenneth S. Cahill and/or Joan
M. Cahill 2,500 2,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ronald Johnson 30,000 30,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ronald Pohl 58,000 58,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Kenneth S. Cahill and/or Joan
M. Cahill 2,500 2,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Kenneth F. Winn 15,000 15,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Fredrick H. Kohr 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Douglas Grice 25,000 25,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Richard Tabby 1,000 1,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Noorudin Paracha 7,000 7,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Richard Tabby 2,000 2,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Kozikouski Trust 78,000 78,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Larry E. Wolfe 20,000 20,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ben Schulyk 700 700 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Vincent Trust, Isidore Cipriano 25,000 25,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Anthony V. Ciamitaro 1,500 1,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Buetson Trust 64,000 64,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Shirley Sadowski 15,500 15,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Greg & Judy Horner 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Lorenzo & Catherine Alongi 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ron & Rose Que 2,500 2,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Leanne Kozup 7,500 7,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ken Gradeless 2,000 2,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Tony Medina 2,000 2,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Irene Maurey 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Richard C. Filippone 250 250 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Craig Fuller 3,200 3,200 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Bradley Horner 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Veronica Horner 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Dwight Lafoon 1,000 1,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Emery Ozdych 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Robert Horner 108,000 108,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Amy B. Grice 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Regina B. Grice 25,000 25,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Midstates Marketing 314,580 314,580 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
David Marshall 2,500 2,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Dan Rice 6,000 6,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
George Cretu 2,000 2,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Dennis Habite 3,000 3,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Greg Karguia 1,500 1,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
70
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Percentage
Held After
Shares Subject to Amount Offered (assuming Shares Subject to Rescission
Warrant Holder Warrants Before Resale all shares are sold) Warrants After Resale Offer
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John Benchick, Sr. 7,000 7,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
John Benchick, Jr. 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Tom Fransico 2,800 2,800 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Tim Francisco 600 600 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Matt Seeley 1,000 1,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Dolly Briston 1,000 1,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Tim Alvaro 1,000 1,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Norman Jordan 3,250 3,250 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Murtin M. Grice 15,000 15,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Amos Greene 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Dean Meisenger 6,000 6,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Miles Reese 12,000 12,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Joyce Graves 2,000 2,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Charles (Kim) Sparre 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Karen Pardo 3,000 3,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Don Toth 2,500 2,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
John Barnes 3,000 3,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Pauline Cassidy 325 325 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Hamul Trust (Mike J.) 300 300 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Jim Mann 900 900 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Will Steger 600 600 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Marcus Sanchez 10,000 10,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Isidor Cipriano 25,000 25,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Vincent Trust, Isidore Cipriano 12,500 12,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Lorenzo & Catherine Alongi 5,000 5,000 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Ron & Rose Que 2,500 2,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Anthony V. Ciarmitaro 1,500 1,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Anthony V. Ciarmitaro 12,500 12,500 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Keith Shaffner(1) 1,009,995 1,009,995 -0- 0%
- ----------------------------------------------------------------------------------------------------------------------
Total 2,200,000 2,200,000 -0- 0%
--------- --------- --- ---
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
___________________
(1) From June 1997 to August 1997, Mr. Shaffner served as a Vice President of
the Company.
The Company will bear the costs incidental to the registration of these
shares, except that each Selling Shareholder will bear his proportional share of
underwriting discounts and commissions and the costs of any separate counsel
retained. The Company will receive gross proceeds of $1.00 per share to the
extent of cash exercises of the Shaffner Warrants (a maximum of $2,200,000).
The Company has extended the expiration of the Shaffner Warrants until
November 4, 2001.
The 4,490,216 shares of Class A Common Stock to be issued to the Rescission
Underwriters and the 2,200,000 shares of Class B Common Stock underlying the
Shaffner Warrants offered by the Selling Shareholders, 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 Rescission
Underwriters or the Selling Shareholders may arrange for other brokers or
dealers to participate. Such brokers or dealers may receive commissions or
discounts from the Rescission Underwriters or the Selling Shareholders 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 Rescission Underwriters or the Selling Shareholders 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
71
<PAGE>
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 Shareholders regarding such liabilities.
SHARES ELIGIBLE FOR FUTURE SALE
The Subject Securities will be freely tradeable to the extent 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 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. Management
will attempt to develop a public market in the Class A and Class B Common Stock
immediately after the closing of the Rescission Offer by means of the OTC
Bulletin Board Service ("OTCBB") by engaging market makers in the shares in such
a manner that will permit trading. Upon the completion of the Rescission Offer,
the Company intends to take the necessary actions to allow its Class A Common
Stock to be traded by means of the Nasdaq National Market System ("NMS").
However, there can be no assurance that a market for the Company's Class A
Common Stock or Class B Common Stock will ever develop on the OTCBB or the NMS.
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."
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
72
<PAGE>
(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 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.
73
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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-28
</TABLE>
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, 1998 and the related consolidated statements of loss, capital
deficit and cash flows for each of the two years in the period ended December
31, 1998. 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, 1998 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1998,
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, 1998 and 1997 totaling $4,356,640 and $7,762,863,
respectively, and at December 31, 1998 had a capital deficit of $12,218,072.
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 has issued 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 rescission offer totaled $13,980,009 and
$13,950,009 as of December 31, 1998 and September 30, 1999, 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.
As discussed in Note 13, the Company's financial statements for the year
ended December 31, 1997 have been restated.
BDO SEIDMAN, LLP
Houston, Texas
April 23, 1999, except footnote 15,
which is as of November 29, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
September 30,
December 31, September 30, 1999
1998 1999 Pro Forma
------------ ------------- -------------
(Note 15)
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................. $ 55,007 $ 39,782 $ 654,479
Accounts receivable:
Trade, less allowance for doubtful
accounts of $99,104 and $240,331................ 463,033 355,686 355,686
Affiliate (Note 6)................................. - 87,533 87,533
Prepaid expenses:
Deferred offering costs (Note 3)................... 2,078,825 2,078,825 -
Other.............................................. 53,843 101,123 101,123
----------- ----------- -----------
Total Current Assets............................... 2,650,708 2,662,949 1,198,821
Property and Equipment, less accumulated
depreciation and amortization (Note 4).................. 2,628,457 2,224,471 2,224,471
Organization costs, less accumulated
amortization of $28,578................................. 18,548 - -
Goodwill, less accumulated amortization of $49,417........ - 204,727 204,727
----------- ----------- -----------
$ 5,297,713 $ 5,092,147 $ 3,628,019
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<PAGE>
CYNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
December 31, September 30, 1999
1998 1999 Pro Forma
------------ ------------- -------------
(Note 15)
(unaudited) (unaudited)
<S> <C> <C> <C>
LIABILITIES AND CAPITAL DEFICIT
Current Liabilities:
Accounts payable and accrued expenses ................................... $ 2,611,522 $ 2,147,709 $ 2,147,709
Dividends payable ....................................................... 535,167 573,635 353,937
Note Payable, including accrued interest (Note 5) ....................... 339,087 312,668 312,668
Advances from affiliate (Note 6) ........................................ - 383,472 383,472
Accrued stock and warrant rights (Note 8) ............................... 50,000 115,748 115,748
------------ ------------ ------------
Total Current Liabilities ............................................... 3,535,776 3,533,232 3,313,534
------------ ------------ ------------
Stock and warrants subject to rescission (Note 8):
Preferred stock - Series A .............................................. 201,265 201,265 -
Preferred stock - Series B .............................................. 259,923 229,923 -
Common stock - Class A .................................................. 7,952,134 7,952,134 -
Common stock - Class B .................................................. 5,365,047 5,365,047 -
Common stock warrants - Class A ......................................... 201,640 201,640 -
------------ ------------ ------------
13,980,009 13,950,009 -
------------ ------------ ------------
Redeemable voting Class A Common Stock (Note 2) ............................ - - 2,667,299
------------ ------------ ------------
Commitments and Contingencies (Notes 8, 10, 11 and 15)
Capital Deficit (Notes 8 and 15):
Cumulative Convertible Preferred Stock:
Series A, non-voting, $2.00 and $1.43 stated value; 3,600,000 shares
authorized; 103,500, 103,500
and 66,000 shares issued and outstanding ............................ - - 109,997
Series B, non-voting, $3.00 stated value;
2,000,000 shares authorized; 87,349, 87,349
and 50,832 shares issued and outstanding ............................ - 30,000 126,240
Common stock:
Class A voting, no par value; 40,000,000 shares
authorized; 20,970,072, 23,565,072 and
26,665,198 shares issued and outstanding ............................ 4,116,703 6,711,703 15,185,605
Class B nonvoting, no par value; 20,000,000
Shares authorized; 3,137,803, 3,137,803 and
2,187,862 shares issued and outstanding ............................. 700,000 700,000 3,199,119
Additional paid-in capital ............................................ - 308,039 308,039
Outstanding warrants .................................................. 362,500 1,706,504 1,888,437
Deficit ............................................................... (17,079,508) (21,529,573) (23,170,251)
------------ ------------ ------------
(11,900,305) (12,073,327) (2,352,814)
Less - treasury stock at cost, 18,041 shares
of Class B common stock ............................................. (317,767) (317,767) -
------------ ------------ ------------
Total Capital Deficit ................................................. (12,218,072) (12,391,094) (2,352,814)
------------ ------------ ------------
$ 5,297,713 $ 5,092,147 $ 3,628,019
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-3
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
------------------------------- --------------------------------
1998 1997 1999 1998
------------ ----------- ------------ ------------
(Restated - (unaudited) (unaudited)
Note 13)
<S> <C> <C> <C> <C>
Revenues ....................................... $ 8,947,732 $ 4,960,355 $ 6,501,849 $ 6,778,197
Cost of revenues ............................... 6,069,184 4,490,505 3,592,920 4,864,570
------------ ------------ ------------ ------------
Gross profit ................................... 2,878,548 469,850 2,908,929 1,913,627
Selling, general and administrative
expenses (Note 1) ........................... 6,107,978 7,517,935 6,457,362 4,415,953
Depreciation and amortization .................. 728,975 414,652 697,204 549,490
Write-down of long-lived assets
(Notes 13 and 14) ........................... 271,957 496,133 - 271,957
------------ ------------ ------------ ------------
Loss from operations ........................... (4,230,362) (7,958,870) (4,245,637) (3,323,773)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (Note 5) .................... (103,851) (2,000) (115,457) (36,975)
Interest income .............................. 2,816 67,348 208 2,688
Other ........................................ (25,243) (8,527) (50,711) (69,153)
------------ ------------ ------------ ------------
(126,278) 56,821 (165,960) (103,440)
------------ ------------ ------------ ------------
Net loss before minority interest in
net loss of consolidated subsidiaries ........ (4,356,640) (7,902,049) (4,411,597) (3,427,213)
Minority interest in net loss
of consolidated subsidiaries ................. - 139,186 - -
------------ ------------ ------------ ------------
Net loss before dividends on preferred stock ... (4,356,640) (7,762,863) (4,411,597) (3,427,213)
Dividends on preferred stock ................... (40,243) (739,204) (38,468) (27,380)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders ..... $ (4,396,883) $ (8,502,067) $ (4,450,065) $ (3,454,593)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share - basic
and assuming dilution ........................ $ (.19) $ (.60) $ (.17) $ (.15)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding .......................... 23,109,154 14,086,177 25,514,211 22,770,299
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock
-------------------- ---------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Shares Amount Shares Amount
--------- ------- -------- --------
<S> <C> <C> <C> <C>
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, 115,767
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 - Restated (Note 13)................................... - - - -
--------- ------- -------- --------
BALANCE, at December 31, 1997 - Restated (Note 13).............. 108,500 - 77,349 -
Issuance of Class B common stock subject to rescission.......... - - - -
Issuance of Class A common stock................................ - - - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - 36,666 -
Issuance of Class A common stock warrants for services.......... - - - -
Issuance of Class B common stock warrants for services.......... - - - -
Purchase of treasury shares, Class B common stock............... - - - -
Issuance of Class A common stock from treasury,
10,000 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...................................... (5,000) - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - (26,666) -
Accrued dividends on preferred stock............................ - - - -
Net loss........................................................ - - - -
--------- ------- -------- --------
BALANCE, at December 31, 1998................................... 103,500 $ - 87,349 $ -
--------- ------- -------- --------
--------- ------- -------- --------
</TABLE>
(1) Outstanding warrants consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---- ----
Shares Amount Shares Amount
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Class A common stock warrants 1,249,000 $201,645 8,049,000 $201,645
Class B common stock warrants 2,200,000 362,500 2,550,954 362,500
--------- -------- ---------- --------
3,449,000 $564,145 10,599,954 $564,145
--------- -------- ---------- --------
--------- -------- ---------- --------
</TABLE>
<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>
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)
- - - - - - (7,762,863) - - (7,762,863)
- ----------- ----------- --------- ------- --------- ------- ----------- ------- -------- ----------
19,770,165 3,014,936 2,954,470 700,000 3,449,000 362,500 (12,682,625) 419,233 (727,000) (9,332,189)
- - 154,000 - - - - - - -
1,101,767 1,101,767 - - - - - - - 1,101,767
- - - - - - - - - -
- - - - 6,800,000 - - - - -
- - - - 350,954 - - - - -
- - - - - - - 18,041 - -
- - - - - - - (419,233) 409,233 409,233
92,640 - - - - - - - - -
5,500 - - - - - - - - -
- - 29,333 - - - - - - -
- - - - - - (40,243) - - (40,243)
- - - - - - (4,356,640) - - (4,356,640)
- ----------- ----------- --------- --------- ---------- ---------- -------------- -------- ----------- ------------
20,970,072 $ 4,116,703 3,137,803 $ 700,000 10,599,954 $ 362,500 $ (17,079,508) 18,041 $ (317,767) $(12,218,072)
- ----------- ----------- --------- --------- ---------- ---------- -------------- -------- ----------- ------------
- ----------- ----------- --------- --------- ---------- ---------- -------------- -------- ----------- ------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED Series A Series B Class A
SEPTEMBER 30, 1999 AND 1998 Preferred Stock Preferred Stock Common Stock
--------------- ----------------- ------------
(UNAUDITED): Shares Amount Shares Amount Shares Amount
-------------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1997 - Restated
(Note 13)..................................... 108,500 $ - 77,349 $ - 19,770,165 $ 3,014,936
Issuance of Class B common stock for
compensation and services subject to
rescission.................................... - - - - - -
Issuance of Class A common stock................. - - - - 881,665 881,665
Issuance of Class A common stock in connection
with the purchase of minority interests...... - - - - 92,640 -
Issuance of Class A common on conversion of
Series A preferred stock...................... (5,000) - - - 5,500 -
Issuance of Series B preferred stock through a
private placement subject to rescission...... - - 36,666 - - -
Issuance of Class B common on conversion of
Series B preferred stock...................... - - (26,666) - - -
Issuance of Class A common stock from
treasury, 10,000 shares subject to rescission. - - - - - -
Purchase of treasury shares, Class B common
stock previously subject to rescission........ - - - - - -
Issuance of Class A common stock warrants
and Class B common stock warrants for
compensation and services..................... - - - - - -
Accrued dividends on preferred stock............. - - - - - -
Net loss......................................... - - - - - -
------- -------- ------ ---------- ----------- -----------
BALANCE, at September 30, 1998................... 103,500 $ - 87,349 $ - 20,749,970 $ 3,896,601
======= ======== ====== ========== =========== ===========
BALANCE, at December 31, 1998.................... 103,500 $ - 87,349 $ - 20,970,072 $ 4,116,703
Issuance of Class A common stock................. - - - - 2,595,000 2,595,000
Reclassification of rescission liability (Note 6) - - - 30,000 - -
Modification of terms of previously issued
Class B common stock warrants, (Note 6)....... - - - - - -
Acquisition of CyNet Interactive, LLC (Note 6)... - - - - - -
Accrued dividends on preferred stock ............ - - - - - -
Net loss......................................... - - - - - -
------- -------- ------ ---------- ----------- -----------
BALANCE, at September 30, 1999................... 103,500 $ - 87,349 $ 30,000 23,565,072 $ 6,711,703
======= ======== ====== ========== =========== ===========
</TABLE>
(1) Outstanding warrants consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1999
----------------------- --------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Class A common stock warrants 8,049,000 $201,645 8,049,000 $ 201,645
Class B common stock warrants 2,550,954 362,500 2,550,954 1,706,504
---------- ---------- ---------- ------------
10,599,954 $564,145 10,599,954 $ 1,908,149
========== ========== ========== ============
</TABLE>
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
<TABLE>
<CAPTION>
Class B Outstanding
Common Stock Additional Warrants (1) Treasury Stock
- ------------------------- Paid-in ------------------ --------------------
Shares Amount Capital Shares Amount Deficit Shares Amount Total
- ----------- ----------- ------------- ---------- ---------- -------------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2,954,470 $ 700,000 $ - 3,449,000 $ 362,500 $ (12,682,625) 419,233 $ (727,000) $ (9,332,189)
154,000 - - - - - - - -
- - - - - - - - 881,665
- - - - - - - - -
- - - - - - - - -
- - - - - - - - -
29,333 - - - - - - - -
- - - - - - (419,233) 409,233 409,233
- - - - - - 18,041 - -
- - - 7,150,954 - - - - -
- - - - - (27,380) - - (27,380)
- - - - - (3,427,213) - - (3,427,213)
- ----------- ----------- ------------- ---------- ---------- -------------- ------- ----------- -------------
3,137,803 $ 700,000 $ - 10,599,954 $ 362,500 $ (16,137,218) 18,041 $ (317,767) $ (11,495,884)
=========== =========== ============= ========== ========== ============== ======= =========== ==============
3,137,803 $ 700,000 $ - 10,599,954 $ 362,500 $ (17,079,508) 18,041 $ (317,767) $ (12,218,072)
- - - - - - - - 2,595,000
- - - - - - - - 30,000
- - - - 1,344,004 - - - 1,344,004
- - 308,039 - - - - - 308,039
- - - - - (38,468) - - (38,468)
- - - - - (4,411,597) - - (4,411,597)
- ----------- ----------- ------------- ---------- ---------- -------------- ------- ----------- -------------
3,137,803 $ 700,000 $ 308,039 10,599,954 $1,706,504 $ (21,529,573) 18,041 $ (317,767) $ (12,391,094)
=========== =========== ============= ========== ========== ============== ======= =========== ==============
</TABLE>
F-6
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
--------------------------------- ------------------------------
1998 1997 1999 1998
-------------- -------------- ------------- ------------
(Restated - (unaudited) (unaudited)
(Note 13)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (4,356,640) $ (7,762,863) $ (4,411,597) $ (3,427,213)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization....................... 728,975 414,652 697,204 549,490
Write-down of long-lived assets..................... 271,957 496,133 - 271,957
Loss on disposal of equipment....................... 25,243 - 27,581 69,153
Property transferred for compensation............... 67,283 - - 67,283
Forgiveness of receivable as compensation........... 121,043 - - 121,043
Minority interest in net income
of consolidated subsidiaries..................... - (139,186) - -
Provision for bad debts............................. 349,327 245,638 200,358 352,713
Stock and warrants issued for compensation
and services..................................... - 266,999 1,344,004 -
Stock and warrant rights issued for loan
costs and services............................... - 60,000 65,748 -
Changes in assets and liabilities:
Accounts receivable............................... (658,594) (390,602) (93,011) (885,073)
Prepaid expenses and other assets................. 54,926 (1,397,627) (134,813) 57,241
Accounts payable and accrued expenses............. 1,612,687 582,055 (463,813) 1,323,109
-------------- -------------- ------------- ------------
Net cash used in operating activities................ (1,783,793) (7,624,801) (2,768,339) (1,500,297)
-------------- -------------- ------------- ------------
Cash flows from investing activities:
Purchase of property and equipment................... (867,835) (3,172,458) (235,939) (769,684)
Proceeds from sale of property and equipment......... 55,250 - 37,000 -
-------------- -------------- ------------- ------------
Net cash used in investing activities................ (812,585) (3,172,458) (198,939) (769,684)
-------------- -------------- ------------- ------------
Cash flows from financing activities:
Issuance of preferred stock - Series A............... - 6,462,308 - -
Issuance of preferred stock - Series B............... 110,000 5,266,623 - 110,000
Issuance of common stock - Class A................... 1,101,767 - 2,595,000 881,665
Issuance of common stock - Class B................... - 50,000 - -
Dividends paid....................................... - (248,128) - -
Repayment of note payable to stockholder............. - (59,680) - -
Proceeds from note payable and advances.............. 600,000 - 383,472 600,000
Payments on note payable............................. (260,913) - (26,419) (366,412)
Purchase of treasury stock........................... (45,102) (450,000) - -
Sale of treasury stock............................... 429,233 144,000 - 429,233
-------------- -------------- ------------- ------------
Net cash provided by financing activities............ 1,934,985 11,165,123 2,952,053 1,654,486
-------------- -------------- ------------- ------------
Net increase (decrease) in cash......................... (661,393) 367,864 (15,225) (615,495)
Cash, beginning of period............................ 716,400 348,536 55,007 716,400
-------------- -------------- ------------- ------------
Cash, end of period.................................. $ 55,007 $ 716,400 $ 39,782 $ 100,905
============== ============== ============= ============
</TABLE>
F-7
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 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., its 50% (prior to December 1, 1997) owned limited
liability companies ("LLCs") and its wholly-owned subsidiaries Worldwide
Marketing, Inc. formed April 24, 1998 and CyNet Interactive, LLC, acquired in
July 1999. 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 LLCs 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., Worldwide Marketing, Inc., CyNet Interactive, LLC
and the LLCs are referred to herein as the Company. During 1998, the Company
dissolved each of the LLCs.
The Company is an Internet business solutions provider. The
Company's products and services are offered through messaging which includes
Fax, Data, Voice, E-Mail and Mobile Messaging, and Internet services which
includes custom application development, e-commerce development, web content
creation, web hosting and Internet access.
The Company is a Texas corporation and was founded in April 1995 to
provide fax services for business-to-business communication. The Company
capitalized on the dramatic increase in the usage of third-party fax services
and created a niche market for itself with its HYPERCAST fax broadcast
desktop client software and service. In 1997, the Company introduced
HYPERLINE, its point-to-point desktop software and fax service in order to
expand its existing fax service.
Having built a reputation for high performance in communications
through its fax services, the Company responded to the rapid growth and
popularity of e-mail and the Internet as a primary communications medium and
set out to become a full service Internet messaging provider. In 1998, the
Company added to its product offering HYPERWEB, its e-mail-to-fax service;
HYPERMAIL, its fax-to-e-mail service; WEBCAST, its e-mail broadcast service,
TELECAST, its voice broadcast service; and HYPERCOMM, its teleconferencing
service. To further enhance its messaging services, the Company, through its
subsidiary Worldwide Marketing Services, Inc., also added enhancement
services such as list procurement, full-service graphic design and copy
development services for its customers. These additional services enabled the
Company to sell complete messaging solutions with end-to-end control of the
solution.
In July 1999, the Company acquired CyNet Interactive, LLC from CyNet
Holdings, LLC, a 56.2% stockholder of the Company, prior to the rescission
offer and rescission financing, (see Note 6). The acquisition of CyNet
Interactive, LLC allowed the Company to expand its messaging and broadcast
enhancement services to include web site design, Internet application
development for e-commerce and other Internet-based applications, and web
site hosting. In July 1999, the Company entered into a strategic alliance
with IXC Communications to enable the Company to further expand its products
and services to include Internet access for business customers. This alliance
with IXC Communications enables the Company to provide complete, "end-to-end"
Internet business solutions just as it is able to provide complete
"end-to-end" messaging business solutions.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of September 30, 1999 and
for the nine months ended September 30, 1999 and 1998 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.
F-8
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
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.
INCOME TAXES
Deferred taxes result from temporary differences between the
financial statement and income tax bases 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, 1998 and 1997, research and development expenditures
were approximately $398,000 and $419,000, respectively.
REVENUE RECOGNITION
Messaging and Internet service revenues are recognized as services
are performed. Revenues from sales of customer lists and other related
services are recognized when the list is provided, or the other services are
performed. The Company also earns revenue from fees relating to web site
design, Internet application development for e-commerce and other
Internet-based applications, and web site hosting. These fees are recognized
as revenue once the related activities have been performed and the project is
complete.
GOODWILL
Goodwill recorded in connection with the acquisition of CyNet
Interactive, LLC (see Note 6) is being amortized using the straight-line
method over three years. Periodically, the Company reviews the recoverability
of goodwill. The measurement of possible impairment is based primarily on the
ability to recover the balance of the goodwill from expected future operating
cash flows on an undiscounted basis. In management's opinion, no impairment
exists at September 30, 1999.
LOSS PER COMMON SHARE
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, 1998 and
1997, potential dilutive securities had an anti-dilutive effect and were not
included in the calculation of diluted net loss per common share.
F-9
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
These securities at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- ---------
(shares) (shares)
<S> <C> <C>
Conversion of Series A preferred stock - Class A.................... 103,500 119,350
Conversion of Series B preferred stock - Class B.................... 87,349 85,084
Incentive stock option plan - Class A............................... 1,465,563 -
Stock warrants outstanding - Class A................................ 8,049,000 1,249,000
Stock warrants outstanding - Class B ............................... 2,550,954 2,200,000
---------- ---------
12,256,366 3,653,434
---------- ---------
---------- ---------
</TABLE>
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.
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 messaging and Internet 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 messaging and Internet 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 AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments include accounts receivable,
accounts payable and notes payable. The fair market value of accounts
receivable, accounts payable and notes payable approximates their carrying
values because their maturities are generally less than one year in duration.
Accounts receivable subject the Company to a concentration of credit risk with
customers in the retail sector. The risk is spread over a large number of
geographically dispersed customers.
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.
F-10
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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, 2000.
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, 2001 to
affect its financial statements.
Effective for all fiscal years beginning after December 31, 1998, SOP
98-5, "Reporting on the Costs of Start-up Activities", requires all start-up and
organizational costs to be expensed as incurred. It also requires all remaining
historically capitalized amounts of these costs existing at the date of adoption
to be expensed and reported as the cumulative effect of a change in accounting
principles. The Company adopted SOP 98-5 in the first quarter of 1999 and it did
not have a material effect on its financial statements.
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the years ended December 31, 1998 and 1997, the Company incurred
net losses totaling $4,356,640 and $7,762,863, respectively, and at December 31,
1998 had a capital deficit of $12,218,072. 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 three 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 periods.
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
originally filed a registration statement in August 1998 and filed the latest
amended registration statement with the Securities and Exchange Commission in
October 1999 that contained the rescission offer as previously discussed and
provided for the registration of the Company's common stock and the resale of
certain common stock by certain selling stockholders. The registration statement
was declared effective by the Securities and Exchange Commission on October 18,
1999, at which time the rescission offer was outstanding for approximately
thirty-five days. The potential liability of the Company, less dividends paid
and excluding interest, for the rescission offer totaled $13,980,009 and
$13,950,009 as of December 31, 1998 and September 30, 1999, respectively. See
Note 15 for discussion regarding the outcome of the rescission offer.
F-11
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
Regarding the funding of the rescissions liability that will be paid
out by the Company to stockholders and warrant holders accepting the rescission
offer, the Company has arranged for stand-by investors. As of September 30,
1999, the Company had entered into agreements with stand-by investors to provide
$5,000,000 funding for the rescission offer. The agreements provide that the
stand-by investors will purchase up to $5,000,000 of Class A common stock at
$1.37 per share if existing stockholders elected to accept the rescission offer.
In addition with the consent of the stand-by investors, any unused proceeds from
the stand-by investors remaining after the funding of the rescission offer will
be used by the Company for general working capital purposes. At September 30,
1999, of the $5,000,000 commitments, approximately $4,961,000 had been placed in
an escrow account with the balance funded prior to the effective date of the
rescission offer.
One of the agreements entered into by the Company discussed above
contains a put option. In accordance with the agreement this stand-by investor,
which has committed to fund $2,200,000 of the rescission financing, can put
their shares back to the Company by the anniversary date of the expiration of
the rescission offer at a $1.51 per share. Accordingly, the $2,200,000 will be
immediately accreted up to $2,424,818 to reflect the put option and classified
outside of the equity section as mezzanine capital until such time the put
option has expired. In addition, in August 1999 the Company entered into an
agreement with a related entity of the stand-by investor to provide financial
advisory services to the Company. In accordance with the agreement the related
entity will receive a warrant to purchase 376,000 shares of the Company's Class
A common stock. The warrant has an exercise price of $2.00 per share, vests
immediately and expires three years from issuance.
See Note 15 for discussion regarding the status of the commitment by
stand-by investors subsequent to September 30, 1999.
Additionally, the Company intends to raise additional working capital
through either private placements or public offerings. As of September 30, 1999,
the Company has a remaining commitment of $5,894,000 from CyNet Holdings, LLC,
the majority stockholder of CyNet, Inc. for additional working capital needs.
See Note 6 for discussion of the terms of the CyNet Holdings, LLCs stock
subscription agreement and status of the funding commitment.
There are no assurances that the Company either (1) achieves a level of
revenues adequate to generate sufficient cash flow from operations; or (2)
receives additional financing through either private placement or public
offerings necessary to support the Company's working capital requirements. 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, 1998 and September 30, 1999, the Company has
incurred expenses totaling $2,078,825 in connection with the private placement
transactions (See Note 8) which have been recorded as prepaid expenses. The
amount consists of cash payments totaling $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
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. See Note 15
for discussions regarding the outcome of the rescission offer.
F-12
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful December 31, September 30,
Lives (Years) 1998 1999
------------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Computer equipment............................... 3-5 $ 1,606,955 $ 1,633,821
Computer software................................ 5 892,652 965,419
Furniture and fixtures........................... 7 537,457 605,891
Telephone equipment.............................. 3-5 294,881 302,722
Automobiles...................................... 5 152,613 152,613
Leasehold improvements........................... 5 205,533 215,782
----------- ------------
3,690,091 3,876,248
Less - accumulated depreciation
and amortization............................. (1,061,634) (1,651,777)
----------- ------------
$ 2,628,457 $ 2,224,471
=========== ============
</TABLE>
NOTE 5 - NOTE PAYABLE
In August 1998, the Company entered into a five-year agreement with an
early cancellation provision to sell certain of its eligible accounts
receivable, on a revolving basis to a non-affiliated entity. The Company
continues to service the receivables and maintains an allowance for doubtful
accounts based upon the expected collectibility of all accounts receivables,
including the receivables sold. The Company agreed to pay a finance charge on
the accounts receivable sold at rates ranging from 5% to 34.01% based on days
the receivables are outstanding. However, the Company has not been remitting the
collection of the sold accounts receivable to the factoring agent and has been
using the agreement as a line of credit and is paying finance charges of
approximately 5% per month (60% annually) on the advances. For the year ended
December 31, 1998 and nine months ended September 30, 1999, the Company incurred
finance charges of $66,877 and $115,457, respectively. As of December 31, 1998
and September 30, 1999 the note payable was $339,087 and $312,668, respectively,
including accrued interest of $66,877 and $12,688.
NOTE 6 - RELATED PARTY TRANSACTIONS
Related party transactions for the year ended December 31, 1998 are as
follows:
(a) In July 1998, the Company entered into a stock subscription
agreement with CyNet Holdings, LLC, an entity that
beneficially owns approximately 56.2% 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. The agreement was subsequently amended to extend the
duration of the agreement to December 31, 1999 and permit the
issuance of Class B common stock to the extent that no
authorized Class A common stock is available. The Company
determined the warrants had no value on issuance under the
minimum value method. As of December 31, 1998, the related
entity had purchased 1,511,000 shares of Class A common stock
of which 409,233 shares were sold from treasury and 1,101,767
were newly issued shares, and purchased an additional
2,595,000 shares as of September 30, 1999. As of September 30,
1999, the Company has a remaining commitment of $5,894,000
from CyNet Holdings, LLC for funding working capital needs.
F-13
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
In addition, in April 1999 CyNet Holdings, LLC acquired 10,000
shares of Series B preferred stock from a stockholder of the
Company for $30,000 in accordance with a settlement agreement
with the stockholder. Accordingly, the acquired shares are no
longer subject to the rescission offer.
(b) In April 1998, stockholders received 100,000 Class A common
stock warrants and 255,954 Class B common stock warrants for
services rendered. The warrants vest immediately, are
exercisable at $1.00 per share and expire five years from the
date of issue. The Company determined the warrants had no
value on issuance under the minimum value method.
(c) In April 1998, the Company transferred certain property with a
net book value of $67,283 to the former president of the
Company and recorded such transfer as compensation. This
amount is in addition to compensation paid in accordance with
this individual's employment agreements.
(d) On August 31, 1998, in accordance with a settlement agreement
and mutual release between the Company and its former
president, the Company forgave a receivable totaling $121,043
due from this individual (see Note 10).
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. In September 1999, the
terms of the warrant issued was modified. The new terms of the
warrant call for the warrant to vest immediately, is
exercisable at $1.00 per share and expires November 4, 2001.
Due to the modification of the terms of the warrant, the
Company recorded a third quarter 1999 non-cash change of
approximately $641,000 based on the fair value of the warrants
at the date of modification.
(b) The Company issued a warrant to a stockholder for 1,150,000
shares of Class B common stock for assistance in raising
capital for the formation of the limited liability companies.
At December 31, 1996, the Company had recorded a liability of
$184,000, the estimated fair market value of the warrant. The
warrant vests immediately and is exercisable at $1.00 per
share and expires three years from issuance. The stockholder
subsequently assigned his right to receive such warrants to
certain individuals and entities. In September1999, the terms
of the warrant issued was modified. The new terms of the
warrant call for the warrant to vest immediately, is
exercisable at $1.00 per share and expires November 4, 2001.
Due to the modification of the terms of the warrant, the
Company recorded a third quarter 1999 non-cash charge of
approximately $703,000 based on the fair value of the warrant
at the date of modification.
(c) 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.
(d) The Company paid consulting fees totaling $313,000 to a
company owned by a stockholder.
(e) A stockholder of the Company transferred certain intellectual
property rights to the Company for a one-time payment of
$250,000.
(f) 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.
(g) The Company purchased 450,000 shares of Class A common stock
for $1.00 per share and recorded such amount as treasury
stock.
F-14
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
Related party transactions for the nine months ended September 30, 1999
are as follows:
(a) In July 1999, the Company entered into a purchase agreement
with CyNet Holdings, LLC. Pursuant to the agreement CyNet
Holdings, LLC transferred all of the outstanding membership
interest of CyNet Interactive, LLC, a wholly-owned subsidiary
of CyNet Holdings, LLC, formed March 1999, to the Company,
resulting in CyNet Interactive, LLC becoming a wholly-owned
subsidiary of the Company. In consideration for this transfer,
the Company forgave a $118,936 account receivable due from
CyNet Interactive, LLC. Prior to the transfer both the Company
and CyNet Interactive, LLC were considered under common
control of CyNet Holdings, LLC. Accordingly, the transfer was
accounted for at historical cost in a manner similar to a
pooling of interest. The operations of CyNet Interactive, LLC
from date of inception through date of acquisition were
minimal.
(b) During the third quarter of 1999, the Company was advanced
$383,472 from CyNet Holdings, LLC for working capital, pending
the outcome of the rescission offer. The unsecured advances
are non-interest bearing and are due on demand. See Note 15
for additional advances from CyNet Holdings, LLC subsequent to
September 30, 1999.
(c) As of September 30, 1999, the Company had advanced an officer
of the Company $87,533.
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. In January 1998, the Company issued an additional 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.
F-15
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
CLASS A COMMON STOCK
During the year ended December 31, 1998 and the nine months ended
September 30, 1999, the Company sold 1,511,000 and 2,595,000 shares of common
stock, respectively, at $1.00 per share to CyNet Holdings, LLC, a related entity
of which 409,233 were issued from treasury stock for the year ended December 31,
1998. In addition, the Company sold 10,000 shares of Class A common stock from
treasury stock for $2.00 a share, which were subject to the rescission offer.
During the year ended December 31, 1997, the Company purchased 450,000 shares of
Class A common stock of which 115,767 shares were resold for net cash proceeds
of $144,000, which were subject to the rescission offer.
During the years ended December 31, 1998 and 1997, 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 January 1998, the Company issued 92,640 shares of Class A
common stock in connection with the purchase of the minority
interest of the LLCs, see Note 7.
(b) 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.
(c) 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 were subject to the rescission offer.
(d) 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.
(e) 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.
CLASS B COMMON STOCK
During the year ended December 31, 1998, the Company purchased 18,041
shares of Class B common stock for $45,102 which were subject to the rescission
offer.
During the year ended December 31, 1998, the Company issued 154,000
shares of Class B common stock valued at $60,000. The stock rights were accrued
at December 31, 1997 for consulting services and were subject to the rescission
offer.
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 were subject to the 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 was
subject to the 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 were subject
to the rescission offer.
F-16
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
At December 31, 1998 and September 30, 1999, the Company had common
stock reserved for future issuance as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
(shares) (shares)
Conversion of Series A preferred stock to Class A................... 103,500 103,500
Conversion of Series B preferred stock to Class B................... 87,349 87,349
Stock rights - Class A.............................................. 50,000 50,000
Warrant rights - Class B............................................ - 100,000
Incentive stock option plan - Class A............................... 1,465,563 1,885,307
Stock warrants outstanding - Class A................................ 8,049,000 8,049,000
Stock warrants outstanding - Class B................................ 2,550,954 2,550,954
---------- ----------
12,306,366 12,826,110
---------- ----------
---------- ----------
</TABLE>
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.
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 (c) after September 1, 1998 the conversion rate is 1.0. 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.
F-17
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
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 year ended December 31, 1997, the Company sold 3,251,154
shares of Series A preferred stock for prices between $1.43 and $2.00 per share
for net cash proceeds of $6,462,308 and issued 3,500 shares valued at $7,000 for
compensation. From inception to December 31, 1997, a total of 3,467,854 shares
were issued of which 5,000 and 3,359,354 shares were converted into 5,500 and
4,031,225 shares of Class A common stock during the years ended December 31,
1998 and 1997, respectively, at a conversion rate of 1.1 and 1.2 shares of Class
A common stock for each share of Series A preferred stock, respectively.
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 after September 1, 1998 the conversion rate is
1.0. 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.
F-18
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
During the year ended December 31, 1998, the Company sold 36,666 shares
of Series B preferred stock for $3 per share for net cash proceeds of $110,000.
Of these shares, 26,666 shares were converted into 29,333 shares of Class B
common stock during the year ended December 31, 1998 at a conversion rate of 1.1
shares of Class B common stock for each share of Series B preferred stock.
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.
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 rescission offer
was effective October 18, 1999, at which time the offer was outstanding for
approximately thirty-five days. Of the common stock and preferred stock sold
during 1998, 1997 and 1996, taking into consideration the conversion of Series A
and B preferred stocks, 5,300,304 and 2,050,093 shares of Class A and B common
stock for net proceeds of $7,988,989 and $5,119,475, respectively; 103,500
shares of Series A preferred stock for net proceeds of $207,000; and 87,349 and
77,349 shares of Series B preferred stock for net proceeds of $262,047 and
$232,047, respectively, were subject to the rescission offer as of December 31,
1998 and September 30, 1999, 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 prior periods, 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; 669,640 shares of Class B common stock valued at
$299,099 taking into consideration conversion of Series B preferred stock; and
799,000 Class A common stock warrants valued at $201,640, were subject to the
rescission offer.
Accordingly, the Company is precluded from classifying these securities
and proceeds as capital until such time as the 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. See Note 15 for discussions regarding the
outcome of the rescission offer.
F-19
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
COMMON STOCK OPTIONS AND WARRANTS
In September, 1999, the Company agreed in principle with a stockholder
of the Company to issue a warrant to purchase 100,000 share of Class B common
stock for assistance with the private placement of preferred stock. The warrant
vests immediately, is exercisable at $1.00 per share and expires November 4,
2001. Due to the settlement of the claim with the stockholder, the Company
accrued a third quarter 1999 non-cash charge of approximately $66,000 based on
the fair value of the warrant which will be issued in the fourth quarter of
1999.
In July 1998, the Company issued warrants to purchase 4,800,000 shares
of Class A common stock at $1.00 per share for a term of five years, see Note 6.
The warrants vest immediately and had no value on issuance under the minimum
value method.
In April 1998, the Company issued warrants to purchase 2,000,000 shares
of Class A common stock at $1.00 per share for a term of five years in
connection with an employment agreement with the Company's former president. The
warrants vest immediately and had no value on issuance under the minimum value
method. Subsequent to receiving these warrants, the Company's former president
assigned the warrants to various stockholders, including 1,710,000 warrants to
the new Chairman of the Board and Chief Executive Officer of the Company.
In May 1998, the Company issued warrants to purchase 350,954 shares of
Class B common stock at $1.00 per share for a term of five years for services
rendered. The warrants vest immediately and had no value on issuance under the
minimum value method.
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 a value of $9,760 at the date of issuance and
were subject to the rescission offer.
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) which was amended and restated effective July 1999. The Plan provides
for the granting of Class A common stock options to key employees of the
Company. Within certain limitations provided by the Plan, such options may
include provisions regarding vesting, exercise price, the amount of each grant
and other terms as shall be approved by the Board of Directors or by a committee
designated by the Board of Directors. Options granted under the Plan may be
either options that qualify as "incentive stock options", within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or those that do
not qualify as such "incentive stock options" ("non-qualified options"). The
Plan, which permits up to 2,000,000 shares of the Company's Class A Common Stock
to be issued, terminates on October 19, 2007. No options were granted in 1997.
F-20
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
A summary of the Company's stock option plan for the year ended
December 31, 1998 and nine months ended September 30, 1999 is presented below:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period................... - $ - 1,465,563 $ .39
Options granted......................... 1,475,000 .39 480,000 1.02
Options exercised....................... - - - -
Options cancelled....................... (9,437) .39 (60,256) .64
--------- ------------ --------- -------------
Options outstanding at
end of period......................... 1,465,563 $ .39 1,885,307 $ .54
--------- ------------ --------- -------------
--------- ------------ --------- -------------
Maximum shares exercisable.............. 738,438 $ .39 942,500 $ .39
--------- ------------ --------- -------------
--------- ------------ --------- -------------
</TABLE>
SFAS 123 requires the Company to provide pro forma information
regarding net loss applicable to common stockholders and loss per share as if
compensation cost for the Company's stock options granted had been determined in
accordance with the fair value based method prescribed in that Statement. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998: dividend yield of 0%; expected volatility
of 60% and a risk-free interest rate of 5% and expected lives of 5 years.
Under the accounting provisions of SFAS No. 123, the Company's net loss
applicable to common stockholders and loss per share would have been revised to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the
For the Year Ended Nine months Ended
December 31, September 30,
--------------------------- ---------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Net loss applicable to common
stockholders:
As reported...................... $ 4,396,883 $ 8,502,067 $ 4,450,065 $3,454,593
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Pro forma........................ $ 4,557,531 $ 8,502,067 $ 4,490,789 $3,575,484
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Net loss per common share:
Basic and assuming dilution
As reported...................... $ (.19) $ (.60) $ (.17) $ (.15)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Pro forma........................ $ (.20) $ (.60) $ (.18) $ (.16)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-21
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
NOTE 9 - INCOME TAXES
Deferred taxes are determined based on the temporary differences
between the financial statement and income tax bases 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, 1998, were as follows:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
Net operating loss carryforward.................................... $ 4,438,000
Loss on write-off of investments.................................... 409,000
Property and equipment............................................. (53,000)
Other .............................................................. 99,000
-------------
Gross deferred tax assets........................................... 4,893,000
Valuation allowance................................................. (4,893,000)
-------------
Net deferred tax assets............................................. $ -
-------------
-------------
</TABLE>
At December 31, 1998, 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.
For the years ended December 31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Provision for income tax benefit at statutory rate.................. $ (1,481,000) $ (2,639,000)
Deferred tax asset valuation allowance.............................. 1,476,000 2,642,000
Other............................................................... 5,000 (3,000)
------------- -------------
$ - $ -
------------- -------------
------------- -------------
</TABLE>
At December 31, 1998, the Company had a net operating loss
carryforwards for federal income tax purposes totaling approximately $13,053,000
which, if not utilized, will expire as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------- ------------
<S> <C>
2010 .............................................................. $ 61,000
2011 ............................................................... 888,000
2012 ............................................................... 7,400,000
2018 ............................................................... 4,704,000
------------
$ 13,053,000
------------
------------
</TABLE>
In April 1998, the Company had a change in ownership which has resulted
in the Company's net operating loss carryforwards being subject to certain
utilization limitations in the future.
F-22
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
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:
<TABLE>
<CAPTION>
Year ended December 31 Amount
---------------------- ---------
<S> <C>
1999 ........................................ $ 185,578
2000 ........................................ 46,394
---------
$ 231,972
=========
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 totaled
$188,264 and $255,156, respectively.
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 immediately 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, which was accrued for as of December 31, 1998 and subsequently
paid, 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, which was accrued for as of December 31, 1998 and subsequently paid, 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
immediately 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, which was accrued for as of December 31, 1998 and
remains unpaid, 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 immediately and are exercisable over a five year period.
In March 1997, the former President of the Company, who was 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.
F-23
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
On April 13, 1998, the former President of the Company terminated his
original employment agreement discussed above, 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 of $150,000, a 2,000,000 Class A common
stock warrant that vests immediately and is exercisable over a five year period
at $1 per share and participation in certain of the Company's employee benefit
plans. Subsequent to receiving this warrant the Company's former president
assigned the warrant to various stockholders, including 1,710,000 warrants to
the new Chairman of the board and Chief Executive Officer of the Company. The
agreement provides that the individual will devote approximately one-half of his
business time and attention to the business of the Company.
On August 31, 1998, the former president of the Company terminated his
employment agreement dated April 13, 1998, discussed above, and entered into a
settlement agreement and mutual release with the Company. In accordance with the
agreement the individual terminated his employment and waived his right to
receive any compensation in accordance with this current employment agreement.
In return, the Company agreed to forgive a receivable from the individual of
$121,043.
On August 26, 1998, the Company entered into an employment agreement
with the Chief Financial Officer. The three year agreement provides for an
annual salary of $125,000, plus incentives and certain employee benefits, as
defined by the agreement. The agreement also provides for a $30,000 signing
bonus, which was accrued for as of December 31, 1998 and subsequently paid, 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
33% annually and are exercisable over a five year period.
On November 19, 1999, the Company and Cynet Interactive were named
as defendants in a suit filed by a former customer of Cynet Interactive. The
plaintiff alleges, among other things, that Cynet Interactive failed to
complete the design and development of an Internet Live Auction project in
accordance with alleged contract terms and conditions, and is seeking to
recover actual and treble damages. The Company has retained counsel to
vigorously defend the matter. Although the Company has not had time to
complete its investigation of the claims asserted by the plaintiff in this
matter, the Company does not believe that this suit will have a material
adverse effect on the Company. The Company is not a party to any other legal
proceedings which the Company believes could have a material adverse effect
on the Company. (unaudited)
NOTE 11 - 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, 1998 and 1997.
F-24
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1998, the Company had the following
non-cash transactions:
(a) The Company accrued dividends payable totaling $40,243.
(b) The Company issued 154,000 shares of Class B common stock
valued at $60,000 for services.
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.
(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 nine months ended September 30, 1999, the Company had the
following non-cash transactions:
(a) The Company accrued dividends payable totaling $38,468.
(b) The Company reclassified $30,000 of the rescission liability
to outstanding Series B preferred stock for the 10,000 shares
acquired by CyNet Holdings, LLC which are no longer subject to
the rescission offer (see Note 6).
(c) The Company acquired CyNet Interactive, LLC from CyNet
Holdings, LLC in a transaction accounted for at historical
cost in a manner similar to a pooling of interest (see Note
6). This transaction resulted in an increase to additional
paid-in capital of $308,039, increase in property, plant and
equipment of $53,895 and an increase in goodwill of $254,144.
F-25
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
During the nine months ended September 30, 1998, the Company had the
following non-cash transactions:
(a) The Company accrued dividends payable totaling $27,380.
(b) The Company issued an additional 92,640 shares of Class A
common stock for the purchase of the minority interests in the
LLCs.
(c) The Company issued 154,000 shares of Class B common stock
valued at $60,000 for services.
NOTE 13 - PRIOR PERIOD ADJUSTMENT
The Company's financial statements for the year ended December 31,
1997, have been restated to reflect the write-down of assets no longer used in
the operations of the business and to reflect the reclassification of research
and development costs that was recorded as computer equipment. In the third
quarter of 1998, the Company under its new management, reviewed its operations
and equipment and determined certain computer equipment was not being used in
the operations of the business prior to December 31, 1997 and had no salvage
value. Accordingly, the Company restated its financial statements to reflect the
write off of $496,133 of computer and telephone equipment during the year ended
December 31, 1997. The Company also determined certain costs were incorrectly
capitalized in 1997 that were for research and development. Accordingly, the
Company restated its financial statements to reflect the correction of the
$241,300 as research and development costs in 1997.
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously As
For the year ended December 31, 1997 Reported Restated
-------------- ------------
<S> <C> <C>
Consolidated Balance Sheet:
Property and equipment, less accumulated
depreciation and amortization............... $ 3,564,947 $ 2,901,257
Deficit....................................... (12,018,936) (12,682,625)
Consolidated Statement of Loss:
Selling, general and administrative expenses.. $ 7,276,635 $ 7,517,935
Depreciation and amortization................. 488,396 414,652
Impairment loss on long-lived assets.......... - 496,133
Loss from operations.......................... (7,295,181) (7,958,870)
Net loss applicable to common stockholders.... (7,838,378) (8,502,067)
Net loss per common share -
basic and assuming dilution................... $ (.56) $ (.60)
</TABLE>
NOTE 14 - WRITE-DOWN OF LONG-LIVED ASSETS
During 1998, the Company acquired certain telecommunications equipment
that is more efficient and has a higher fax transmission capacity than certain
of its existing equipment. The Company determined that its nodes, which is
primarily computer equipment that is located in various cities throughout the
United States, were cost prohibitive. The computer equipment from the nodes was
implemented in the Company's operations to the extent possible. Accordingly, the
Company recorded a write-down of $163,079 for the year ended December 31, 1998
for property and equipment that is currently not being utilized.
In addition, during 1998 the Company wrote-down certain art work and
artifacts to their estimated market value based on an independent appraisal and
recorded an impairment loss of $108,878.
F-26
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to September 30, 1999 through November 29, 1999, CyNet
Holdings, LLC provided additional funding of $550,000 through unsecured
non-interest bearing advances to the Company.
The Company's rescission offer was effective October 18, 1999 and was
outstanding for approximately thirty-five days. The following is a summary of
the outcome of the rescission offer:
<TABLE>
<CAPTION>
Stockholders
Securities Subject to Electing to Accept Total
Rescission Offer Rescission Offer Interest Dividends Rescission
Class of Stock Shares Amount Shares Amount Expenses Paid Liability
- -------------- --------- ------------ --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A Preferred Stock 103,500 $ 201,265 37,500 $ 75,000 $ 12,775 $ (2,333) $ 85,442
Series B Preferred Stock 77,349 229,923 36,517 109,550 22,720 (855) 131,415
Class A Common Stock 5,514,491 7,952,134 1,390,090 2,220,150 421,791 (81,497) 2,560,444
Class B Common Stock 2,719,733 5,365,047 949,941 2,376,999 400,732 (18,133) 2,759,598
Warrants - Class A 799,000 201,640 - - - - -
------------ --------- ---------- --------- ---------- -----------
$ 13,950,009 $4,781,699 $ 858,018 $ (102,818) $ 5,536,899
============ ========== ========= ========== ===========
</TABLE>
The rescission offer liability exceeded the initial funding provided by
the stand-by investors by approximately $536,899. Accordingly, in November 1999,
the Company entered into agreements with certain of the original stand-by
investors to increase their funding commitment and purchase an additional
$1,151,596 of Class A common stock at $1.37 per share in accordance with the
original terms of the stand-by investor agreements. Under the original terms of
one of the agreements the stand-by investor can put their shares back to the
Company at $1.51 per share. This stand-by investor committed to fund an
additional $220,000, accordingly, the $220,000 will be immediately accreted up
to $242,481. In addition, a related entity of the investor received an
additional warrant to purchase 37,600 shares of the Company's Class A common
stock. The warrant has an exercise price of $2.00 per share, vests immediately
and expires three years from issuance (see Note 2). As of November 29, 1999, the
Company had $6,151,596 in escrow to fund the rescission liability. The Company
expects the rescission liability to be paid in December 1999.
As of November 29, 1999, the Company had contingent rescission
liability of approximately $44,000 which pertains to six stockholders which
could not be located or the required time period in accordance with the
rescission offer had not expired.
F-27
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
The following balance sheet unaudited pro forma adjustment gives effect
of the outcome of the rescission offer as if it occurred as of September 30,
1999:
<TABLE>
<CAPTION>
Amount
------------------------------
Dr. (Cr.)
---------- ----------
<S> <C> <C>
Cash.............................................. $ 614,697 $ -
Deferred offering costs........................... 2,078,825
Dividends payable................................. 219,698 -
Stock and warrants subject to rescission:
Preferred stock - Series A................... 201,265 -
Preferred Stock - Series B................... 229,923 -
Common Stock - Class A....................... 7,952,134 -
Common Stock - Class B....................... 5,365,047 -
Common Stock Warrants - Class A.............. 201,640 -
Redeemable Class A Voting Common Stock............ - 2,667,299
Capital deficit:
Cumulative Convertible Preferred Stock:
Series A................................... - 109,997
Series B................................... - 96,240
Common Stock:
Class A.................................... - 8,473,902
Class B.................................... - 2,499,119
Outstanding Warrants......................... - 181,933
Deficit...................................... 1,640,678 -
Treasury stock............................... - 317,767
</TABLE>
F-28
<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 ______________, 1999, 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
_______________, 1999, 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
_______________, 1999 (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.
PLEASE SELECT "A" OR "B" BELOW BY CHECKING THE APPROPRIATE BOX BELOW
______ 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
A-1
<PAGE>
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.
<TABLE>
Class of Certificate Number of Consideration Dividends Rescission
Security Number Shares Paid Interest Due Received 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.
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: ________________, 1999 _________________________________________________
Signature
_________________________________________________
Tax I.D./Soc. Sec. No.
Dated: ________________, 1999 _________________________________________________
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
INDEX TO EXCERPTS FROM STATE SECURITIES LAWS
<TABLE>
<S> <C>
ARIZONA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
ARKANSAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
CALIFORNIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
COLORADO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-6
CONNECTICUT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-8
DISTRICT OF COLUMBIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-9
FLORIDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-9
GEORGIA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-10
HAWAII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-12
IDAHO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-13
ILLINOIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-13
INDIANA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-15
IOWA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-16
KANSAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-18
KENTUCKY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19
LOUISIANA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20
MAINE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-22
MARYLAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-23
MASSACHUSETTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25
MICHIGAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-26
MINNESOTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-27
MISSISSIPPI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-28
MISSOURI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29
NEVADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
NEW HAMPSHIRE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-31
NEW JERSEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-32
NEW YORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-34
NORTH CAROLINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-34
OHIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-35
OKLAHOMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-36
OREGON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-37
PENNSYLVANIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-39
SOUTH CAROLINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-40
TENNESSEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-40
TEXAS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-42
UTAH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-46
VERMONT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-47
VIRGINIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-48
WASHINGTON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-49
WISCONSIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-51
</TABLE>
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<PAGE>
ARIZONA SECURITIES ACT
SECTION 44-1841. SALE OF UNREGISTERED SECURITIES PROHIBITED;
CLASSIFICATION.
A. It is unlawful to sell or offer for sale within or from this state
any securities unless such securities have been registered by description under
sections 44-1871 through 44-1875 or registered by qualification under sections
44-1891 through 44-1902 or are securities for which a notice filing has been
made under section 44-3321, except securities exempt under section 44-1843 or
44-1843.01 or securities sold in exempt transactions under section 44-1844.
B. A person violating this section is guilty of a class 4 felony.
SECTION 44-2001. VOIDABLE SALE OR CONTRACT FOR SALE OF SECURITIES; REMEDY.
A. A sale or contract for sale of any securities to any purchaser in
violation of any provision of section 44-1841 or 44-1842 or article 13 of this
chapter is voidable at the election of the purchaser, who may bring an action in
a court of competent jurisdiction to recover the consideration paid for the
securities, with interest thereon, taxable court costs and reasonable attorneys'
fees, less the amount of any income received by dividend or otherwise from
ownership of the securities, upon tender of the securities purchased or the
contract made, or for damages if he no longer owns the securities.
B. A person against whom an action for a violation of section 44-1991
is brought is not liable under subsection A of this section if the person
sustains the burden of proof that the person did not know and in the exercise of
reasonable care could not have known of the untrue statement or misleading
omission.
SECTION 44-2004. LIMITATION OF CIVIL ACTIONS.
A. No civil action shall be maintained under this article to enforce
any liability based on a violation of section 44-1841 or 44-1842 unless brought
within one year after the violation occurs.
B. Except as provided in subsection C of this section, no civil action
shall be brought under this article to enforce any liability based on a
violation of article 13 unless brought within two years after discovery of the
fraudulent practice on which the liability is based, or after the discovery
should have been made by the exercise of reasonable diligence.
C. No civil action shall be brought under this article to enforce any
liability based on a violation of section 44-1997 or 44-1998 unless brought
within one year after the discovery of the untrue statement or the omission or
after the discovery should have been made by the exercise of reasonable
diligence. No action shall be brought to enforce a liability created under
section 44-1997 more than three years after the security was bona fidely offered
to the public or under section 44-1998 more than three years after the sale.
SECTION 44-2005. REMEDY NOT EXCLUSIVE.
Nothing in this article shall limit any statutory or common law right of
any person in any court for any act involved in the sale of securities.
ARKANSAS SECURITIES ACT
SECTION 23-42-106. CIVIL LIABILITY.
(a)(1) Any person who commits the following acts is liable to the person
buying the security from him, who may sue either at law or in equity to recover
the consideration paid for the security, together with interest at six percent
(6%) per year from the date of payment, costs, and reasonable attorney's fees,
less the amount of any income received on the security, upon the tender of the
security, or for damages if he no longer owns the security:
(A) Offers or sells a security in violation of Sections 23-42-301,
23-42-212(b), 23-42-501(1) or (2), or of any rule or order under Section
23-42-502 which requires the affirmative approval of sales literature before it
is used, or in violation of any condition imposed under Sections 23-42-403(d),
23-42-404(g), or 23-42-404(i); or
(B) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of circumstances under which they are
made, not misleading, the buyer not knowing of the untruth or omission, and who
does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission;
(2) Damages are the amount that would be recoverable upon a tender less
the value of the security when the buyer disposed of it and interest at six
percent (6%) per year from the date of disposition.
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<PAGE>
(b)(1) Any person who purchases a security in violation of Sections
23-42-301, 23-42-307, 23-42-507, and 23-42-508, or otherwise by means of any
untrue statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they are made, not misleading, the seller not knowing of the untruth
or omission, and who shall not sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of the untruth or
omission, shall be liable to the person selling the security to him, who may sue
either at law or in equity to recover either the security or the security plus
any income or other distributions in cash or other property received directly or
indirectly by the purchaser, upon tender of the consideration the seller
received or for damages together with interest at six percent (6%) from the date
of purchase plus costs and reasonable attorneys' fees.
(2) Damages may be for out-of-pocket losses or for the benefit of the
bargain.
(3) Notice of willingness to pay the amount specified in exchange for
the security shall constitute valid tender pending acceptance thereof by the
purchaser.
(c) Every person who controls a seller liable under subsection (a) of
this section or a purchaser liable under subsection (b) of this section; every
partner, officer, or director of such a seller or purchaser; every person
occupying a similar status or performing a similar function; every employee of
such a seller or purchaser who materially aids in the sale; and every
broker-dealer or agent who materially aids in the sale or also liable jointly
and severally with, and to the same extent as, the seller or purchaser, unless
the nonseller or nonpurchaser who is so liable sustains the burden of proof that
he did not know, and in the exercise of reasonable care could not have known, of
the existence of the facts by reason of which the liability is alleged to exist.
There is contribution as in cases of contract among the several persons so
liable.
(d) Any tender specified in this section may be made at any time before
entry of judgment.
(e) Every cause of action under this section survives the death of any
person who might have been a plaintiff or defendant.
(f) No person may sue under this section after five (5) years from the
effective date of the contract of sale. No person may sue under this section:
(1) If the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent (6%) per year from the date of payment less the amount
of any income received on the security, and he failed to accept the offer within
thirty (30) days of its receipt; or
(2) If the buyer received such an offer before suit and at a time when
he did not own the security unless he rejected the offer in writing within
thirty (30) days of its receipt.
(g) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
SECTION 23-42-501. SALE OF UNREGISTERED NONEXEMPT SECURITIES.
It is unlawful for any person to offer or sell any security in this state
unless:
(1) It is registered under this chapter;
(2) The security or transaction is exempted under Section 23-42-503 or
23-42-504; or
(3) It is a covered security.
CALIFORNIA CORPORATE SECURITIES LAW OF 1968
SECTION 25110. It is unlawful for any person to offer or sell in this
state any security in an issuer transaction (other than in a transaction subject
to Section 25120), whether or not by or through underwriters, unless such sale
has been qualified under Section 25111, 25112 or 25113 (and no order under
Section 25140 or subdivision (a) of Section 25143 is in effect with respect to
such qualification) or unless such security or transaction is exempted under
Chapter 1 (commencing with Section 25100) of this part. The offer or sale of
such a security in a manner that varies or differs from, exceeds the scope of,
or fails to conform with either a material term or material condition of
qualification of the offering as set forth in the permit or qualification order,
or a material representation as to the manner of offering which is set forth in
the application for qualification, shall be an unqualified offer or sale.
SECTION 25500. Any person who willfully participates in any act or
transaction in violation of Section 25400 shall be liable to any other person
who purchases or sells any security at a price which was affected by such act or
transaction for the damages sustained by the latter as a result of such act or
transaction. Such damages shall be the
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<PAGE>
difference between the price at which such other person purchased or sold
securities and the market value which such securities would have had at the
time of his purchase or sale in the absence of such act or transaction, plus
interest at the legal rate.
SECTION 25501. Any person who violates Section 25401 shall be liable to
the person who purchases a security from him or sells a security to him, who may
sue either for rescission or for damages (if the plaintiff or the defendant, as
the case may be, no longer owns the security), unless the defendant proves that
the plaintiff knew the facts concerning the untruth or omission or that the
defendant exercised reasonable care and did not know (or if he had exercised
reasonable care would not have known) of the untruth or omission. Upon
rescission, a purchaser may recover the consideration paid for the security,
plus interest at the legal rate, less the amount of any income received on the
security, upon tender of the security. Upon rescission, a seller may recover
the security, upon tender of the consideration paid for the security plus
interest at the legal rate, less the amount of any income received by the
defendant on the security. Damages recoverable under this section by a
purchaser shall be an amount equal to the difference between (a) the price at
which the security was bought plus interest at the legal rate from the date of
purchase and (b) the value of the security at the time it was disposed of by the
plaintiff plus the amount of any income received on the security by the
plaintiff. Damages recoverable under this section by a seller shall be an
amount equal to the difference between (1) the value of the security at the time
of the filing of the complaint plus the amount of any income received by the
defendant on the security and (2) the price at which the security was sold plus
interest at the legal rate from the date of sale. Any tender specified in this
section may be made at any time before entry of judgment.
SECTION 25502. Any person who violates Section 25402 shall be liable to
the person who purchases a security from him or sells a security to him, for
damages equal to the difference between the price at which such security was
purchased or sold and the market value which such security would have had at the
time of the purchase or sale if the information known to the defendant had been
publicly disseminated prior to that time and a reasonable time had elapsed for
the market to absorb the information, plus interest at the legal rate, unless
the defendant proves that the plaintiff knew the information or that the
plaintiff would have purchased or sold at the same price even if the information
had been revealed to him.
SECTION 25503. Any person who violates Section 25110, 25130 or 25133, or a
condition of qualification under Chapter 2 (commencing with Section 25110) of
this part, imposed pursuant to Section 25141, or an order suspending trading
issued pursuant to Section 25219, shall be liable to any person acquiring from
him the security sold in violation of such section, who may sue to recover the
consideration he paid for such security with interest thereon at the legal rate,
less the amount of any income received therefrom, upon the tender of such
security, or for damages, if he no longer owns the security, or if the
consideration given for the security is not capable of being returned. Damages,
if the plaintiff no longer owns the security, shall be equal to the difference
between (a) his purchase price plus interest at the legal rate from the date of
purchase and (b) the value of the security at the time it was disposed of by the
plaintiff plus the amount of any income received therefrom by the plaintiff.
Damages, if the consideration given for the security is not capable of
being returned, shall be equal to the value of that consideration plus interest
at the legal rate from the date of purchase, provided the security is tendered;
and if the plaintiff no longer owns the security, damages in such case shall be
equal to the difference between (a) the value of the consideration given for the
security plus interest at the legal rate from the date of purchase and (b) the
value of the security at the time it was disposed of by the plaintiff plus the
amount of any income received therefrom by the plaintiff. Any person who
violates Section 25120 or a condition of qualification under Chapter 3
(commencing with Section 25120) of this part imposed pursuant to Section 25141,
shall be liable to any person acquiring from him the security sold in violation
of such section who may sue to recover the difference between (a) the value of
the consideration received by the seller and (b) the value of the security at
the time it was received by the buyer, with interest thereon at the legal rate
from the date of purchase. Any person on whose behalf an offering is made and
any underwriter of the offering, whether on a best efforts or a firm commitment
basis, shall be jointly and severally liable under this section, but in no event
shall any underwriter (unless such underwriter shall have knowingly received
from the issuer for acting as an underwriter some benefit, directly or
indirectly, in which all other underwriters similarly situated did not share in
proportion to their respective interest in the underwriting) be liable in any
suit or suits authorized under this section for damages in excess of the total
price at which the securities underwritten by him and distributed to the public
were offered to the public. Any tender specified in this section may be made at
any time before entry of judgment. No person shall be liable under this section
for violation of Section 25110, 25120 or 25130 if the sale of the security is
qualified prior to the payment or receipt of any part of the consideration for
the security sold, even though an offer to sell or a contract of sale may have
been made or entered into without qualification.
B-4
<PAGE>
SECTION 25504. Every person who directly or indirectly controls a
person liable under Section 25501, or 25503, every partner in a firm so
liable, every principal executive officer or director of a corporation so
liable, every person occupying a similar status or performing similar
functions, every employee of a person so liable who materially aids in the
act or transaction constituting the violation, and every broker-dealer or
agent who materially aids in the act or transaction constituting the
violation, are also liable jointly and severally with and to the same extent
as such person, unless the other person who is so liable had no knowledge of
or reasonable grounds to believe in the existence of the facts by reason of
which the liability is alleged to exist.
SECTION 25507. (a) No action shall be maintained to enforce any
liability created under Section 25503 (or Section 25504 or Section 25504.1
insofar as they relate to that section) unless brought before the expiration
of two years after the violation upon which it is based or the expiration of
one year after the discovery by the plaintiff of the facts constituting such
violation, whichever shall first expire.
(b) No buyer may commence an action under Section 25503 if, before
suit is commenced, such buyer shall have received a written offer approved as
to form by the commissioner (1) stating the respect in which liability under
such section may have arisen, (2) offering to repurchase the security for a
cash price payable upon delivery of the security or offering to pay the buyer
an amount in cash equal in either case to the amount recoverable by the buyer
in accordance with Section 25503, or, offering to rescind the transaction by
putting the parties back in the same position as before the transaction, (3)
providing that such offer may be accepted by the buyer at any time within a
specified period of not less than 30 days after the date of receipt thereof
unless rejected earlier during such period by the buyer, (4) setting forth
the provisions of this subdivision (b), and (5) containing such other
information as the commissioner may require by rule or order, and such buyer
shall have failed to accept such offer in writing within the specified period
after receipt thereof.
(c) The commissioner may by rule or order impose as a condition to
approval of an offer under subdivision (b) of this section, if the
commissioner finds such action is necessary and appropriate for the
protection of investors, conditions requiring:
(1) That equivalent and concurrent offers be made to all investors as
to whom liability may have arisen and still exists under Section 25503 (or
Section 25504 or Section 25504.1 insofar as they relate to that section) in
connection with the distribution or transaction;
(2) That the offer be made subject to a condition voiding such offer
if the issuer, by reason of acceptances, is disabled from commencing or
continuing business;
(3) That the offer be made within a specific period after approval
thereof by the commissioner;
(4) If the consideration paid by the offeree was other than monetary
or if the offer is of rescission, and if the offer is rejected by the offeree
on the ground that it does not accord him the damages payable under Section
25503 or that the rescission offered does not place the parties back in the
same position as before the transaction, that an offer so rejected shall not
bar the commencement of an action by the offeree under Section 25503 (or
Section 25504 or Section 25504.1 insofar as they relate to that section); or
(5) That the offeror file a report or reports with the commissioner
containing such information as he may require concerning the making of the
offer, its acceptance or rejection, and compliance with its terms and
conditions or with conditions imposed under this subdivision.
(d) Each person who files a repurchase offer with the commissioner
pursuant to subdivision (b) shall file with the commissioner, in such form as
the commissioner by rule prescribes, an irrevocable consent appointing the
commissioner or the commissioner's successor in office to be such person's
attorney to receive service of any lawful process in any noncriminal suit,
action or proceeding against such person or such person's successor, executor
or administrator, which arises under this law or any rule or order hereunder
after the consent has been filed, with the same force and validity as if
served personally on the person filing the consent. A person who has filed
such a consent in connection with a qualification under this law (or
application for a permit under any prior law if the application under this
law states that such consent is still effective) need not file another.
Service may be made by leaving a copy of the process in the office of the
commissioner but it is not effective unless (1) the plaintiff, who may be the
commissioner in a suit, action or proceeding instituted by him, forthwith
sends notice of the service and a copy of the process by registered or
certified mail to the defendant or respondent at such person's last address
on file with the commissioner, and (2) the plaintiff's affidavit of
compliance with this section is filed in the case on or before the return day
of the process, if any, or within such further time as the court allows.
SECTION 25534. Whenever any securities are issued which the
commissioner determines were offered or sold in violation of Section 25110,
25120, or 25130, the commissioner may, by written order to the issuer and
notice to the holders of such securities, require certificates evidencing
such securities to have stamped or printed prominently on their face a
legend, in the form prescribed by rule of the commissioner, restricting the
transfer of such securities. Upon receipt of the order, the issuer shall
stamp or print such legend prominently on the face of all outstanding
certificates subject to
B-5
<PAGE>
the order. If, after such order or notice has been given, a request for a
hearing is filed in writing by the person or persons to whom such order or
notice was addressed, a hearing shall be held in accordance with the
provisions of the Administrative Procedure Act, Chapter 5 (commencing with
Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, and
the commissioner shall have all the powers granted thereunder; unless such
hearing is commenced within 15 business days after the request for hearing is
received by the commissioner (or the person or persons affected and the
issuer consent to a later date), such order and notice are rescinded.
COLORADO SECURITIES ACT
SECTION 11-51-301. REQUIREMENT FOR REGISTRATION OF SECURITIES.
It is unlawful for any person to offer to sell or sell any security in
this state unless it is registered under this article or unless the security
or transaction is exempted under sections 11-51-307, 11-51-308, or 11-51-309.
SECTION 11-51-604. CIVIL LIABILITIES.
(1) Any person who sells a security in violation of section 11-51-301
is liable to the person buying the security from such seller for the
consideration paid for the security, together with interest at the statutory
rate from the date of payment, costs, and reasonable attorney fees, less the
amount of any income received on the security, upon the tender of the
security, or is liable for damages if the buyer no longer owns the security.
Damages are deemed to be the amount that would be recoverable upon a tender,
less the value of the security when the buyer disposed of it, and interest at
the statutory rate from the date of disposition. No person is liable under
this subsection (1) for a violation of section 11-51-301 due solely to a
failure to file the prescribed notification of exemption or to pay the
required exemption fee for an exemption under section 11-51-308(1)(p).
(2)(a) Except as provided in paragraph (b) of this subsection (2), any
broker-dealer or sales representative who sells a security in violation of
section 11-51-401 is liable to the person buying the security from such
seller for the consideration paid for the security, together with interest at
the statutory rate from the date of payment, costs, and reasonable attorney
fees, less the amount of any income received on the security, upon the tender
of the security, or is liable for damages if the buyer no longer owns the
security. Damages are deemed to be the amount that would be recoverable upon
a tender, less the value of the security when the buyer disposed of it, and
interest at the statutory rate from the date of disposition.
(b) No broker-dealer or sales representative is liable under this
subsection (2) for a sale of a security exempt from registration under
section 11-51-307(1)(g) to (1)(j) or for a sale of a security in a
transaction exempt from registration under section 11-51-308 (1)(a), (1)(e)
to (1)(l), (1)(o), or (1)(p); but this paragraph (b) does not apply if at the
time of such sale:
(I) In the case of a violation of section 11-51-401 arising from the
failure of a broker-dealer to be licensed under this article, such
broker-dealer was registered as a broker-dealer under the federal "Securities
Exchange Act of 1934", licensed as a broker-dealer or its equivalent under
the laws of another state, or held a limited license under this article; or
(II) In the case of a violation of section 11-51-401 arising from the
failure of a sales representative to be licensed under this article, such
sales representative was licensed as a sales representative or its equivalent
under the laws of another state, held a limited license under this article,
or in connection with such sale was acting for a broker-dealer which was
registered as a broker-dealer under the federal "Securities Exchange Act of
1934", licensed as a broker-dealer or its equivalent under the laws of
another state, or licensed under this article.
(3) Any person who recklessly, knowingly, or with an intent to
defraud sells or buys a security in violation of section 11-51-501 is liable
to the person buying or selling a security in connection with the violation
for such legal or equitable relief which the court deems appropriate,
including rescission, actual damages, interest at the statutory rate, costs,
and reasonable attorney fees.
(4) Any person who sells a security in violation of section
11-51-501(1)(b) (the buyer not knowing of the untruth or omission) and who
does not sustain the burden of proof that such person did not know, and in
the exercise of reasonable care could not have known, of the untruth or
omission is liable to the person buying the security from such person, who
may sue to recover the consideration paid for the security, together with
interest at the statutory rate from the date of payment, costs, and
reasonable attorney fees, less the amount of any income received on the
security, upon the tender of the security, or is liable for damages if the
buyer no longer owns the security. Damages are deemed to be the amount that
would be recoverable upon a tender, less the value of the security when the
buyer disposed of it, and interest at the statutory rate from the date of
disposition.
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<PAGE>
(5)(a) Every person who, directly or indirectly, controls a person
liable under subsection (1) or (2) of this section is liable jointly and
severally with and to the same extent as such controlled person, unless the
controlling person sustains the burden of proof that such person did not
know, and in the exercise of reasonable care could not have known, of the
existence of the facts by reason of which the liability is alleged to exist.
(b) Every person who, directly or indirectly, controls a person
liable under subsection (3) or (4) of this section is liable jointly and
severally with and to the same extent as such controlled person, unless such
controlling person sustains the burden of proof that such person acted in
good faith and did not, directly or indirectly, induce the act or acts
constituting the violation or cause of action.
(c) Any person who knows that another person liable under subsection
(3) or (4) of this section is engaged in conduct which constitutes a violation
of section 11-51-501 and who gives substantial assistance to such conduct is
jointly and severally liable to the same extent as such other person.
(6) Any tender specified in this section may be made at any time
before entry of judgment.
(7) Every cause of action under this article survives the death of
any individual who might have been a plaintiff or defendant.
(8) No person may sue under subsection (1) or (2) or paragraph (a) of
subsection (5) of this section more than two years after the contract of
sale. No person may sue under subsection (3) or (4) or paragraph (b) or (c)
of subsection (5) of this section more than three years after the discovery
of the facts giving rise to a cause of action under subsection (3) or (4) of
this section or after such discovery should have been made by the exercise of
reasonable diligence and in no event more than five years after the purchase
or sale.
(9)(a) No buyer may sue under this section:
(I) If the buyer received a written rescission offer, before suit and
at a time when the buyer owned the security, to refund the consideration paid
together with interest at the statutory rate from the date of payment, less
the amount of any income received on the security, and the buyer failed to
accept the offer within thirty days of its receipt; or
(II) If the buyer received such an offer before suit and at a time
when the buyer did not own the security, unless the buyer rejects the offer
in writing within thirty days of its receipt.
(b) If, after acceptance, a rescission offer is not performed in
accordance with its terms, the buyer may obtain relief under this section
without regard to the rescission offer.
(10) No person who has made or engaged in the performance of any
contract in violation of any provision of this article or any rule or order
under this article or who has acquired any purported right under any such
contract with knowledge of the facts by reason of which the making or
performance of any such contract was in violation may base any suit on the
contract.
(11) Any condition, stipulation, or provision binding any person
acquiring or disposing of any security to waive compliance with any provision
of this article or any rule or order under this article is void.
(12) The rights and remedies provided by this article may be pleaded
and proved in the alternative and are in addition to any other rights or
remedies that may exist at law or in equity, but this article does not create
any cause of action not specified in this section or section 11-51-602.
(13) Any person liable under this section may seek and obtain
contribution from other persons liable under this section, directly or
indirectly, for the same violation. Contribution shall be awarded by the
court in accordance with the actual relative culpabilities of the various
persons so liable.
(14) In the case of a willful violation of or a willful refusal to
comply with or obey an order issued by the securities commissioner to any
person pursuant to section 11-51-410 or 11-51-606, the district court of the
city and county of Denver, upon application by the securities commissioner,
may issue to the person an order requiring that person to appear before the
court regarding such violation or refusal. If the securities commissioner
establishes by a preponderance of the evidence that the person willfully
violated or willfully refused to comply with or obey the order, the court may
impose legal and equitable sanctions as are available to the court in the
case of contempt of court and as the court deems appropriate upon such person.
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CONNECTICUT UNIFORM SECURITIES ACT
SECTION 36b-16. REGISTRATION OF SECURITY PRIOR TO OFFER OR SALE
REQUIRED; EXEMPTION.
No person shall offer or sell any security in this state unless (1) it
is registered under sections 36b-2 to 36b-33, inclusive, as amended by this
Act, (2) the security or transaction is exempted under section 36b-21, as
amended by section 11 of this Act, or (3) the security is a covered security
provided such person complies with any applicable requirements in subsections
(c), (d) and (e) of section 36b-21, as amended by section 11 of this Act.
SECTION 36b-29. BUYER'S REMEDIES.
(a) Any person who: (1) Offers or sells a security in violation of
subsection (a) of section 36b-6, 36b-16 or subsection (b) of section 36b-24
or of any regulation or order under section 36b-22 which requires the
affirmative approval of sales literature before it is used, or of any
condition imposed under subsection (d) of section 36b-18 or subsection (g) or
(h) of section 36b-19; or (2) offers or sells or materially assists any
person who offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
are made, not misleading, who knew or in the exercise of reasonable care
should have known of the untruth or omission, the buyer not knowing of the
untruth or omission, and who does not sustain the burden of proof that he did
not know, and in the exercise of reasonable care could not have known, of the
untruth or omission, is liable to the person buying the security, who may sue
either at law or in equity to recover the consideration paid for the
security, together with interest at eight per cent per year from the date of
payment, costs and reasonable attorneys' fees, less the amount of any income
received on the security, upon the tender of the security, or for damages if
he no longer owns the security.
(b)(1) Any person who violates subsection (a) of section 36b-5 and (2)
any investment adviser who violates subsection (b) or (c) of section 36b-5,
the registration requirement in subsection (c) of section 36b-6, or
subsection (b) of section 36b-24, shall be liable to the recipient of
investment advisory services for any consideration paid by the recipient for
those services and any loss resulting from the investment advisory services
provided, less any profits earned by the recipient through transactions
effected as a result of the advice rendered, plus interest at the rate of
eight per cent per year from the date of payment of the consideration, costs
and reasonable attorney's fees.
(c) Every person who directly or indirectly controls a person liable
under subsections (a) and (b) of this section, every partner, officer or
director of such a person, every person occupying a similar status or
performing similar functions, every employee of such a person who materially
aids in the act or transaction constituting the violation and every
broker-dealer or agent who materially aids in the act or transaction
constituting the violation are also liable jointly and severally with and to
the same extent as such person, unless the person who is so liable sustains
the burden of proof that he did not know, and in exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist. There shall be contribution as in cases of
contract among the several persons so liable.
(d) Any tender specified in this section may be made at any time
before entry of judgment.
(e) Every cause of action under sections 36b-2 to 36b-33, inclusive,
survives the death of any person who might have been a plaintiff or defendant.
(f) No person may bring an action under this section more than two
years after the date of the contract of sale or of the contract for
investment advisory services, except that (1) with respect to actions arising
out of intentional misrepresentation or fraud in the purchase or sale of any
interest in any limited partnership not required to be registered under the
Securities Act of 1933, no person may bring an action more than one year from
the date when the misrepresentation or fraud is discovered, except that no
such action may be brought more than five years from the date of such
misrepresentation or fraud provided, with respect to an action pending on
July 1, 1993, that asserts facts upon which a claim could be asserted under
this section on and after July 1, 1993, and which claim is asserted prior to
January 1, 1994, no such action may be brought for intentional
misrepresentation or fraud that occurred more than five years prior to the
date of the filing of the complaint in such action, and (2) with respect to
actions arising out of intentional misrepresentation or fraud in the purchase
or sale of securities other than securities described in subdivision (1) of
this subsection, no person may bring an action more than one year from the
date when the misrepresentation or fraud is discovered or in the exercise of
reasonable care should have been discovered, except that no such action may
be brought more than three years from the date of such misrepresentation or
fraud.
(g) No person may bring an action under subsection (a) of this
section: (1) If the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent per year from the date of payment, less the amount of
any income received on the security, and he failed to accept
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the offer within thirty days of its receipt, or (2) if the buyer received
such an offer before bringing a cause of action and at a time when he did not
own the security, unless he rejected the offer in writing within thirty days
of its receipt.
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of sections 36b-2 to 36b-33,
inclusive, or any regulation or order thereunder, or who has acquired any
purported right under any such contract with knowledge of the facts by reason
of which its making or performance was in violation, may base any cause of
action on the contract.
(i) Any condition, stipulation or provision binding any person
acquiring any security or receiving investment advice to waive compliance
with any provision of sections 36b-2 to 36b-33, inclusive, or any regulation
or order thereunder is void.
(j) The rights and remedies provided by sections 36b-2 to 36b-33,
inclusive, are in addition to any other rights or remedies that may exist at
law or in equity.
DISTRICT OF COLUMBIA SECURITIES ACT
[NO PROVISION REQUIRING REGISTRATION OF SECURITIES.]
FLORIDA SECURITIES AND INVESTOR PROTECTION ACT
SECTION 517.07. REGISTRATION OF SECURITIES.
(1) It is unlawful and a violation of this chapter for any person to
sell or offer to sell a security within this state unless the security is
exempt under section 517.051, is sold in a transaction exempt under section.
517.061, is a federal covered security, or is registered pursuant to this
chapter.
(2) No securities that are required to be registered under this
chapter shall be sold or offered for sale within this state unless such
securities have been registered pursuant to this chapter and unless prior to
each sale the purchaser is furnished with a prospectus meeting the
requirements of rules adopted by the department.
(3) The department shall issue a permit when registration has been
granted by the department. A permit to sell securities is effective for 1
year from the date it was granted. Registration of securities shall be
deemed to include the registration of rights to subscribe to such securities
if the application under section 517.081 or section 517.082 for registration
of such securities includes a statement that such rights are to be issued.
(4) A record of the registration of securities shall be kept in the
office of the department, in which register of securities shall also be
recorded any orders entered by the department with respect to such
securities. Such register, and all information with respect to the securities
registered therein, shall be open to public inspection.
(5) Notwithstanding any other provision of this section, offers of
securities required to be registered by this section may be made in this
state before the registration of such securities if the offers are made in
conformity with rules adopted by the department.
SECTION 517.211. REMEDIES AVAILABLE IN CASES OF UNLAWFUL SALE.
(1) Every sale made in violation of either section 517.07 or section
517.12 may be rescinded at the election of the purchaser; and the person
making the sale and every director, officer, partner, or agent of or for the
seller, if the director, officer, partner, or agent has personally
participated or aided in making the sale, is jointly and severally liable to
the purchaser in an action for rescission, if the purchaser still owns the
security, or for damages, if the purchaser has sold the security. No
purchaser otherwise entitled will have the benefit of this subsection who has
refused or failed, within 30 days of receipt, to accept an offer made in
writing by the seller, if the purchaser has not sold the security, to take
back the security in question and to refund the full amount paid by the
purchaser or, if the purchaser has sold the security, to pay the purchaser an
amount equal to the difference between the amount paid for the security and
the amount received by the purchaser on the sale of the security, together,
in either case, with interest on the full amount paid for the security by the
purchaser at the legal rate, pursuant to section 55.03, for the period from
the date of payment by the purchaser to the date of repayment, less the
amount of any income received by the purchaser on the security.
(2) Any person purchasing or selling a security in violation of
section 517.301, and every director, officer, partner, or agent of or for the
purchaser or seller, if the director, officer, partner, or agent has
personally participated or aided in making the sale or purchase, is jointly
and severally liable to the person selling the security to or purchasing the
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security from such person in an action for rescission, if the plaintiff still
owns the security, or for damages, if the plaintiff has sold the security.
(3) In an action for rescission:
(a) A purchaser may recover the consideration paid for the security
or investment, plus interest thereon at the legal rate, less the amount of
any income received by the purchaser on the security or investment upon
tender of the security or investment.
(b) A seller may recover the security upon tender of the
consideration paid for the security, plus interest at the legal rate, less
the amount of any income received by the defendant on the security.
(4) In an action for damages brought by a purchaser of a security or
investment, the plaintiff shall recover an amount equal to the difference
between:
(a) The consideration paid for the security or investment, plus
interest thereon at the legal rate from the date of purchase; and
(b) The value of the security or investment at the time it was disposed
of by the plaintiff, plus the amount of any income received on the security or
investment by the plaintiff.
(5) In an action for damages brought by a seller of a security, the
plaintiff shall recover an amount equal to the difference between:
(a) The value of the security at the time of the complaint, plus the
amount of any income received by the defendant on the security; and
(b) The consideration received for the security, plus interest at the
legal rate from the date of sale.
(6) In any action brought under this section, including an appeal, the
court shall award reasonable attorneys' fees to the prevailing party unless the
court finds that the award of such fees would be unjust.
GEORGIA SECURITIES ACT OF 1973
SECTION 10-5-5. REGISTRATION OF SECURITIES; WHEN AND HOW REQUIRED; DELIVERY
OF PROSPECTUS; PURCHASER'S RIGHT OF RESCISSION.
(a) Generally. It shall be unlawful for any person to offer for sale or
to sell any securities to any person in this state unless:
(1) They are subject to an effective registration statement under this
chapter;
(2) The security or transaction is exempt under Code Section 10-5-8 or
Code Section 10-5-9, respectively; or
(3) The security is a federal covered security.
SECTION 10-5-12. UNLAWFUL PRACTICES.
(a) It shall be unlawful for any person:
(1) To offer to sell or to sell any security in violation of Code
Section 10-5-3, 10-5-5, or 10-5-19 or any rule, regulation, or order promulgated
or issued by the commissioner under this chapter;
SECTION 10-5-14. CIVIL LIABILITIES FROM SALES OF SECURITIES.
(a) Any person who violates subsection (a) of Code Section 10-5-12
shall be liable to the person buying such security; and such buyer may sue in
any court of competent jurisdiction to recover the consideration paid in cash
(or the fair value thereof at the time the consideration was paid if such
consideration was not paid in cash) for the security with interest thereon
from the date of payment down to the date of repayment as computed in
paragraph (1) of subsection (d) of this Code section (less the amount of any
income received thereon), together with all taxable court costs and
reasonable attorney's fees, upon the tender, where practicable, of the
security at any time before the entry of judgment, or for damages if he no
longer owns the security. Damages are the amount which equals the difference
between the fair value of the consideration the buyer gave for the security
and the fair value of the security at the time the buyer disposed of it, plus
interest thereon from the date of payment down to the date of repayment as
computed in paragraph (2) of subsection (d) of this Code section. A person
who offers or sells a security in violation of paragraph (2) of subsection
(a) of Code Section 10-5-12 is not liable under this subsection if:
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(1) The purchaser knew of the untrue statement of a material fact or
omission of a statement of a material fact; or
(2) The seller did not know and in the exercise of reasonable care
could not have known of the untrue statement or misleading omission.
(b) Every contract between a certified public accountant who holds
himself out as a "financial planner" or an "investment adviser" and an
advisory client or between an investment adviser and an advisory client made
in violation of any provision of this chapter and every such contract
heretofore or hereafter made, the performance of which involves the violation
of or continuance of any relationship or practice in violation of any
provision of this chapter or any rule, regulation, or order thereunder, shall
be void:
(1) As regards the rights of any person who, in violation of any such
provision, rule, regulation, or order shall have made or engaged in the
performance of any such contract; and
(2) As regards the rights of any person who, not being a party to
such contract, shall have acquired any right thereunder with actual knowledge
of the facts by reason of which the making or performance of such contract
was in violation of any such provision.
The advisory client who is a party to such a contract may sue to recover
the consideration paid under such contract to such investment adviser or
investment adviser representative, together with interest thereon at the
annual rate of 6 percent from the date of payment of the consideration, plus
costs and reasonable attorney's fees.
(c) Every person who directly or indirectly controls a person liable
under subsection (a), (b), or (h) of this Code section, every general
partner, executive officer, or director of such person liable under
subsection (a), (b), or (h) of this Code section, every person occupying a
similar status or performing similar functions, and every dealer, limited
dealer, salesman, or limited salesman who participates in any material way in
the sale is liable jointly and severally with and to the same extent as the
person whose liability arises under subsection (a), (b), or (h) of this Code
section unless the person whose liability arises under this subsection
sustains the burden of proof that he did not know and in the exercise of
reasonable care could not have known of the existence of the facts by reason
of which liability is alleged to exist. There is contribution as in the case
of contract among several persons so liable.
(d) With respect to the purchase, sale, or offer to purchase or sell
a security, no person may sue under this Code section more than two years
from the date of the contract for sale or sale, if there is no contract for
sale. With respect to the purchase, sale, or offer to purchase or sell a
security, no person may sue under this Code section:
(1) If the buyer received a written offer, before suit and at a time
when he owned the security, to repay in cash or by certified or official bank
check, within 30 days from the date of acceptance of such offer in exchange
for the securities, the fair value of the consideration paid (determined as
of the date such payment was originally paid by the buyer), together with
interest on such amount for the period from the date of payment down to the
date of repayment, such interest to be computed in case the security consists
of an interest-bearing obligation at the same rate as provided in the
security or, in case the security consists of other than an interest-bearing
obligation, at the rate of 6 percent per annum, less, in every case, the
amount of any income received on the security, and:
(A) Such offeree does not accept the offer within 30 days of its
receipt; or
(B) If such offer was accepted, the terms thereof were complied with
by the offeror; or
(2) If the buyer received a written offer before suit and at a time
when he did not own the security to repay in cash or by certified or official
bank check, within 30 days from the date of acceptance of such offer, an
amount equal to the difference between the fair value of the consideration
the buyer gave for the security and the fair value of the security at the
time the buyer disposed of it, together with interest on such amount for the
period from the date of payment down to the date of repayment, such interest
to be computed in case the security consists of an interest-bearing
obligation at the same rate as provided in the security or, in case the
security consists of other than an interest-bearing obligation, at the rate
of 6 percent per annum, less, in every case, the amount of any income
received on the security, and:
(A) Such offeree does not accept the offer within 30 days of its
receipt; or
(B) If such offer was accepted, the terms thereof were complied with
by the offeror, provided no written offer shall be effective within the
meaning of this subsection unless it would be exempt under Code Section
10-5-9 or, if registration would have been required, then unless such
rescission offer has been registered and effected under a subsection of Code
Section 10-5-5. Any person who is paid for his security in the amount
provided by this subsection shall be foreclosed from asserting any remedies
under this chapter regardless of whether the other requirements of this
subsection have been complied with.
(e) With respect to the activities of a certified public accountant
who holds himself out as a "financial planner" or an "investment adviser" or
an investment adviser or investment adviser representative, no person may sue
under this Code section more than two years from the date of the transaction
upon which the suit is based.
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(f) Every cause of action under this chapter survives the death of
any person who might have been a plaintiff or defendant.
(g) Nothing in this chapter shall limit any statutory or common-law
right of any person in any court for any act involving the sale of a security.
(h) Any designated dealer or designated salesman who materially
violates Code Section 10-5-4 or 10-5-5 or subsection (a) or (d) of Code
Section 10-5-12 with respect to a transaction involving a designated security
shall be liable to the person buying such security for:
(1) The consideration paid in cash (or the fair value of the
consideration paid at the time it was paid if such consideration was not paid
in cash) for such security with interest thereon from the date of payment to
the date of repayment as computed under paragraph (1) of subsection (d) of
this Code section, less the amount of any income paid thereon, upon the
tender of the security at any time before the entry of judgment;
(2) An additional amount equal to three times the amount calculated
pursuant to paragraph (1) of this subsection; and
(3) Court costs and reasonable attorney's fees.
(i) The form of action provided by Code Section 9-11-23 may be used
in any action brought pursuant to subsection (h) of this Code section, and,
in such case, it shall be conclusively presumed that a class of persons
numbering ten or more who purchased the same designated security from or
through the same designated dealer or designated salesman shall constitute a
class so numerous as to make it impracticable to bring them all before the
courts.
HAWAII UNIFORM SECURITIES ACT
SECTION 485-8. REGISTRATION OF SECURITIES.
It shall be unlawful for any person to sell or offer to sell in the
state, any securities except of a class exempt under section 485-4 or unless
sold or offered in any transaction exempt under section 485-6 or unless it is
federal covered security, unless the security has been registered by
notification or by qualification as hereinafter provided. Registration of
stock shall be deemed to include the registration of rights to subscribe to
the stock if the notice under section 485-9 or the application under section
485-10 includes a statement that the rights are to be issued. A record of
the registration of securities shall be kept in a register of securities to
be kept in the office of the commissioner of securities in which register
also shall be recorded any notice filings made pursuant to section 485-A and
any orders entered by the commissioner with respect to the securities. The
register and all information with respect to the securities registered
therein shall be open to public inspection.
SECTION 485-20. REMEDIES.
(a) Sales voidable when and by whom. Every sale made in violation of
this chapter shall be voidable at the election of the purchaser; and the
person making the sale and every director, officer, or agent of or for the
seller, if the director, officer, or agent has personally participated or
aided in any way in making the sale, shall be jointly and severally liable to
the purchaser in an action at law in any court of competent jurisdiction upon
tender of the securities sold or of the contract made for the full amount
paid by the purchaser, with interest, together with all taxable court costs
(and reasonable attorney's fees); provided that notwithstanding any law to
the contrary, no action shall be brought for the recovery of the purchase
price after five years from the date of sale or after two years from the
discovery of facts constituting the violations, but in any event after seven
years from the date of the sale; and provided further that no purchaser
otherwise entitled shall claim or have the benefit of this section who has
refused or failed within thirty days from the date thereof to accept an offer
in writing of the seller to take back the security in question and to refund
the full amount paid by the purchaser, together with interest on the amount
for the period from the date of payment by the purchaser down to the date of
repayment, such interest to be computed:
(1) In case the securities consist of interest-bearing obligations,
at the same rate as provided in the obligations; and
(2) In case the securities consist of other than interest-bearing
obligations, at the rate of ten percent a year; less, in every case, the
amount of any income from the securities that may have been received by the
purchaser.
(b) Action on bond. Any person having a right of action against a
dealer or salesperson under this section shall have a right of action under
the bond provided in section 485-14.
(c) Registration in good faith. A registration by notification made
in good faith and after the commissioner of securities, on application, has
given tentative consent to such registration, shall not, as to sales made
prior to revocation
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of the registration, result in the liabilities prescribed in this section,
although the securities may not be entitled to such registration.
IDAHO SECURITIES ACT
SECTION 30-1446. CIVIL LIABILITIES -- SURVIVAL AND LIMITATION OF ACTIONS
WAIVER OF ACT VOID.
(1) Any person who offers or sells a security in violation of any
provisions of sections 30-1416 through 30-1431, Idaho Code, transacts
business in violation of the provisions of section 30-1406, Idaho Code,
except section 30-1406(4), Idaho Code, or offers to sell or sells a security
by means of any untrue statement of a material fact or any omission to state
a material fact necessary in order to make the statements made, in the light
of the circumstances under which they are made, not misleading (the buyer not
knowing of the untruth or omission) and who does not sustain the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, the untruth or omission is liable to the person buying the
security from him, who shall be entitled to sue either at law or in equity to
recover the consideration paid for the security, together with interest at
six per cent (6%) per annum from the date of payment, costs, and reasonable
attorneys' fees, less the amount of any income received on the security, upon
the tender of the security, or for damages if he no longer owns the security.
Damages shall be the amount that would be recoverable upon a tender less (a)
the value of the security when the buyer disposed of it, and (b) interest at
six per cent (6%) per annum from the date of disposition.
(2) Every person who directly or indirectly controls a seller liable
under subsection (1) of this section, every partner, officer or director or
person occupying a similar status or performing similar functions or employee
of such a seller and every broker-dealer or salesman who participates or
materially aids in the sale is liable jointly and severally with and to the
same extent as the seller if such person knew, or in the exercise of
reasonable care could have known, of the existence of the facts by reason of
which the liability is alleged to exist. There shall be contribution among
the several persons so liable.
(3) Any tender specified in this section may be made at any time before
entry of judgment. A cause of action under this statute survives the death of
any person who might have been a plaintiff or a defendant. No person may sue
under this section more than three (3) years after the contract of sale. No
person may sue under this section (a) if the buyer has received a bona fide
offer in writing at a time when he owned the security, to refund the
consideration paid together with interest at six percent (6%) per annum from
the date of payment, less the amount of any income received on the security,
and failed to accept such offer within thirty (30) days of its receipt, or
(b) if the buyer has received a bona fide offer in writing at a time when he
did not own the security in the amount that would be recoverable under this
section upon a tender less; (i) the value of the security when the buyer
disposed of it and, (ii) interest at six percent (6%) per annum from the date
of disposition, and failed to accept such offer within thirty (30) days of
its receipt.
(4) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was
in violation, may base any suit on such contract. Any condition, stipulation
or provision binding any person acquiring any security to waive compliance
with any provision of this chapter or any rule or order hereunder is void as
against public policy and in the public interest.
ILLINOIS SECURITIES LAW OF 1953
SECTION 5. REGISTRATION OF SECURITIES.
All securities except those set forth under Section 2a of this Act, or
those exempt under Section 3 of this Act, or those offered or sold in
transactions exempt under Section 4 of this Act, or face amount certificate
contracts required to be registered under Section 6 of this Act, or
investment fund shares required to be registered under Section 7 of this Act,
shall be registered either by coordination or by qualification, as
hereinafter in this Section provided, prior to their offer or sale in this
State.
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SECTION 13. PRIVATE AND OTHER CIVIL REMEDIES; SECURITIES.
A. Every sale of a security made in violation of the provisions of
this Act shall be voidable at the election of the purchaser exercised as
provided in subsection B of this Section; and the issuer, controlling person,
underwriter, dealer or other person by or on behalf of whom said sale was made,
and each underwriter, dealer or salesperson who shall have participated or aided
in any way in making the sale, and in case the issuer, controlling person,
underwriter or dealer is a corporation or unincorporated association or
organization, each of its officers and directors (or persons performing similar
functions) who shall have participated or aided in making the sale, shall be
jointly and severally liable to the purchaser as follows:
(1) for the full amount paid, together with interest from the date of
payment for the securities sold at the rate of the interest or dividend
stipulated in the securities sold (or if no rate is stipulated, then at the rate
of 10% per annum) less any income or other amounts received by the purchaser on
the securities, upon offer to tender to the seller or tender into court of the
securities sold or, where the securities were not received, of any contract made
in respect of the sale, or
(2) if the purchaser no longer owns the securities, for the amounts set
forth in clause (1) of this subsection A less any amounts received by the
purchaser for or on account of the disposition of the securities.
If the purchaser shall prevail in any action brought to enforce any of the
remedies provided in this subsection, the court shall assess costs together with
the reasonable fees and expenses of the purchaser's attorney against the
defendant. Any provision of this subsection A to the contrary notwithstanding,
the civil remedies provided in this subsection A shall not be available against
any person by reason of the failure to file with the Secretary of State, or on
account of the content of, any report of sale provided for in subsection G or P
of Section 4, paragraph (2) of subsection D of Sections 5 and 6 or paragraph (2)
of subsection F of Section 7 of this Act.
B. Notice of any election provided for in subsection A of this Section
shall be given by the purchaser within 6 months after the purchaser shall have
knowledge that the sale of the securities to him or her is voidable, to each
person from whom recovery will be sought, by registered mail or certified mail,
return receipt requested, addressed to the person to be notified at his or her
last known address with proper postage affixed, or by personal service.
C. No purchaser shall have any right or remedy under this Section who
shall fail, within 15 days from the date of receipt thereof, to accept an offer
to repurchase the securities purchased by him or her for a price equal to the
full amount paid therefor plus interest thereon and less any income thereon as
set forth in subsection A of this Section. Every offer of repurchase provided
for in this subsection shall be in writing, shall be delivered to the purchaser
or sent by registered mail or certified mail, return receipt requested,
addressed to the purchaser at his or her last known address, and shall offer to
repurchase the securities sold for a price equal to the full amount paid
therefor plus interest thereon and less any income thereon as set for in
subsection A of this Section. Such offer shall continue in force for 15 days
from the date on which it was received by the purchaser, shall advise the
purchaser of his or her rights and the period of time limited for acceptance
thereof, and shall contain such further information, if any, as the Secretary of
State may prescribe. Any agreement not to accept or refusing or waiving any
offer made during or prior to said 15 days shall be void.
D. No action shall be brought for relief under this Section or upon or
because of any of the matters for which relief is granted by this Section after
3 years from the date of sale; provided, that if the party bringing the action
neither know nor in the exercise of reasonable diligence should have known of
any alleged violation of subsection E, F, G, H, I or J of Section 12 of this Act
which is the basis for the action, the 3 year period provided herein shall begin
to run upon the earlier of:
(1) the date upon which the party bringing the action has actual
knowledge of the alleged violation of this Act; or
(2) the date upon which the party bringing the action has notice of
facts which in the exercise of reasonable diligence would lead to actual
knowledge of the alleged violation of this Act; but in no event shall the period
of limitation so extended be more than 2 years beyond the expiration of the 3
year period otherwise applicable.
E. The term purchaser as used in this Section shall include the
personal representative or representatives of the purchaser.
F. Anything in this Act to the contrary notwithstanding and in
addition to all other remedies, the Secretary of State through the Office of the
Attorney General may bring an action in any circuit court of the State of
Illinois in the name and on behalf of the State of Illinois against any person
or persons participating in or about to participate in a violation of this Act
to enjoin those persons who are continuing or doing any act in violation of this
Act or to enforce compliance with this Act. Upon a proper showing the court may
grant a permanent or preliminary injunction or temporary restraining order
without bond, and may order the defendant to make an offer of rescission of any
sales or purchases of securities determined by the court to be unlawful under
this Act. The court shall further have jurisdiction and authority, in addition
to the other penalties and remedies in this Act provided, to act or appoint
another person as a receiver,
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conservator, ancillary receiver or ancillary conservator for the defendant or
the defendant's assets located in this State and may assess costs against the
defendant for the use of the State.
G.(1) Whenever any person has engaged or is about to engage in any act or
practice constituting a violation of this Act, any party in interest may bring
an action in the circuit court of the county in which the party in interest may
bring an action in the circuit court of the county in which the party in
interest resides, or where the person has his, her or its principal office or
registered office or where any part of the transaction has or will take place,
to enjoin that person from continuing or doing any act in violation of or to
enforce compliance with this Act. Upon a proper showing, the court shall grant
a permanent or preliminary injunction or temporary restraining order or
rescission of any sales or purchases of securities determined to be unlawful
under this Act, and may assess costs of the proceedings against the defendant.
(2) A copy of the complaint shall be served upon the Secretary of State
within one business day of filing in the form and manner prescribed by the
Secretary of Sate by rule or regulation; provided, that the failure to comply
with this provision shall not invalidate the action which is the subject of the
complaint.
H. Any provision of this Section 13 to the contrary notwithstanding,
neither the civil remedies provided in subsection A of this Section 13 nor the
remedies of rescission and appointment of a receiver, conservator, ancillary
receiver or ancillary conservator provided in subsection I of Section 11 of this
Act and in subsections F and G of this Section 13 of this Act nor the remedies
of restitution, damages or disgorgement of profits provided in subsection I of
Section 11 of this Act shall be available against any person by reason of the
failure to file with the Secretary of State, or on account of the contents of,
any notice filing under Section 2a of the Act or subsection C-5 of Section 8 of
this Act or any report of sale provided for in subsection G or P of Section 4,
paragraph (2) of subsection D of Sections 5 and 6, or paragraph (2) of
subsection F of Section 7 of this Act.
INDIANA CODE
SECTION 23-2-1-3. It is unlawful for any person to offer or sell any
security in Indiana unless:
(1) it is registered under this chapter;
(2) the security or transaction is exempted under section 2 of this
chapter; or
(3) it is a federal covered security.
SECTION 23-2-1-19. (a) A person who offers or sells a security in
violation of this chapter, and who does not sustain the burden of proof that the
person did not know and in the exercise of reasonable care could not have known
of the violation, is liable to any other party to the transaction who did not
knowingly participate in the violation or who did not have, at the time of the
transaction, knowledge of the violation, who may sue either at law or in equity
to rescind the transaction or to recover the consideration paid, together, in
either case, with interest as computed in subsection (g)(1), plus costs, and
reasonable attorney's fees, less the amount of any cash or other property
received on the security upon the tender of the security by the person bringing
the action or for damages if the person no longer owns the security. Damages are
the amount that would be recoverable upon a tender less:
(1) the value of the security when the buyer disposed of the security;
and
(2) the interest as computed in subsection (g)(1) on the value of the
security from the date of disposition.
(b) A person who purchases a security in violation of this chapter, and
who does not sustain the burden of proof that the person did not know and in the
exercise of reasonable care could not have known of the violation, is liable to
any other party to the transaction who did not knowingly participate in the
violation or who did not have, at the time of the transaction, knowledge of the
violation. The other party to the transaction may bring an action to rescind the
transaction or for damages, together, in either case, with reasonable attorney's
fees, upon the tender of the consideration received by the person bringing the
action.
(c) A person who, for compensation, engages in the business of advising
others, either directly or through publications or writings, as to the value of
securities or as to the advisability of investing in, purchasing, or selling
securities, or who, for compensation and as a part of a regular business, issues
analyses or reports concerning securities and:
(1) violates section 8, 12.1(b), or 14 of this chapter;
(2) employs a device, scheme, or artifice to defraud a person; or
(3) engages in an act that operates or would operate as fraud or deceit
upon a person;
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is liable to the other person, who may bring an action to recover any
consideration paid for advice, any loss due to advice, interest at eight percent
(8%) each year from the date consideration was paid, costs, and reasonable
attorney's fees less the value of cash or property received due to the advice.
It is a defense to an action brought for a violation of section 12.1(b) of this
chapter that the person accused of the violation did not know of the violation
and, exercising reasonable care, could not have known of the violation.
(d) A person who directly or indirectly controls a person liable under
subsection (a), (b), or (c), a partner, officer, or director of the person, a
person occupying a similar status or performing similar functions, an employee
of a person who materially aids in the conduct creating the liability, and a
broker-dealer or agent who materially aids in the conduct are also liable
jointly and severally with and to the same extent as the person, unless the
person who is liable sustains the burden of proof that the person did not know,
and in the exercise of reasonable care could not have known, of the existence of
the facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons liable.
(e) A tender specified in this section may be made at any time before
entry of judgment.
(f) A cause of action under this statute survives the death of a person
who might have been a plaintiff or defendant.
(g) Action under this section shall be commenced within three (3) years
after discovery by the person bringing the action of a violation of this
chapter, and not afterwards. No person may sue under this section:
(1) if that person received a written offer, before suit and at a time
when the person owned the security, to refund the consideration paid together
with interest on that amount from the date of payment to the date of repayment,
with interest on:
(A) interest-bearing obligations to be computed at the same rate as
provided on the security; and
(B) all other securities at the rate of eight percent (8%) per year;
less the amount of any income received on the security, and the person failed to
accept the offer within thirty (30) days of its receipt; or
(2) if the person received an offer before suit and at a time when the
person did not own the security, unless the person rejected the offer in writing
within thirty (30) days of its receipt.
(h) No person who has made or engaged in the performance of a contract
in violation of this chapter or a rule or order under this chapter, or who has
acquired a purported right under a contract with knowledge of the facts by
reason of which its making or performance was in violation, may base a suit on
the contract.
(i) A condition, stipulation, or provision binding a person acquiring a
security to waive compliance with this chapter or a rule or order under this
chapter is void.
(j) The rights and remedies specifically prescribed by this chapter are
the only rights and remedies created by this chapter, but are in addition to any
other rights or remedies that exist at law or in equity.
IOWA UNIFORM SECURITIES ACT
SECTION 502.201. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this state
unless
1. It is registered under this chapter; or
2. The security or transaction is exempted under section 502.202 or
502.203.
3. It is a federal covered security.
SECTION 502.501. VIOLATION OF REGISTRATION AND RELATED REQUIREMENTS.
1. Any person who:
a. Violates section 502.201, subsection 1 or 2, or section 502.208,
subsection 12, or section 502.406, subsection 2, paragraph "b", or
b. Violates any material condition imposed under section 502.208, or
c. Offers or sells a security at any time when such person has
committed a material violation of section 502.301, or
d. Commits a material violation of any order issued by the
administrator under this chapter, shall be liable to the person purchasing the
security offered or sold in connection with such violation, who may sue either
at law or in
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equity to recover the consideration paid for the security, together with
interest at the legal rate from the date of payment, costs and reasonable
attorneys' fees, less the amount of any income or distributions, in cash or
in kind, received on the security, upon the tender of the security, or for
damages if the purchaser no longer owns the security. Damages shall be the
amount that would be recoverable upon a tender less
(1) The value of the security when the purchaser disposed of it and
(2) Interest on said value at the legal rate from the date of
disposition. Any person on whose behalf an offering is made and any
underwriter of the offering, whether on a best efforts or a firm commitment
basis, shall be jointly and severally liable under this section, but in no
event shall any underwriter be liable in any suit or suits authorized under
this section for damages in excess of the total price at which the securities
underwritten by it and distributed to the public were offered to the public.
Tender requires only notice of willingness to exchange the security for the
amount specified. Any notice may be given by service as in civil actions or
by certified mail addressed to the last known address of the person liable.
2. Any person who violates section 502.211 shall be liable to the
person selling the security to such violator, which seller may sue either at
law or in equity to recover the security, costs and reasonable attorney's
fees, plus any income or distributions, in cash or in kind, received by the
purchaser thereon, upon tender of the consideration received, or for damages
if the purchaser no longer owns the security. Damages shall be the excess of
the value of the security when the purchaser disposed of it, plus interest at
the legal rate from the date of disposition, over the consideration paid for
the security. Tender requires only notice of willingness to pay the amount
specified in exchange for the security. Any notice may be given by service
as in civil actions or by certified mail to the last known address of the
person liable.
3. In addition to other remedies provided in this chapter, in a
proceeding alleging a violation of sections 502.211 through 502.218 the court
may provide that all shares acquired from a resident of this state in
violation of any provision of this chapter or rule or order issued pursuant
to this chapter be denied voting rights for one year after acquisition, that
the shares be nontransferable on the books of the target company, or that
during this one-year period the target company have the option to call the
shares for redemption either at the price at which the shares were acquired
or at book value per share as of the last day of the fiscal quarter ended
prior to the date of the call for redemption, which redemption shall occur on
the date set in the call notice but not later than sixty days after the call
notice is given.
SECTION 502.504. TIME LIMITATIONS ON RIGHTS OF ACTION.
1. No action shall be maintained to enforce any liability created
under either section 502.501 or section 502.503, subsection 1 insofar as it
relates to section 502.501 unless brought within two years after the
violation upon which it is based.
2. No action shall be maintained to enforce any liability created
under either section 502.502 or section 502.503, subsection 1, insofar as it
relates to section 502.502, unless brought within the shorter of the
following two periods:
a. Five years after the act or transaction constituting the violation;
or
b. Two years after the plaintiff receives actual notice of, or upon
the exercise of reasonable diligence should have known of, the facts
constituting the violation.
3. No Action shall be maintained to enforce any right of
indemnification or contribution created by section 502.503, subsection 2
unless brought within one year after final judgment based upon the liability
for which the right of indemnification or contribution exists.
4. No purchaser may commence an action under sections 502.501, 502.502
or 502.503 if:
a. Before suit is commenced, the purchaser has received a written
offer:
(1) Stating in reasonable detail why liability under such section may
have arisen and fairly advising the purchaser of the purchaser's rights;
(2) Offering to repurchase the security for cash, payable on delivery
of the security, equal to the consideration paid, together with interest at
the legal rate from the date of payment, less the amount of any income or
distributions, in cash or in kind, received thereon or, if the purchaser no
longer owns the security, offering to pay the purchaser upon acceptance of
the offer an amount in cash equal to the damages computed in accordance with
section 502.502, subsection 1; and
(3) Stating that the offer may be accepted by the purchaser at any
time within a specified period of not less than thirty days after the date of
receipt thereof, or such shorter period as the administrator may by rule
prescribe; and
b. The purchaser has failed to accept such offer in writing within the
specified period.
5. No seller may commence an action under sections 502.501, 502.502 or
502.503 if:
a. Before suit is commenced, the seller has received a written offer:
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(1) Stating in reasonable detail why liability under such section may
have arisen and fairly advising the seller of the seller's rights;
(2) Offering to return the security plus the amount of any income or
distributions, in cash or in kind, received thereon upon payment of the
consideration received, or, if the purchaser no longer owns the security,
offering to pay the seller upon acceptance of the offer an amount in cash
equal to the damages computed in accordance with section 502.502, subsection
2; and
(3) Stating that the offer may be accepted by the seller at any time
within a specified period of not less than thirty days after the date of
receipt thereof, or such shorter period as the administrator may by rule
prescribe; and
b. The seller has failed to accept the offer in writing within the
specified period.
6. Offers under subsections 4 or 5 shall be in the form and contain
the information the administrator by rule prescribes. Every offer under
either subsection shall be delivered to the offeree personally or sent by
certified mail addressed to the offeree at the offeree's last known address.
If an offer is not performed in accordance with its terms, suit by the
offeree under sections 502.501, 502.502 or 502.503 shall be permitted without
regard to subsections 4 and 5 of this section.
KANSAS SECURITIES ACT
SECTION 17-1255. UNLAWFUL TO SELL OR OFFER FOR SALE CERTAIN UNREGISTERED
SECURITIES; PENALTY.
(a) It is unlawful for any person to offer or sell any security in
this state, unless:
(1) It is registered under this act;
(2) the security or transaction is exempt under K.S.A. 17-1261 or
17-1262, and amendments thereto; or
(3) it is a federal covered security for which the fee has been paid
and documents have been filed as required by K.S.A. 1997 Supp. 17-1270a.
(b) A conviction for an intentional violation of this section is a
severity level 7, nonperson felony. Any violation of this section committed
on or after July 1, 1993, resulting in a loss of $25,000 or more, regardless
of its location on the sentencing grid block, shall have a presumptive
sentence of imprisonment.
SECTION 17-1268. CIVIL LIABILITIES.
(a) Any person, who offers or sells a security in violation of K.S.A.
17-1254 or 17-1255, and amendments thereto, or offers or sells a security by
means of any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made in the light of
the circumstances under which they are made not misleading (the buyer not
knowing of the untruth or omission) and who does not sustain the burden of
proof that such person did not know and in the exercise of reasonable care
could not have known of the untruth or omission, is liable to the person
buying the security from such person, who may sue either at law or in equity
to recover the consideration paid for the security, together with interest at
15% per annum from the date of payment, costs, and reasonable attorney fees,
less the amount of any income received on the security, upon the tender of
the security, or for damages if the buyer no longer owns the security.
Damages are the amount that would be recoverable upon a tender less:
(1) The value of the security when the buyer disposed of it; and (2)
interest at 15% per annum from the date of disposition.
(b) Every person who directly or indirectly controls a seller liable
under subsection (a), every partner, officer, or director (or person
occupying a similar status or performing similar functions) or employee of
such a seller who materially aids in the sale, and every broker-dealer or
agent who materially aids in the sale is also liable jointly and severally
with and to the same extent as the seller, unless the nonseller who is so
liable sustains the burden of proof that such nonseller did not know, and in
the exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
(c) Any tender specified in this section may be made at any time
before entry of judgment. Every cause of action under this statute survives
the death of any person who might have been a plaintiff or defendant. No
person may sue under this section if:
(1) The buyer received a written offer, before suit and at a time
when the buyer owned the security, to refund the consideration paid, together
with interest at 15% per annum from the date of payment, less the amount of
any
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income received on the security, and the buyer failed to accept the offer
within 30 days of its receipt; or (2) the buyer received such an offer before
suit and at a time when the buyer did not own the security, unless the buyer
rejected the offer in writing within 30 days of its receipt.
(d) No person who has made or engaged in the performance of any
contract in violation of any provision of this act or any rule and regulation or
order hereunder, or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract. Any condition, stipulation, or
provision binding any person acquiring any security or receiving any investment
advice to waive compliance with any provision of this act or any rule and
regulation or order hereunder is void.
SECURITIES ACT OF KENTUCKY
SECTION 292.340. REGISTRATION OF SECURITIES.
It is unlawful for any person to offer or sell any security in this
state, unless the security is registered under this chapter, or the security
or transaction is exempt under this chapter, or the security is a covered
security.
SECTION 292.480. CIVIL LIABILITIES.
(1) Any person, who offers or sells a security in violation of this
chapter or of any rules or orders promulgated hereunder or offers or sells a
security by means of any untrue statement of a material fact or any omission
to state a material fact necessary in order to make the statements made in
the light of the circumstances under which they are made not misleading (the
buyer nor knowing of the untruth or omission) and who does not sustain the
burden of proof that he did not know and in the exercise of reasonable care
could not have known of the untruth or omission is liable to the person
buying the security from him, who may sue either at law or in equity to
recover the consideration paid for the security, together with interest at
the legal rate from the date of payment costs and reasonable attorneys' fees,
less the amount of any income received on the security, upon the tender of
the security, or for damages if he no longer owns the security. Damages are
the amount that would be recoverable upon a tender less (a) the value of the
security when the buyer has disposed of it and (b) interest at the legal rate
from the date of disposition.
(2) Any person who purchases a security in violation of the chapter
or of any administrative regulations or orders promulgated under this chapter
or who purchases a security by means of any untrue statement of a material
fact or any omission to state a material fact necessary in order to make the
statements made in light of the circumstances under which they are made not
misleading, the seller not knowing of the untruth or omission, and who does
not sustain the burden of proof that he did not know and in the exercise of
reasonable care could not have known of the untruth or omission is liable to
the person selling the security to him, who may sue either at law or in
equity for:
(a) A return of the security, together with any income received by
the purchaser on the security, costs, and reasonable attorney's fees, upon a
tender of the full amount of the consideration received for the security; or
(b) If the purchaser no longer owns the security, the difference
between the fair value of the security at the date of the transaction and the
consideration received for the security, together with interest on the
difference at the legal rate compounded annually from the date of the
transaction, and costs and reasonable attorney's fees.
(3) For purposes of paragraph (b) of subsection (2) of this section,
when the purchaser no longer owns the security, if a seller seeking relief
under paragraph (b) of subsection (2) of this section offers and presents
admissible evidence of the highest intermediate value of the subject security
as of some specific date occurring within a reasonable period of time after
the date of the sale of the security but no later than the date an action
under paragraph (b) of subsection (2) of this section is filed, or of the
total consideration received by the purchaser in a subsequent sale of that
security, it shall be presumed until rebutted by a preponderance of evidence
to the contrary that the value or sale price, as applicable, is the fair
value of the security at the date of the transaction as those terms are used
in paragraph (b) of subsection (2) of this section to measure damages. For
purposes of subsections (1) and (2) of this section and all other provisions
of this chapter, statements and omissions may be either oral or written.
(4) Every person who directly or indirectly controls a seller or
purchaser liable under subsection (1) or (2) of this section, every partner,
officer or director (or person occupying a similar status or performing
similar functions) or employee of a seller or purchaser who materially aids
in the sale or purchase, and every broker-dealer or agent who materially aids
in the sale or purchase is also liable jointly and severally with and to the
same extent as the seller or purchaser, unless the nonseller or nonpurchaser
who is so liable sustains the burden of proof that he did not know, and in
the exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
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(5) Any tender specified in this section may be made at any time
before entry of judgement. Every cause of action under this statute survives
the death of any person who might have been a plaintiff or defendant. No
person may sue under this section more than three (3) years after the
occurrence of the act, omission, or transaction constituting a violation of
this chapter. No person may sue under this section:
(a) If the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at the legal rate from the date of payment, less the amount of any
income received on the security, and he failed to accept the offer within
thirty (30) days of its receipt;
(b) If the buyer received an offer before suit and at a time when he
did not own the security, unless he rejected the offer in writing within
thirty (30) days of its receipt; or
(c) If paragraph (b) of subsection (2) or this section applies, and
if the seller received a written offer before suit equal to the difference
between the greater of the highest intermediate value of the security of the
consideration received by the purchaser upon disposal of the security and the
consideration received by the seller for the security, together with interest
on the difference at the legal rate from the date of the transaction; or if
paragraph (a) of subsection (2) of this section applies, and if the seller
received a written offer to return the security together with any income
received by the purchaser on the security; and in either case he failed to
accept the offer within thirty (30) days of its receipt.
(6) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract. Any condition, stipulation or
provision binding any person acquiring any security to waive compliance with
any provision of this chapter or any rule or order hereunder is void.
(7) The rights and remedies provided by this section are in addition
to any other rights or remedies that may exist at law or in equity.
LOUISIANA SECURITIES LAW
SECTION 51:705. REGISTRATION OF SECURITIES; WHEN AND HOW REQUIRED; DELIVERY
OF PROSPECTUS.
A. Generally. It shall be unlawful for any person to offer for sale
or to sell any securities to any person in this state unless:
(1) They are subject to an effective registration statement under this
Part; or
(2) The security or transaction is exempt under R.S. 51:708 or R.S.
51:709.
SECTION 51:712. UNLAWFUL PRACTICES.
A. It shall be unlawful for any person:
(1) To offer to sell or to sell any security in violation of R.S.
51:703, 705, or any rule, regulation or order promulgated or issued by the
commissioner under this Part.
(2) To offer to sell or to sell a security by means of any oral or
written untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they are made, not misleading, the buyer not
knowing of the untruth or omission, if such person shall not sustain the
burden of proof that he did not know, and in the exercise of reasonable care
could not have known, of the untruth or omission.
(3) To offer or sell any security:
(a) Registered under R.S. 51:705(B) by means of any prospectus except a
prospectus which complies with R.S. 51:705(B)(3).
(b) Registered under R.S. 51:705(E) by means of any prospectus except
a prospectus which complies with R.S. 51:705(E)(3).
(c) Registered under R.S. 51:705(F) by means of any prospectus except a
prospectus which complies with R.S. 51:705(F)(4).
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SECTION 51:714. CIVIL LIABILITY FROM SALES OF SECURITIES.
A. Any person who violates R.S. 51:712(A) shall be liable to the
person buying such security, and such buyer may sue in any court to recover
the consideration paid in cash or, if such consideration was not paid in
cash, the fair value thereof at the time such consideration was paid for the
security with interest thereon from the date of payment down to the date of
repayment as computed in R.S. 51:714(C)(1), less the amount of any income
received thereon, together with all taxable court costs and reasonable
attorney's fees, upon the tender, where practicable, of the security at any
time before the entry of judgment, or for damages if he no longer owns the
security. Damages are the amount which equals the difference between the
fair value of the consideration the buyer gave for the security and the fair
value of the security at the time the buyer disposed of it, plus interest
thereon from the date of payment to the date of repayment as computed in R.S.
51:714(C)(2).
B. Every person who directly or indirectly controls a person liable
under Subsection A of this Section, every general partner, executive officer,
or director of such person liable under Subsection A of this Section, every
person occupying a similar status or performing similar functions, and every
dealer or salesman who participates in any material way in the sale is liable
jointly and severally with and to the same extent as the person liable under
Subsection A of this Section unless the person whose liability arises under
this Subsection sustains the burden of proof that he did not know and in the
exercise of reasonable care could not have known of the existence of the
facts by reason of which liability is alleged to exist. There is
contribution as in the case of contract among several persons so liable.
C. (1) No person may sue under this Section more than two years from
the date of the contract for sale or sale, if there is no contract for sale.
No person may sue under this Section:
(a) If the buyer received a written offer, before suit and at a time
when he owned the security, to repay in cash or by certified or official bank
check, within thirty days from the date of acceptance of such offer in
exchange for the securities, the fair value of the consideration paid,
determined as of the date such payment was originally paid by the buyer,
together with interest on such amount for the period from the date of payment
to the date of repayment, such interest to be computed in case the security
consists of an interest-bearing obligation, at the same rate as provided in
the security or, in case the security consists of other than an
interest-bearing obligation, at the applicable rate of legal interest, less,
in every case, the amount of any income received on the security, and:
(i) Such offeree does not accept the offer within thirty days of its
receipt or
(ii) If such offer was accepted, the terms thereof were complied with by
the offeror;
(b) If the buyer received a written offer before suit and at a time
when he did not own the security to repay in cash or by certified or official
bank check, within thirty days from the date of acceptance of such offer, an
amount equal to the difference between the fair value of the consideration
the buyer gave for the security and the fair value of the security at the
time the buyer disposed of it, together with interest on such amount for the
period from the date of payment down to the date of repayment, such interest
to be computed in case the security consists of an interest-bearing
obligation at the same rate as provided in the security or, in case the
security consists of other than an interest-bearing obligation, at the
applicable rate of legal interest, less, in every case, the amount of any
income received on the security, and:
(i) Such offeree does not accept the offer within thirty days of its
receipt or
(ii) If such offer was accepted, the terms thereof were complied with by
the offeror;
Provided, that no written offer shall be effective within the meaning of this
Subsection unless, if it were an offer to sell securities, it would be exempt
under R.S. 51:709 or, if registration would have been required, then unless
such rescission offer has been registered and effected under R.S. 51:705.
Any person who is paid for his security in the amount provided by this
Subsection shall be foreclosed from asserting any remedies under this Part,
regardless of whether the other requirements of this Subsection have been
complied with.
D. Every cause of action under this Part survives the death of any
person who might have been a plaintiff or defendant.
E. Nothing in this Part shall limit any statutory or civil right of
any person to bring action in any court for any act involved in the sale of
securities or the right of this state to punish any person for any violation
of any law. The attorney general and each of the district attorneys
throughout this state, with regard to violation of this Part in their
respective districts, shall lend full assistance to the commissioner in any
investigations or prosecutions that the commissioner may deem necessary under
the provisions of this Part.
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REVISED MAINE SECURITIES ACT
SECTION 10605. CIVIL LIABILITY.
1. Offer or sale of security. Any person who offers or sells a security
in violation of section 10201, 10205, 10301, 10401 or 10405, subsection 8, or
any rule of the administrator relating to those sections or any condition
imposed under section 10405, subsection 7, is liable to the person purchasing
the security from that person. The person purchasing the security may sue to
recover the consideration paid for the security, together with interest at
the legal rate from the date of payment, costs and reasonable attorneys' fees
less the amount of any income received on the security, upon the tender of
the security, or for damages plus costs and reasonable attorneys' fees if the
person no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the purchaser
disposed of it and interest at the legal rate from the date of disposition.
Tender shall require only notice of willingness to exchange the security for
the amount specified. A person who offers or sells a security in violation of
section 10201, subsection 2, is not liable under this subsection if the
purchaser knew of the untrue statement of a material fact or omission of a
statement of a material fact; or the person sustains the burden of proof to
establish that the person did not know and in the exercise of reasonable care
could not have known of the untrue statement or omission.
2. Purchase of a security. Any person who purchases a security in
violation of section 10201, subsection 2, is liable to the person selling the
security to that person. The person selling the security may sue to recover
the security, plus any income received by the purchaser on the security upon
tender of the consideration received, costs and reasonable attorneys' fees,
or for damages plus costs and reasonable attorneys' fees if the purchaser no
longer owns the security. Damages are the excess of the value of the security
when the purchaser acquired it, plus interest at the legal rate on that
amount from the date of disposition, over the consideration paid for the
security plus any income received on the security. Tender requires only
notice of willingness to pay the amount specified in exchange for the
security. A person who purchases a security in violation of section 10201,
subsection 2, is not liable under this subsection if the seller knew of the
untrue statement of a material fact or omission of a statement of a material
fact; or the person sustains the burden of proof to establish that the person
did not know and in the exercise of reasonable care could not have known of
the untrue statement or omission.
3. Control persons. Every person who directly or indirectly controls
another person liable under subsection 1 or 2, every partner, officer or
director of that other person, every person occupying a similar status or
performing similar functions, every employee of that other person who
materially aids in the act or transaction constituting the violation and
every broker-dealer or sales representative who materially aids in the act or
transaction constituting the violation is also liable jointly and severally
with and to the same extent as that other person, unless the person otherwise
secondarily liable under this Act proves that the person did not know, and in
the exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
SECTION 10606. CIVIL STATUTE OF LIMITATIONS.
No person may sue under section 10605, unless suit is brought within 2
years after the violation, except that, if liability arises under subchapter
II, suit must be brought within 2 years after the discovery of the violation
or after discovery should have been made by the exercise of reasonable
diligence.
SECTION 10607. RESCISSION AND SETTLEMENT OFFERS.
1. Purchaser. No purchaser may commence an action under section 10605 if,
before suit is commenced, the purchaser has received a written offer:
A. Stating the respect in which liability under section 10605 may have
arisen and fairly advising the purchaser of the purchaser's rights;
B. Offering to repurchase the security for cash, payable on delivery of
the security, equal to the consideration paid, together with interest at the
legal rate from the date of payment, less the amount of any income received
thereon, or, if the purchaser no longer owns the security, offering to pay
the purchaser upon acceptance of the offer an amount in cash equal to the
damages computed in accordance with section 10605, subsection 1; and
C. Stating that the offer may be accepted by the purchaser at any time
within a specified period of not less than 30 days after the date of its
receipt by the purchaser.
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2. Seller. No seller may commence an action under section 10605 if,
before suit is commenced, the seller has received a written offer:
A. Stating the respect in which liability under section 10605 may have
arisen and fairly advising the seller of the seller's rights;
B. Offering to return the security, plus the amount of any income
received on the security, upon payment of the consideration received, or, if
the purchaser no longer owns the security, offering to pay the seller upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with section 10605, subsection 2; and
C. Providing that the offer may be accepted by the seller at any time
within a specified period of not less than 30 days after the date of its
receipt by the seller.
3. Form of offer. The administrator, by rule, may prescribe the form in
which the information specified in subsections 1 and 2 shall be contained in
any offer made under subsection 1 or 2.
4. Delivery of offer. Every offer under subsection 1 or 2 shall be
delivered to the offeree or sent by certified mail to the offeree at the
offeree's last known address.
5. Statute of limitation tolled. If an offer is not performed in
accordance with its terms, suit by the offeree under section 10605 shall be
permitted without regard to this section and the statute of limitations shall
toll from the time of receipt of the offer until 60 days after the rescission
or settlement offer was to have been performed.
MARYLAND SECURITIES ACT
SECTION 11-501. REGISTRATION REQUIREMENT.
A person may not offer or sell any security in this State unless:
(1) The security is registered under this title;
(2) The security or transaction is exempted under Subtitle 6 of this
title; or
(3) The security is a federal covered security.
SECTION 11-703. CIVIL LIABILITIES.
(a) When seller, purchaser or advisor liable. (1) A person is civilly
liable to the person buying a security from him if he:
(i) Offers or sells the security in violation of Section 11-304(b),
Section 11-401(a), Section 11-402(a), or Section 11-501 of this title, or of
any rule or order under Section 11-205 of this title which requires the
affirmative approval of sales literature before it is used; or
(ii) Offers or sells the security by means of any untrue statement of
a material fact or any omission to state a material fact necessary in order
to make the statements made, in the light of the circumstances under which
they are made, not misleading, the buyer not knowing of the untruth or
omission, and if he does not sustain the burden of proof that he did not
know, and in the exercise of reasonable care could not have known, of the
untruth or omission.
(2) A person is civilly liable to the person selling a security to
him if he offers to purchase or purchases the security by means of any untrue
statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they are made, not misleading, the seller not knowing of the
untruth or omission, and if he does not sustain the burden of proof that he
did not know, and in the exercise of reasonable care could not have known, of
the untruth or omission.
(3) A person is civilly liable to another person if the person:
(i) Acts as an investment adviser or representative in violation of
Section 11-302(c), Section 11-401(b), Section 11-402(b), or Section 11-304(b)
of this title or any rule or order promulgated under it, except that an
action based on a violation of Section 11-402(b) of this title may not be
maintained except by those persons who directly received advice from the
unregistered investment adviser representative; or
(ii) Receives, directly or indirectly, any consideration from another
person for advice as to the value of securities or their purchase or sale or
for acting as an investment adviser or representative under Section 11-101(h)
and (i) of this title, whether through the issuance of analyses, reports, or
otherwise, and employs any device, scheme, or artifice to defraud such other
person or engages in any act, practice or course of business which operates
or would operate as a fraud or deceit on such other person.
(b) Extent of liability. (1) A buyer may sue either at law or in
equity:
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(i) On tender of the security, to recover the consideration paid for
the security, together with interest at the rate provided for in Section
11-107(a) of the Courts and Judicial Proceedings Article, as amended, from the
date of payment, costs, and reasonable attorneys' fees, less the amount of any
income received on the security; or
(ii) If he no longer owns the security, for damages.
(2) A seller may sue either at law or in equity:
(i) On tender of the consideration paid for the security, to recover
the security, together with the amount of any income received on the security,
costs, and reasonable attorneys' fees; or
(ii) If the buyer no longer owns the security, for damages.
(3) For the purposes of subsection (b)(1)(ii) of this section, damages
are the amount that would be recoverable on a tender less the value of the
security when the buyer disposed of it and interest at the rate provided for in
Section 11-107(a) of the Courts and Judicial Proceedings Article, as amended,
from the date of disposition.
(4)(i) In any action brought under subsection (a)(3) of this section a
person may sue either at law or in equity for the rescission of the advisory
contract and any damages resulting from the violation, together with interest at
the rate provided for in Section 11-107(a) of the Courts and Judicial
Proceedings Article, as amended, from the date of payment of the consideration,
costs, and reasonable attorneys' fees, less the amount of any income received
from such advice.
(ii) An action based on a violation of Section 11-302(c) of this title
may not prevail where the person accused of the violation sustains the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, of the existence of the facts by reason of which the liability is
alleged to exist.
(c) Others jointly and severally liable with seller or purchaser.
(1) Every person who directly or indirectly controls a person liable
under subsection (a) of this section, every partner, officer, or director of the
person liable, every person occupying a similar status or performing similar
functions, every employee of the person liable who materially aids in the
conduct giving rise to the liability, and every broker-dealer or agent who
materially aids in such conduct are also liable jointly and severally with and
to the same extent as the person liable, unless able to sustain the burden of
proof that he did not know, and in exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is alleged
to exist.
(2) There is contribution as in cases of contract among the several
persons so liable.
(d) Time of making tender. Any tender specified in this section may be
made at any time before entry of judgment.
(e) Survival of cause of action. Every cause of action under this
statute survives the death of any person who might have been a plaintiff or
defendant.
(f) Limitation of actions; effect of offer of refund.
(1) A person may not sue under subsections (a)(1) and (2) of this
section after the earlier to occur of 3 years after the contract of sale or
purchase or the time specified in paragraph (2) of this subsection.
(2) An action may not be maintained:
(i) To enforce any liability created under subsection (a)(1)(i) of this
section, unless brought within one year after the violation on which it is
based; or
(ii) To enforce any liability created under subsection (a)(1)(ii) or (2)
of this section, unless brought within one year after the discovery of the
untrue statement or omission, or after the discovery should have been made by
the exercise of reasonable diligence.
(3) A person may not sue under subsection (a)(3) of this section more
than 3 years after the date of the advisory contract or the rendering of
investment advice, or the expiration of 2 years after the discovery of the facts
constituting the violation, whichever first occurs.
(4) A person may not sue under this section:
(i) If the buyer received a written offer, before suit and at a time
when he owned the security or asset, to refund the consideration paid together
with interest at the rate provided for in Section 11-107(a) of the Courts and
Judicial Proceedings Article, as amended, from the date of payment, less the
amount of any income received on the security or asset, and he failed to accept
the offer within 30 days of its receipt;
(ii) If the buyer received the offer before suit and at a time when he
did not own the security or asset, unless he rejected the offer in writing
within 30 days of its receipt; or
(iii) If the seller received a written offer from the buyer, before suit,
to return the security or asset, together with the amount of any income received
on the security, less interest at the rate provided for in Section 11-107(a) of
the Courts and Judicial Proceedings Article, as amended, from the date of
payment, and he failed to accept the offer within 30 days of its receipt.
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(g) Effect of making or performing contract with knowledge of facts. A
person may not base any suit on any contract if he:
(1) Has made or engaged in the performance of the contract in violation
of any provision of this title or any rule or order under this title; or
(2) Has acquired any purported right under the contract with knowledge
of the facts by reason of which its making or performance was in violation.
(h) Provision for waiver of compliance with section void. Any
condition, stipulation, or provision binding any person acquiring any security
or asset or receiving any investment advice to waive compliance with any
provision of this title or any rule or order under this title is void.
(i) Rights and remedies additional to others. The rights and remedies
provided by this title are in addition to any other rights or remedies that may
exist at law or in equity, but this title does not create any cause of action
not specified in this section or Section 11-410 of this title.
MASSACHUSETTS UNIFORM SECURITIES ACT
SECTION 301. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in the
commonwealth unless (1) it is registered under this chapter or (2) the security
or transaction is exempted under section 402.
SECTION 410. CIVIL LIABILITIES.
(a) Any person who
(1) offers or sells a security in violation of section 201(a), 301, or
405(b), or of any rule or order under section 403 which requires the affirmative
approval of sales literature before it is used, or of any condition imposed
under section 303(d), or
(2) offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are
made, not misleading, the buyer not knowing of the untruth or omission, and who
does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission, is liable
to the person buying the security from him, who may sue either at law or in
equity to recover the consideration paid for the security, together with
interest at six per cent per year from the date of payment, costs, and
reasonable attorneys' fees, less the amount of any income received on the
security, upon the tender of the security, or for damages if he no longer owns
the security. Damages are the amount that would be recoverable upon a tender
less the value of the security when the buyer disposed of it and interest at six
per cent per year from the date of disposition.
(b) Every person who directly or indirectly controls a seller liable
under subsection (a), every partner, officer, or director of such a seller,
every person occupying a similar status or performing similar functions, every
employee of such a seller who materially aids in the sale, and every
broker-dealer or agent who materially aids in the sale are also liable jointly
and severally with and to the same extent as the seller, unless the non-seller
who is so liable sustains the burden of proof that he did not know, and in
exercise of reasonable care could not have known, of the existence of the facts
by reason of which the liability is alleged to exist. There is contribution as
in cases of contract among the several persons so liable.
(c) Any tender specified in this section may be made at any time before
entry of judgment.
(d) Every cause of action under this statute survives the death of any
person who might have been a plaintiff or defendant.
(e) No person may sue under this section more than four years after the
discovery by the person bringing the action of a violation of this chapter or
any rule promulgated or order issued thereunder. No person may sue under this
section (1) if the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent per year from the date of payment, less the amount of
any income received on the security, and he failed to accept the offer within
thirty days of its receipt, or (2) if the buyer received such an offer before
suit and at a time when he did not own the security, unless he rejected the
offer in writing within thirty days of its receipt.
(f) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
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(g) Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of this chapter or
any rule or order hereunder is void.
(h) The rights and remedies provided by this chapter are in addition to
any other rights or remedies that may exist at law or in equity, but this
chapter does not create any cause of action not specified in this section.
MICHIGAN UNIFORM SECURITIES ACT
SECTION 301. SALE OF SECURITIES; REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this state
unless (1) it is registered under this act or (2) the security or transaction is
exempted under section 402.
SECTION 410. OFFER OR SALE OF SECURITY OR COMMODITY CONTRACT; LIABILITY;
DAMAGES; CONTRIBUTION; TENDER; SURVIVAL OF ACTION; LIMITATIONS; RESCISSION
OFFER; DISCLOSURE; SUIT BASED ON CONTRACT; RIGHTS AND REMEDIES CUMULATIVE.
(a) Any person who does either of the following shall be liable to the
person buying the security or commodity contract from him or her and the buyer
may sue either at law or in equity to recover the consideration paid for the
security or commodity contract, together with interest at 6% per year from the
date of payment, costs, and reasonable attorneys' fees, less the amount of
income received on the security or commodity contract, upon the tender of the
security or commodity contract, or, if he or she no longer owns the security or
commodity contract, for damages which shall be the amount that would be
recoverable upon a tender less the value of the security or commodity contract
when the buyer disposed of it and interest at 6% per year from the date of
disposition:
(1) Offers or sells a security or commodity contract in violation of
section 201(a), 301, or 405(b) or of any rule or order under section 403, which
requires the affirmative approval of sales literature before it is used, or of
any condition imposed under section 304(d), 305(f), 305(g), or 412(g), or
(2) Offers or sells a security or commodity contract by means of any
untrue statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading, the buyer not knowing
of the untruth or omission, and who does not sustain the burden of proof that he
or she did not know, and in the exercise of reasonable care could not have
known, of the untruth or omission.
(b) Every person who directly or indirectly controls a seller liable
under subsection (a), every partner, officer, or director of such a seller,
every person occupying a similar status or performing similar functions, every
employee of such a seller who materially aids in the sale, and every
broker-dealer or agent who materially aids in the sale are also liable jointly
and severally with and to the same extent as the seller, unless the non-seller
who is so liable sustains the burden of proof that he or she did not know, and
in exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
(c) Any tender specified in this section may be made at any time before
entry of judgment.
(d) Every cause of action under this statute survives the death of any
person who might have been a plaintiff or defendant.
(e) A person may not bring an action under subsection (a)(1) more than
2 years after the contract of sale. A person may not bring an action under
subsection (a)(2) more than 2 years after such person, in the exercise of
reasonable care, knew or should have known of the untruth or omission, but in no
event more than 4 years after the contract of sale. A person may not bring an
action under this section if the buyer received a written offer, before the
action and at a time when he or she owned the security or commodity contract, to
refund the consideration paid together with interest at 6% per year from the
date of payment, less the amount of any income received on the security, and he
or she failed to accept the offer within 30 days of its receipt, or if the buyer
received such an offer before the action and at a time when he or she did not
own the security or commodity contract, unless he or she rejected the offer in
writing within 30 days of its receipt. The documents making full written
disclosure about the financial and business condition of the issuer and the
financial and business risks associated with the retention of the securities or
commodities shall be provided to the offeree concurrently with the written
rescission offer. Such an offer shall not be made until 45 days after the date
of sale of the securities and acceptance or rejection of the offer shall not be
binding until 48 hours after receipt by the offeree. The rescission offer shall
recite the provisions of this section. A rescission offer under this section
shall not be valid unless the offeror substantiates that it has the ability to
fund the offering and this information is set forth in the disclosure documents.
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(f) No person who has made or engaged in the performance of any
contract in violation of any provision of this act or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
(g) Any condition, stipulation, or provision binding any person
acquiring any security or commodity contract to waive compliance with any
provision of this act or any rule or order hereunder is void.
(h) The rights and remedies provided by this act are in addition to any
other rights or remedies that may exist at law or in equity, but this act does
not create any cause of action not specified in this section or section 202(e).
MINNESOTA SECURITIES ACT
SECTION 80A.08. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this state
unless (a) it is registered under sections 80A.01 to 80A.31 or (b) the security
or transaction is exempted under section 80A.15 or (c) it is a federal covered
security.
SECTION 80A.23. CIVIL LIABILITIES.
Subdivision 1. Any person who sells a security in violation of sections
80A.08 or 80A.18, or of any condition imposed under section 80A.11, subdivision
4, or 80A.12, subdivisions 5 and 6, is liable to the person purchasing the
security, who may sue either in equity for rescission upon tender of the
security or at law for damages if that person no longer owns the security. In
any action for rescission, the purchaser shall be entitled to recover the
consideration paid for the security together with interest at the legal rate,
costs, and reasonable attorney's fees, less the amount of any income received on
the securities. In an action at law, damages shall be the consideration paid
for the security together with interest at the legal rate to the date of
disposition, costs, and reasonable attorney's fees, less the value of the
security at the date of disposition.
Subd. 2. Any person who violates section 80A.01 in connection with the
purchase or sale of any security shall be liable to any person damaged thereby
who sold such security to that person or to whom that person sold such security,
and any person who violates section 80A.03 in connection with the purchase or
sale of any security shall be liable to any person damaged by the conduct
prescribed by section 80A.03. Any person who violates section 80A.02 in
connection with the purchase or sale of any security shall be liable to any
investment advisory client who is damaged thereby. Damages in an action
pursuant to this subdivision shall include the actual damages sustained plus
interest from the date of payment or sale, costs and reasonable attorney's fees.
Subd. 3. Every person who directly or indirectly controls a person liable
under subdivision 1 or 2, every partner, principal executive officer or director
of such person, every person occupying a similar status or performing a similar
function, every employee of such person who materially aids in the act or
transaction constituting the violation, and every broker-dealer or agent who
materially aids in the act or transaction constituting the violation, are also
liable jointly and severally with and to the same extent as such person. There
is contribution as in cases of contract among the several persons so liable.
Subd. 4. No person shall be liable under subdivisions 1 to 3 who shall
sustain the burden of proof that the person did not know, and in the exercise of
reasonable care could not have known, of the existence of facts by reason of
which the liability is alleged to exist.
Subd. 5. Any tender specified in this section may be made at any time
before entry of judgment. Tender by a purchaser shall require only notice of
willingness to exchange the security for the amount computed pursuant to
subdivision 1. Tender by a seller shall require only notice of willingness to
pay the amount specified in exchange for the security. Any notice may be given
by service as in civil actions or by certified mail to the last known address of
the person liable.
Subd. 6. Every cause of action under this statute survives the death of
any person who might have been a plaintiff or defendant.
Subd. 7. No person may commence an action under subdivision 1 more than
three years after the sale upon which such action is based. No person may
commence an action under subdivision 2 more than three years after the
occurrence of the act or transaction constituting the violation.
Subd. 8. No purchaser may commence an action under subdivision 1 if,
before suit is commenced, the purchaser has received a written offer to
repurchase the security for cash payable on delivery of the security equal to
the consideration paid, together with interest at the legal rate from the date
of payment, less the amount of any income
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received thereon or, if the purchaser no longer owns the security, an offer
to pay an amount in cash equal to the damages computed in accordance with
subdivision 1 and the purchaser has failed to accept such offer in writing
within 30 days of its receipt. No offer shall be effective to prevent suit
under this section unless a duplicate copy thereof shall have been filed with
the commissioner at least 20 days prior to its delivery to the offeree and
the commissioner shall not have objected to the offer within that time. The
offer shall be in the form and contain the information the commissioner by
rule or order prescribes. If the offer is not performed in accordance with
its terms, suit by the offeree under this section shall be permitted without
regard to this subdivision.
Subd. 9. No person who has made or engaged in the performance of any
contract in violation of any provision of this section or any rule or order
hereunder or has acquired any purported rights under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation may base any suit on such violation under the contract.
Subd. 10. Any condition, stipulation or provision binding any person to
waive compliance with any provision of sections 80A.01 to 80A.31 or any rule or
order hereunder in the purchase or sale of any security is void.
Subd. 11. The rights and remedies promulgated by sections 80A.01 to 80A.31
are in addition to any other right or remedy that may exist at law or in equity,
but sections 80A.01 to 80A.31 do not create any cause of action not specified in
this section or section 80A.05, subdivision 5. No civil cause of action may be
based solely upon the failure of a broker-dealer or agent to comply with the
requirements of section 80A.04, subdivision 1 or 3, except a cause of action
arising under section 45.027.
MISSISSIPPI SECURITIES ACT
SECTION 75-71-401. REGISTRATION OR EXEMPTION REQUIRED.
Except as provided for in Section 75-71-109(a), it is unlawful for any
person to offer or sell any security in the State of Mississippi unless (1) it
is registered under this chapter or (2) the security or transaction is exempted
under Article 3 of this chapter.
SECTION 75-71-717. LIABILITY TO BUYERS FOR ILLEGAL OR FRAUDULENT SALES OR
OFFERS.
(a) Any person who (1) offers or sells a security in violation of
Section 75-71-117(a), 75-71-301 or 75-71-401, or of any rule or order under
Section 75-71-113 which requires the affirmative approval of sales literature
before it is used, or of any condition imposed under Section 75-71-405(d) or
75-71-417, or (2) offers or sells a security by the use of any written or oral
communication which contains any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they are made, not
misleading (the buyer not knowing of the untruth or omission), and who does not
sustain the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission, is liable to
the person buying the security from him, who may sue either at law or in equity
to recover the consideration paid for the security, together with interest at
eight percent (8%) per year from the date of payment, costs and reasonable
attorneys' fees, less the amount of any income received on the security, upon
the tender of the security, or for damages if he no longer owns the security.
Damages are the amount that would be recoverable upon a tender less the value of
the security when the buyer disposed of it and interest at eight percent (8%)
per year from the date of disposition.
(b) No buyer may sue under this section if, before suit is commenced,
the buyer has received a written offer stating the respect in which liability
under this section may have arisen and fairly advising the buyer of his rights;
offering to repurchase the security for cash payable on delivery of the security
equal to the consideration paid, together with interest at six percent (6%) from
the date of payment, less the amount of any income received on the security or,
if the buyer no longer owns the security, offering to pay the buyer upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with subsection (a); and stating that the offer may be accepted by
the buyer at any time within thirty (30) days of its receipt; and the buyer has
failed to accept such offer in writing within the specified period.
SECTION 75-71-725. LIMITATION OF ACTIONS.
No action shall be maintained to enforce any liability created under
section 75-71-717(2) unless brought within two (2) years after the discovery of
the untrue statement or omission, or after such discovery should have been made
by the exercise of reasonable diligence, or, if the action is to enforce a
liability created under section 75-71-717(1) unless brought within two (2) years
after the violation upon which it is based.
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MISSOURI UNIFORM SECURITIES ACT
SECTION 409.301. REGISTRATION REQUIREMENT (SECURITIES).
It is unlawful for any person to offer or sell any security in this state
unless:
(1) It is registered under this act;
(2) The security or transaction is exempted under section 409.402; or
(3) It is a federal covered security.
SECTION 409.411. CIVIL LIABILITIES.
(a) Any person who:
(1) Offers or sells a security in violation of section 409.201(a),
409.301, or 409.405(b), or of any rule or order under section 409.403 which
requires the affirmative approval of sales literature before it is used, or of
any condition imposed under section 409.304(d), 409.305(f), or 409.305(g); or
(2) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are
made, not misleading (the buyer not knowing of the untruth or omission), and who
does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission, is liable
to the person buying the security from him, who may sue either at law or in
equity to recover the amount specified under subsection (j) of this section.
(b) Any person who:
(1) Engages in the business of advising others, for compensation,
either directly or through publications or writings, as to the value of
securities or as to the advisability of investing in, purchasing, or selling
securities, or who, for compensation and as a part of a regular business, issues
or promulgates analyses or reports concerning securities in violation of section
409.102, 409.201(c) or (d), 409.405(b); or
(2) Receives directly or indirectly any consideration from another
person for advice as to the value of securities or their purchase or sale,
whether through the issuance of analyses, reports or otherwise and employs any
device, scheme, or artifice to defraud such other person or engages in any act,
practice or course of business which operates or would operate as a fraud or
deceit on such other person, is liable to that person who may sue either at law
or in equity to recover the consideration paid for such advice and any loss due
to such advice, together with interest at eight percent per year from the date
of payment of the consideration plus costs and reasonable attorney's fees, less
the amount of any income received from such advice in the amount specified in
subsection (j) of this section.
(c) Every person who directly or indirectly controls a person liable
under subsections (a) and (b) of this section, including every partner, officer,
or director of such a person, every person occupying a similar status or
performing similar functions, every employee of such a person who materially
aids in the conduct giving rise to the liability, and every broker-dealer or
agent who materially aids in such conduct is also liable jointly and severally
with and to the same extent as such person, unless able to sustain the burden of
proof that he did not know, and in exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is alleged
to exist. There is contribution as in cases of contract among the several
persons so liable.
(d) Any tender specified in this section may be made at any time before
entry of judgment.
(e) Every cause of action under this statute survives the death of any
person who might have been a plaintiff or defendant.
(f) No person may sue under this section more than three years after
the contract of sale, or the rendering of investment advice.
(g) No person may sue under this section (1) if the buyer received a
written offer, before suit and at a time when he owned the security, to refund
the consideration paid together with interest at eight percent per year from the
date of payment, less the amount of any income received on the security, and he
failed to accept the offer within thirty days of its receipt, or (2) if the
buyer received such an offer before suit and at a time when he did not own the
security, unless he rejected the offer in writing within thirty days of its
receipt.
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of sections 409.101 to 409.419 or any
rule or order hereunder, or who has acquired any purported right under any such
contract with knowledge of the facts by reason of which its making or
performance was in violation, may base any suit on the contract.
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(i) Any condition, stipulation, or provision binding any person
acquiring any security or receiving any investment advice to waive compliance
with any provision of sections 409.101 to 409.419 or any rule or order hereunder
is void.
(j) The amounts recoverable by a person damaged as a result of a
violation of subsection (a) or (b) of this section shall be the consideration
paid for the purchase of the security together with interest at eight percent
per year from the date of payment, cost, and reasonable attorney's fees, less
the amount of any income received on the security, upon the tender of the
security, or for damages if he no longer owns the security. "Damages" is the
amount that would be recoverable upon the tender less the value of the security
when the buyer disposed of it and interest at eight percent per year from the
date of disposal. An action pursuant to a violation of subsection (b) of this
section may not be maintained except by those persons who directly receive
advice from the person charged with the violation. Any recovery under subsection
(b) of this section must be offset by any recovery received from any source
under subsection (a) of this section.
(k) The rights and remedies provided by sections 409.101 to 409.419 are
in addition to any other rights or remedies that may exist at law or in equity,
but sections 409.101 to 409.419 do not create any cause of action not specified
in this section or section 409.202(e).
NEVADA UNIFORM SECURITIES ACT
SECTION 90.460. REGISTRATION REQUIREMENT.
It is unlawful for a person to offer to sell or sell any security in this
state unless the security is registered or the security or transaction is exempt
under this chapter.
SECTION 90.660. CIVIL LIABILITY.
1. A person who offers or sells a security in violation of any of the
following provisions:
(a) Subsection 1 of NRS 90.310;
(b) NRS 90.460;
(c) Subsection 10 of NRS 90.500;
(d) Subsection 2 of NRS 90.570;
(e) Subsection 2 of NRS 90.610; or
(f) A condition imposed in subsection 8 or 9 of NRS 90.500, is liable
to the person purchasing the security. Upon tender of the security, the
purchaser may recover the consideration paid for the security and interest at
the legal rate of this state from the date of payment, costs and reasonable
attorney's fees, less the amount of income received on the security. A purchaser
who no longer owns the security may recover damages. Damages are the amount that
would be recoverable upon a tender less the value of the security when the
purchaser disposed of it, plus interest at the legal rate of this state from the
date of disposition of the security, costs and reasonable attorney's fees
determined by the court. Tender requires only notice of willingness to exchange
the security for the amount specified.
2. A person who offers or sells a security in violation of subsection
2 of NRS 90.570 is not liable under subsection 1 of this section if:
(a) The purchaser knew that a statement of a material fact was untrue
or that there was an omission of a statement of a material fact; or
(b) The seller did not know and in the exercise of reasonable care
could not have known of the untrue statement or misleading omission.
3. A person who willfully participates in any act or transaction in
violation of NRS 90.580 is liable to a person who purchases or sells a security,
other than a security traded on a national securities exchange or quoted on a
national automated quotation system administered by a self-regulatory
organization, at a price that was affected by the act or transaction for the
damages sustained as a result of the act or transaction. Damages are the
difference between the price at which the securities were purchased or sold and
the market value the securities would have had at the time of the person's
purchases or sale in the absence of the act or transaction, plus interest at the
legal rate of this state from the date of the act or transaction and reasonable
attorney's fees.
4. A person who directly or indirectly controls another person who is
liable under subsection 1 or 3, a partner, officer or director of the person
liable, a person occupying a similar status or performing similar functions, any
agent of the person liable, an employee of the person liable if the employee
materially aids in the act, omission or transaction constituting the violation,
and a broker-dealer or sales representative who materially aids in the act,
omission
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or transaction constituting the violation, are also liable jointly and
severally with and to the same extent as the other person, but it is a
defense that the person did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by which the liability is
alleged to exist. With respect to a person who directly or indirectly,
controls another person who is liable under subsection 3, it is also a
defense that the controlling person acted in good faith and did not, directly
or indirectly, induce the act, omission or transaction constituting the
violation. Contribution among the several persons liable is the same as in
cases arising out of breach of contract.
SECTION 90.670. STATUTE OF LIMITATIONS.
A person may not sue under NRS 90.660 unless suit is brought within the
earliest of 1 year after the discovery of the violation, 1 year after discovery
should have been made by the exercise of reasonable care, or 5 years after the
act, omission or transaction constituting the violation.
SECTION 90.680. OFFER OF RESCISSION AND SETTLEMENT.
1. Relief may not be obtained under subsection 1 of NRS 90.660 if,
before suit is commenced, the purchaser:
(a) Receives a written offer:
(1) Stating the respect in which liability under NRS 90.660 may have
arisen and fairly advising the purchaser of his rights of rescission;
(2) If the basis for relief under subsection 1 of NRS 90.660 is a
violation of subsection 2 of NRS 90.570, including financial and other
information necessary to correct all material misstatements or omissions in the
information which was required by this chapter to be furnished to the purchaser
as of the time of the sale of the security to the purchaser;
(3) Offering to repurchase the security for cash, payable on delivery
of the security, equal to the consideration paid, plus interest at the legal
rate of this state from the date of payment, less income received thereon, or,
if the purchaser no longer owns the security, offering to pay the purchaser upon
acceptance of the offer an amount in cash equal to the damages computed under
subsection 1 of NRS 90.660 plus attorney's fees; and
(4) Stating that the offer may be accepted by the purchaser at any time
within a specified period of not less than 30 days after the date of its receipt
by the purchaser or such shorter or longer time as the administrator by order
prescribes; and
(b) Fails to accept the offer in writing within the period specified
under subparagraph (4) of paragraph (a).
2. The administrator by regulation may prescribe the form in which the
information specified in subsection 1 must be contained in an offer made under
subsection 1.
3. An offer under subsection 1 must be delivered to the offeree or
sent in a manner which assures actual receipt by the offeree.
4. If, after acceptance, a rescission offer is not performed in
accordance with either its terms or this section, the offeree may obtain relief
under NRS 90.660 without regard to this section.
NEW HAMPSHIRE UNIFORM SECURITIES ACT
SECTION 421-B:11. REGISTRATION REQUIREMENT AND NOTICE FILING OF SECURITIES.
I. It is unlawful for any person to offer or sell any security in this
state unless it is registered under this chapter, the security or transaction is
exempted under RSA 421-B:17, or it is a federal covered security for which the
fee has been paid and documents have been filed as required by paragraph I-a of
this section.
SECTION 421-B:25. CIVIL LIABILITIES.
I. Any person who sells a security in violation of RSA 421-B:11 or
421-B:20, I or of any condition imposed under RSA 421-B:14, IV or RSA 421-B:15,
V, VI and VII, is liable to the person purchasing the security from him, who may
sue either in equity for rescission upon tender of the security or at law for
damages if he no longer owns the security. In any action for rescission, the
purchaser shall be entitled to recover the consideration paid for the security
together with interest at the legal rate, costs, and reasonable attorney's fees,
less the amount of any income received on the securities. In an action at law,
damages shall be the consideration paid for the security together with interest
at the legal rate to the date of disposition, costs, and reasonable attorney's
fees, less the value of the security at the date of disposition.
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II. Any person who violates RSA 421-B:3 in connection with the purchase
or sale of any security shall be liable to any person damaged by the violation
of that section who sold such security to him or to whom he sold such security,
and any person who violates RSA 421-B:5 in connection with the purchase or sale
of any security shall be liable to any person damaged by the conduct proscribed
by RSA 421-B:5. Any person who violates RSA 421-B:4 in connection with the
purchase or sale of any security shall be liable to any investment advisory
client of his who is damaged by the violation of that section. Damages in an
action pursuant to this paragraph shall include the actual damages sustained
plus interest from the date of payment or sale, costs, and reasonable attorney's
fees.
III. Every person who directly or indirectly controls a person liable
under paragraph I or II, every partner, principal executive officer, or director
of such person, every person occupying a similar status or performing a similar
function, every employee of such person who materially aids in the act or
transaction constituting the violation, and every broker-dealer or agent who
materially aids in the acts or transactions constituting the violation, are also
liable jointly and severally with and to the same extent as such person. There
is contribution as in cases of contract among the several persons so liable.
IV. No person shall be liable under paragraphs I and III who shall
sustain the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of the existence of facts by reason of
which the liability is alleged to exist.
V. Any tender specified in this section may be made at any time before
entry of judgment. Tender by a purchaser shall require only notice of
willingness to exchange the security for the amount computed pursuant to
paragraph I. Tender by a seller shall require only notice of willingness to pay
the amount specified in exchange for the security. Any notice may be given by
service as in civil actions or by certified mail to the last known address of
the person liable.
VI. Every cause of action under this chapter survives the death of any
person who might have been a plaintiff or defendant.
VII. A person may not recover under this section in actions commenced
more than 6 years after his first payment of money to the broker-dealer or
issuer in the contested transaction.
VIII. No purchaser may commence an action under paragraph I if, before
suit is commenced, the purchaser has received a written offer to repurchase the
security for cash payable on delivery of the security equal to the consideration
paid, together with interest at the legal rate from the date of payment, less
the amount of any income received on the security or, if the purchaser no longer
owns the security, an offer to pay an amount in cash equal to the damages
computed in accordance with paragraph I and the purchaser has failed to accept
such offer in writing within 30 days of its receipt. No offer shall be
effective to prevent suit under this section unless a duplicate copy thereof
shall have been filed with the secretary of state at least 20 days prior to its
delivery to the offeree and the secretary of state shall not have objected to
the offer within that time. The offer shall be in the form and contain the
information the secretary of state by rule or order prescribes. If the offer is
not performed in accordance with its terms, suit by the offeree under this
section shall be permitted without regard to this subdivision.
IX. No person who has made or engaged in the performance of any
contract in violation of any provision of this section or any rule or order
under this section or has acquired any purported rights under any such contract
with knowledge of the facts by reason of which its making or performance was in
violation may base any suit on such violation under the contract.
X. Any condition, stipulation or provision binding any person to waive
compliance with any provision of this chapter or any rule or order under this
chapter in the purchase or sale of any security is void.
XI. The rights and remedies promulgated by this chapter are in addition
to any other right or remedy that may exist at law or in equity, but this
chapter does not create any cause of action not specified in this section or RSA
421-B:8, V. No civil cause of action may be based solely upon the failure of a
broker-dealer or agent to comply with the requirements of RSA 421-B:6, I or III,
except a cause of action arising under RSA 421-B:23.
NEW JERSEY UNIFORM SECURITIES LAW
SECTION 49:3-60. It is unlawful for any security to be offered or sold in
this State unless:
(a) The security or transaction is exempt under section 3 of P.L.1967,
c.93 (C.49:3-50);
(b) (Deleted by amendment, P.L.1997, c.276.)
(c) (Deleted by amendment, P.L.1985, c.405.)
(d) (Deleted by amendment, P.L.1985, c.405.)
(e) The security is registered under this act; or
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(f) It is a federal covered security for which a notice filing and fees
have been submitted as required by section 14 of this act (C.49:3-60.1).
SECTION 49:3-71. (a) Any person who
(1) Offers, sells or purchases a security in violation of subsection
(b) of section 8, subsection (a) of section 9 or section 13 of P.L.1967, c.93
(C.49:3-55, 49:3-56, or 49:3-60), or
(2) Offers, sells or purchases a security by means of any untrue
statement of material fact or any omission to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which
they are made, not misleading (the buyer not knowing of the untruth or
omission), or
(3) offers, sells or purchases a security by employing any device,
scheme, or artifice to defraud, or
(4) offers, sells or purchases a security by engaging in any act,
practice or course of business which operates or would operate as a fraud or
deceit upon any person, or
(5) engages in the business of advising others, for compensation,
either directly or through publications or writings, as to the value of
securities, or as to the advisability of investing in, purchasing or selling
securities, or who, for compensation and as a part of a regular business, issues
or promulgates analyses or reports concerning securities (i) in willful
violation of this act or of any rule or order promulgated pursuant to this act,
or (ii) employs any device, scheme or artifice to defraud the other person or
engages in any act, practice or course of business or conduct which operates or
would operate as a fraud or deceit on the other person, is liable as set forth
in subsection (c) of this section;
(b)(1) If any claim is brought for violation of paragraph (2), (3), (4) or
(5) of subsection (a) of this section, the person who bought the security or
received the investment advice shall sustain the burden of proof that the seller
or giver of investment advice knew of the untruth or omission and intended to
deceive the buyer or recipient of investment advice and that the buyer or
recipient of investment advice has suffered a financial detriment;
(2) If any claim is brought for violation of paragraph (2), (3), (4) or
(5) of subsection (a) of this section involving a purchase of securities by
others or investment advice as to the selling of securities, the person who sold
the security or who received the investment advice to sell the security shall
sustain the burden of proof that that person suffered a net loss with respect to
that sale or investment advice taking into account all transactions by that
person in the same security or any security convertible into that security
within one year before or after the sale or advice which is the basis of the
claim;
(c) Any person who offered, sold or purchased a security or engaged in
the business of giving investment advice to a person in violation of paragraph
(1), (2), (3), (4) or (5) of subsection (a) of this section is liable to that
person, who may bring an action either at law or in equity to recover the
consideration paid for the security or the investment advice and any loss due to
the advice, together with interest set at the rate established for interest on
judgments for the same period by the Rules Governing the Courts of the State of
New Jersey from the date of payment of the consideration for the investment
advice or security, and costs, less the amount of any income received on the
security, upon the tender of the security and any income received from the
investment advice or on the security, or for damages if he no longer owns the
security. Damages are the amount that would be recoverable upon a tender less
the value of the security when the buyer disposed of it and interest at the rate
established for interest on judgments for the same period by the Rules Governing
the Courts of the State of New Jersey from the date of disposition;
(d) Every person who directly or indirectly controls a seller liable
under subsection (a) of this section, every partner, officer, or director of
such a seller, or investment adviser, every person occupying a similar status or
performing similar functions, every employee of such a seller or investment
adviser who materially aids in the sale or in the conduct giving rise to the
liability, and every broker-dealer, investment adviser, investment adviser
representative or agent who materially aids in the sale or conduct are also
liable jointly and severally with and to the same extent as the seller or
investment adviser, unless the nonseller who is so liable sustains the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, of the existence of the facts under paragraphs (1) through (5) of
subsection (a) of this section which give rise to liability. There is
contribution as in cases of contract among the several persons so liable;
(e) Any tender specified in this section may be made at any time before
entry of judgment;
(f) Every cause of action under this act survives the death of any
person who might have been a plaintiff or defendant;
(g) No person may bring an action under this section more than two
years after the contract of sale or the rendering of the investment advice, or
more than two years after the time when the person aggrieved knew or should have
known of the existence of his cause of action, whichever is later. No person
may bring an action under this section (1) if the buyer received a written
offer, before suit and at a time when he owned the security, to refund the
consideration paid, together with interest at the rate established for interest
on judgments for the same period by the Rules Governing the
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Courts of the State of New Jersey at the time the offer was made, from the
date of payment, less the amount of any income received on the security, and
he failed to accept the offer within 30 days of its receipt, or (2) if the
buyer received such an offer before suit and at a time when he did not own
the security, unless he rejected the offer in writing within 30 days of its
receipt;
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of this act or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract;
(i) Any condition, stipulation or provision binding any person
acquiring any security or receiving investment advice to waive compliance with
any provision of this act or any rule or order hereunder is void;
(j) The rights and remedies provided by this act are in addition to any
other rights or remedies that may exist at law or in equity, but this act does
not create any cause of action not specified in this section or subsection (e)
of section 10 of P.L.1967, c.93 (C.49:3-57).
NEW YORK BLUE SKY LAW (MARTIN ACT)
[NO PROVISION REQUIRING REGISTRATION OF SECURITIES.]
NORTH CAROLINA SECURITIES ACT
SECTION 78A-24. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this State
unless (i) it is registered under this Chapter, (ii) the security or transaction
is exempted under G.S. 78A-16 or 78A-17 and such exemption has not been denied
or revoked under G.S. 78A-18, or (iii) it is a security covered under federal
law.
SECTION. 78A-56. CIVIL LIABILITIES.
(a) Any person who:
(1) Offers or sells a security in violation of G.S. 78A-8(1), 78A,
8(3), 78A-10(b), 78A-12, 78A-24, or 78A-36(a), or of any rule or order under
G.S. 78A-49(d) which requires the affirmative approval of sales literature
before it is used, or of any condition imposed under G.S. 78A-27(d) or
78A-28(g), or
(2) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
were made, not misleading (the purchaser not knowing of the untruth or
omission), and who does not sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of the untruth or
omission, is liable to the person purchasing the security from him, who may sue
either at law or in equity to recover the consideration paid for the security,
together with interest at the legal rate from the date of payment, costs, and
reasonable attorneys' fees, less the amount of any income received on the
security, upon the tender of the security, or for damages if he no longer owns
the security. Damages are the amount that would be recoverable upon a tender
less the value of the security when the purchaser disposed of it and interest at
the legal rate as provided by G.S. 24-1 from the date of disposition.
(b) Any person who purchases a security by means of any untrue
statement of a material fact or any omission to state a material fact necessary
in order to make the statements made, in the light of the circumstances under
which they are made, not misleading (the seller not knowing of the untruth or
omission), and who does not sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of the untruth or
omission, shall be liable to the person selling the security to him, who may sue
either at law or in equity to recover the security, plus any income received by
the purchaser thereon, upon tender of the consideration received, or for damages
if the purchaser no longer owns the security. Damages are the excess of the
value of the security when the purchaser disposed of it, plus interest at the
legal rate from the date of disposition, over the consideration paid for the
security.
(c) Every person who directly or indirectly controls a person liable
under subsection (a) or (b), every partner, officer, or director of such a
person, every person occupying a similar status or performing similar functions,
every employee of such a person who materially aids in the act or transaction,
and every dealer or salesman who materially aids in the sale are also liable
jointly and severally with and to the same extent as such person, unless the
person who is so liable sustains the burden of proof that he did not know, and
in the exercise of reasonable care should not have known, of the existence of
the facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
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(d) Any tender specified in this section may be made at any time before
entry of judgment. Tender shall require only notice of willingness to exchange
the security for the amount specified. Any notice may be given by service as in
civil actions or by certified mail addressed to the last known address of the
person liable.
(e) Every cause of action under this statute survives the death of any
person who might have been a plaintiff or defendant.
(f) No person may sue under this section more than two years after the
sale or contract of sale.
(g)(1) No purchaser may sue under this section if, before suit is
commenced, the purchaser has received a written offer stating the respect in
which liability under this section may have arisen and fairly advising the
purchaser of his rights; offering to repurchase the security for cash payable on
delivery of the security equal to the consideration paid, together with interest
at the legal rate as provided by G.S. 24-1 from the date of payment, less the
amount of any income received on the security or, if the purchaser no longer
owns the security, offering to pay the purchaser upon acceptance of the offer an
amount in cash equal to the damages computed in accordance with subsection (a);
and stating that the offer may be accepted by the purchaser at any time within
30 days of its receipt; and the purchaser has failed to accept such offer in
writing within the specified period.
(2) No seller may sue under this section if, before suit is commenced,
the seller has received a written offer stating the respect in which liability
under this section may have arisen and fairly advising the seller of his rights;
offering to return the security plus the amount of any income received thereon
upon payment of the consideration received, or, if the purchaser no longer owns
the security, offering to pay the seller upon acceptance of the offer an amount
in cash equal to the damages computed in accordance with subsection (b); and
providing that the offer may be accepted by the seller at any time within 30
days of its receipt; and the seller has failed to accept such offer in writing
within the specified period.
(3) Offers shall be in the form and contain the information the
Administrator by rule prescribes. Every offer under subsection (g) shall be
delivered to the offeree or sent by certified mail addressed to him at his last
known address. If an offer is not performed in accordance with its terms, suit
by the offeree under this section shall be permitted without regard to this
subsection.
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of this Chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
(i) Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of this Chapter or
any rule or order hereunder is void.
(j) The rights and remedies provided by this Chapter are in addition to
any other rights or remedies that may exist at law or in equity, but this
Chapter does not create any cause of action not specified in this section or
G.S. 78A-37(d).
OHIO SECURITIES ACT
SECTION 1707.43. REMEDIES OF PURCHASER IN UNLAWFUL SALE.
Every sale or contract for sale made in violation of Chapter 1707 of the
Revised Code, is voidable at the election of the purchaser. The person making
such sale or contract for sale, and every person who has participated in or
aided the seller in any way in making such sale or contract for sale, are
jointly and severally liable to such purchaser, in an action at law in any court
of competent jurisdiction, upon tender to the seller in person or in open court
of the securities sold or of the contract made, for the full amount paid by such
purchaser and for all taxable court costs, unless the court determines that the
violation did not materially affect the protection contemplated by the violated
provision.
No action for the recovery of the purchase price as provided for in this
section, and no other action for any recovery based upon or arising out of a
sale or contract for sale made in violation of Chapter 1707. of the Revised
Code, shall be brought more than two years after the plaintiff knew, or had
reason to know, of the facts by reason of which the actions of the person or
director were unlawful, or more than four years from the date of such sale or
contract for sale, whichever is the shorter period.
No purchaser is entitled to the benefit of this section who has failed to
accept, within thirty days from the date of such offer, an offer in writing made
after two weeks from the date of such sale or contract of sale, by the seller or
by any person who has participated in or aided the seller in any way in making
such sale or contract of sale, to take back the security in question and to
refund the full amount paid by such purchaser.
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OKLAHOMA SECURITIES ACT
SECTION 301. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this state
unless:
(1) it is registered under this act or the security or transaction is
exempted under Section 401 of this title; or
(2) it is a federal covered security.
SECTION 408. CIVIL LIABILITIES.
(a) Any person who:
(1) offers or sells a security in violation of Sections 201(a), 301, or
404(b) of this title, or of any rule or order under Section 402 of this title,
or of any condition imposed under Sections 304(d), 305(f), or 305(g) of this
title; or
(2) offers or sells or purchases a security by means of any untrue
statement of a material fact or any omission to state a material fact necessary
in order to make the statements made, in the light of the circumstances under
which they are made, not misleading (the other party not knowing of the untruth
or omission), and who does not sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of the untruth or
omission, is liable:
(A) in the case of an offer or sale of a security, to the person buying
the security from him, who may sue either at law or in equity to recover the
consideration paid for the security, together with interest at ten percent (10%)
per year from the date of payment, costs, and reasonable attorneys' fees, less
the amount of any income received on the security, upon the tender of the
security, or for damages if he no longer owns the security. Damages are the
amount that would be recoverable upon a tender, less the value of the security
when the buyer disposed of it, and interest at ten percent (10%) per year from
the date of disposition; or
(B) in the case of a purchase of a security, to the person selling the
security to him, who may sue at law or in equity, for a return of the security,
together with any income received by the purchaser on the security, costs and
reasonable attorneys' fees, upon a tender of the full amount of the
consideration received for the security, or, if the purchaser no longer owns the
security, for the difference between the fair value of the security at the date
of the transaction and the consideration received for the security, together
with interest on such difference at the rate of ten percent (10%) per year from
the date of the transaction, costs and reasonable attorneys' fees.
(b) Every person who materially participates or aids in a sale or
purchase made by any person liable under paragraph (1) or (2) of subsection (a)
of this section, or who directly or indirectly controls any person so liable,
shall also be liable jointly and severally with and to the same extent as the
person so liable, unless the person who so participates, aids or controls,
sustains the burden of proof that he did not know, and could not have known, of
the existence of the facts by reason of which liability is alleged to exist.
There shall be contribution as in cases of contract among the several persons so
liable.
(c) Any person who:
(1) in violation of Sections 201(c) and 201(d) of this title, engages
in the business of advising others for compensation, either directly or through
publications or writings, as to the value of securities or as to the
advisability of investing in, purchasing, or selling securities, or who, for
compensation and as a part of a regular business, issues or promulgates analyses
or reports concerning securities, in violation of Sections 201(c) and 201(d) of
this title; or
(2) receives, directly or indirectly, any consideration from another
person for advice as to the value of securities or their purchase or sale,
whether through the issuance of analyses, reports or otherwise and employs any
device, scheme, or artifice to defraud such other person or engages in any act,
practice or course of business which operates or would operate as a fraud or
deceit on such other person, is liable to that person who may sue either at law
or in equity to recover the consideration paid for such advice and any loss due
to such advice, together with interest at ten percent (10%) per year from the
date of payment of the consideration plus costs and reasonable attorney's fees,
less the amount of any income received from such advice.
(d) Any tender specified in this section may be made at any time before
entry of judgment.
(e) Every cause of action under this section survives the death of any
person who might have been a plaintiff or defendant.
(f) No person may sue under paragraph (1) of subsection (a) of this
section more than three (3) years after the sale. No person may sue under
paragraph (2) of subsection (a) of this section more than two (2) years after
the untruth
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or omission was discovered, but in no event more than three (3) years after
the sale. No person may sue under this section if:
(1) the buyer received a written offer, before suit and at a time when
he owned the security, to refund the consideration paid together with interest
at ten percent (10%) per year from the date of payment, less the amount of any
income received on the security, and he failed to accept the offer within thirty
(30) days of its receipt; or
(2) the buyer received such an offer before suit and at a time when he
did not own the security, unless he rejected the offer in writing within thirty
(30) days of its receipt.
(g) No person may sue under paragraph (1) of subsection (c) of this
section more than three (3) years from the date the advice was given. No person
may sue under paragraph (2) of subsection (c) of this section more than one (1)
year after the fraud or deceit was discovered, but in no event more than three
(3) years after the date the advice was given.
(h) Provided, any longer term of limitation as otherwise provided by
law shall apply to any actions brought under the Oklahoma Securities Act.
(i) No person who has made or engaged in the performance of any
contract in violation of any provision of this title or any rule or order
promulgated thereunder, or who has acquired any purported right under any such
contract with knowledge of the facts by reason of which its making or
performance was in violation, may base any suit on the contract. Any defendant
who prevails in an action brought under paragraph (1) or (2) of subsection (a)
or paragraph (1) or (2) of subsection (c) of this section may recover his
reasonable attorneys' fees and costs in the action from the plaintiff if the
court, in its discretion, determines that the action was without substantial
merit. Any plaintiff who prevails in an action brought under paragraph (1) or
(2) of subsection (a) or paragraph (1) or (2) of subsection (c) of this section
may recover his reasonable attorneys' fees and costs in the action from the
defendant.
(j) Any condition, stipulation, or provision is void if it would bind a
person acquiring any security to waive compliance with any provision of this
title, or any rule or order promulgated thereunder.
(k) The rights and remedies provided for in this title are in addition
to other rights or remedies that may exist in law or in equity; however, no
additional cause of action is created unless specified in this section.
OREGON SECURITIES LAW
SECTION 59.055. CONDITIONS OF OFFER AND SALE OF SECURITIES.
It is unlawful for any person to offer or sell any security in this state,
unless:
(1) The security is registered and the offer or sale is not in
violation of any rule or order of the Director of the Department of Consumer and
Business Services or any condition, limitation or restriction imposed by the
director upon such registration;
(2) The security is exempt under ORS 59.025 or the sale is exempt under
ORS 59.035; or
(3) The security is a federal covered security for which a notice has
been filed and fees have been paid under ORS 59.049.
SECTION 59.115. LIABILITY IN CONNECTION WITH SALE OF SECURITIES; RECOVERY
BY PURCHASER; LIMITATIONS ON PROCEEDING; ATTORNEY FEES.
(1) A person who sells a security is liable as provided in subsection
(2) of this section to a purchaser of the security if the person:
(a) Sells a security, other than a federal covered security, in
violation of the Oregon Securities Law or of any condition, limitation or
restriction imposed upon a registration or license under the Oregon Securities
Law; or
(b) Sells a security by means of an untrue statement of a material fact
or an omission to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they are made, not
misleading (the buyer not knowing of the untruth or omission), and who does not
sustain the burden of proof that the person did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission.
(2) The purchaser may recover:
(a) Upon tender of the security, the consideration paid for the
security, and interest from the date of payment equal to the greater of the rate
of interest specified in ORS 82.010 for judgments and decrees for the payment of
money or the rate provided in the security if the security is an
interest-bearing obligation, less any amount received on the security; or
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(b) If the purchaser no longer owns the security, damages in the amount
that would be recoverable upon a tender, less the value of the security when the
purchaser disposed of it and less interest on such value at the rate of interest
specified in ORS 82.010 for judgments and decrees for the payment of money from
the date of disposition.
(3) Every person who directly or indirectly controls a seller liable
under subsection (1) of this section, every partner, limited liability company
manager, including a member who is a manager, officer or director of such
seller, every person occupying a similar status or performing similar functions,
and every person who participates or materially aids in the sale is also liable
jointly and severally with and to the same extent as the seller, unless the
nonseller sustains the burden of proof that the nonseller did not know, and, in
the exercise of reasonable care, could not have known, of the existence of facts
on which the liability is based. Any person held liable under this section shall
be entitled to contribution from those jointly and severally liable with that
person.
(4) Notwithstanding the provisions of subsection (3) of this section, a
person whose sole function in connection with the sale of a security is to
provide ministerial functions of escrow, custody or deposit services in
accordance with applicable law is liable only if the person participates or
materially aids in the sale and the purchaser sustains the burden of proof that
the person knew of the existence of facts on which liability is based or that
the person's failure to know of the existence of such facts was the result of
the person's recklessness or gross negligence.
(5) Any tender specified in this section may be made at any time before
entry of judgment.
(6) Except as otherwise provided in this subsection, no action or suit
may be commenced under this section more than three years after the sale. An
action under this section for a violation of subsection (1)(b) of this section
or ORS 59.135 may be commenced within three years after the sale or two years
after the person bringing the action discovered or should have discovered the
facts on which the action is based, whichever is later. Failure to commence an
action on a timely basis is an affirmative defense.
(7) No action may be commenced under this section solely because an
offer was made prior to registration of the securities.
(8) Any person having a right of action against a broker-dealer, state
investment adviser or against a salesperson or investment adviser representative
acting within the course and scope or apparent course and scope of authority of
the salesperson or investment adviser representative, under this section shall
have a right of action under the bond or irrevocable letter of credit provided
in ORS 59.175.
(9) Subsection (4) of this section shall not limit the liability of any
person:
(a) For conduct other than in the circumstances described in subsection
(4) of this section; or
(b) Under any other law, including any other provisions of the Oregon
Securities Law.
(10) Except as provided in subsection (11) of this section, the court
may award reasonable attorney fees to the prevailing party in an action under
this section.
(11) The court may not award attorney fees to a prevailing defendant
under the provisions of subsection (10) of this section if the action under this
section is maintained as a class action pursuant to ORCP 32.
SECTION 59.125. EFFECT OF NOTICE OF OFFER TO REPAY PURCHASER; EXCEPTIONS;
REGISTRATION OF TRANSACTION.
(1) Except as provided in subsection (3) of this section, no action or
suit may be commenced under ORS 59.115 if the purchaser has received before suit
a written notice as outlined in subsection (2) of this section.
(2) The notice shall contain:
(a) An offer to pay the amount specified in ORS 59.115(2)(a) upon
tender of the security; and
(b) A statement of the effect on the purchaser's rights of failure to
respond as required in subsection (3) of this section.
(3) An action or suit under this section may be commenced after receipt
of a notice as outlined in subsection (2) of this section:
(a) If the purchaser owned the security when the notice was received,
accepted the payment offer within 30 days after its receipt, and has not been
paid the full amount offered; or
(b) If the purchaser did not own the security when the notice was
received and, within 30 days after receipt, gave written notice of inability to
tender back the security.
(4) An offer to repay the purchaser pursuant to this section involves
the offer or sale of a security. The transaction must be registered under ORS
59.055 unless there is an exemption from the registration requirement or a
notice is filed under ORS 59.049.
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PENNSYLVANIA SECURITIES ACT OF 1972
SECTION 201. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this State
unless the security is registered under this act or the security or transaction
is exempted under section 202 or 203 hereof.
SECTION 502. VIOLATION OF REGISTRATION REQUIREMENTS.
Any person who violates section 201 or any material condition imposed under
section 206 or 207 shall be liable to the person purchasing the security offered
or sold in violation of section 201 from him who may sue either at law or in
equity to recover the consideration paid for the security, together with
interest at the legal rate from the date of payment, less the amount of any
income or distributions, in cash or in kind, received on the security, upon the
tender of the security, or for damages if he no longer owns the security.
Damages shall be the amount that would be recoverable upon a tender less the
value of the security when the purchaser disposed of it and interest at the
legal rate from the date of disposition. Any person on whose behalf an offering
is made and any underwriter of the offering, whether on a best efforts or a firm
commitment basis, shall be jointly and severally liable under this section, but
in no event shall any underwriter be liable in any suit or suits authorized
under this section for damages in excess of the total price at which the
securities underwritten by him and distributed to the public were offered to the
public. Tender requires only notice of willingness to exchange the security for
the amount specified. Any notice may be given by service as in civil actions or
by certified mail addressed to the last known address of the person liable. No
person shall be liable under this section if the sale of the security is
registered prior to the payment or receipt of any part of the consideration for
the security sold, even though an offer to sell or a contract of sale may have
been made or entered into without registration.
SECTION 504. TIME LIMITATIONS ON RIGHTS OF ACTION.
(a) No action shall be maintained to enforce any liability created
under section 501 (or section 503 in so far as it relates to that section)
unless brought before the expiration of four years after the act or transaction
constituting the violation or the expiration of one year after the plaintiff
receives actual notice or upon the exercise of reasonable diligence should have
known of the facts constituting the violation, whichever shall first expire.
(b) No action shall be maintained to enforce any liability created
under section 502 (or section 503 in so far as it relates to that section)
unless brought before the expiration of two years after the violation upon which
it is based or the expiration of one year after the plaintiff receives actual
notice or upon the exercise of reasonable diligence should have known of the
facts constituting such violation, whichever shall first expire.
(c) No action shall be maintained to enforce any right of
indemnification or contribution created by section 503 unless brought before the
expiration of one year after final judgment based upon the liability for which
the right of indemnification or contribution exists.
(d) No purchaser may commence an action under section 501, 502 or 503
if, before suit is commenced, the purchaser has received a written offer: (i)
stating the respect in which liability under such section may have arisen and
fairly advising the purchaser of his rights; offering to repurchase the security
for cash, payable on delivery of the security, equal to the consideration paid,
together with interest at the legal rate from the date of payment, less the
amount of any income or distributions, in cash or in kind, received thereon or,
if the purchaser no longer owns the security, offering to pay the purchaser upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with section 501(a); and (ii) stating that the offer may be accepted
by the purchaser at any time within a specified period of not less than thirty
days after the date of receipt thereof, or such shorter period as the commission
may by rule prescribe; and the purchaser has failed to accept such offer in
writing within the specified period.
(e) No seller may commence an action under section 501, 502 or 503 if,
before suit is commenced, the seller has received a written offer: (i) stating
the respect in which liability under such section may have arisen and fairly
advising the seller of his rights; (ii) offering to return the security plus the
amount of any income or distributions, in cash or in kind, received thereon upon
payment of the consideration received, or if the purchaser no longer owns the
security, offering to pay the seller upon acceptance of the offer an amount in
cash equal to the damages computed in accordance with section 501(b); and (iii)
providing that the offer may be accepted by the seller at any time within a
specified period of not less than thirty days after the date of receipt thereof,
or such shorter period as the commission may by regulation prescribe; and the
seller has failed to accept such offer in writing within the specified period.
(f) Offers under subsection (d) or (e) of this section 504 shall be in
the form and contain the information the commission by rule prescribes. Every
offer under this subsection shall be delivered to the offeree personally or sent
by certified mail addressed to him at his last known address. If an offer is
not performed in accordance with its terms,
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suit by the offeree under section 501, 502 or 503, shall be permitted without
regard to subsections (d) and (e) of this section 504.
SOUTH CAROLINA UNIFORM SECURITIES ACT
SECTION 35-1-810. REGISTERED, EXEMPTED, OR FEDERAL COVERED SECURITY
REQUIRED.
It is unlawful for any person to offer or sell any security in this State
unless (a) it is registered under this chapter, (b) the security or transaction
is exempted under Section 35-1-310 or 35-1-320, or (c) it is a federal covered
security.
SECTION 35-1-1490. LIABILITY TO BUYERS FOR ILLEGAL OR FRAUDULENT SALES OR
OFFERS.
Any person who:
(1) offers or sells a security in violation of subsection (2) of
Section 35-1-170 or Section 35-1-410 or Section 35-1-810, or of any rule or
order under Section 35-1-50 which requires the affirmative approval of sales
literature before it is used or of any condition imposed under Section 35-1-950
or Section 35-1-990; or
(2) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are
made, not misleading, the buyer not knowing of the untruth or omission, and who
does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission;
Is liable to the person buying the security from him, who may sue either at
law or in equity to recover the consideration paid for the security, together
with interest at six percent per year from the date of payment, costs, and
reasonable attorneys' fees, less the amount of any income received on the
security, upon the tender of the security, or for damages if he no longer owns
the security. Damages are the amount that would be recoverable upon a tender
less the value of the security when the buyer disposed of it and interest at six
percent per year from the date of disposition.
SECTION 35-1-1530. LIMITATION OF ACTIONS; EFFECT OF OFFER TO REFUND
CONSIDERATION WITH INTEREST.
No person may sue under Sections 35-1-1490 and 35-1-1500 more than three
years after the contract of sale. No person may sue under either section (a) if
the buyer received a written offer, before suit and at a time when he owned the
security, to refund the consideration paid together with interest at six percent
per year from the date of payment, less the amount of any income received on the
security, and he failed to accept the offer within thirty days of its receipt or
(b) if the buyer received such an offer before suit and at a time when he did
not own the security, unless he rejected the offer in writing within thirty days
of its receipt.
TENNESSEE SECURITIES ACT OF 1980
SECTION 48-2-104. SECURITIES REGISTRATION REQUIREMENT.
It is unlawful for any person to sell any security in this state unless:
(1) It is registered under this part;
(2) The security or transaction is exempted under Section 48-2-103; or
(3) The security is a covered security.
SECTION 48-2-122. CIVIL LIABILITIES.
(a)(1) Any person who:
(A) Sells a security in violation of Sections 48-2-104C48-2-109,
48-2-110(f), or of any condition imposed under Section 48-2-107(g), or any rule,
or order under this part of which he has notice; or
(B) Sells a security in violation of Section 48-2-121(a) (the purchaser
not knowing of the violation of Section 48-2-121(a)); shall be liable to the
person purchasing the security from the seller to recover the consideration paid
for the security, together with interest at the legal rate from the date of
payment, less the amount of any income received on the security, upon the tender
of the security, or, if the purchaser no longer owns the security, the amount
that would
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be recoverable upon a tender, less the value of the security when the
purchaser disposed of it and interest at the legal rate form the date of
disposition.
(2) Tender shall require only notice of willingness to exchange the
security for the amount specified.
(3) Any notice may be given by service as in civil actions or by
certified mail addressed to the last known address of the person liable.
(b)(1) Any person who purchases a security in violation of Section
48-2-121(a) (the seller not knowing of the violation of Section 48-2-121(a), and
who does not carry the burden of proof of showing that he did not know and in
the exercise of reasonable care could not have known of the violation of Section
48-2-121(a)) shall be liable to the person selling the security to the purchaser
to return the security, plus any income received by the purchaser thereon, upon
tender of the consideration received, or, if the purchaser no longer owns the
security, the excess of the value of the security when the purchaser disposed of
it, plus interest at the legal rate from the date of disposition, over the
consideration paid for the security.
(2) Tender requires only notice of willingness to pay the amount
specified in exchange for the security.
(3) Any notice may be given by service as in civil actions or by
certified mail to the last known address of the person liable.
(c)(1) Any person who willfully engages in any act or conduct which
violates Section 48-2-121 shall be liable to any other person (not knowing that
any such conduct constituted a violation of Section 48-2-121) who purchases or
sells any security at a price which was affected by the act or conduct for the
damages sustained as a result of such act or conduct unless the person sued
shall prove that the person sued acted in good faith and did not know, and in
the exercise of reasonable care could not have known, that such act or conduct
violated Section 48-2-121.
(2) Damages shall be the difference between the price at which the
other person purchased or sold securities and the market value which the
securities would have had at the time of the other person's purchase or sale in
the absence of the act or conduct plus interest at the legal rate.
(d) Any person who shall make or cause to be made any statement in any
application, report, or document filed pursuant to this part or any rule or
order hereunder or any undertaking contained in a registration statement
hereunder, or in any advice given in such person's capacity as an investment
adviser, which statement was at the time and in the light of the circumstances
under which it was made false or misleading with respect to any material fact
shall be liable to any person (not knowing that any such statement was false or
misleading) who, in reliance upon such statement, shall have purchased or sold a
security at a price which was affected by such statement, for damages
(calculated as provided in subsections (a) and (b)) caused by such reliance,
unless the person sued shall prove that the person sued acted in god faith and
had no knowledge that such statement was false or misleading and in the exercise
of reasonable care could not have known that such statement was false or
misleading.
(e) A person seeking to enforce any liability under this section may
sue either at law or in equity in any court of competent jurisdiction.
(f) In any such suit under this section, the court may, in its
discretion, require an undertaking for the payment of the costs of such suit,
and assess reasonable cost, including reasonable attorneys' fees, against either
party litigant.
(g) Every person who directly or indirectly controls a person liable
under this section, every partner, principal executive officer, or director of
such person, every person occupying a similar status or performing similar
functions, every employee of such person who materially aids in the act or
transaction constituting the violation, and every broker-dealer or agent who
materially aids in the act or transaction constituting the violation, are also
liable jointly and severally with and to the same extent as such person, unless
the person who would be liable under subsection (d) proves that the person who
would be liable did not know, and in the exercise of reasonable care could not
have known, of the existence of the facts by reason of which the liability is
alleged to exist. There is contribution as in cases of contract among the
several persons so liable.
(h) No action shall be maintained under this section unless commenced
before the expiration of two (2) years after the act or transaction constituting
the violation or the expiration of one (1) year after the discovery of the facts
constituting the violation, or after such discovery should have been made by the
exercise of reasonable diligence, whichever first expires.
(i) Any condition, stipulation or provision binding any person
acquiring any security to waive compliance with any provision of this part or
any rule or order hereunder is void.
(j) The rights and remedies under this part are in addition to any
other rights or remedies that may exist at law or in equity.
(k) The legal rate of interest shall be that as provided by Section
47-14-121.
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TEXAS SECURITIES ACT OF 1957
SECTION 7. PERMIT OR REGISTRATION FOR ISSUE BY COMMISSIONER; INFORMATION
FOR ISSUANCE OF PERMIT OR REGISTRATION.
A. Qualification of Securities.
(1) No dealer, agent or salesman shall sell or offer for sale any
securities issued after September 6, 1955, except those which shall have been
registered by Notification under subsection B or by Coordination under
subsection C of this Section 7 and except those which come within the classes
enumerated in Section 5 or Section 6 of this Act, until the issuer of such
securities or a dealer registered under the provisions of this Act shall have
been granted a permit by the Commissioner; and no such permit shall be
granted by the Commissioner until the issuer of such securities or a dealer
registered under the provisions of this Act shall have filed with the
Commissioner a sworn statement verified under the oath of an executive
officer or partner of the issuer, or of such registered dealer, and attested
by the secretary or partner thereof, setting forth the following information:
a. The names, residences and post office addresses of the officers
and directors of the company;
b. The location of its principal office and of all branch offices in
this State, if any;
c. A copy of its articles of incorporation or partnership or
association, as the case may be, and of any amendments thereto, if any; if a
corporation, a copy of all minutes of any proceedings of its directors,
stockholders or members relating to or affecting the issue of said security;
if a corporation, a copy of its bylaws and of any amendments thereto; if a
trustee, a copy of all instruments by which the trust is created and in which
it is accepted, acknowledged or declared;
d. A statement showing the amount of capital stock, if any, and if
no capital stock, the amount of capital of the issuer that is contemplated to
be employed; the number of shares into which such stock is divided, or if not
divided into shares of stock, what division is to be made or is contemplated;
the par value of each share, or if no par stock, the price at which such
security is proposed to be sold; the promotional fees or commissions to be
paid for the sale of same, including any and all compensations of every
nature that are in any way to be allowed the promoters or allowed for the
sale of same; and how such compensation is to be paid, whether in cash,
securities, service or otherwise, or partly of either or both; also, the
amount of cash to be paid, or securities to be issued, given, transferred or
sold to promoters for promotion or organization services and expenses, and
the amount of promotion or organization services and expenses which will be
assumed or in any way paid by the issuer;
e. Copies of certificates of the stock and all other securities to
be sold, or offered for sale, together with application blanks therefor; a
copy of any contract it proposes to make concerning such security; a copy of
any prospectus or advertisement or other description of security prepared by
or for it for distribution or publication;
f.1. A detailed statement prepared in accordance with generally
accepted auditing standards and procedures and generally accepted accounting
principles, showing all the assets and all the liabilities of the issuer,
said statement to reflect the financial condition of the issuer on a day not
more than ninety (90) days prior to the date such statement is filed. Such
statement shall list all assets in detail and shall show how the value of
such assets was determined, that is, whether the value set forth in said
statement represents the actual cost in money of such assets, or whether such
value represents their present market value, or some other value than the
actual cost in money, and shall show the present actual value of said assets;
also, whether the value set forth in the statement is greater or less than
the actual cost value in money and greater or less than the present market
value of such assets. If any of the assets consist of real estate, then said
statement shall show the amount for which said real estate is rendered for
State and county taxes, or assessed for taxes. If any such assets listed
shall consist of anything other than cash and real estate, same shall be set
out in detail so as to give the Commissioner the fullest possible information
concerning same, and the Commissioner shall have the power to require the
filing of such additional information as the Commissioner may deem necessary
to determine whether or not the true value of said assets are reflected in
the statement filed. Should any of the assets listed in said statement be
subject to any repurchase agreement, or any other agreement of like
character, by the terms of which the absolute ownership of, or title to said
assets is qualified or limited in any way, then the terms and conditions of
said agreement by which the absolute ownership of, or title to said assets is
qualified or limited, as well as the amount and character of the assets
subject thereto shall be fully stated. Said statement shall list all current
liabilities, that is, all liabilities which will mature and become due within
one year from the date of such application, and shall list separately from
such current liabilities, all other liabilities, contingent or otherwise,
showing the amount of those which are secured by mortgage or otherwise, the
assets of the issuer which are subject to such mortgage, and the dates of
maturity of any such mortgage indebtedness. Such application shall also
include a detailed income statement, prepared in accordance with generally
accepted auditing standards and procedures and generally accepted accounting
principles, which shall cover the last three (3) years' operations of the
issuer, if such issuer has been in operation for three (3) years, but if not,
said income statement shall
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cover the time that said issuer has been operating. If said issuer has not
been operating, but is taking over a concern of any kind which has been
previously operating, an income statement showing the operations of the
concern thus taken over for a period of the last three (3) years next
preceding the taking over of said concern shall be included in said
statement; said income statement shall clearly reflect the amount of net
income or net loss incurred during each of the years shown.
2. The financial statements required in subparagraph (1) of this
paragraph for a small business issuer, as defined by Board rule, may be
reviewed by an independent certified public accountant in accordance with the
Statements on Standards for Accounting and Review Services promulgated by the
American Institute of Certified Public Accountants in lieu of being audited
and certified, provided that the small business issuer otherwise meets all of
the requirements that the Board by rule, regulation, or order may prescribe,
conditionally or unconditionally.
SECTION 33. CIVIL LIABILITIES.
A. Liability of Sellers.
(1) Registration and Related Violations. A person who offers or
sells a security in violation of Section 7, 9 (or a requirement of the
Commissioner thereunder), 12, 23B, or an order under 23A of this Act is
liable to the person buying the security from him, who may sue either at law
or in equity for rescission or for damages if the buyer no longer owns the
security.
(2) Untruth or Omission. A person who offers or sells a security
(whether or not the security or transaction is exempt under Section 5 or 6 of
this Act) by means of an untrue statement of a material fact or an omission
to state a material fact necessary in order to make the statements made, in
the light of the circumstances under which they are made, not misleading, is
liable to the person buying the security from him, who may sue either at law
or in equity for rescission, or for damages if the buyer no longer owns the
security. However, a person is not liable if he sustains the burden of proof
that either (a) the buyer knew of the untruth or omission or (b) he (the
offeror or seller) did not know, and in the exercise of reasonable care could
not have known, of the untruth or omission. The issuer of the security
(other than a government issuer identified in Section 5M) is not entitled to
the defense in clause (b) with respect to an untruth or omission (i) in a
prospectus required in connection with a registration statement under Section
7A, 7B, or 7C, or (ii) in a writing prepared and delivered by the issuer in
the sale of a security.
B. Liability of Buyers. A person who offers to buy or buys a
security (whether or not the security or transaction is exempt under Section
5 or 6 of this Act) by means of an untrue statement of a material fact or an
omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they are made, not
misleading, is liable to the person selling the security to him, who may sue
either at law or in equity for rescission or for damages if the buyer no
longer owns the security. However, a person is not liable if he sustains the
burden of proof that either (a) the seller knew of the untruth or omission,
or (b) he (the offeror or buyer) did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission.
C. Liability of Nonselling Issuers Which Register.
(1) This Section 33C applies only to an issuer which registers under
Section 7A, 7B, or 7C of this Act, or under Section 6 of the U.S. Securities
Act of 1933, its outstanding securities for offer and sale by or for the
owner of the securities. (2) If the prospectus required in connection
with the registration contains, as of its effective date, an untrue statement
of a material fact or an omission to state a material fact necessary in order
to make the statements made, in the light of the circumstances under which
they are made, not misleading, the issuer is liable to a person buying the
registered security, who may sue either at law or in equity for rescission or
for damages if the buyer no longer owns the securities. However, an issuer
is not liable if it sustains the burden of proof that the buyer knew of the
untruth or omission.
D. Rescission and Damages. For this Section 33:
(1) On rescission, a buyer shall recover (a) the consideration he
paid for the security plus interest thereon at the legal rate from the date
of payment by him, less (b) the amount of any income he received on the
security, upon tender of the security (or a security of the same class and
series).
(2) On rescission, a seller shall recover the security (or a security
of the same class and series) upon tender of (a) the consideration he
received for the security plus interest thereon at the legal rate from the
date of receipt by him, less (b) the amount of any income the buyer received
on the security.
(3) In damages, a buyer shall recover (a) the consideration he paid
for the security plus interest thereon at the legal rate from the date of
payment by him, less (b) the value of the security at the time he disposed of
it plus the amount of any income he received on the security.
(4) In damages, a seller shall recover (a) the value of the security
at the time of sale plus the amount of any income the buyer received on the
security, less (b) the consideration paid the seller for the security plus
interest thereon at the legal rate from the date of payment to the seller.
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(5) For a buyer suing under Section 33C, the consideration he paid
shall be deemed the lesser of (a) the price he paid and (b) the price at
which the security was offered to the public.
(6) On rescission or as a part of damages, a buyer or a seller shall
also recover costs.
(7) On rescission or as a part of damages, a buyer or a seller may
also recover reasonable attorney's fees if the court finds that the recovery
would be equitable in the circumstances.
E. Time of Tender. Any tender specified in Section 33D may be made
at any time before entry of judgment.
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly controls a seller, buyer, or
issuer of a security is liable under Section 33A, 33B, or 33C jointly and
severally with the seller, buyer, or issuer, and to the same extent as if he
were the seller, buyer, or issuer, unless the controlling person sustains the
burden of proof that he did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist.
(2) A person who directly or indirectly with intent to deceive or
defraud or with reckless disregard for the truth or the law materially aids a
seller, buyer, or issuer of a security is liable under Section 33A, 33B, or
33C jointly and severally with the seller, buyer, or issuer, and to the same
extent as if he were the seller, buyer, or issuer.
(3) There is contribution as in cases of contract among the several
persons so liable.
G. Survivability of Actions. Every cause of action under this Act
survives the death of any person who might have been a plaintiff or defendant.
H. Statute of Limitations.
(1) No person may sue under Section 33A(1) or 33F so far as it
relates to Section 33A(1):
(a) more than three years after the sale; or
(b) if he received a rescission offer (meeting the requirements of
Section 33I) before suit unless he (i) rejected the offer in writing within
30 days of its receipt and (ii) expressly reserved in the rejection his right
to sue; or
(c) more than one year after he so rejected a rescission offer
meeting the requirements of Section 33I.
(2) No person may sue under Section 33A(2), 33C, or 33F so far as it
relates to 33A(2) or 33C:
(a) more than three years after discovery of the untruth or omission,
or after discovery should have been made by the exercise of reasonable
diligence; or
(b) more than five years after the sale; or
(c) if he received a rescission offer (meeting the requirements of
Section 33I) before suit, unless he (i) rejected the offer in writing within
30 days of its receipt, and (ii) expressly reserved in the rejection his
right to sue; or
(d) more than one year after he so rejected a rescission offer
meeting the requirements of Section 33I.
(3) No person may sue under Section 33B or 33F so far as it relates
to Section 33B:
(a) more than three years after discovery of the untruth or omission,
or after discovery should have been made by the exercise of reasonable
diligence; or
(b) more than five years after the purchase; or
(c) if he received a rescission offer (meeting the requirements of
Section 33J) before suit unless he (i) rejected the offer in writing within
30 days of its receipt, and (ii) expressly reserved in the rejection his
right to sue; or
(d) more than one year after he so rejected a rescission offer
meeting the requirements of Section 33J.
I. Requirements of a Rescission Offer to Buyers. A rescission offer
under Section 33H(1) or (2) shall meet the following requirements:
(1) The offer shall include financial and other information material
to the offeree's decision whether to accept the offer, and shall not contain
an untrue statement of a material fact or an omission to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.
(2) The offeror shall deposit funds in escrow in a state or national
bank doing business in Texas (or in another bank approved by the
commissioner) or receive an unqualified commitment from such a bank to
furnish funds sufficient to pay the amount offered.
(3) The amount of the offer to a buyer who still owns the security
shall be the amount (excluding costs and attorney's fees) he would recover on
rescission under Section 33D(1).
(4) The amount of the offer to a buyer who no longer owns the
security shall be the amount (excluding costs and attorney's fees) he would
recover in damages under Section 33D(3).
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(5) The offer shall state:
(a) the amount of the offer, as determined pursuant to Paragraph (3)
or (4) above, which shall be given (i) so far as practicable in terms of a
specified number of dollars and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of
specified elements (such as the value of the security when it was disposed of
by the offeree) known to the offeree but not to the offeror, which are
subject to the furnishing of reasonable evidence by the offeree. (b) the
name and address of the bank where the amount of the offer will be paid.
(c) that the offeree will receive the amount of the offer within a
specified number of days (not more than 30) after receipt by the bank, in
form reasonably acceptable to the offeror, and in compliance with the
instructions in the offer, of:
(i) the security, if the offeree still owns it, or evidence of the
fact and date of disposition if he no longer owns it; and
(ii) evidence, if necessary, of elements referred to in Paragraph
(a)(ii) above.
(d) conspicuously that the offeree may not sue on his purchase under
Section 33 unless:
(i) he accepts the offer but does not receive the amount of the
offer, in which case he may sue within the time allowed by Section 33H(1)(a)
or 33H(2)(a) or (b), as applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and
expressly reserves in the rejection his right to sue, in which case he may
sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act
that occurred or may have occurred.
(f) any other information the offeror wants to include.
J. Requirements of a Rescission Offer to Sellers. A rescission
offer under Section 33H(3) shall meet the following requirements:
(1) The offer shall include financial and other information material
to the offeree's decision whether to accept the offer, and shall not contain
an untrue statement of a material fact or an omission to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.
(2) The offeror shall deposit the securities in escrow in a state or
national bank doing business in Texas (or in another bank approved by the
commissioner).
(3) The terms of the offer shall be the same (excluding costs and
attorney's fees) as the seller would recover on rescission under Section
33D(2).
(4) The offer shall state:
(a) the terms of the offer, as determined pursuant to Paragraph (3)
above, which shall be given (i) so far as practicable in terms of a specified
number and kind of securities and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of
specified elements known to the offeree but not the offeror, which are
subject to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the terms of the offer
will be carried out.
(c) that the offeree will receive the securities within a specified
number of days (not more than 30) after receipt by the bank, in form
reasonably acceptable to the offeror, and in compliance with the instructions
in the offer, of:
(i) the amount required by the terms of the offer; and
(ii) evidence, if necessary, of elements referred to in Paragraph
(a)(ii) above.
(d) conspicuously that the offeree may not sue on his sale under
Section 33 unless:
(i) he accepts the offer but does not receive the securities, in
which case he may sue within the time allowed by Section 33H(3)(a) or (b), as
applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt and
expressly reserves in the rejection his right to sue, in which case he may
sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act
that occurred or may have occurred.
(f) any other information the offeror wants to include.
K. Unenforceability of Illegal Contracts. No person who has made or
engaged in the performance of any contract in violation of any provision of
this Act or any rule or order or requirement hereunder, or who has acquired
any purported right under any such contract with knowledge of the facts by
reason of which its making or performance was in violation, may base any suit
on the contract.
L. Waivers Void. A condition, stipulation, or provision binding a
buyer or seller of a security to waive compliance with a provision of this
Act or a rule or order or requirement hereunder is void.
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M. Saving of Existing Remedies. The rights and remedies provided by
this Act are in addition to any other rights (including exemplary or punitive
damages) or remedies that may exist at law or in equity.
N. Limitation of Liability in Small Business Issuances.
(1) For purposes of this Section 33N, unless the context otherwise
requires, "small business issuer" means an issuer of securities that, at the
time of an offer to which this Section 33N applies:
(a) has annual gross revenues in an amount that does not exceed $25
million; and
(b) does not have a class of equity securities registered, or
required to be registered, with the Securities and Exchange Commission under
Section 12 of the Securities Exchange Act of 1934, as amended (15 U.S.C.
Section 78l).
(2) This Section 33N applies only to:
(a) an offer of securities made by a small business issuer or by the
seller of securities of a small business issuer that is in an aggregate
amount that does not exceed $5 million; and
(b) a person who has been engaged to provide services relating to an
offer of securities described by Section 33N(2)(a), including an attorney, an
accountant, a consultant, or the firm of the attorney, accountant, or
consultant.
(3) The maximum amount that may be recovered against a person to
which this Section 33N applies in any action or series of actions under
Section 33 relating to an offer of securities to which this Section 33N
applies is an amount equal to three times the fee paid by the issuer or other
seller to the person for the services related to the offer of securities,
unless the trier of fact finds the person engaged in intentional wrongdoing
in providing the services.
(4) A small business issuer making an offer of securities shall
provide to the prospective buyer a written disclosure of the limitation of
liability created by this Section 33N and shall receive a signed
acknowledgment that the disclosure was provided.
UTAH UNIFORM SECURITIES ACT
SECTION 61-1-7. REGISTRATION BEFORE SALE.
It is unlawful for any person to offer or sell any security in this
state unless it is registered under this chapter, the security or transaction
is exempted under Section 61-1-14, or the security is a federal covered
security for which a notice filing has been made pursuant to the provisions
of Section 61-1-15.5.
SECTION 61-1-22. SALES AND PURCHASES IN VIOLATION; REMEDIES; LIMITATION
OF ACTIONS.
(1)(a) A person who offers or sells a security in violation of
Subsection 61-1-3(1), Section 61-1-7, Subsection 61-1-17(2), any rule or
order under Section 61-1-15, which requires the affirmative approval of sales
literature before it is used, any condition imposed under Subsection
61-1-10(4) or 61-1-11(7), or offers, sells, or purchases a security in
violation of Subsection 61-1-1(2) is liable to the person selling the
security to or buying the security from him, who may sue either at law or in
equity to recover the consideration paid for the security, together with
interest at 12% per year from the date of payment, costs, and reasonable
attorney's fees, less the amount of any income received on the security, upon
the tender of the security or for damages if he no longer owns the security.
(b) Damages are the amount that would be recoverable upon a tender
less the value of the security when the buyer disposed of it and interest at
12% per year from the date of disposition.
(2) The court in a suit brought under Subsection (1) may award an
amount equal to three times the consideration paid for the security, together
with interest, costs, and attorney's fees, less any amounts, all as specified
in Subsection (1) upon a showing that the violation was reckless or
intentional.
(3) A person who offers or sells a security in violation of
Subsection 61-1-1(2) is not liable under Subsection (1)(a) if the purchaser
knew of the untruth or omission, or the seller did not know and in the
exercise of reasonable care could not have known of the untrue statement or
misleading omission.
(4)(a) Every person who directly or indirectly controls a seller or
buyer liable under Subsection (1), every partner, officer, or director of
such a seller or buyer, every person occupying a similar status or performing
similar functions, every employee of such a seller or buyer who materially
aids in the sale or purchase, and every broker-dealer or agent who materially
aids in the sale are also liable jointly and severally with and to the same
extent as the seller or purchaser, unless the nonseller or nonpurchaser who
is so liable sustains the burden of proof that he did not know, and in
exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist.
(b) There is contribution as in cases of contract among the several
persons so liable.
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(5) Any tender specified in this section may be made at any time
before entry of judgment.
(6) A cause of action under this section survives the death of any
person who might have been a plaintiff or defendant.
(7)(a) No action shall be maintained to enforce any liability under this
section unless brought before the expiration of four years after the act or
transaction constituting the violation or the expiration of two years after
the discovery by the plaintiff of the facts constituting the violation,
whichever expires first.
(b) No person may sue under this section if:
(i) the buyer or seller received a written offer, before suit and at
a time when he owned the security, to refund the consideration paid together
with interest at 12% per year from the date of payment, less the amount of
any income received on the security, and he failed to accept the offer within
30 days of its receipt; or
(ii) the buyer or seller received such an offer before suit and at a
time when he did not own the security, unless he rejected the offer in
writing within 30 days of its receipt.
(8) No person who has made or engaged in the performance of any
contract in violation of this chapter or any rule or order hereunder, or who
has acquired any purported right under any such contract with knowledge of
the facts by reason of which its making or performance was in violation, may
base any suit on the contract.
(9) A condition, stipulation, or provision binding a person acquiring
a security to waive compliance with this chapter or a rule or order hereunder
is void.
(10)(a) The rights and remedies provided by this chapter are in
addition to any other rights or remedies that may exist at law or in equity.
(b) This chapter does not create any cause of action not specified in
this section or Subsection 61-1-4(6).
VERMONT SECURITIES ACT
SECTION 4205. REGISTRATION AND NOTICE FILING OF SECURITIES.
No securities except those exempted under section 4203a of this title,
those sold in any transaction exempt under section 4204a of this title, or
those that are federal covered securities may be offered for sale or sold
within this state unless such securities shall have been registered by
notification or by qualification as defined in this chapter. Registration of
stock shall be deemed to include the registration of rights to subscribe to
such stock if the notice under section 4207 of this title or the application
under section 4208 of this title for registration of such stock includes a
statement that such rights are to be issued.
SECTION 4240. CIVIL LIABILITY.
(a) Any person who offers or sells a security in violation of
sections 4205, 4213, 4224a or 4234 of this title, or any rule of the
commissioner relating to those sections is liable to the person purchasing
the security from that person. The purchaser of the security may sue to
recover the consideration paid for the security, together with interest at
the legal rate from the date of payment, costs and reasonable attorneys' fees
less the amount of any income received on the security, upon the tender of
the security, or for damages plus costs and reasonable attorneys' fees if the
purchaser no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the purchaser
disposed of it and interest at the legal rate from the date of disposition.
Tender shall require only notice of willingness to exchange the security for
the amount specified.
(b) A person who offers or sells a security in violation of
subsection 4224a(a) is not liable under this subsection if the purchaser knew
of the untrue statement of a material fact or omission of a statement of a
material fact; or the seller sustains the burden of proof to establish that
the seller did not know and in the exercise of reasonable care could not have
known of the untrue statement or omission.
(c) Any person who purchases a security in violation of subsection
4224a(a) is liable to the person selling the security to that person. The
seller of the security may sue to recover the security, plus any income
received by the purchaser on the security upon tender of the consideration
received, costs and reasonable attorneys' fees, or for damages plus costs and
reasonable attorneys' fees if the purchaser no longer owns the security.
Damages are the excess of the value of the security when the purchaser
acquired it, plus interest at the legal rate on that amount from the date of
disposition, over the consideration paid for the security plus any income
received on the security. Tender requires only notice of willingness to pay
the amount specified in exchange for the security.
B-47
<PAGE>
(d) A person who purchases a security in violation of subsection
4224a(a) is not liable under this subsection if the seller knew of the untrue
statement of a material fact or omission of a statement of a material fact;
or the purchaser sustains the burden of proof to establish that the purchaser
did not know and in the exercise of reasonable care could not have known of
the untrue statement or omission.
(e)(1) A person who engages in the business of advising other persons,
for compensation, either directly or through publications or writings, as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as a part of
a regular business, issues or promulgates analyses or reports concerning
securities in violation of subsections 4213(f), (g), (h) or (i) of this
title, subsections 4224a(e), (f), (g), or (i) of this title, or section 4234
of this title is liable to such other persons, who may sue to recover the
consideration paid for such advice and any loss due to such advice, together
with interest at the legal rate from the date of payment of the consideration
plus costs and reasonable attorney's fees, less the amount of any income
received from such advice.
(2) A person who receives directly or indirectly any consideration
from another person for advice as to the value of securities or their
purchase or sale, whether through the issuance of analyses, reports, or
otherwise and employs any device, scheme, or artifice to defraud such other
person or engages in any act, practice, or course of business which operates
or would operate as a fraud or deceit on such other person, is liable to such
other person, who may sue to recover the consideration paid for such advice
and any loss due to such advice, together with interest at the legal rate
from the date of payment of the consideration plus costs and reasonable
attorney's fees, less the amount of any income received from such advice.
(f) Every person who directly or indirectly controls another person
liable under subsection (a), (c) or (e) of this section, every partner,
officer or director of that other person, every member in a member-managed
limited liability company, every manager in a manager-managed limited
liability company, and every member in a manager-managed limited liability
company who materially aids in the act or transaction constituting the
violation, every person occupying a similar status or performing similar
functions, every employee of that other person who materially aids in the act
or transaction constituting the violation and every broker-dealer or sales
representative who materially aids in the act or transaction constituting the
violation is also liable jointly and severally with and to the same extent as
that other person, unless the person otherwise secondarily liable under this
chapter proves that the person did not know, and in the exercise of
reasonable care could not have known, of the existence of the facts by reason
of which the liability is alleged to exist. There is contribution as in cases
of contract among the several persons so liable.
(g) An action under this section shall be brought within three years
after the act, omission or transaction constituting the violation, or within
two years after the violation is or reasonably should have been discovered,
whichever occurs later, but not later than six years after the act, omission
or transaction constituting the violation.
(h) No person subject to this chapter who has made or engaged in the
performance of any contract in violation of sections 4205, 4213, 4224a or
4234 of this chapter or any rule or order of the commissioner, or who has
acquired any purported right under any contract with knowledge of the facts
by reason of which its making or performance was in violation, may base any
suit on the contract.
(i) The rights and remedies provided by this chapter are in addition
to any other rights or remedies that may exist at law or in equity.
(j) Every cause of action under this chapter survives the death of
any person who might have been a plaintiff or defendant.
VIRGINIA SECURITIES ACT
SECTION 13.1-507. REGISTRATION REQUIREMENT; EXEMPTIONS.
It shall be unlawful for any person to offer or sell any security unless
(i) the security is registered under this chapter, (ii) the security or
transaction is exempted by this chapter, or (iii) the security is a federal
covered security. Notwithstanding the provisions of subdivision (iii), for
the period ending three years from October 11, 1996, the Commission may
require the registration of a federal covered security issued by any issuer
who refuses to pay a fee required by this chapter or rule promulgated
pursuant to this chapter; provided, that a delay in payment or an
underpayment of a fee that is remedied within fifteen days after receipt of
notice from the Commission shall not constitute a refusal to pay the fee.
B-48
<PAGE>
SECTION 13.1-522. CIVIL LIABILITIES.
A. Any person who: (i) sells a security in violation of Section
13.1-502, 13.1-504A, 13.1-507(i) or (ii), 13.1-510(e) or (f), or (ii) sells a
security by means of an untrue statement of a material fact or any omission
to state a material fact necessary in order to make the statement made, in
the light of the circumstances under which they were made, not misleading
(the purchaser not knowing of such untruth or omission), and who shall not
sustain the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of such untruth or omission, shall be
liable to the person purchasing such security from him who may sue either at
law or in equity to recover the consideration paid for such security,
together with interest thereon at the annual rate of six percent, costs, and
reasonable attorneys' fees, less the amount of any income received on the
security, upon the tender of such security, or for the substantial equivalent
in damages if he no longer owns the security.
B. Any person who (i) engages in the business of advising others,
for compensation, either directly or through publications or writings, as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as a part of
a regular business, issues or promulgates analyses or reports concerning
securities in willful and material violation of Section13.1-503, subsection A
of Section13.1-504, or of any rule or order under Section13.1-505.1, or (ii)
receives, directly or indirectly, any consideration from another person for
advice as to the value of securities or their purchase or sale, whether
through the issuance of analyses, reports or otherwise and employs any
device, scheme, or artifice to defraud such other person or engages in any
act, practice or course of business which operates or would operate as a
fraud or deceit on such other person, shall be liable to that person who may
sue either at law or in equity to recover the consideration paid for such
advice and any loss due to such advice, together with interest thereon at the
annual rate of six percent from the date of payment of the consideration plus
costs and reasonable attorney's fees, less the amount of any income received
from such advice and any other economic advantage.
C. Every person who directly or indirectly controls a person liable
under subsection A or B of this section, including every partner, officer, or
director of such a person, every person occupying a similar status or
performing similar functions, every employee of such a person who materially
aids in the conduct giving rise to the liability, and every broker-dealer,
investment advisor, investment advisor representative or agent who materially
aids in such conduct shall be liable jointly and severally with and to the
same extent as such person, unless able to sustain the burden of proof that
he did not know, and in the exercise of reasonable care could not have known,
of the existence of the facts by reason of which the liability is alleged to
exist. There shall be contribution as in cases of contract among the several
persons so liable.
D. No suit shall be maintained to enforce any liability created
under this section unless brought within two years after the transaction upon
which it is based; provided, that, if any person liable by reason of
subsection A, B or C of this section makes a written offer, before suit is
brought, to refund the consideration paid and any loss due to any investment
advice provided by such person, together with interest thereon at the annual
rate of six percent, less the amount of any income received on the security
or resulting from such advice, or to pay damages if the purchaser no longer
owns the security, no purchaser or user of the investment advisory service
shall maintain a suit under this section who has refused or failed to accept
such offer within thirty days of its receipt.
E. Any tender specified in this section may be made at any time
before entry of judgment.
F. Any condition, stipulation or provision binding any person
acquiring any security or receiving any investment advice to waive compliance
with any provision of this chapter or of any rule or order thereunder shall
be void.
G. The rights and remedies provided by this chapter shall be in
addition to any and all other rights and remedies that may exist at law or in
equity.
THE SECURITIES ACT OF WASHINGTON
SECTION 21.20.140. UNLAWFUL TO OFFER OR SELL UNREGISTERED SECURITIES;
EXCEPTIONS.
It is unlawful for any person to offer or sell any security in this
state unless: (1) The security is registered by coordination or
qualification under this chapter; (2) the security or transaction is exempted
under RCW 21.20.310 or 21.20.320; or (3) the security is a federal covered
security, and, if required, the filing is made and a fee is paid in
accordance with RCW 21.20.327.
B-49
<PAGE>
SECTION 21.20.430. CIVIL LIABILITIES; SURVIVAL, LIMITATION OF ACTIONS;
WAIVER OF CHAPTER VOID; SCIENTER.
(1) Any person, who offers or sells a security in violation of any
provisions of RCW 21.20.010, 21.20.140(1) or (2), or 21.20.180 through
21.20.230, is liable to the person buying the security from him or her, who
may sue either at law or in equity to recover the consideration paid for the
security, together with interest at eight percent per annum from the date of
payment, costs, and reasonable attorneys' fees, less the amount of any income
received on the security, upon the tender of the security, or for damages if
he or she no longer owns the security. Damages are the amount that would be
recoverable upon a tender less (a) the value of the security when the buyer
disposed of it and (b) interest at eight percent per annum from the date of
disposition.
(2) Any person who buys a security in violation of the provisions of
RCW 21.20.010 is liable to the person selling the security to him or her, who
may sue either at law or in equity to recover the security, together with any
income received on the security, upon tender of the consideration received,
costs, and reasonable attorneys' fees, or if the security cannot be
recovered, for damages. Damages are the value of the security when the buyer
disposed of it, and any income received on the security, less the
consideration received for the security, plus interest at eight percent per
annum from the date of disposition, costs, and reasonable attorneys' fees.
(3) Every person who directly or indirectly controls a seller or
buyer liable under subsection (1) or (2) above, every partner, officer,
director or person who occupies a similar status or performs a similar
function of such seller or buyer, every employee of such a seller or buyer
who materially aids in the transaction, and every broker-dealer, salesperson,
or person exempt under the provisions of RCW 21.20.040 who materially aids in
the transaction is also liable jointly and severally with and to the same
extent as the seller or buyer, unless such person sustains the burden of
proof that he or she did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist. There is contribution as in cases of contract
among the several persons so liable.
(4)(a) Every cause of action under this statute survives the death of
any person who might have been a plaintiff or defendant.
(b) No person may sue under this section more than three years after
the contract of sale for any violation of the provisions of RCW 21.20.140(1)
or (2) or 21.20.180 through 21.20.230, or more than three years after a
violation of the provisions of RCW 21.20.010, either was discovered by such
person or would have been discovered by him or her in the exercise of
reasonable care. No person may sue under this section if the buyer or seller
receives a written rescission offer, which has been passed upon by the
director before suit and at a time when he or she owned the security, to
refund the consideration paid together with interest at eight percent per
annum from the date of payment, less the amount of any income received on the
security in the case of a buyer, or plus the amount of income received on the
security in the case of a seller.
(5) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was
in violation, may base any suit on the contract. Any condition, stipulation,
or provision binding any person acquiring any security to waive compliance
with any provision of this chapter or any rule or order hereunder is void.
(6) Any tender specified in this section may be made at any time
before entry of judgment.
(7) Notwithstanding subsections (1) through (6) of this section, if
an initial offer or sale of securities that are exempt from registration
under RCW 21.20.310 is made by this state or its agencies, political
subdivisions, municipal or quasi-municipal corporations, or other
instrumentality of one or more of the foregoing and is in violation of RCW
21.20.010(2), and any such issuer, member of the governing body, committee
member, public officer, director, employee, or agent of such issuer acting on
its behalf, or person in control of such issuer, member of the governing
body, committee member, public officer, director, employee, or agent of such
person acting on its behalf, materially aids in the offer or sale, such
person is liable to the purchaser of the security only if the purchaser
establishes scienter on the part of the defendant. The word "employee" or
the word "agent," as such words are used in this subsection, do not include a
bond counsel or an underwriter. Under no circumstances whatsoever shall this
subsection be applied to require purchasers to establish scienter on the part
of bond counsels or underwriters. The provisions of this subsection are
retroactive and apply to any action commenced but not final before July 27,
1985. In addition, the provisions of this subsection apply to any action
commenced on or after July 27, 1985.
B-50
<PAGE>
WISCONSIN UNIFORM SECURITIES LAW
SECTION 551.21. REGISTRATION REQUIREMENT.
(1) It is unlawful for any person to offer or sell any security in
this state unless at least one of the following conditions is met:
(a) The security is registered under this chapter.
(b) The security or transaction is exempted under s. 551.22 or 551.23.
(c) The security is a federal covered security.
(2) It is unlawful for any issuer or registrant of any securities
registered under this chapter, or any person in control of or controlled by
or under common control with the issuer or registrant, to offer or sell any
of the registered securities in this state if the issuer or registrant is in
violation of this chapter, or any rule under this chapter, or any order under
this chapter of which he or she has notice, or if the registration statement
relating to the securities, as of the date of such offer or sale, is
incomplete in any material respect or contains any statement which is false
or misleading with respect to any material fact.
SECTION 551.59. CIVIL LIABILITIES.
(1)(a) Any person who offers or sells a security in violation of s.
551.21, 551.31, 551.41 or 551.55 or any rule relating thereto, or any
condition imposed under s. 551.26 or 551.27 or any order under this chapter
of which the person has notice is liable to the person purchasing the
security from him or her. The person purchasing the security may sue either
at law or in equity to recover the consideration paid for the security,
together with interest at the legal rate under s. 138.04 from the date of
payment, and reasonable attorney fees, less the amount of any income received
on the security, upon the tender of the security, or for damages if the
person no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the purchaser
disposed of it and interest at the legal rate under s. 138.04 from the date
of disposition. Tender shall require only notice of willingness to exchange
the security for the amount specified. Any notice may be given by service as
in civil actions or by certified mail addressed to the last-known address of
the person liable.
(1)(b) A person who offers or sells a security in violation of s.
551.41(2) is not liable under par. (a) if the purchaser knew of the untrue
statement of a material fact or omission of a statement of a material fact or
the person sustains the burden of proof to establish that he or she did not
know and in the exercise of reasonable care could not have known of the
untrue statement or omission.
(2)(a) Any person who purchases a security in violation of s. 551.41(2)
is liable to the person selling the security to him or her, who may sue
either at law or in equity to recover the security and reasonable attorney
fees, plus any income received by the purchaser thereon, upon tender of the
consideration received, or for damages and reasonable attorney fees if the
purchaser no longer owns the security. Damages are the excess of the value of
the security when the purchaser disposed of it, plus interest at the legal
rate under s. 138.04 from the date of disposition, over the consideration
paid for the security. Tender requires only notice of willingness to pay the
amount specified in exchange for the security. Any notice may be given by
service as in civil actions or by certified mail to the last-known address of
the person liable.
(2)(b) A person who purchases a security in violation of s. 551.41(2) is
not liable under par. (a) if the seller knew of the untrue statement of a
material fact or omission of a statement of a material fact or the person
sustains the burden of proof to establish that he or she did not know and in
the exercise of reasonable care could not have known of the untrue statement
or omission.
(3) Any person who wilfully participates in any act or transaction in
violation of s. 551.42 shall be liable to any other person who purchases or
sells any security at a price which was affected by the act or transaction
for the damages sustained as a result of such act or transaction. Damages
shall be the difference between the price at which the other person purchased
or sold securities and the market value which the securities would have had
at the time of his or her purchase or sale in the absence of the act or
transaction, plus interest at the legal rate under s. 138.04 and reasonable
attorney fees.
(4) Every person who directly or indirectly controls a person liable
under sub. (1), (2) or (3), every partner, principal executive officer or
director of such person, every person occupying a similar status or
performing similar functions, every employee of such person who materially
aids in the act or transaction constituting the violation, and every
broker-dealer or agent who materially aids in the act or transaction
constituting the violation, are also liable jointly and severally with and to
the same extent as such person, unless the person liable hereunder proves
that he or she did not know, and in the exercise of reasonable care could not
have known, of the existence of the facts by reason of which the liability is
alleged to exist. There is contribution as in cases of contract among the
several persons so liable.
B-51
<PAGE>
(5) No action shall be maintained under this section unless commenced
before the expiration of 3 years after the act or transaction constituting
the violation, but the time specified for commencing such action shall be
extended by reason of any fact and for the time specified in ss. 893.13 and
893.16 to 893.23.
(6)(a) No purchaser may commence an action under this section if, before
suit is commenced, the purchaser has received a written offer stating the
respect in which liability under this section may have arisen and fairly
advising the purchaser of his or her rights; offering to repurchase the
security for cash payable on delivery of the security equal to the
consideration paid, together with interest at the legal rate under s. 138.04
from the date of payment, less the amount of any income received thereon or,
if the purchaser no longer owns the security, offering to pay the purchaser
upon acceptance of the offer an amount in cash equal to the damages computed
in accordance with sub. (1); and stating that the offer may be accepted by
the purchaser at any time within a specified period of not less than 30 days
after the date of receipt thereof or such shorter period as the division may
by rule prescribe; and the purchaser has failed to accept such offer in
writing within the specified period.
(b) No seller may commence an action under this section if, before
suit is commenced, the seller has received a written offer stating the
respect in which liability under this section may have arisen and fairly
advising the seller of his or her rights; offering to return the security
plus the amount of any income received thereon upon payment of the
consideration received, or, if the purchaser no longer owns the security,
offering to pay the seller upon acceptance of the offer an amount in cash
equal to the damages computed in accordance with sub. (2); and providing that
the offer may be accepted by the seller at any time within a specified period
of not less than 30 days after the date of receipt thereof; and the seller
has failed to accept the offer in writing within the specified period.
(c) Offers shall be in the form and contain the information the
division by rule prescribes. Every offer under this subsection shall be
delivered to the offeree or sent by certified mail addressed to the offeree
at the offeree's last-known address. If an offer is not performed in
accordance with its terms, suit by the offeree under this section shall be
permitted without regard to this subsection.
(7) No person who has made or engaged in the performance of any
contract in violation of this chapter or any rule or order hereunder, or who
has acquired any purported right under any contract with knowledge of the
facts by reason of which its making or performance was in violation, may base
any suit on the contract.
(8) Any condition, stipulation or provision binding any person
acquiring any security to waive compliance with any provision of this chapter
or any rule or order hereunder is void.
(9) The rights and remedies under this chapter are in addition to any
other rights or remedies that may exist at law or in equity.
B-52
<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.
<TABLE>
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
RESCISSION OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 35
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
PLAN OF DISTRIBUTION AND SELLING
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . . . . . 71
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
EXHIBIT A RESCISSION ELECTION FORM . . . . . . . . . . . . . . . . . . . . . . . .A-1
EXHIBIT B INDEX TO EXCERPTS FROM STATE
SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-1
</TABLE>
UNTIL , 1999 (90 DAYS FROM THE DATE OF THIS PROSPECTUS),
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.
<TABLE>
<S> <C>
SEC Registration Fee.................................. $ 304
NASD Filing Fee....................................... --
Legal Fees and Expenses............................... 25,000
Accounting Fees and Expenses.......................... 50,000
Blue Sky Fees and Expenses (including
counsel fees)......................................... --
Federal Taxes......................................... --
State Taxes and Fees.................................. --
Printing and Engraving Expenses....................... 5,000
Transfer Agent and Registrar Fees and
Expenses.............................................. --
Expenses by Selling Shareholders...................... --
Miscellaneous......................................... --
-------
Total........................................ $80,304
=======
</TABLE>
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. 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.
II-1
<PAGE>
However, subsequent events have led the Company to believe that such
transactions were not exempt from registration under Regulation D under
the Securities Act.
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.
Subsequent to their issuance, 3,364,354 shares of the Series A Preferred
Stock converted into 4,036,724 shares of Class A Common Stock (1 to 1.2
ratio) prior to January 1, 1998, leaving 103,500 shares of Series A
Preferred Stock outstanding. At the time of the offering, the Company
believed such individuals were sophisticated investors and received
adequate information concerning an investment in the Company. As a result,
the Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent events
have led the Company to believe that at the time of the offering such
individuals were not sophisticated investors or did not receive adequate
information in connection with their investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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). Subsequent to their issuance,
1,691,225 shares of Series B Preferred Stock converted into 2,029,470
shares of Class B Common Stock prior to March 31, 1998, leaving 87,349
shares of Series B Preferred Stock outstanding of which 77,349 shares are
subject to rescission. At the time of the offering, the Company believed
such individuals were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent events
have led the Company to believe that at the time of the offering such
individuals were not sophisticated investors or did not receive adequate
information in connection with their investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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 such individuals were sophisticated investors and received
adequate information concerning an investment in the Company. As a result,
the Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent events
have led the Company to believe that at the time of the offering such
individuals were not sophisticated investors or did not receive adequate
information in connection with their investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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 Mr. Crutchfield was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. However, because subsequent events have led the Company
to believe that at the time of the offering Mr. Crutchfield was not a
sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
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 Mr. Jenkins was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believed the transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof as a transaction
by an issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering Mr.
Jenkins was not a sophisticated investor or did not receive
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<PAGE>
adequate information in connection with his investment in the Company, the
Company believes the transaction was not exempt from registration under
Section 4(2) of the Securities Act.
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 such individuals were sophisticated investors and received
adequate information concerning an investment in the Company. As a result,
the Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent events
have led the Company to believe that at the time of the offering such
individuals were not sophisticated investors or did not receive adequate
information in connection with their investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
8. In April 1997, the Company issued Antoni 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 Mr. Albaut was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believed the transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof as a transaction
by an issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering Mr.
Albaut was not a sophisticated investor or did not receive adequate
information in connection with his investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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 Mr. Eagleeye was
a sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. However, because subsequent events have led the Company
to believe that at the time of the offering Mr. Eagleeye was not a
sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
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 Mr. Berg was a sophisticated investor and received
adequate information concerning an investment in the Company. As a result,
the Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent events
have led the Company to believe that at the time of the offering Mr. Berg
was not a sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
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 Mr. Flores was a sophisticated investor and received
adequate information concerning an investment in the Company. As a result,
the Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent events
have led the Company to believe that at the time of the offering Mr. Flores
was not a sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
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 Mr. Najoan was a sophisticated
investor and received adequate information concerning an investment in the
Company. As a result, the Company believed the transaction was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof as a
transaction by an issuer not involving a public offering. However, because
subsequent events have led the
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<PAGE>
Company to believe that at the time of the offering Mr. Najoan was not a
sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
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 Mr. Jenkins was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believed the transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof as a transaction
by an issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering Mr.
Jenkins was not a sophisticated investor or did not receive adequate
information in connection with his investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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 such individuals were
sophisticated investors and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. However, because subsequent events have led the Company
to believe that at the time of the offering such individuals were not
sophisticated investors or did not receive adequate information in
connection with their investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
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 Mr. Horner was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believed the transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof as a transaction
by an issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering Mr.
Horner was not a sophisticated investor or did not receive adequate
information in connection with his investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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 Mr. Krause was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believed the transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof as a transaction
by an issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering Mr.
Krause was not a sophisticated investor or did not receive adequate
information in connection with his investment in the Company, the Company
believes the transaction was not exempt from registration under Section
4(2) of the Securities Act.
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 Ms.
Schoberg was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company believed
the transaction was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not
involving a public offering. However, because subsequent events have led
the Company to believe that at the time of the offering Ms. Schoberg was
not a sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
18. 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 Mr. Smith was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof as a transaction by an issuer not involving a
public offering. However, because subsequent events have led the
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<PAGE>
Company to believe that at the time of the offering Mr. Smith was not a
sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
19. 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 such partnerships were sophisticated investors and
received adequate information concerning an investment in the Company. As
a result, the Company believed the transaction was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof as a transaction
by an issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering
such partnerships were not sophisticated investors or did not receive
adequate information in connection with their investment in the Company,
the Company believes the transaction was not exempt from registration under
Section 4(2) of the Securities Act.
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. At the time of
the offering, the Company believed such trusts and partnership were
sophisticated investors and received adequate information concerning an
investment in the Company. As a result, the Company believes 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.
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. At
the time of the offering, the Company believed such trusts and partnership
were sophisticated investors and received adequate information concerning
an investment in the Company. As a result, the Company believes 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.
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. At the time of the offering, the
Company believed Mr. Stone was a sophisticated investor and received
adequate information concerning an investment in the Company. As a result,
the Company believes 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.
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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. At the time of the
offering, the Company believed Mr. McKinley was a sophisticated investor
and received adequate information concerning an investment in the Company.
As a result, the Company believes 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 December 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
Mr. McKinley's proportionate share of the Minority Interest. At the time
of the offering, the Company believed such individuals were sophisticated
investors and received adequate information concerning an investment in the
Company. As a result, the Company believes 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. 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 (which the Company has agreed to
extend until November 4, 2001), (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 (which the Company has
agreed to extend until November 4, 2001), (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. At the time of the offering, the Company believed Mr. Shaffner
was a sophisticated investor and received adequate information concerning
an investment in the Company. As a result, the Company believes 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 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. At the time of the offering, the Company
believed Mr. Davis was a sophisticated investor and received adequate
information concerning an investment in the Company. As a result, the
Company believes 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 May 1998, the Company issued five-year warrants entitling certain
individuals and entities to purchase an aggregate of 350,954 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.
11. In July 1998 the Company entered into a Subscription Agreement with Cynet
Holdings, LLC ("Cynet Holdings"), pursuant to which Cynet 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. The
Subscription Agreement was subsequently amended to extend the duration of
the agreement to December 31, 1999. As of November 30, 1999, Cynet
Holdings has purchased an aggregate of 4,106,000 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 Cynet 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 Cynet Holdings certain demand and
piggy-back registration rights covering the Company's securities held by
Cynet Holdings. At the time of the offering, the Company believed Cynet
Holdings was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company believes
the transaction was exempt from
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registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
12. In September 1999, the Company agreed to issue a warrant entitling Michael
Silvert to purchase 100,000 shares of Class B Common Stock at a price of
$1.00 per share. This warrant will be issued upon the completion of the
Rescission Offer in satisfaction of certain claims by Mr. Silvert that he
was entitled to receive such warrant in exchange for providing services to
the Company during 1997. At the time Mr. Silvert performed such services
in 1997, the Company believed Mr. Silvert was a sophisticated investor and
received adequate information concerning an investment in the Company. As
a result, the Company believes 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.
ITEM 27. EXHIBITS.
(a)
<TABLE>
<C> <S>
1 Form of Underwriting Agreement (incorporated by reference to the
same numbered exhibit to Amendment No. 3 to the Company's
Registration Statement on Form SB-2, No. 333-60765, filed October
15, 1999).
3.1 Articles of Incorporation of the Company, as amended
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed September 17, 1999).
3.2 Bylaws of the Company (incorporated by reference to the same
numbered exhibit to Amendment No. 2 to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed September 17, 1999).
4.1 Form of Certificate Representing Class A Common Stock
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed September 17, 1999).
4.2 Form of Certificate Representing Class B Common Stock
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed September 17, 1999).
4.3 Form of Certificate Representing Series A Preferred Stock
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed September 17, 1999).
4.4 Form of Certificate Representing Series B Preferred Stock
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed September 17, 1999).
4.5 Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of Convertible Non-voting Series A
Preferred Stock (incorporated by reference to the same numbered
exhibit to the Company's Registration Statement on Form SB-2, No.
333-60765, filed August 6, 1998).
4.6 Certificate of Designation, Preferences, Rights and Limitations
of Convertible Non-voting Series B Preferred Stock (incorporated
by reference to the same numbered exhibit to the Company's
Registration Statement on Form SB-2, No. 333-60765, filed August
6, 1998).
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 (incorporated by reference to the same
numbered exhibit to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed August 6, 1998).
10.2 Assignment of Intellectual Property dated as of March 3, 1997,
between the Company and Ray C. Davis (incorporated by reference
to the same numbered exhibit to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed August 6, 1998).
10.3 Consulting Agreement dated as of June 17, 1997, between the
Company and Vincent W. Beale, Sr (incorporated by reference to
the same numbered exhibit to the Company's Registration Statement
on Form SB-2, No. 333-60765, filed August 6, 1998).
</TABLE>
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10.4 Settlement Agreement and Mutual Release dated as of November 14,
1997, among the Company, Keith Shaffner and CyFax, Inc.
(incorporated by reference to the same numbered exhibit to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed August 6, 1998)
10.5 1997 Restated Stock Option Plan (incorporated by reference to the
same numbered exhibit to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, No. 333-60765, filed August
12, 1999).
10.6 Employment Agreement dated as of February 1, 1998, between the
Company and Vincent W. Beale, Sr. (incorporated by reference to
the same numbered exhibit to the Company's Registration Statement
on Form SB-2, No. 333-60765, filed August 6, 1998).
10.7 Employment Agreement dated as of March 1, 1998, between the
Company and David R. Hearon, Jr. (incorporated by reference to
the same numbered exhibit to the Company's Registration Statement
on Form SB-2, No. 333-60765, filed August 6, 1998).
10.8 Employment Agreement dated as of April 13, 1998, between the
Company and Ray C. Davis (incorporated by reference to the same
numbered exhibit to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed August 6, 1998).
10.9 Warrant dated April 13, 1998, issued to Ray C. Davis
(incorporated by reference to the same numbered exhibit to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed August 6, 1998).
10.10 Employment Agreement dated as of July 22, 1998, between the
Company and Bernard B. Beale (incorporated by reference to the
same numbered exhibit to the Company's Registration Statement on
Form SB-2, No. 333-60765, filed August 6, 1998).
10.11 Employment Agreement dated as of July 22, 1998, between the
Company and Samuel C. Beale (incorporated by reference to the
same numbered exhibit to the Company's Registration Statement on
Form SB-2, No. 333-60765, filed August 6, 1998).
10.12 Subscription Agreement dated as of July 22, 1998, between the
Company and Cynet Holdings, LLC (incorporated by reference to the
same numbered exhibit to the Company's Registration Statement on
Form SB-2, No. 333-60765, filed August 6, 1998).
10.13 Registration Rights Agreement dated as of July 22, 1998, between
the Company and Cynet Holdings, LLC (incorporated by reference to
the same numbered exhibit to the Company's Registration Statement
on Form SB-2, No. 333-60765, filed August 6, 1998).
10.14 Warrant dated July 22, 1998 issued to Cynet Holdings, LLC
(incorporated by reference to the same numbered exhibit to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed August 6, 1998).
10.15 Form of Assignment Agreement between the Company and the members
of the LLCs (incorporated by reference to the same numbered
exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed August 12, 1999).
10.16 Letter Agreement dated June 26, 1996, between the Company, Ray
Davis and International Fax Corporation (incorporated by
reference to the same numbered exhibit to Amendment No. 1 to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed August 12, 1999).
10.17 Supplement dated October 30,1997, to the Letter Agreement dated
June 26, 1996, among the Company, Ray Davis and International Fax
Corporation (incorporated by reference to the same numbered
exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed August 12, 1999).
10.18 Employment Agreement dated as of August 26, 1998, between the
Company and R. Greg Smith (incorporated by reference to the same
numbered exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed August 12, 1999).
10.19 Settlement Agreement and Mutual Release in Full dated as of
August 31, 1998, between the Company and Ray C. Davis
(incorporated by reference to the same numbered exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
SB-2, No. 333-60765, filed September 17, 1999).
10.20 First Amendment to Subscription Agreement dated July 31, 1999,
between the Company and Cynet Holdings, LLC (incorporated by
reference to the same numbered exhibit to Amendment No. 1 to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed August 12, 1999).
10.21 Purchase and Sale Agreement as of July 31, 1999, between the
Company and Cynet Holdings, LLC (incorporated by reference to the
same numbered exhibit to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, No. 333-60765, filed August
12, 1999).
II-8
<PAGE>
10.22 Strategic Alliance Agreement dated August 9, 1999, between the
Company and IXC Communications Services, Inc (incorporated by
reference to the same numbered exhibit to Amendment No. 2 to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed September 17, 1999).
10.23 Letter of December 15, 1998, from the Company to Brooktrout
Technology, Inc. (incorporated by reference to the same numbered
exhibit to Amendment No. 2 to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed September 17, 1999).
10.24 Joint Sales and Support Agreement dated January 21, 1999 between
the Company and Telesystems Marketing, Inc. (incorporated by
reference to the same numbered exhibit to Amendment No. 2 to the
Company's Registration Statement on Form SB-2, No. 333-60765,
filed September 17, 1999).
10.25 Form of Rescission Fund Escrow Agreement by and among the
Company, First Bank Texas, N.A. and each of the Rescission
Underwriters (incorporated by reference to the same numbered
exhibit to Amendment No. 3 to the Company's Registration
Statement on Form SB-2, No. 333-60765, filed October 15, 1999).
10.26 Letter Agreement dated September 22, 1999 and Addendum dated
October 22, 1999 among the Company, GlobeWave, Inc. and Teliran
Electronic Industries, Inc.
21.1 Subsidiaries of the Company (incorporated by reference to the
same numbered exhibit to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, No. 333-60765, filed August
12, 1999).
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.
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.
II-9
<PAGE>
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-10
<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 3rd day of December, 1999.
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 R. Greg Smith 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 December 3, 1999
- --------------------------- and Chief Executive Officer
Vincent W. Beale, Sr. (Principal Executive Officer)
/s/ R. Greg Smith Chief Financial Officer December 3, 1999
- --------------------------- (Principal Financial and Accounting Officer)
R. Greg Smith
/s/ Wayne Schroeder Director December 3, 1999
- ---------------------------
Wayne Schroeder
</TABLE>
II-11
<PAGE>
[LETTERHEAD]
December 3, 1999
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel to CyNet, Inc. a Texas corporation (the
"COMPANY"), in connection with the transactions contemplated by the
Registration Statement on Form SB-2 to be filed by the Company with the
Securities and Exchange Commission (the "COMMISSION") on or about December 3,
1999 ( the "REGISTRATION STATEMENT"). The Registration Statement pertains to
the registration of 840,581 shares of Class A Common Stock (the "ADDITIONAL
RESCISSION UNDERWRITER SHARES"), which have been authorized for issuance to the
Rescission Underwriters to fund the Company's pending rescission offer described
in the Registration Statement. We are rendering this opinion to you to satisfy
the requirements of the Commission and certain states' securities laws with
respect to the Registration Statement. Capitalized terms used but not defined
herein shall have the same meanings as are assigned to them in the Registration
Statement.
We have examined the Registration Statement and originals or copies of (i)
the Articles of Incorporation of the Company, as amended to date, (ii) the
Bylaws of the Company, as amended to date, (iii) certain resolutions of the
Board of Directors of the Company, and (iv) such other documents and records as
we have deemed necessary and relevant for purposes hereof. In addition, we have
relied, as to certain matters of fact relating to the opinions expressed below,
on certificates of officers of the Company, and we have made such investigations
of law as we have deemed necessary and relevant as a basis hereof.
In our examination of documents and certificates, we have assumed the
genuineness of all signatures (other than those of the Company), the legal
capacity to contract of all natural persons, the authenticity of all
documents and records submitted to us as originals, the conformity to
original documents and records of all documents and records submitted to us
as copies, and the correctness and accuracy of all statements of fact
contained therein. Moreover, we have assumed all parties to documents (other
than the Company) have the capacity and power to enter into and perform all
of
<PAGE>
CyNet, Inc.
December 3, 1999
Page 2
their obligations under such documents, that such documents have been duly
authorized, executed and delivered by such parties and that such documents
are valid, binding and enforceable as to those parties.
Based upon the foregoing, having due regard for such legal considerations
as we deem relevant, and subject to the limitations, qualifications and
assumptions set forth herein, we are of the opinion that upon completion of the
Rescission Offer, we are of the opinion that the Additional Rescission
Underwriter Shares to be issued to the Rescission Underwriters pursuant to the
standby underwriting agreements between the Company and each of the Rescission
Underwriters (collectively, the "UNDERWRITING AGREEMENTS") have been duly
authorized for issuance by the Company and, when issued and paid for in
accordance with the terms of the Underwriting Agreements, will be validly
issued, fully paid and nonassessable shares of Class A Common Stock of the
Company.
The foregoing opinion is predicated on and qualified in its entirety by the
following:
1. The foregoing opinion is based on and is limited to the law of the
State of Texas and the relevant law of the United States of America,
and we render no opinion with respect to the law of any other
jurisdiction.
2. We express no opinion as to any matters other than as expressly set
forth above, and no opinion is to be otherwise implied or inferred
herefrom
This opinion is solely for your benefit and may not be relied on by any
person.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ CHAMBERLAIN, HRDLICKA, WHITE,
WILLIAMS & MARTIN
CHAMBERLAIN, HRDLICKA, WHITE,
WILLIAMS & MARTIN
<PAGE>
September 22, 1999
Mr. Menashe Ben-David
c/o GlobeWave Inc.
Teliran Electronic Industries Ltd.
218 Route 17 North
Rochelle Park, New Jersey 07662
Re: CyNet, Inc., Teliran & GlobeWave Strategic Alliance
Dear Mr. Ben-David:
This letter summarizes the understanding among CyNet, Inc., Teliran Electronic
Industries Ltd. & GlobeWave following our August 19, 1999 meeting in Houston,
Texas. The terms and conditions are as follows:
1. GlobeWave Inc. ("GlobeWave") is the wholly owned marketing arm of
Teliran Electronic Industries Ltd. ("Teliran") and Teliran is an
Israeli corporation. Collectively, GlobeWave and Teliran are referred
to as the "Company." CyNet, Inc. is a Texas corporation ("CyNet").
2. CyNet desires to be the exclusive sales agent of the Company and the
Company desires CyNet to be its exclusive sales agent in a defined
territory in the United States (US) that consists of the states of
Florida, Georgia, Alabama, Tennessee, Mississippi, Arkansas,
Louisiana, Oklahoma, Texas, New Mexico, Colorado, Arizona, Nevada,
California, Utah, Oregon, Washington, and Hawaii. Based upon CyNet's
sales performance in the above defined territory, the Company will
consider appointing CyNet as the Company's exclusive sales agent in
the US and its territories.
3. As consideration for the Company appointing CyNet as its exclusive
sales agent in the defined territories from September 1999 through
December 1999, CyNet agrees to purchase 1,000 units of the GlobeWave
Cellular Modem with delivery schedules for the 1,000 units to be
completed on or before December 31, 1999. The purchase price for
this order is $400 each. GlobeWave will provide CyNet with a special
$50 discount on each unit. This discount is in recognition of
<PAGE>
CyNet/Teliran/GlobeWave
Letter of Understanding
September 22, 1999
Page 2
CyNet's marketing and sales effort. Terms for this specific order
are net 60.
4. As consideration for the Company appointing CyNet as its exclusive
sales agent in the defined territories after December 1999, CyNet
agrees to purchase 5,714 units of the GlobeWave Cellular Modem at a
purchase price of $350. The purchase commitment is to be secured by
a $2,000,000 standby letter of credit from a financial institution
having a term of 300 days.
5. The Company shall provide CyNet with training and support on the
sale and deployment of the Company's products.
We are eagerly looking forward to completing the agreements that will make this
a great alliance between us.
Please confirm your agreement to move forward by executing below.
Sincerely,
CyNet, Inc.
/s/ Bernard B. Beale
__________________________
Bernard B. Beale
Executive Vice President
AGREED:
GlobeWave, Inc.
By: /s/ Menashe Ben-David
__________________________
Menashe Ben-David
President
Teliran Electronic Industries, Ltd.
By: /s/ Menashe Shabi
_________________________
Menashe Shabi
President
<PAGE>
Addendum to 10.26
October 22, 1999
Mr. Menashe Ben-David
c/o GlobeWave Inc.
Teliran Electronic Industries Ltd.
218 Route 17 North
Rochelle Park, New Jersey 07662
Re: Addendum to Contract dated September 22, 1999
This is the first addendum to the Contract by and between GlobeWave, Inc.
("GlobeWave") and CyNet, Inc. ("CyNet") stating additional terms and
conditions as follows:
1) CyNet desires to be the exclusive sales agent of the GlobeWave 33.6
wireless modem and GlobeWave desires CyNet to be its exclusive sales
agent in the defined territory of the entire United States (US) for
the time period of October, November, and December 1999, and January 2000.
2) Delivery schedule of 1,000 units will be in receipt by CyNet within the
following time frames:
Immediate delivery - 300 units
On or before December 1999 delivery - 300 units
On or before January 2000 delivery - 400 units
3) CyNet and GlobeWave agree to consider an extension of the exclusivity
agreement on or before January 2000.
This Addendum is binding when executed by both parties.
GlobeWave, Inc. CYNET, Inc.
By: /s/ Menashe Ben-David By: /s/ Bernard B. Beale
Name: Menashe Ben-David Name: Bernard B. Beale
Title: President Title: Executive Vice President
<PAGE>
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 April 23, 1999, except for
footnote 15, which is as of November 29, 1999, 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
December 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 SEP-30-1999 DEC-31-1997 SEP-30-1998
<PERIOD-START> JAN-01-1998 JAN-01-1999 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1998 SEP-30-1999 DEC-31-1997 SEP-30-1998
<CASH> 55,007 39,782 0 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 562,137 596,017 0 0
<ALLOWANCES> (99,104) (240,331) 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 2,132,660 2,267,481 0 0
<PP&E> 3,690,091 3,876,248 0 0
<DEPRECIATION> (1,061,634) (1,651,777) 0 0
<TOTAL-ASSETS> 5,297,713 5,092,147 0 0
<CURRENT-LIABILITIES> 3,535,776 3,533,232 0 0
<BONDS> 13,980,009 13,950,009 0 0
0 0 0 0
0 30,000 0 0
<COMMON> 4,816,703 7,411,703 0 0
<OTHER-SE> (17,034,775) (19,832,797) 0 0
<TOTAL-LIABILITY-AND-EQUITY> 5,297,713 5,092,147 0 0
<SALES> 8,947,732 6,501,849 4,960,355 6,778,197
<TOTAL-REVENUES> 8,947,732 6,501,849 4,960,355 6,778,197
<CGS> 6,069,184 3,592,920 4,490,505 4,864,570
<TOTAL-COSTS> 7,108,910 7,154,566 8,428,720 5,237,400
<OTHER-EXPENSES> (126,278) (165,960) 56,821 (103,440)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (103,851) (115,457) (2,000) (36,975)
<INCOME-PRETAX> (4,356,640) (4,411,597) (7,762,863) (3,427,213)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (4,356,640) (4,411,597) (7,762,863) (3,427,213)
<EPS-BASIC> (.19) (.17) (.60) (.15)
<EPS-DILUTED> (.19) (.17) (.60) (.15)
</TABLE>
