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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-28349
CYNET, INC.
(Exact name of small business issuer as specified in its charter)
Texas 76-0467099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12777 Jones Road, Suite 400
Houston, Texas 77070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 897-8317
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
Class B Common Stock, no par value
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year were $8,626,675.
As of March 15, 2000, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $38,989,636,
based on the closing sale price of such common equity on that date.
As of March 15, 2000, 26,111,813 shares of the issuer's Class A Common
Stock were outstanding and 2,242,952 shares of the issuer's Class B Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: None.
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CYNET, INC.
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1999
INDEX
PAGE
PART I
Item 1. Description of Business..............................,...........2
Item 2. Description of Properties.......................................12
Item 3. Legal Proceedings...............................................12
Item 4. Submission of Matters to a Vote of Security Holders.............12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........13
Item 6. Management's Discussion and Analysis or Plan of Operation.......14
Item 7. Financial Statements............................................18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............19
Item 11. Security Ownership of Certain Beneficial Owners and
Management.....................................................28
Item 12. Certain Relationships and Related Transactions.................30
Item 13. Exhibits and Reports on Form 8-K...............................32
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FORWARD LOOKING STATEMENTS
When used in this Form 10-KSB and elsewhere by management or CYNET,
Inc. ("CYNET" or the "Company") from time to time, the words "believes,"
"anticipates," "expects," "will" and similar expressions are intended to
identify forward-looking statements concerning CYNET's operations, economic
performance and financial condition. These include, but are not limited to,
forward-looking statements about CYNET's business strategy and means to
implement the strategy, CYNET's objectives, the amount of future capital
expenditures, the likelihood of CYNET's success in developing and introducing
new products and services and expanding its business, and the timing of the
introduction of new and modified products and services. For those statements,
CYNET claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. These
statements are based on a number of assumptions and estimates inherently subject
to significant risks and uncertainties, many of which are beyond the control of
CYNET, and reflect future business decisions, which are subject to change. A
variety of factors could cause actual results to differ materially from those
anticipated in CYNET's forward-looking statements, including the following
factors:
- factors described from time to time in the Company's press
releases, reports and other filings made with the Securities
and Exchange Commission;
- CYNET's ability to manage its growth and to respond to rapid
technological change and risk of obsolescence of its products,
services and technology;
- market acceptance of new products and services;
- development of effective marketing, pricing and distribution
strategies for new products and services;
- the success of CYNET's strategic relationships, including the
amount of business generated and the viability of the
strategic partners, may not meet expectations;
- possible adverse results of pending or future litigation;
- risks associated with interruption in CYNET's services due to
the failure of the platforms and network infrastructure used
in providing its services; and
- legislative or regulatory changes may adversely affect the
business in which CYNET is engaged.
CYNET, Inc. cautions that these factors are not exclusive.
Consequently, all of the forward-looking statements made in this Form 10-KSB are
qualified by these cautionary statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Form 10-KSB. CYNET assumes no obligation to publicly release the
results of any revisions to these forward- looking statements that may be made
to reflect events or circumstances after the date of this Form 10-KSB, or the
date of the statement, if a different date.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
SERVICES
The Company is an Internet business applications solutions provider
integrating convergent messaging with Internet Services. The Company's
products and services are CONVERGENT MESSAGING which includes fax, data,
voice, e-mail and wireless 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 communications. The Company capitalized
on the dramatic increase in the usage of third-party fax services and created a
niche market for itself with its fax broadcast desktop client software and
related services. In 1997, the Company introduced its point-to-point desktop
software and fax service in order to expand its marketing efforts.
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 an
applications service provider offering full service Internet messaging. In
1998, the Company added Internet-to-fax, fax-to-e-mail, e-mail broadcast,
voice broadcast, and teleconferencing services to its product offerings. To
further enhance its convergent 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, Inc. ("CYNET Interactive"), a wholly owned
subsidiary of Cynet Holdings, LLC ("Cynet Holdings"). See "Certain Relationships
and Related Transactions." 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 solutions that are more effective 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 a major Internet service provider to enable the Company
to expand its products and services to include Internet access for business
customers. The Company expects this alliance 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 strategy is to position itself as a full service
provider of convergent messaging and Internet service solutions. The Company
coordinates the delivery of and supports 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 have been
refocused to target Fortune 500 and other large corporate and medium-sized
companies offering a unified solution. This sales effort has been 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 alliances and resellers who are able to
sell the Company's products and services. See "--Strategic Relationships"
below.
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CURRENT MESSAGING AND INTERNET MARKET
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.
Forrester Research, Inc. ("Forrester"), a technology research firm, estimates
that there were over 76 million and 51 million web users in the United States
and over 147 million and 97 million worldwide at the end of 1999 and 1998,
respectively. Forrester projects these numbers will 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. Forrester estimates that the value of purchases of goods and services
on the Internet, excluding fund transfers and stock transfers, will grow from
$32.4 billion worldwide in 1998 to $425.7 billion worldwide in 2002.
TRENDS IN INTERNET MESSAGING
E-mail, the most widely adopted Internet application, ranges from a
personal messaging tool to a strategic business tool. According to Electronic
Mail & Messaging Systems, an Internet publication, there were approximately 435
million and 325 million e-mail accounts in operation at the end of 1999 and
1998, respectively. E-mail messages have increased in volume and functionality,
and this trend is expected to continue. For example, e-mail has become a major
vehicle for e-commerce transactions. Forrester estimates that by 2001 the
typical online consumer will participate in eight to ten commerce-related
exchanges via e-mail per week. The e-mail account 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 account 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 technology, the various messaging 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 - (using the telephone, personal computer, and
traditional fax machine) or accessing the web.
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.
Forrester defines unified messaging as a "single 'in-box' for voice, e-mail and
fax messages that is accessible by both telephone and personal computer."
International Data Corporation ("IDC"), a technology research firm estimates
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 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. Forrester estimates that
worldwide fax transmissions will increase from 540 billion and 395 billion
minutes in 1999 and 1998, respectively, to 647 billion minutes in 2002.
According to Forrester, fax transmissions generated estimated
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revenues of $125 billion and $92 billion in 1999 and 1998, respectively, 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 telephone lines, thereby growing less
dependent on traditional fax machines. IDC estimates that the share of faxes
sent using a fax machine in the United States was 82% in 1998 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 software
applications market is growing at a significant rate as Internet e-commerce
increases. According to Forrester's Internet Commerce Software Applications
Market Review and Forecast, revenues derived from Internet e-commerce soared
280% and 154% to $1.7 billion and $444 million in 1999 and 1998, respectively,
and are expected to increase another 771% to approximately $13.1 billion in
2003. The Company believes many companies will be developing e-commerce sites
over the coming years as e-commerce presents vendors with sales opportunities.
The proliferation of Internet Service Providers ("ISPs") has enabled
more vendors to use 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, web hosting and Internet content
development.
NEED FOR COST-EFFECTIVE SOLUTIONS
The Company believes businesses constantly seek to cost-effectively
manage expanding, increasingly sophisticated communications systems making
utilization of third parties to manage their messaging and Internet needs
preferable. Moreover, the Company believes businesses often find it difficult to
implement state-of-the-art technology in their own infrastructure, as experts
are scarce and costly to hire, train and retain. Consequently, the Company
believes organizations, in an effort to reduce costs and 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.
Many autonomous communications services are currently provided through
hardware-based legacy systems, including landline telephone systems, messaging
devices and local area networks ("LANs") that reside, entirely or partially, at
a customer's location. The architecture of the customer's equipment comprising
such systems is often resistant to unification with other systems and networks,
making integration difficult and expensive. Increasingly, users are demanding
the combination of existing services with more open and intelligent worldwide
communications networks such as the Internet. CYNET believes that, due
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to the expansion of Internet communications and the complexity of the
unification of current telecommunications and Internet services, outsourcing
communications requirements to third parties, such as CYNET, will soon become
widely utilized by Companies and individuals alike. Management believes its
one-stop, customized, network-based solutions for streamlining communications
place the Company in a position to capitalize on these trends.
OPERATIONS
The Company's operations include 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 and delivery instructions
(such as 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 using the
Internet (e-mail) or a 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
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 a third-party ISP. The Company's technical
staff monitors both the web site hosting services and 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 (technicians to
monitor the servers and messaging queues), Customer Service, Engineering
(developers for custom messaging and Internet application development),
Graphics (writers of document, web site and web content design), and Copy
(designers of 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. 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 intends 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 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.
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CYNET SERVICES
FAX BROADCAST
The Company's automated fax broadcasting service allows its
customers to mass-distribute business documents over broad geographical areas
during specified periods of time. After the customer electronically 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
telephone lists and other external applications.
POINT-TO-POINT FAX
The Company's point-to-point enhanced fax service allows customers to
fax directly from their desktops to recipients using the Company's system. This
service can be fully customized to each customer's individual faxing needs. The
features include: (i) customization of cover pages, (ii) implementation of
accounting codes, (iii) development of control centers that maintain and
manage faxes, (iv) receipt of delivery and non-delivery reports via e-mail and
(v) production of daily journals.
FAX TO E-MAIL
The Company's fax-to-email service 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. Customers are assigned a
toll-free or local virtual fax number, which is linked to their e-mail address
and to the Company's fax viewer software. The 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
The Company's Internet to fax service 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 personal computer. Additionally, customers receive
delivery confirmation reports either by e-mail or by fax. An added feature is
the ability to include custom logos and to insert automatic headers into
outgoing messages. This product can also be customized to assign individual
billing codes and tracking reference numbers on faxes and telexes for easy
record keeping.
E-MAIL TO E-MAIL
The Company's E-mail to E-mail service gives customers the ability
to broadcast e-mail messages to any number of recipients simultaneously. The
Company's service has the capability to deliver approximately 200 e-mail
messages per second or 720,000 per hour. To use 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 this
product are: (i) the ability to attach documents, (ii) the presence of a
special e-mail address for forwarding outbound messages and (iii) the
availability of delivery priority options: InstaMail for immediate delivery
or Scheduled for a specific time.
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IMAGE RESOLUTION/DOCUMENT ENHANCEMENT
The Company's image resolution and document enhancement service can be
used in conjunction with any of the Company's messaging services. To use this
service, the customer submits graphics, photos, and 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 Complete Wireless Cell/Modem is a high-speed V.34
cellular modem that transfers at landline speeds up to 33.6Kbps and cellular
speeds up to 21.6Kbps. This cellular modem can be used with your laptop to
access the Internet, as well as send/receive data, fax, email and voice
communications. It is designed to be compatible with any laptop or portable
device equipped with a PCMCIA Type III slot and contains a built-in cell phone,
eliminating the need for a separate device for voice communications.
VOICE BROADCAST
The Company's voice-broadcasting service gives customers the capability
to transmit voice broadcasts 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 mailboxes the
customer specifies.
VOICE TELECONFERENCING
The Company's voice teleconferencing service 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 one of
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, dedicated and dial-up ISP
capabilities, providing its business customers with Internet connectivity in
addition to e-commerce, wireless and messaging services. The ISP service
includes 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, e-mail
accounts, online news services and additional services.
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, energy trading applications and Internet Web-based magazines.
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MARKETING SOLUTIONS
Worldwide Marketing Services, Inc. ("Worldwide") is a wholly-owned
subsidiary of the Company. Worldwide specializes in providing verified list,
Opt-in e-mail, marketing, 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. The
Company has a disaster recovery plan with a redundant network-switching center
in place. 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. Substantially all of the
Company's computing equipment is readily available from large, well-known
suppliers.
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 the years ended December 31, 1999 and
1998.
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 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
March 15, 2000, the Company employed a team of 31 sales and support personnel in
its Houston, Texas, four in its Yorba Linda, California and two in its Portland,
Oregon locations. 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 engages in telephone and direct contact with customers and
prospects as part of its marketing efforts. The Company also actively seeks to
forge 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.
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STRATEGIC RELATIONSHIPS
The Company is actively pursuing 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 consumers for
its services.
The following is a summary of certain of the strategic relationships
that 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, some
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.
BROOKTROUT TECHNOLOGY, INC. ("BROOKTROUT"). The Company is currently
conducting certain joint marketing and technology sharing efforts with
Brooktrout, and has been a Beta Testing customer for certain Brooktrout
technology. The Company and Brooktrout currently conduct joint marketing efforts
at selected trade shows, and have periodic joint technology round table
discussions with their respective research and development, engineering and
software development teams. These joint marketing efforts and discussions could
result in additional technology agreements and understandings between the
Company and Brooktrout. The Company expects to continue to be a Beta Testing
customer for new Brooktrout technology pertaining to faxing, unified messaging
and other related technology.
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.
AECsoft USA, INC. ("AECSOFT"). The Company has entered into an
agreement with AECsoft pursuant to which AECsoft provides to the Company and
certain of its clients Internet web-based software and web site building tools
(the "ADC2000" system and modules). AECsoft has granted the Company the right to
resell licenses to use the ADC2000 system and/or its modules to the Company's
clients. Also, AECsoft has agreed to provide web building and customization
services to the Company for ADC2000- related projects. In addition, AECsoft has
agreed to grant the Company up to 50% ownership of the ADC2000 system and
modules based on the Company's sales of ADC2000 projects.
TELIRAN ELECTRONICS, LTD. ("TELIRAN"). The Company previously entered
into an alliance agreement with GlobeWave, Inc. ("GlobeWave"), a subsidiary of
Teliran, pursuant to which the Company sold and distributed units of the Teliran
Complete PC card (the "Cell Phone/Modem") in the United States from October 1999
through January 2000. On February 16, 2000 the Company, Cynet Holdings and
Teliran entered into another agreement (the "Teliran Agreement"), pursuant to
which Teliran granted Cynet Holdings exclusive worldwide sales and marketing
rights with respect to the Cell Phone/Modem for a term of three years. In
consideration for these rights, Cynet Holdings committed to sell a minimum of
23,700 Cell Phone/Modem units during each of the years 2000, 2001 and 2002, with
a provision for additional sales targets for 2001 and 2002 to be mutually agreed
upon by the parties. Teliran agreed to pay up to $10,000 per month in technical
support with respect to the Cell Phone/Modem units. The Teliran Agreement also
contemplates certain equity purchase rights among the Company, Cynet Holdings
and Teliran if performance by the parties to the Teliran Agreement is
satisfactory after one year. Pursuant to the Teliran Agreement, the Company has
acquired from Cynet Holdings the exclusive sales, marketing and technical
support rights
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with respect to the Cell Phone/Modem under the Teliran Agreement for an
initial term of one year, subject to the Company's satisfaction of the
minimum sales and other requirements under the Teliran Agreement. See
"Certain Relationships and Related Transactions."
RESEARCH AND DEVELOPMENT
CYNET's research and development and engineering personnel are
responsible for developing, testing and supporting proprietary software
applications, as well as creating and improving enhanced system features and
services. CYNET's research and development strategy is to focus efforts on
enhancing its proprietary software and integrating it with readily available
software and hardware when practicable. CYNET maintains both internal and
outsourced software development programs through which the Company introduces
new products and enhances existing ones. CYNET's research, development, and
engineering personnel also engage in joint development efforts with CYNET's
strategic partners.
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 currently 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) the Company's 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) the industry's response 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:
- Telecommunications companies and resellers (e.g., AT&T, MCI
Worldcom);
- Internet Service Providers (e.g., UUNET Technologies, NETCOM
On-Line Communications Services, Inc.);
- Enhanced fax service providers (e.g., Mail.com, Premiere
Technologies, Inc.);
- Unified Internet messaging providers (e.g., JFAX.COM, INC. FaxNet
Corp.);
- Wireless Cell/Modem providers (e.g., Sierra Wireless); and
- Various web design and electronic commerce service providers
(e.g., Ariba, Commerce One, Ondisplay, Breakaway Solutions).
The Company is unaware of any other entity that combines Convergent
Messaging and Internet Services in a unified service offering. Nevertheless,
the Company believes competitors will emulate its current business strategy
in the future and such competitors will enter the markets served by the
Company. Some 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 software
development resources 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 trains sales
personnel to utilize selling techniques aimed at specific customer needs.
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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 reductions of prices and gross margin 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 operational
results.
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
regulatory classification of the Company. 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.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as online content, user privacy,
security, pricing and characteristics and quality of products and services.
The tax treatment of the Internet and e-commerce is also unsettled. A
number of proposals have been made at the federal, state and local level and by
certain foreign governments that could impose taxes on the sale of goods and
services and certain other Internet activities. A recently-passed federal law
places a temporary moratorium on certain types of taxation on Internet commerce.
The Company cannot predict the effect of current attempts at taxing or
regulating commerce over the Internet. Any legislation that substantially
impairs the growth of e-commerce could have a material adverse effect on the
Company's business, financial condition and operating results.
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 seeks 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 March 15, 2000, the Company employed 111 persons, substantially
all of whom were full-time employees. None of the Company's employees is
currently covered by a collective bargaining arrangement. The majority of the
Company's employees are located at the Company's headquarters in Houston, Texas.
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The Company also has employees in Yorba Linda, California and Portland, Oregon.
The Company considers the relations 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 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's, 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. The
Company also licenses certain technology from third parties as necessary for the
operation of certain of its products and services. In the event that a third
party successfully develops technologies similar or superior to the Company's
technology, the Company may be subject to claims that its products and services
infringe on the intellectual property rights of others.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company does not own any real property. The Company's headquarters,
which includes its administrative, sales, marketing, management information
systems and development offices and its operations center, is located in
approximately 22,000 square feet of leased space in Houston, TEXAS. THE LEASE ON
THE HOUSTON FACILITY EXPIRES IN MARCH 2003. 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. Suitable additional space
in close proximity to its headquarters will be available as needed to
accommodate growth of its operations.
ITEM 3. 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 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 (Cause 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 defend the matter vigorously. Although the Company has not
completed its discovery 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 a party to other legal proceedings, none of which the
Company believes will have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Since January 19, 2000, the Company's Class A Common Stock, no par
value per share (the "Class A Common Stock"), has been approved for trading on
the NASDAQ OTC Bulletin Board Service under the trading symbol "CYNE." As of
March 15, 2000, there were approximately 503 shareholders of record of the
Company's Class A Common Stock.
Since January 28, 2000, the Company's Class B Common Stock, no par
value per share (the "Class B Common Stock"), has been approved for trading on
the NASDAQ OTC Bulletin Board Service under the trading symbol "CYNEB." As of
March 15, 2000, there were approximately 160 shareholders of record of the
Company's Class B Common Stock.
DIVIDENDS
The Company has never paid dividends on its Class A Common Stock or
its Class B Common Stock. The current policy of the Company's Board of
Directors is to retain any available earnings for use in the operations and
expansion of the Company's business. As a result, cash dividend payments on
the Class A Common Stock or the Class B Common Stock are unlikely in the near
future. Any future decision to pay cash dividends will be at the discretion
of the Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition and any other factors deemed relevant by
the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
Pursuant to a registration statement on Form SB-2 (the "Registration
Statement") declared effective by the Securities and Exchange Commission on
December 6, 1999 (Registration No. 333-92099), the Company completed its
registered rescission offer (the "Rescission Offer") to rescind the issuance or
sale of certain of the Company's securities (the "Subject Securities"). In order
to fund the Rescission Offer, the Company sold 4,490,216 shares of Class A
Common Stock at a price of $1.37 per share (the "Rescission Financing") to a
group of investors. The net proceeds to the Company from the Rescission
Financing (after deducting offering expenses) were approximately $6,151,598 of
which $5,536,899 was used to repurchase the Subject Securities tendered for
rescission, and of which $614,699 was used for working capital and general
corporate purposes. See Note 7 of the Notes to Consolidated Financial Statements
under the caption "Rescission Offer" beginning on Page F-15.
The following information relates to securities of the Company issued
or sold by the Company during the past year which were not registered under the
Securities Act of 1933, as amended (the "Securities Act").
(1) During 1999, the Company issued an aggregate of 3,714,472
shares of Class A Common Stock to Cynet Holdings in exchange
for (i) $2,595,000 cash paid to the Company by Cynet Holdings
and (ii) the cancellation of the Company's $1,119,472
indebtedness to Cynet Holdings. The shares were issued
pursuant to the subscription agreement between the Company and
Cynet Holdings. See "Certain Relationships and Related
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.
(2) In connection with the closing of the Company's Rescission
Offer in December 1999, the Company issued a warrant entitling
Michael Silvert to purchase 100,000 shares of Class B
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Common Stock at a price of $1.00 per share. This warrant was
issued 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.
The Company believes the foregoing transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering. The shares of Class A Common Stock issued to Cynet
Holdings and the warrant issued to Mr. Silvert (as well as its underlying shares
of Class B Common Stock), may be sold publicly following their registration
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act, such as Rule 144 promulgated thereunder. No
underwriting discounts or commissions were paid in connection with the foregoing
transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following is a discussion of the financial condition of the Company
as of December 31, 1999 and 1998 and results of operations of the Company for
the years ended December 31, 1999 and 1998. It should be read in conjunction
with the financial statements and the notes thereto included elsewhere in this
report. The following information contains forward-looking statements.
OVERVIEW
In January 1998, the Company underwent a change of control and
management. The new management team completed a registered rescission offering
in December 1999 and its stock began publicly trading on the NASDAQ OTC Bulletin
Board Service in January 2000. In 1999, the Company transitioned itself from a
messaging company (delivering fax, e-mail, voice and data between businesses) to
an Internet applications solutions provider incorporating full convergent
messaging, wireless and Internet capabilities.
The Company's strategy is to position itself as a one-stop-shop for
convergent messaging and Internet service solutions. The Company coordinates the
delivery of and supports 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 have been refocused to Fortune 500, other
large corporate and medium-sized companies offering a unified service solution.
This sales effort has been 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.
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. Cell/Modems revenue is recognized upon final acceptance of product by
the customer under the terms of the right of return policy.
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, 1999 and
1998, research and development expenditures were approximately $755,000 and
$398,000, 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
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judgments as to future realization of the deferred tax benefits supported by
demonstrated trends in the Company's operating results. At December 31, 1999,
the Company provided a 100% valuation allowance for the deferred tax asset
because the Company could not determine whether it was more likely than not that
the deferred tax asset would be realized.
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues decreased to $8,626,675 for the year ended December 31, 1999
from $8,947,732 for the year ended December 31, 1998. The decrease of $321,057
or 4% was primarily attributable to a decrease in sales of the Company's fax
broadcasting product offering. For the years ended 1999 and 1998, revenues from
the Company's messaging services represented 93% and 95% respectively, of the
Company's total revenues.
Cost of revenues decreased to $4,807,061 for the year ended December
31, 1999 from $6,069,184 for the year ended December 31, 1998. The cost of
revenues as a percentage of revenues decreased to 56% for the period ended
December 31, 1999 as compared to 68% for the period ended December 31, 1998. The
decrease in cost of revenues of $1,262,123 or 21% was primarily attributable to
decreased telephone charges resulting from more advantageous pricing from the
Company's primary telephone carriers. Gross margins increased to 44% for the
year ended December 31, 1999 from 32% for the year ended December 31, 1998 due
to the decrease in telecommunications 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 in the future.
Selling, and general and administrative expenses increased to
$10,223,558 for the year ended December 31, 1999 from $6,107,978 for the year
ended December 31, 1998. The increase of $4,115,580 was primarily
attributable to (i) a non-cash charge of $1,334,000 resulting from the
Company's agreement to extend the expiration date of certain warrants until
November 4, 2001 (See Note 5 to the Consolidated Financial Statements), (ii)
expensing $841,763 in deferred offering costs related to the rescission
offering, (iii) an increase of $675,200 and $287,106 in personnel costs and
related expenses from expansion of the Company's sales force and
administrative staff, respectively, (iv) an increase of approximately
$358,000 in research and development expense, (v) an increase in office rent
expense of approximately $149,000, and (vi) an increase of approximately
$104,000 in accounting and $50,000 in legal fees.
Depreciation and amortization increased to $930,450 for the year ended
December 31, 1999 from $728,975 for the year ended December 31, 1998. The
increase was attributable primarily to additional
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equipment acquired in 1998, including equipment acquired in the expansion of the
Company's messaging infrastructure.
Impairment loss on long-lived assets was $271,957 for the year ended
December 31, 1998. The write down was due to obsolete computer equipment and
certain other assets. There were no write-downs of long-lived assets during the
year ended December 31, 1999.
Other expense totaled $969,544 for the year ended December 31, 1999
compared to other expense of $126,278 for the year ended December 31, 1998.
The increase in other expense was primarily attributable to (i) interest
expense of $154,366 on a revolving account receivable lending agreement and
(ii) effective interest expense of $755,200 associated with the rescission
offer.
The Company incurred a net loss of $8,303,938 for the year ended
December 31, 1999 compared to a net loss of $4,356,640 for the year ended
December 31, 1998. The increase in net loss was due to the factors discussed
above.
Net loss per common share increased to $0.33 from $0.19 for the year
ended December 31, 1999 compared to the year ended December 31, 1998.
In the future the Company may experience significant fluctuations in
its results of operations. Such fluctuations may result in volatility in the
price of the Company's common stock. Results of operations may fluctuate as a
result of a variety of factors, including the demand for the Company's services,
the introduction of new services and service enhancements by the Company or its
competitors, the 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 the general condition of the economy.
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
Net cash used in operating activities was $4,595,011 and $1,783,793 for
the years ended December 31, 1999 and 1998, respectively. The increase in net
cash used in operating activities for the year ended December 31, 1999 was
primarily due to the increase in the Company's net operating loss.
Net cash used in investment activities was $312,768 and $812,585 for
the years ended December 31, 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 $5,035,563 and $1,934,985
for the years ended December 31, 1999 and 1998, respectively. The Company has
obtained financing primarily through a series of public and private sales of
Class A Common Stock. During the year ended December 31, 1999, the Company
entered into agreements with certain stand-by investors to provide $6,151,598 to
fund the Company's Rescission Offer of which $5,536,899 was used to repurchase
the Subject Securities tendered for rescission by the shareholders that elected
to accept the Rescission Offer. The amount required to fund the Rescission Offer
was $5,536,899, including $4,781,699 for the repurchase of Subject Securities
plus $858,018 in interest expenses less $102,818 in dividends previously paid.
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As of December 31, 1999 the Company had a cash balance of $182,881 and
a deficit working capital position of $3,345,391. In February 2000, the Company
raised a total of $3,200,000 through a private placement of debt and equity
securities. See Note 13 to the Consolidated Financial Statements for the terms
of this private placement.
The Company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. 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 current 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 also 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's capital requirements depend on a number of factors
including market acceptance of its products and services, the amount of
resources the Company devotes to network expansion, new product development,
sales and marketing expansion, brand promotions and other factors. The
Company expects a substantial increase in capital expenditures and operating
leases consistent with the planned growth in its convergent messaging and
Internet infrastructures and anticipate that this will continue for the
foreseeable future. Additionally, the Company expects to make additional
investments in technologies and its network, and plans to expand its sales
and marketing programs and conduct more aggressive brand promotions.
The Company has been advised by its counsel that it is unclear whether
the Rescission Offer (which was completed in December 1999) has eliminated 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 Securities and Exchange 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.
On January 31, 2000, the Company received a letter from a
telecommunications carrier asserting that the Company had failed to meet certain
financial obligations including both payment for services rendered totaling
approximately $248,000 and certain shortfall penalties on volume commitments for
long distance services totaling approximately $1,100,000. The alleged liability
to the Company as a result of this agreement, including future year volume
commitments and other expenses is approximately $4,000,000. The Company has
disputed the claim based on the Company's assertion that the carrier breached
the contract with respect to services rendered. The parties are presently in
preliminary discussions to resolve their disputes. The Company believes it will
resolve the issues related to this dispute by entering into a new multi-year
agreement for long distance or related services and does not expect this dispute
will have a material adverse effect on the Company.
The Company currently does not have sufficient capital to meet its cash
flow requirements over the next 12 months. As a result, the Company will be
required to satisfy cash flow shortages through private
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placements, public offerings and/or bank financing. The Company is currently in
discussions with several investors and financial institutions, however no
definitive agreements have been reached.
There can be no assurance 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 financing 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 and further could be dilutive to existing shareholders. If adequate
working capital is not available, the Company may be required to curtail its
operations. Accordingly, the Company's independent public accountants have
issued their report for the years ending 1999 and 1998 containing a paragraph
discussing substantial doubt surrounding the Company's ability to continue as a
going concern.
YEAR 2000 COMPLIANCE
The Company has incorporated a compliance standard with rules and
definitions into its operations systems with respect to Year 2000 compliance.
Based upon an initial evaluation of its broader list of vendors and results of
operations in the first two months of the year 2000, the Company has no reason
to believe that these providers are not in compliance with Year 2000 protocol.
The Company does not anticipate any material future costs associated
with this project. However, if the Company's customers, 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.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Consolidated Financial Statements, Notes to Consolidated
Financial Statements and the report of BDO Seidman, LLP, independent
certified public accountants, with respect thereto, referred to in the Index
to Financial Statements, appear elsewhere in this report beginning on Page
F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with independent certified
public accountants on accounting and financial disclosure with respect to the
Company.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND OFFICERS
The following table sets forth information concerning directors,
executive officers and significant employees of the Company, including their
ages and positions with the Company as of March 15, 2000:
<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 43 Executive Vice President and Chief Operating
Officer
David R. Hearon, Jr. 62 Senior Vice President, Institutional Development
Samuel C. Beale 44 Vice President, General Counsel and Secretary
R. Greg Smith 41 Vice President, Chief Financial Officer
Michael A. Galloway 54 Vice President, Technical Operations
Tom Y. Ren 33 Vice President
Menashe Ben David 47 Vice President
Wayne Schroeder 57 Director
Daniel C. Lawson 54 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., Paine Webber, 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. Before 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 1985, 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. joined the Company in March 1998 as Vice President
and Chief Technical Officer. In March 2000, Mr. Hearon was promoted to Senior
Vice President, Institutional Development. 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.
19
<PAGE>
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. ADAC
Healthcare Information Systems ("ADAC") most recently employed Mr. Smith as Vice
President Finance and 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. Before 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.
MICHAEL A. GALLOWAY joined the Company in February 2000 as Vice
President, Technical Operations. Prior to joining the Company, Mr. Galloway
served two years at General Motors International Operations in Berkshire, UK,
where he held the position of Executive Director of Change Management. Mr.
Galloway's many responsibilities at General Motors included operations
management, process engineering and information technology program
management. Mr. Galloway also served on several technical teams, leading the
development of global voice and data strategies and customer-facing Internet
applications, web hosting and architecture. During the three years prior to
his position at General Motors, Mr. Galloway held various positions with
Dresser-Kellogg Energy Services, Merck & Co., McDermott International and
Brown & Root, Inc.
TOM Y. REN, joined the Company in October 1999 and serves as a
Vice-President and Director of CYNET Interactive. Prior to joining the
Company, Mr. Ren co-founded and served as President of AECsoft USA, Inc., a
Houston- based software company. For more than the past four years, Mr. Ren
has also held positions with the World Trade Network (wt.net) as Vice
President of Web Development and with COADE Engineering Software as a senior
developer. Mr. Ren graduated from the University of Houston with dual
Master's Degrees in Physics and Chemical Engineering and is a licensed
Professional Engineer in the State of Texas. Mr. Ren engineered and developed
the ADC2000 technology, a web-based trading, Business to Business and
Business to Consumer local/vertical portal technology.
MENASHE BEN-DAVID joined the Company in January 2000 and serves as a
Vice President of the Company. Mr. Ben-David brings over 20 years of
communications and technology experience to his position with CYNET. Prior to
joining the Company, Mr. Ben-David served one year as President of GlobeWave,
Inc., a wholly owned subsidiary of Teliran Electronics, Ltd. where he was
instrumental in bringing new wireless cell/modem technology to the market.
Mr. Ben-David also provided senior sales, marketing, financial, operational
and executive-level leadership to domestic and global wireless resellers and
end users. Before joining GlobeWave, Mr. Ben-David held positions with Geotek
Communications as Vice President of Field Operations and Bogen Communications
as Executive Vice President and Chief Operating Officer.
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
20
<PAGE>
a director of Arrhythmia Research Technology, Inc. Mr. Schroeder graduated from
the University of Texas at Austin with a degree in finance and accounting.
DANIEL C. LAWSON was appointed to the Board of Directors during
January 2000 to fill a vacancy in the Board of Directors when the number of
directors was increased from three to four directors. Mr. Lawson is Chairman
and Chief Executive Officer of the DCL Company, Inc. ("DCLC"), a
Houston-based diversified group of companies with expertise in all phases of
supplying products and services to urban public transportation services.
Through a joint effort with Penske Corporation and GE Capital, Mr. Lawson and
Roger Penske created the first turnkey maintenance program for transportation
systems. Mr. Lawson has been recognized by various national publications,
including The New York Times, Black Enterprise, Essence, Fortune, Money and
USA Today for his knowledge of African American business. He is also known as
a dynamic motivational and inspirational speaker carrying a message of
"entrepreneurship" to business, civic, social, and trade organizations,
educational institutions and churches from coast-to-coast.
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.
STRUCTURE OF BOARD OF DIRECTORS. The Board of Directors of the company
consists of Vincent W. Beale, Sr. (Chairman of the Board), Danny C. Lawson
(outside director) and Wayne Schroeder (outside director). Directors are elected
annually by the shareholders. The Board is required to have an annual meeting
following the annual shareholder meeting. Actions can be taken without a meeting
if all of the directors consent in the form of a written consent action. A
majority vote at a duly called meeting of the Board of Directors at which a
quorum is present is required for a motion to be carried at such meeting. A
majority of the total number of directors constitutes a quorum.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, executive officers and persons who own
more than ten percent of a registered class of the Company's voting equity
securities, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of the Class A
Common Stock and other equity securities of the Company. Officers, directors,
and greater than ten-percent beneficial owners are required by SEC regulation to
furnish the Company with copies of all Section 16(a) reports they file.
Based solely upon a review of the copies of such reports furnished
to the Company, the Company believes there was compliance for the fiscal year
ended December 31, 1999 with all Section 16(a) filing requirements applicable
to the Company's officers, directors and greater than ten percent beneficial
owners.
ITEM 10. 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, 1999, 1998 and 1997. No other director or executive officer
received salary and bonus which exceeded $100,000 during any of the three fiscal
years ended December 31, 1999. See "--Employment Agreements" below for
information regarding the current compensation of certain of the Company's
directors and the executive officers named below.
21
<PAGE>
<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. 1999 $180,000 -- -- -- --
President and Chief 1998 $133,693 $30,000 -- 100,000 shares --
Executive Officer
(since 1/98)
Ray C. Davis 1998 $110,287 -- -- -- $188,326(2)
President and Chief 1997 $198,430 $50,000 $7,500(3) -- $250,000(4)
Executive Officer
(until 1/98)
Bernard B. Beale 1999 $153,136 $30,000 -- -- --
Executive Vice 1998 $131,696 -- -- 150,000 shares --
President, Chief
Operating Officer
(since 1/98)
David R. Hearon, Jr. 1999 $150,000 -- -- -- --
Vice President, Chief 1998 $122,226 $30,000 -- 75,000 shares --
Technical Officer
(since 3/98)
Samuel C. Beale 1999 $108,000 -- -- -- --
Vice President, 1998 $90,845 -- -- 100,000 shares --
General Counsel and
Secretary
(since 3/98)
R. Greg Smith 1999 $125,000 $30,000 -- -- --
Vice President, Chief 1998 $42,308 -- -- 100,000 shares --
Financial Officer
(since 8/98)
Vickroy Stone 1997 -- -- --(5) -- --
Chief Financial
Officer
(9/95 to 2/97)
</TABLE>
22
<PAGE>
<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>
John Kim 1997 $262,302 $6,000 -- -- --
Vice President, Sales -- -- --
(4/96 to 2/98)
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 Relationships and Related 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 Relationships and Related 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
Relationships and Related Transactions."
(6) Represents $1,005,136 paid to Mr. Shaffner, individually, and $971,527
paid to his affiliate, CyFax, Inc. See "Certain Relationships and
Related Transactions."
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
23
<PAGE>
"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 of Directors 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 to whom Options are
granted, 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. Nonqualified 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 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 vested immediately on
the date of grant, 150,000 shares to Bernard B. Beale which vested immediately
on the date of grant, 100,000 shares to Samuel C. Beale which vested immediately
on the date of grant, 75,000 shares to David R. Hearon, Jr. which vest ratably
over a four-year period, 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.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The table below reflects the number of shares covered by both
exercisable and non-exercisable stock options as of December 31, 1999 for the
executive officers named below. Values for "in the money" options represent the
position spread between the exercise price of existing options and the market
value for the Company's Class A Common Stock on December 31, 1999:
24
<PAGE>
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired Number of Unexercised in-the-money Options
on Exercise Value Options at Fiscal Year End at December 31, 1999
Name (#) Realized Exerciseable/Unexerciseable (1) Exerciseable/Unexerciseable(2)
- ---- ----------- -------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Vincent W. Beale, Sr.
President,
Chief Executive Officer (3) (3) 100,000 $151,000
(since 1/98) ------- --------
100,000/0 $151,000/0
Bernard B. Beale
Executive Vice
President, (3) (3) 150,000 $226,500
Chief Operating ------- --------
Officer 150,000/0 $226,500/0
(since 1/98)
David R. Hearon, Jr.
Vice President,
Chief Technical Officer (3) (3) 75,000 $113,250
(since 3/98) ------ --------
18,750/56,250 $28,313/$84,938
Samuel C. Beale
Vice President, General
Counsel and Secretary (3) (3) 100,000 $151,000
(since 3/98) ------- --------
100,000/0 $151,000/0
R. Greg Smith
Vice President,
Chief Financial Officer (3) (3) 100,000 $151,000
(since 8/98) ------- --------
33,333/66,667 $50,333/$100,667
</TABLE>
- -------------------
(1) Indicates number of options exercisable and unexerciseable as of
December 31, 1999.
(2) Based upon $1.51 per share, the estimated fair market value of a share
of the Class A Common Stock at December 31, 1999, as determined by
reference to the last transaction in 1999 involving the sale and
issuance of shares of Class A Common Stock.
(3) None of the Company's executive officers exercised any options during
the fiscal year ended December 31, 1999. The Company did not issue any
SARs during the fiscal year ended December 31, 1999.
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
capacities as directors.
None of the Company's executive officers was granted awards under any
long-term incentive plan during the fiscal year ended December 31, 1999.
25
<PAGE>
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 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, 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
26
<PAGE>
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 Mr. Davis devotes 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 Relationships and Related 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, 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
27
<PAGE>
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.
CONSULTING SERVICES
Pursuant to the terms of the Rescission Financing, the Company
entered into a Consulting Agreement (the "Enron Advisory Agreement") with
Houston Economic Opportunity Fund, L.P. ("HEOF"), an investor in the funding
of the Company's Rescission Offer and an affiliate of Enron Corporation,
pursuant to which HEOF agreed to provide certain business advisory services
to the Company. Pursuant to the Enron Advisory Agreement, the Company issued
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 is exercisable, in whole or in part, at any
time during the three-year period beginning on September 30, 1999.
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) an act or omission not
in good faith which involve intentional misconduct or a knowing violation of the
law, (iii) an act or omission for which the liability of a director is expressly
provided for by an applicable statute or (iv) any transaction from which the
director derived an improper personal benefit, whether or not the benefit
resulted from an action taken in the person's official capacity.
The inclusion of this provision in the Company's Articles of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its shareholders. However, such limitation on liabilities does
not affect the standard of conduct with which directors must comply, the
availability of equitable relief or any causes of action based on federal law.
The Company's Articles of Incorporation provide for the indemnification
of its current and former officers and directors to the fullest extent permitted
by applicable law.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 15, 2000, 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.
28
<PAGE>
<TABLE>
<CAPTION>
Shares of Class A
Name of Beneficial Owner Common Percent of Class(1)
Stock Beneficially Owned
- ----------------------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
Vincent W. Beale, Sr. 16,939,283 shares(2) 45.2%
Cynet Holdings, LLC 15,691,283 shares(3) 41.9%
Leonard Childress 3,164,964 shares(4) 8.5%
Guy M. Lewis 2,883,888 shares(5) 7.7%
Northern Neck Enterprises, Inc. 2,868,268 shares(6) 7.6%
Houston Economic Opportunity Fund, L.P. 2,180,023 shares(7) 5.8%
Bernard B. Beale 1,150,000 shares(8)(9) 3.1%
Samuel C. Beale 1,100,000 shares(8)(9) 2.9%
Wayne Schroeder 100,000 shares(8) *
Daniel C. Lawson 100,000 shares *
David R. Hearon, Jr. 37,500 shares(8) *
R. Greg Smith 33,333 shares(8) *
All directors and executive officers
as a group (6 people) 17,460,116 shares(10) 46.6%
</TABLE>
- --------------------------
* Less than one percent.
(1) Percentages shown are based upon (i) 27,784,207 shares of Class A
Common Stock presently outstanding, (ii) warrants to purchase 8,593,571
shares of Class A Common Stock and (iii) 972,500 shares subject to
vested stock options. On this basis, for purposes of these
calculations, the number of shares used is 37,445,307.
(2) Represents (i) 15,691,283 shares of beneficially owned by Cynet
Holdings, of which Mr. Beale is the President and majority owner, (ii)
1,148,000 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.
(3) Includes (i) 9,473,000 shares purchased from Ray C. Davis and related
entities controlled by Mr. Davis, (ii) 5,225,472 shares purchased
pursuant to the Subscription Agreement between the Company and Cynet
Holdings (the "Holdings Subscription Agreement"), (iii) 1,090,000
shares which may be purchased at any time prior to July 22, 2003, at a
purchase price of $1.00 per share, upon exercise of a warrant issued
pursuant to the Holdings Subscription Agreement, and (iv) 152,811
shares purchased as part of the Rescission Financing. The amount shown
excludes 250,000 shares that were pledged to an unaffiliated financial
institution in 1998 and subsequently foreclosed upon. See "Certain
Relationships and Related Transactions."
(4) Includes (i) 1,300,000 shares deemed beneficially owned by Mr.
Childress as a result of his interest in Cynet Holdings and (ii)
1,000,000 shares which may be purchased at any time prior to July 22,
2003, at a purchase price of $1.00 per share, upon exercise of a
warrant originally issued pursuant to the Holdings Subscription
Agreement.
(5) Includes 2,000,000 shares which may be purchased at any time prior to
July 22, 2003, at a purchase price of $1.00 per share, upon exercise of
a warrant originally issued pursuant to the Holdings Subscription
Agreement.
(6) Includes (i) 1,500,000 shares deemed beneficially owned by Northern
Neck Enterprises, Inc. as a result of its interest in Cynet Holdings
and (ii) 1,000,000 shares which may be purchased at any time prior to
July 22, 2003, at a purchase price of $1.00 per share, upon exercise of
a warrant originally issued pursuant to the Holdings Subscription
Agreement.
(7) Represents (i) 1,766,423 shares into which an equal number of shares of
the Series D Redeemable Convertible Preferred Stock may be converted
and (ii) 413,600 shares, which may be purchased upon exercise of a
warrant issued pursuant to the Enron Advisory Agreement.
29
<PAGE>
(8) Includes shares subject to vested stock options.
(9) Includes shares deemed beneficially owned as a result of an interest in
Cynet Holdings.
(10) Includes an aggregate of 7,425,683 shares that such persons have the
right to acquire within 60 days pursuant to warrants and options held
by such persons.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 5 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.
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 sixteen limited liability companies. 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
30
<PAGE>
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 extended 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 extended 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 required the Company to recognize a non-cash
charge of approximately $1,344,000 during the third quarter of 1999. See Note
5 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 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. In August 1999 the Subscription
Agreement was amended to (i) extend the duration of the Subscription
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. In
January 2000 the Subscription Agreement was amended to extend the duration of
the agreement to June 30, 2000 and increase the purchase price per share
payable by Cynet Holdings from $1.00 to $1.51 per share. As of March 15,
2000, the Company issued an aggregate of 5,225,472 shares of Class A Common
Stock to Cynet Holdings pursuant to the Holdings Subscription Agreement in
exchange for (i) $4,106,000 in cash contributions, and (ii) the conversion of
$1,119,472 in short-term unsecured borrowings that were converted into shares
of Class A Common Stock at a price of $1.00 per share. 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 also entered into an Underwriting Agreement with the
Company pursuant to which Cynet Holdings purchased 584,825 shares of Class A
Common Stock for $1.37 per share as a rescission underwriter in the
Rescission Offer.
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.
During 1999, Cynet Holdings provided the Company short-term financing
of an aggregate of $1,119,472 for working capital and other corporate purposes.
These borrowings were unsecured, non-interest bearing and due on demand by Cynet
Holdings. On December 31, 1999, in accordance with the Holdings Subscription
Agreement, the Company issued 1,119,472 shares of Class A Common Stock to Cynet
Holdings.
31
<PAGE>
In January 2000, Cynet Holdings provided the Company additional
short-term financing of $500,000 for working capital and other corporate
purposes. These borrowings were unsecured, non-interest bearing and due on
demand by Cynet Holdings. In February 2000, the Company repaid the short-term
financing and provided Cynet Holdings a short-term advance of $80,000 for
working capital. This advance is unsecured, bears interest at a rate of 6% per
annum and is due on demand by the Company. Cynet Holdings has advised the
Company that it expects the advance will be repaid on or before June 30, 2000.
On March 1, 2000, Cynet Holdings assigned to the Company its sales and
marketing rights with respect to the Cell Phone/Modem under the Teliran
Agreement for an initial term of one year in consideration for, among other
things, the Company's agreement to satisfy the minimum sales requirements
applicable to the Cell Phone/Modem units as provided in the Teliran Agreement.
This assignment is renewable for additional one-year periods subject to the
Company's meeting such minimum sales requirements.
CYNET INTERACTIVE. On July 31, 1999, the Company acquired from Cynet
Holdings all of the outstanding membership interests of CYNET Interactive, LLC,
a wholly-owned subsidiary of Cynet Holdings, pursuant to the terms of a Purchase
and Sale Agreement (the "CYNET Interactive Agreement") between the Company and
Cynet Holdings. CYNET Interactive, LLC 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.
HOUSTON ECONOMIC OPPORTUNITY FUND, L.P. In December 1999, Houston
Economic Opportunity Fund, L.P. ("HEOF") acquired 1,766,423 shares of Class A
Common Stock for a purchase price of $1.37 per share as part of the
Rescission Financing. The Company also issued HEOF a warrant to purchase
413,600 shares of Class A Common Stock for a purchase price of $1.00 per
share pursuant to the Enron Advisory Agreement. The warrant is exercisable,
in whole or in part, at any time during the three-year period beginning on
September 30, 1999. On February 4, 2000, the Company also completed a private
placement (the "HEOF Financing") of its securities to HEOF, pursuant to which
HEOF (i) invested $1,600,000 in the Company in exchange for 1,600,000 shares
of the Company's newly-issued Series C Redeemable Callable Preferred Stock,
no par value, and (ii) exchanged 1,766,423 shares of Common Stock owned by
HEOF for 1,766,423 shares of the Company's newly-issued Series D Redeemable
Convertible Preferred Stock, no par value. The HEOF Financing was completed
pursuant to a Stock Purchase Agreement dated as of January 31, 2000 by and
between the Company and HEOF.
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 "Executive
Compensation--Employment Agreements."
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
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).
32
<PAGE>
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 the Series C
Redeemable Callable Preferred Stock
4.4 Form of Certificate Representing the Series D
Redeemable Convertible Preferred Stock
4.5 Statement of the Powers, Designations, Preferences
and Rights of the Series C Preferred Stock
4.6 Statement of the Powers, Designations, Preferences
and Rights of the Series D Preferred Stock
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).
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).
33
<PAGE>
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 certain limited liability companies
(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).
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).
34
<PAGE>
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. (incorporated by reference to the same numbered
exhibit to the Company's Registration Statement on
Form SB-2, No. 333-92099, filed December 3, 1999).
10.27 Second Amendment to Subscription Agreement dated
January 12, 2000, between the Company and Cynet
Holdings, LLC.
10.28 Securities Purchase Agreement dated as of January 31,
2000 by and between the Company and Augustine Fund,
L.P.
10.29 Stock Purchase Agreement dated as of January 31, 2000
by and between the Company and Houston Economic
Opportunity Fund, L.P.
10.30 Agreement dated February 16, 2000 among the Company,
Teliran Electronics, Ltd., and Cynet Holdings, LLC.
10.31 Agreement dated March 1, 2000 between the Company and
Cynet Holdings, LLC.
21 Subsidiaries of the Company
Following is a list of the Company's Subsidiaries:
<TABLE>
<CAPTION>
Other Name Under
Which Subsidiary Jurisdiction of
Name of Subsidiary Conducts Business Incorporation
------------------ ----------------- -------------
<S> <C> <C>
Worldwide Marketing Services, Inc. None Texas
CYNET Interactive, LLC None Texas
</TABLE>
27 Financial Data Schedule.
REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY THIS
FORM 10-KSB.
None.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 30, 2000 CYNET, INC.
By: /s/ Vincent W. Beale, Sr.
---------------------------------
Vincent W. Beale, Sr., Chairman
of the Board and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ R. Greg Smith
---------------------------------
R. Greg Smith, Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
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 March 30, 2000
- ------------------------------ and Chief Executive Officer
Vincent W. Beale, Sr. (Principal Executive Officer)
/s/ R. GREG SMITH Chief Financial Officer March 30, 2000
- ------------------------------ (Principal Financial and Accounting Officer)
R. Greg Smith
/s/ WAYNE SCHROEDER Director March 30, 2000
- ------------------------------
Wayne Schroeder
/s/ DANIEL C. LAWSON Director March 30, 2000
- ------------------------------
</TABLE>
36
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CYNET, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants........... F-2
Consolidated Balance Sheet................................... F-3
Consolidated Statements of Loss.............................. F-4
Consolidated Statements of Capital Deficit................... F-5
Consolidated Statements of Cash Flows ....................... F-6
Notes to Consolidated Financial Statements................... F-7 - F-25
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CyNet, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of CyNet, Inc. as of
December 31, 1999 and the related consolidated statements of loss, capital
deficit and cash flows for each of the two years in the period ended December
31, 1999. 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, 1999 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1999, 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, 1999 and 1998 totaling $8,303,938 and $4,356,640,
respectively, and at December 31, 1999 had a capital deficit of $3,707,046. 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)
obtains additional financing necessary to support its working capital
requirements. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
BDO SEIDMAN, LLP
Houston, Texas
February 11, 2000, except for note 13,
which is as of March 10, 2000
F-2
<PAGE>
CYNET, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999
------------
ASSETS
------
<S> <C>
Current Assets:
Cash................................................................................ $ 182,881
Accounts receivable:
Trade, less allowance for doubtful accounts of $140,000.......................... 306,840
Employees (Note 5)............................................................... 82,684
Prepaid expenses - other............................................................ 41,978
--------------
Total Current Assets............................................................. 614,383
Property and Equipment, less accumulated depreciation and amortization (Note 3)......... 2,122,096
Goodwill, less accumulated amortization of $70,596...................................... 183,548
--------------
$ 2,920,027
==============
LIABILITIES AND CAPITAL DEFICIT
-------------------------------
Current Liabilities:
Accounts payable..................................................................... $ 2,314,635
Accrued expenses..................................................................... 836,043
Dividends payable ................................................................... 361,773
Note Payable, including accrued interest (Note 4).................................... 331,575
Accrued stock and warrant rights (Note 7)............................................ 115,748
------------
Total Current Liabilities............................................................ 3,959,774
------------
Redeemable Class A voting Common Stock (Note 7)......................................... 2,667,299
------------
Commitments and Contingencies (Notes 7, 9, 10 and 13)
Capital Deficit (Note 7):
Cumulative Convertible Preferred Stock:
Series A, non-voting, $2.00 and $1.43 stated value; 3,600,000 shares authorized;
66,000 shares issued and outstanding............................................ 109,997
Series B, non-voting, $3.00 stated value; 2,000,000 shares authorized;
60,832 shares issued and outstanding............................................. 126,240
Common stock:
Class A voting, no par value; 40,000,000 shares authorized;
27,784,207 shares issued and outstanding ........................................ 16,263,783
Class B nonvoting, no par value; 20,000,000 shares authorized;
2,123,264 shares issued and outstanding ......................................... 3,199,119
Additional paid-in capital......................................................... 308,039
Outstanding warrants............................................................... 1,888,437
Deficit............................................................................ (25,602,661)
-------------
Total Capital Deficit.............................................................. (3,707,046)
-------------
$ 2,920,027
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Revenues........................................................................ $ 8,626,675 $ 8,947,732
Cost of revenues................................................................ 4,807,061 6,069,184
----------- ------------
Gross profit.................................................................... 3,819,614 2,878,548
Selling, general and administrative expenses (Notes 1 and 5).................... 10,223,558 6,107,978
Depreciation and amortization................................................... 930,450 728,975
Write-down of long-lived assets (Note 12)....................................... - 271,957
----------- ------------
Loss from operations............................................................ (7,334,394) (4,230,362)
------------ ------------
Other income (expense):
Interest expense (Notes 4 and 7).............................................. (939,557) (103,851)
Interest income............................................................... 24,902 2,816
Other......................................................................... (54,889) (25,243)
------------ ------------
(969,544) (126,278)
------------ ------------
Net loss before dividends on preferred stock.................................... (8,303,938) (4,356,640)
Dividends on preferred stock.................................................... (46,304) (40,243)
Accretion on redeemable Class A voting common stock............................. (247,299) -
------------ ------------
Net loss applicable to common stockholders...................................... $(8,597,541) $ (4,396,883)
============ ============
Net loss per common share - basic and assuming dilution......................... $ (.33) $ (.19)
=========== ============
Weighted average number of common shares outstanding............................ 25,809,272 23,109,154
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Class A
Preferred Stock Preferred Stock Common Stock
--------------- --------------- ------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1997.................... 108,500 $ - 77,349 $ - 19,770,165 $ 3,014,936
Issuance of Class B common stock
subject to rescission......................... - - - - - -
Issuance of Class A common stock................. - - - - 1,101,767 1,101,767
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................ - - - - 92,640 -
Issuance of Class A common stock
on conversion of Series A
preferred stock............................... (5,000) - - - 5,500 -
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 - 20,970,072 4,116,703
Issuance of Class A common stock................. - - - - 2,595,000 2,595,000
Issuance of Class A common stock on conversion
of advances from CyNet Holdings, LLC.......... - - - - 1,119,472 1,119,472
Reclassification of rescission
liability (Note 5)............................ - - - 30,000 - -
Modification of terms of previously
issued Class B common stock
warrants, (Note 5)............................ - - - - - -
Acquisition of CyNet Interactive, LLC
(Note 5)...................................... - - - - - -
Accrued dividends on preferred stock............. - - - - - -
Issuance of Class A common stock in
rescission offer.............................. - - - - 4,490,216 6,151,598
Issuance of Class A common stock warrants in
rescission offer.............................. - - - - - -
Reclassification and accretion of redeemable
Class A voting common stock................... - - - - - (2,420,000)
Shares rescinded pursuant to the rescission offer
(Note 7)...................................... (37,500) 109,997 (26,517) 96,240 (1,390,553) 4,742,304
Cost of issuance of Class A common stock......... - - - - - (41,294)
Net loss......................................... - - - - - -
-------- --------- -------- --------- ---------- -----------
BALANCE, at December 31, 1999.................... 66,000 $ 109,997 60,832 $ 126,240 27,784,207 $16,263,783
======== ========= ======== ========= ========== ===========
CYNET, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
<CAPTION>
Class B
Common Stock Additional Warrants (1)
------------------------- Paid-in -----------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 Shares Amount Capital Shares Amount
----------- ----------- ----------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1997.................... 2,954,470 $ 700,000 $ - 3,449,000 $ 362,500
Issuance of Class B common stock
subject to rescission......................... 154,000 - - - -
Issuance of Class A common stock................. - - - - -
Issuance of Series B preferred stock
through a private placement
subject to rescission......................... - - - - -
Issuance of Class A common stock
warrants for services......................... - - - 6,800,000 -
Issuance of Class B common stock
warrants for services......................... - - - 350,954 -
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............................... - - - - -
Issuance of Class B common stock
on conversion of Series B
preferred stock............................... 29,333 - - - -
Accrued dividends on preferred stock............. - - - - -
Net loss......................................... - - - - -
----------- ----------- ----------------- ----------- ----------
BALANCE, at December 31, 1998.................... 3,137,803 700,000 - 10,599,954 362,500
Issuance of Class A common stock................. - - - - -
Issuance of Class A common stock on conversion
of advances from CyNet Holdings, LLC.......... - - - - -
Reclassification of rescission
liability (Note 5)............................ - - - - -
Modification of terms of previously
issued Class B common stock
warrants, (Note 5)............................ - - - - 1,344,004
Acquisition of CyNet Interactive, LLC
(Note 5)...................................... - - 308,039 - -
Accrued dividends on preferred stock............. - - - - -
Issuance of Class A common stock in
rescission offer.............................. - - - - -
Issuance of Class A common stock warrants in
rescission offer.............................. - - - 413,600 -
Reclassification and accretion of redeemable
Class A voting common stock................... - - - - -
Shares rescinded pursuant to the rescission offer
(Note 7)...................................... (1,014,539) 2,499,119 - - 181,933
Cost of issuance of Class A common stock......... - - - - -
Net loss......................................... - - - - -
----------- ----------- ----------------- ----------- ----------
BALANCE, at December 31, 1999.................... 2,123,264 $ 3,199,119 $ 308,039 11,013,554 $1,888,437
=========== =========== ================= =========== ==========
<CAPTION>
Treasury Stock
-------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 Deficit Shares Amount Total
-------------- ------ ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1997.................... $ (12,682,625) 419,233 $ (727,000) $(9,332,189)
Issuance of Class B common stock
subject to rescission......................... - - - -
Issuance of Class A common stock................. - - - 1,101,767
Issuance of Series B preferred stock
through a private placement
subject to rescission......................... - - - -
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.......................... - 18,041 - -
Issuance of Class A common stock
from treasury, 10,000 shares
subject to rescission......................... - (419,233) 409,233 409,233
Issuance of Class A common stock
to purchase minority interests................ - - - -
Issuance of Class A common stock
on conversion of Series A
preferred stock............................... - - - -
Issuance of Class B common stock
on conversion of Series B
preferred stock............................... - - - -
Accrued dividends on preferred stock............. (40,243) - - (40,243)
Net loss......................................... (4,356,640) - - (4,356,640)
-------------- --------- ----------- --------------
BALANCE, at December 31, 1998.................... (17,079,508) 18,041 (317,767) (12,218,072)
Issuance of Class A common stock................. - - - 2,595,000
Issuance of Class A common stock on conversion
of advances from CyNet Holdings, LLC.......... - - - 1,119,472
Reclassification of rescission
liability (Note 5)............................ - - - 30,000
Modification of terms of previously
issued Class B common stock
warrants, (Note 5)............................ - - - 1,344,004
Acquisition of CyNet Interactive, LLC
(Note 5)...................................... - - - 308,039
Accrued dividends on preferred stock............. (46,304) - - (46,304)
Issuance of Class A common stock in
rescission offer.............................. - - - 6,151,598
Issuance of Class A common stock warrants in
rescission offer.............................. - - - -
Reclassification and accretion of redeemable
Class A voting common stock................... (247,299) - - (2,667,299)
Shares rescinded pursuant to the rescission offer
(Note 7)...................................... 74,388 (18,041) 317,767 8,021,748
Cost of issuance of Class A common stock......... - - - (41,294)
Net loss......................................... (8,303,938) - - (8,303,938)
--------------- ------ ----------- -----------
BALANCE, at December 31, 1999.................... $ (25,602,661) - $ - $(3,707,046)
=============== ====== =========== ===========
</TABLE>
(1) Outstanding warrants consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---- ----
Shares Amount Shares Amount
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Class A common stock warrants 8,049,000 $201,645 8,462,600 $ 181,933
Class B common stock warrants 2,550,954 362,500 2,550,954 1,706,504
---------- -------- ----------- ----------
10,599,954 $564,145 11,013,554 $1,888,437
========== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................................................. $ (8,303,938) $ (4,356,640)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................................... 930,450 728,975
Write-down of long-lived assets..................................................... - 271,957
Loss on disposal of equipment....................................................... 31,628 25,243
Property transferred for compensation............................................... - 67,283
Forgiveness of receivable as compensation........................................... - 121,043
Provision for bad debts............................................................. 200,272 349,327
Stock and warrants issued for compensation and services............................. 1,344,004 -
Stock and warrant rights issued for loan costs and services......................... 65,748 -
Expensing of deferred offering costs pursuant to the rescission offer............... 712,567 -
Changes in assets and liabilities:
Accounts receivable............................................................... (126,763) (658,594)
Prepaid expenses and other assets................................................. 11,865 54,926
Accounts payable and accrued expenses............................................. 539,156 1,612,687
------------- ---------
Net cash used in operating activities............................................... (4,595,011) (1,783,793)
-------------- ----------
Cash flows from investing activities:
Purchase of property and equipment.................................................. (349,678) (867,835)
Proceeds from sale of property and equipment........................................ 37,000 55,250
------------- ------------
Net cash used in investing activities............................................... (312,678) (812,585)
-------------- ------------
Cash flows from financing activities:
Issuance of preferred stock - Series B.............................................. - 110,000
Issuance of common stock - Class A, net of issuance costs........................... 8,705,302 1,101,767
Proceeds from note payable and advances............................................. 1,119,472 600,000
Payments on note payable............................................................ (7,512) (260,913)
Payment of rescission liability..................................................... (4,781,699) -
Purchase of treasury stock.......................................................... - (45,102)
Sale of treasury stock.............................................................. - 429,233
------------- ------------
Net cash provided by financing activities........................................... 5,035,563 1,934,985
------------- ------------
Net increase (decrease) in cash........................................................ 127,874 (661,393)
Cash, beginning of period........................................................... 55,007 716,400
------------- ------------
Cash, end of period................................................................. $ 182,881 $ 55,007
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 6). 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 integrating full
convergent messaging with internet services. The Company's products and services
are convergent 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 5). 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 a major Internet
service provider to enable the Company to further expand its products and
services to include Internet access for business customers. This alliance
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.
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 8). 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.
F-7
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998, research and development expenditures were
approximately $755,000 and $398,000, 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 5) 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 December 31, 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, 1999 and 1998, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.
These securities at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ------------
(shares) (shares)
<S> <C> <C>
Conversion of Series A preferred stock - Class A.................... 66,000 103,500
Conversion of Series B preferred stock - Class B.................... 60,832 87,349
Incentive stock option plan - Class A............................... 2,176,249 1,465,563
Stock warrants outstanding - Class A................................ 8,462,600 8,049,000
Stock warrants outstanding - Class B ............................... 2,550,954 2,550,954
---------- ------------
13,316,635 12,256,366
========== ============
</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.
F-8
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company extends credit to customers in a wide variety of industries and does
not consider there to be a concentration of credit risk.
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.
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.
F-9
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the years ended December 31, 1999 and 1998, the Company incurred
net losses totaling $8,303,938 and $4,356,640, respectively, and at December 31,
1999 had a capital deficit of $3,707,046. 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.
Subsequent to December 31, 1999, the Company raised a total of
$3,200,000 through debt and equity financing agreements. See Note 13 for the
terms of these agreements. In addition, in accordance with the amended stock
subscription agreement, the Company has a remaining commitment of $4,774,528
from CyNet Holdings, LLC, through June 30, 2000 for additional working capital
needs. See Note 5 for the terms of the stock subscription agreement.
Additionally, the Company intends to raise additional working capital
through either private placements, public offerings and/or bank financing. As of
February 11, 2000, the Company is in discussions with several investors and
lending institutions, however no definitive agreements have been reached.
There are no assurances that the Company will be able to either (1)
achieves a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private placement,
public offerings and/or bank financing necessary to support the Company's
working capital requirements. To the extent that funds generated from operations
and any private placements, public offerings and/or bank financing 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.
These conditions raise 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 - PROPERTY AND EQUIPMENT
At December 31, 1999, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives (Years) Amount
------------- -------------
<S> <C> <C>
Computer equipment................................................ 3-5 $ 1,778,926
Computer software................................................. 5 965,420
Furniture and fixtures............................................ 7 559,423
Telephone equipment............................................... 3-5 305,273
Automobiles....................................................... 5 152,613
Leasehold improvements............................................ 5 219,822
-------------
3,981,477
Less - accumulated depreciation and amortization.................. 1,859,381
-------------
$ 2,122,096
=============
</TABLE>
F-10
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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 the
aging of the receivables. 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, 1999 and 1998, the Company incurred finance charges of $154,366 and
$66,877, respectively. As of December 31, 1999 the note payable was $331,575,
including accrued interest of $31,596.
NOTE 5 - RELATED PARTY TRANSACTIONS
Related party transactions for the year ended December 31, 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) In September 1999, the Company modified the terms of previously
issued warrants to purchase 2,200,000 shares of Class B common
stock. The new terms of the warrants call for the warrants to vest
immediately, are exercisable at $1.00 per share and expire
November 4, 2001. Due to the modification of the terms of the
warrants, the Company recorded a third quarter 1999 non-cash
charge of approximately $1,344,000 based on the fair value of the
warrants at the date of modification.
(c) During 1999, the Company was advanced $1,119,472 from CyNet
Holdings, LLC for working capital, pending the outcome of the
rescission offer. The unsecured advances were non-interest bearing
and due on demand. As of December 31, 1999, all advances from
CyNet Holdings, LLC were converted into Class A common stock at
$1.00 per share under the subscription agreement discussed below.
(d) As of December 31, 1999, the Company had an outstanding employee
receivable from an officer of the Company totaling $50,399.
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
owned 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. 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 3,714,472 shares in
1999. On January 3, 2000, the stock subscription agreement was
amended whereby the duration of the agreement was extended to June
30, 2000 and the price per share was increased to $1.51.
F-11
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 May 1998, stockholders received 350,954 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 9).
NOTE 6 - 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 7 - CAPITAL
COMMON STOCK
The Company is authorized to issue up to 60,000,000 shares of its no
par value common stock of which 40,000,000 shares have been designated as Class
A voting common stock and 20,000,000 shares have been designated as Class B
non-voting common stock. The holders of shares of Class A common stock are
entitled to one vote for each share on all matters submitted to a vote of
stockholders. Holders of Class B common Stock are entitled under the Texas
Business Corporation Act to vote in connection with the voluntary dissolution of
the Company but have no voting privileges with respect to other matters. The
holders of both Class A and Class B common stock are entitled to receive such
dividends, if any, as may be declared by the Board of Directors from time to
time out of legally available funds. Upon liquidation or dissolution of the
Company, the holders of both Class A and Class B common stock are entitled to
share ratably in all assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the priority rights of any holders of preferred stock then outstanding. Holders
of Class A and Class B common stock have no preemptive rights to acquire new
securities issued by the Company and have no rights to convert their common
stock into any other securities of the Company.
CLASS A COMMON STOCK
During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company issued 4,490,216 shares of Class
A common stock at $1.37 per share, in accordance with the terms of the stand-by
investor agreements. Of the shares issued, 1,766,423 shares are subject to a put
option. See Rescission Offer below for discussion of this put option.
F-12
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 1,390,553
shares of Class A common stock for $2,220,150, not including interest and
dividends paid. See Rescission Offer below.
During the years ended December 31, 1999 and 1998, the Company sold
3,714,472 and 1,511,000 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, during 1998
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, 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 6.
CLASS B COMMON STOCK
During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 1,014,539
shares of Class B common stock for $2,376,999, not including interest and
dividends paid. See Rescission Offer below.
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.
At December 31, 1999, the Company had common stock reserved for future
issuance as follows:
<TABLE>
<CAPTION>
1999
------------
(shares)
<S> <C>
Conversion of Series A preferred stock to Class A................... 66,000
Conversion of Series B preferred stock to Class B................... 60,832
Stock rights - Class A.............................................. 50,000
Warrant rights - Class B............................................ 100,000
Incentive stock option plan - Class A............................... 2,176,249
Stock warrants outstanding - Class A................................ 8,462,600
Stock warrants outstanding - Class B................................ 2,550,954
------------
13,466,635
============
</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:
F-13
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 37,500
shares of Series A preferred stock for $75,000, not including interest and
dividends paid. See Note 7 rescission offer.
During the year ended December 31, 1998, 5,000 shares of previously
issued Series A preferred stock were converted into 5,500 shares of Class A
common stock at a conversion rate of 1.1 share of Class B common stock for each
share of Series B preferred stock.
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.
F-14
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 26,517
shares of Series B preferred stock for $109,500, not including interest and
dividends paid. See Rescission Offer below.
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.
RESCISSION OFFER
During 1998, 1997 and 1996, 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.
F-15
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
However, the Company was 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 determined that
certain issuances of common and preferred stock and stock warrants issued for
services were also subject to rescission for an amount equal to the estimated
value of services rendered to the Company. As a result, the Company 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, and 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 77,349 shares of Series B preferred stock for net
proceeds of $232,047, were subject to the rescission offer, 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 was precluded from classifying these
securities and proceeds as capital until such time as the rescission offer was
completed. At which time the Company classified as capital such securities and
proceeds to the extent the security holders elected to retain their ownership in
the Company. For security holders electing to rescind their ownership, the
rescission price was paid in cash.
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
Rescission Offer Rescission Offer Total
------------------------ ---------------------- 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 26,517 109,550 22,720 (855) 131,415
Class A Common Stock 5,514,491 7,952,134 1,390,553 2,220,150 421,791 (81,497) 2,560,444
Class B Common Stock 2,719,733 5,365,047 1,014,539 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>
To fund the rescission liability of $5,536,899, the Company arranged
for stand-by investors. During the year ended December 31, 1999, the Company
entered into agreements with stand-by investors to provide $6,151,598 to fund
the rescission offer. The agreements provided that the stand-by investors
purchase up to $6,151,598 of Class A common stock at $1.37 per share to the
extent 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 that remained after the funding of the rescission offer was used by
the Company for general working capital purposes.
F-16
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 committed to fund $2,420,000 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 $2,420,000 was
immediately accreted up to $2,667,299 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 received warrants to purchase 413,600 shares of the Company's Class A
common stock. The warrants have an exercise price of $2.00 per share, vest
immediately and expire three years from issuance.
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.
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 5.
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'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.
F-17
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option plan for the years ended
December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year..................... 1,465,563 $ .39 - $ -
Options granted......................... 940,000 1.11 1,475,000 .39
Options exercised....................... - - - -
Options cancelled....................... (229,314) .50 (9,437) .39
-------------- ------------ ---------- -------------
Options outstanding at
end of year........................... 2,176,249 $ .67 1,465,563 $ .39
============= ============ ========== =============
Shares exercisable...................... 926,250 $ .39 738,438 $ .39
============= ============ ========== =============
Weighted-average fair value of
options from during the year.......... $ .62 $ .22
============ =============
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/99 Life Price At 12/31/99 Price
------------- -------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$ .39 - $ 1.51 2,176,243 3.8 $ .67 926,250 $ .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 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Dividend yield................................................ 0% 0%
Expected volatility........................................... 60% 60%
Risk-free interest rate....................................... 6% 5%
Expected lives................................................ 5 years 5 years
</TABLE>
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 Years Ended
December 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported.............................................. $(8,597,541) $(4,396,883)
============ ============
Pro forma................................................ $(8,655,315) $ (4,557,531)
============ =============
Net loss per common share:
Basic and assuming dilution
As reported.............................................. $ (.33) $ (.19)
=========== ==========
Pro forma................................................ $ (.34) $ (.20)
=========== ==========
</TABLE>
F-18
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - 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, 1999, were as follows:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
Net operating loss carryforward.................................... $ 6,826,000
Warrant expense..................................................... 457,000
Loss on write-off of investments.................................... 409,000
Property and equipment............................................. 27,000
Other .............................................................. (11,000)
--------------
Gross deferred tax assets........................................... 7,708,000
Valuation allowance................................................. (7,708,000)
--------------
Net deferred tax assets............................................. $ -
=============
</TABLE>
At December 31, 1999, 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, 1999 and 1998, 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>
1999 1998
---------- ------------
<S> <C> <C>
Provision for income tax benefit at statutory rate.................. $ (2,823,000) $ (1,481,000)
Change in deferred tax asset valuation allowance.................... 2,815,000 1,476,000
Other............................................................... 8,000 5,000
-------------- ------------
$ - $ -
============= =============
</TABLE>
At December 31, 1999, the Company had a net operating loss
carryforwards for federal income tax purposes totaling approximately $20,077,000
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
2019 ............................................................... 7,024,000
------------
$20,077,000
===========
</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-19
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under a long-term non-cancelable operating
lease for office space expiring through the year 2003, at a minimum annual rent
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
2000 .............................................................. $ 362,123
2001 ............................................................... 345,623
2002 ............................................................... 311,663
2003 ............................................................... 75,201
----------
$1,094,610
==========
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 totaled
$378,508 and $225,693, respectively.
TELECOMMUNICATION CARRIER DISPUTE
On January 31, 2000, the Company received a letter from a major
telecommunications carrier asserting that the Company had failed to meet certain
financial obligations including both payment for services rendered totaling
approximately $248,000 and certain short fall penalties on volume commitments
for long distance services totaling approximately $1,100,000. The alleged
liability to the Company as a result of this agreement, including future year
volume commitments and other expenses is approximately $4,000,000. The Company
has disputed the claim based on the Company's assertion that the carrier
breached the contract with respect to services rendered. The parties are
presently in preliminary discussions to resolve their disputes. The Company
believes it will resolve the issues relating to this dispute by entering into a
new multi-year agreement for long distance or related services and does not
expect this dispute will have a material adverse effect on the Company. As of
December 31, 1999, the Company had recorded a liability of approximately
$179,000 for services rendered.
LITIGATION
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 completed 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.
EMPLOYMENT AGREEMENTS
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 is 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 is exercisable over a five year period.
F-20
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is 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 is exercisable over a five year period.
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 is 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.
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.
NOTE 10 - 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, 1999 and 1998.
F-21
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1999, the Company had the following
non-cash transactions:
(a) During 1999, the Company completed a rescission offer as discussed
in Note 7. Of the outstanding liability at December 31, 1998, of
$13,980,009, $4,781,699 was rescinded for cash and the remainder
was reclassified as follows:
<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
Rescission liability at December 31, 1998................................. $ 13,980,009
Rescinded for cash........................................................ 4,781,699
-------------
Reclass to equity......................................................... 9,198,310
Reclass deferred offering costs to equity for shares not rescinded........ (1,366,258)
Reclass accrued dividends no longer payable to equity..................... 219,696
Reclass shares purchased by CyNet Holdings, LLC during 1999............... (30,000)
--------------
Net reclass to equity to reflect the rescission offer..................... $ 8,021,748
=============
</TABLE>
(b) The Company accrued dividends payable totaling $46,304.
(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 5). 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.
(d) The Company issued 1,119,472 shares of the Company's Class A
common stock on conversion of advance totaling $1,119,472 from
CyNet Holdings, LLC.
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.
NOTE 12 - 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-22
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENTS
DEBT FINANCING
On January 31, 2000, the Company entered into a securities purchase
agreement with a non-related entity. In accordance with the agreement the
Company issued a $1,600,000 Series A (8%) Convertible promissory note. The
promissory note bears interest at 8% payable quarterly in cash or common stock
beginning June 30, 2000, with outstanding principal and interest due January 31,
2002. At the holders' option at any time commencing at the earlier of the
effective date of the registration statement or May 30, 2000, the original face
amount of the note or a portion can be converted into the Company's Class A
common stock at a per share conversion rate equaled to the lesser of (1) 110% of
the average of the closing bid prices for the Company's Class A common stock
five trading days prior to January 31, 2000 or (2) 75% of the average of the
three lowest closing bid prices for the Company's Class A common stock thirty
trading days immediately preceding the conversion date.
On issuance of the promissory note the Company recorded a debt discount
of approximately $1,250,000 to record the effect of the beneficial conversion
rate of the promissory note at date of issuance. The debt discount will be
amortized as a non-cash charge to interest expense from the date the promissory
note was issued to the first date the promissory note is eligible for
conversion. Accordingly, the Company will incur a non-cash interest charge of
approximately $625,000 in each of the first and second quarters of 2000.
In addition, the Company issued the note holder a warrant to purchase
160,000 shares of the Company's Class A common stock at a per share price
equaled to 120% of the average of the closing bid prices of the Company's Class
A common stock five trading days prior to January 31, 2000. The warrant vests
immediately and expires January 31, 2003. At the date of issuance the Company
recorded a debt discount of approximately $350,000 for the value of the warrant.
The debt discount will be amortized as a non-cash charge to interest expense
over the term of the promissory note.
In accordance with the agreement, the Company is required to file a
registration statement to register the appropriate shares of Class A common
stock that the promissory note and warrant can be converted into by March 1,
2000 or have the registration statement effective by May 30, 2000. If the
Company fails to comply, the Company is subject to liquidating damages of 1% of
the face value of the promissory note outstanding each thirty days until the
registration statement is declared effective. In addition, if the above
registration requirements are not met, the 75% conversion rate discussed above
is reduced by 2% each thirty days, with a 50% floor, until such time the
registration statement becomes effective.
The agreement also requires the Company, among other things, to
maintain a shelf registration, comply with the terms of the agreement, and
maintain the public trading of the Company's Class A common stock. If the
Company breaches these requirement it is subject to the 1% liquidating damages
discussed above for each thirty days the violation has not been cured.
In association with the issuance of this promissory note the Company
paid finders fees totaling $185,000, which consisted of issuance of 10,000
shares of the Company's Class A common stock valued at $55,000 and a cash
payment of $130,000.
EQUITY FINANCING
On February 3, 2000, the Company entered into a stock purchase
agreement with a stockholder who was one of the stand-by investors during the
rescission offer (see Note 7, Rescission Offer). In accordance with the
agreement, the stockholder (1) purchased 1,600,000 shares of newly designated
Series C preferred stock at $1.00 per share, and (2) exchanged 1,766,423 shares
of Class A common stock issued during the rescission offer for 1,766,423 shares
of newly designated Series D preferred stock.
F-23
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The non-voting Series C preferred stock is senior to the Company's
common and Series D preferred stock and is junior to the Company's Series A and
B preferred stock with respect to rights upon liquidation or dissolution of the
Company. The Series C preferred stock is not entitled to any dividends, except
liquidating dividends, as defined by the agreement. The Series C preferred stock
contains a call and put option feature as follows:
Call Option:
<TABLE>
<CAPTION>
Period Price per Share
------------------------------------- ---------------
<S> <C>
February 3, 2000 to July 31, 2000................................................... $ 1.09
August 1, 2000 to January 31, 2001.................................................. $ 1.18
February 1, 2001 to July 31, 2001................................................... $ 1.31
August 1, 2001 to January 31, 2002.................................................. $ 1.45
February 1, 2002 to July 31, 2002................................................... $ 1.64
On or after August 1, 2002.......................................................... $ 1.86
</TABLE>
Put Option:
<TABLE>
Period Price per Share
------------------------------------ ---------------
<S> <C>
February 1, 2001 to July 31, 2001................................................... $ 1.31
August 1, 2001 to January 31, 2002.................................................. $ 1.45
February 1, 2002 to July 31, 2002................................................... $ 1.64
On or after August 1, 2002.......................................................... $ 1.86
</TABLE>
The Series C preferred stock also has a mandatory redemption feature,
whereby the Company shall redeem shares of Series C preferred stock at the
applicable call option price upon the issuance of any equity or debt securities
of the Company, as defined by the Agreement. The amount of shares redeemed shall
equal the aggregate dollar amount of consideration the Company received, other
than for outstanding stock options and warrants, divided by the applicable call
option price.
Due to the put option feature the Series C preferred stock will be
classified outside of the equity section as mezzanine capital and accreted up to
the put redemption value over the applicable periods as defined above.
The Series C preferred stock agreement also contains certain protective
provisions whereby, as long as the Series C preferred stock is outstanding the
Company will not, without first obtaining the approval of its holders of at
least 66-2/3% of the Series C preferred stock, among other things, (1) sell or
otherwise dispose of substantially all of its property or business, as defined,
(2) authorize or issue equity securities, as defined, except for securities
issued pursuant to the stock subscription agreement between the Company and
CyNet Holdings, LLC., or any other options, warrants or other commitments to
issue equity securities outstanding as of January 31, 2000, (3) purchase of
Series A and B preferred stock and Class A and B common stock, as defined, (4)
declare or pay dividends on Class A and B common stock, (5) increase the number
of directors of the Company greater than nine and (6) incur any debts,
obligations or other liabilities except ordinary trade payables and accrued
operating expenses.
The voting Series D preferred stock is senior to the Company's common
stock and is junior to the Company's Series A, B and C preferred stock with
respect to rights upon liquidation or dissolution of the Company. The Series D
preferred stock is entitled to receive dividends equal to the per share
dividends declared on the Company's Class A common stock. The Series D preferred
stock contains a put option, whereby, the holder can put their shares back to
the Company by the second annual anniversary of the date of the issuance of the
Series D preferred stock at $1.51 per share. See rescission offer Note 7 for
discussion of the accretion of this redemption value prior to the exchange of
the Class A common stock for the Series D preferred stock. Due to the redemption
feature the Series D preferred stock will be classified outside of the equity
section as mezzanine capital until such time as the put option has expired. In
addition, the Series D preferred stock may be converted into the Company's Class
A common stock at a conversion rate of $1.00 per share.
F-24
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, CyNet Holding, Inc. granted this stockholder the right to
first refusal to purchase up to 25% of the shares of the Company's Class A
common stock which CyNet Holdings, LLC may, from time to time, propose to
purchase pursuant to the stock subscription agreement between CyNet Holdings,
LLC and the Company (see Note 5).
WIRELESS CELL/MODEM SALES AND MARKETING AGREEMENT
On February 16, 2000, the Company and CyNet Holdings, LLC entered into
an agreement with a non-related entity to grant and provide, among other things,
sales and marketing rights and technical support pertaining to the wireless
cell/modem product. In accordance with the agreement and a separate agreement
with CyNet Holdings, LLC, the Company receives the exclusive global sales and
marketing rights for the wireless cell/modem products for the year 2000. The
agreements require a minimum sales performance level for the year ended December
31, 2000. In the event the sales levels are not achieved CyNet Holdings, LLC may
take back the sales and marketing rights for the specific markets that these
sale levels have not been achieved. Sales and marketing rights are revoked if
the agreements terminate.
In accordance with the agreements, the Company is required to meet the
minimum sales performance level of $8,295,000 for the year ended December 31,
2000. If any or all of the specific area sales and marketing rights are revoked,
the Company's minimum sales level is reduced accordingly. To secure the first
quarter 2000 purchase commitment, the Company is required to provide a letter of
credit or other acceptable security for $1,050,000. As of March 10, 2000, the
Company had provided a letter of credit totaling $1,050,000, which expires June
8, 2000, in accordance with this agreement.
The agreements require beginning February 1, 2000, the non-related
entity will pay the Company $10,000 per month towards the technical support,
sales and marketing employee and related costs the Company will incur to
successfully perform in accordance with the agreements.
In addition, the Company, CyNet Holdings, LLC and the non-related
entity have agreed to form a joint venture for the research and development of
improvements to the cell/modem product and other products. The joint venture
agreement shall be executed on or before April 1, 2000. The Company and CyNet
Holdings, LLC have agreed to invest up to a minimum of $5,000,000 in cash and/or
technologies and related knowledge on or before December 31, 2000.
Upon entering into these agreements, the Company formed a new division,
CyNet Wireless, which was formed to implement this agreement and to better serve
the Company's wireless customers and develop wireless technology.
CONVERSION OF SERIES A AND B PREFERRED STOCK
On February 28, 2000, the Company elected to exercise the mandatory
conversion feature of the Series A and B preferred stock. Accordingly, Series A
and B preferred stock totaling 66,000 and 60,832, respectively, were converted
into 66,000 and 60,832 shares of Class A and B common stock, respectively.
F-25
<PAGE>
SEE REVERSE FOR RESTRICTIONS
No. C- CYNET, INC. Shares
PREFERRED STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
THIS CERTIFIES THAT SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES C REDEEMABLE CALLABLE
PREFERRED STOCK, NO PAR VALUE, OF
CYNET, INC., A CORPORATION ORGANIZED IN THE STATE OF TEXAS, TRANSFERABLE ON
THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF, IN PERSON OR BY DULY
AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL BE
HELD SUBJECT TO ALL OF THE PROVISIONS OF THE ARTICLES OF INCORPORATION OF THE
CORPORATION, AS AMENDED, AND THE BYLAWS OF THE CORPORATION, AS AMENDED,
COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION, TO
ALL OF WHICH THE HOLDER OF THIS CERTIFICATE ASSENTS BY ACCEPTANCE HEREOF.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED
BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HERETO AFFIXED.
Dated:
- ----------------------------------- ------------------------------------
<PAGE>
CYNET, INC.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE. EXCEPT UPON SUCH REGISTRATION,
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED AT ANY TIME WHATSOEVER EXCEPT UPON
DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER AND/OR
SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO
THE CORPORATION TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND/OR APPLICABLE STATE SECURITIES
LAWS AND/OR ANY RULE OR REGULATION PROMULGATED THEREUNDER.
STATEMENT REGARDING AUTHORIZED SHARES OF MORE THAN ONE CLASS AND NOTICE OF
DENIAL OF PREEMPTIVE RIGHTS.
FULL STATEMENTS OF THE DESIGNATION, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF AUTHORIZED STOCK OF THE
CORPORATION, THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES OF THE SHARES
OF ANY SERIES OF PREFERRED STOCK SO FAR AS THE SAME HAVE BEEN FIXED AND
DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE
RELATIVE RIGHTS AND PREFERENCES OF EACH SERIES THEREOF, AND OF THE DENIAL OF THE
PREEMPTIVE RIGHTS OF SHAREHOLDERS TO ACQUIRE UNISSUED OR TREASURY SHARES OF THE
CORPORATION, ARE SET FORTH IN THE ARTICLES OF INCORPORATION OF THE CORPORATION,
AS AMENDED, WHICH ARE ON FILE IN THE OFFICE OF THE SECRETARY OF THE STATE OF
TEXAS, COPIES OF WHICH MAY BE OBTAINED, WITHOUT CHARGE ON WRITTEN REQUEST TO THE
CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE
OF THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL
ACCORDING TO APPLICABLE LAW OR REGULATION:
TEN COM - AS TENANTS IN
COMMON TEN ENT - AS TENANTS BY THE ENTIRETIES
JT TEN - AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP AND NOT AS TENANTS IN
COMMON.
UNIF GIFT MIN ACT- CUSTODIAN
----------------------- ----------------------------
(CUST) (MINOR)
UNDER UNIFORM GIFTS TO MINORS ACT
-------------------
(STATE)
UNIF TRF MIN ACT- CUSTODIAN (UNTIL AGE __)
----------------------- --------------
(CUST) (MINOR)
UNDER UNIFORM TRANSFER TO MINOR ACT
------------------
(STATE)
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN ABOVE LIST.
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
-----------------------
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN
- -----------------------
CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
------------------
ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION
WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
----------------------------
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST X
CORRESPOND WITH THE NAME(S) AS WRITTEN ON -----------------------------------
THE FACE OF THE CERTIFICATE IN EVERY (SIGNATURE
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. X
-----------------------------------
(SIGNATURE)
-----------------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM.)
-----------------------------------
SIGNATURE(S) GUARANTEED BY:
<PAGE>
SEE REVERSE FOR RESTRICTIONS
No. D- CYNET, INC. Shares
PREFERRED STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
THIS CERTIFIES THAT SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES D REDEEMABLE CONVERTIBLE
PREFERRED STOCK, NO PAR VALUE, OF
CYNET, INC., A CORPORATION ORGANIZED IN THE STATE OF TEXAS, TRANSFERABLE ON
THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF, IN PERSON OR BY DULY
AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE ISSUED AND SHALL BE
HELD SUBJECT TO ALL OF THE PROVISIONS OF THE ARTICLES OF INCORPORATION OF THE
CORPORATION, AS AMENDED, AND THE BYLAWS OF THE CORPORATION, AS AMENDED,
COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION, TO
ALL OF WHICH THE HOLDER OF THIS CERTIFICATE ASSENTS BY ACCEPTANCE HEREOF.
IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED
BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HERETO AFFIXED.
Dated:
- ----------------------------------- ----------------------------------------
<PAGE>
CYNET, INC.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE. EXCEPT UPON SUCH REGISTRATION,
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED AT ANY TIME WHATSOEVER EXCEPT UPON
DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER AND/OR
SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO
THE CORPORATION TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND/OR APPLICABLE STATE SECURITIES
LAWS AND/OR ANY RULE OR REGULATION PROMULGATED THEREUNDER.
STATEMENT REGARDING AUTHORIZED SHARES OF MORE THAN ONE CLASS AND NOTICE OF
DENIAL OF PREEMPTIVE RIGHTS.
FULL STATEMENTS OF THE DESIGNATION, PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF AUTHORIZED STOCK OF THE
CORPORATION, THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES OF THE SHARES
OF ANY SERIES OF PREFERRED STOCK SO FAR AS THE SAME HAVE BEEN FIXED AND
DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE
RELATIVE RIGHTS AND PREFERENCES OF EACH SERIES THEREOF, AND OF THE DENIAL OF THE
PREEMPTIVE RIGHTS OF SHAREHOLDERS TO ACQUIRE UNISSUED OR TREASURY SHARES OF THE
CORPORATION, ARE SET FORTH IN THE ARTICLES OF INCORPORATION OF THE CORPORATION,
AS AMENDED, WHICH ARE ON FILE IN THE OFFICE OF THE SECRETARY OF THE STATE OF
TEXAS, COPIES OF WHICH MAY BE OBTAINED, WITHOUT CHARGE ON WRITTEN REQUEST TO THE
CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE
OF THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL
ACCORDING TO APPLICABLE LAW OR REGULATION:
TEN COM - AS TENANTS IN COMMON
TEN ENT - AS TENANTS BY THE ENTIRETIES
JT TEN - AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP AND NOT AS TENANTS IN
COMMON.
UNIF GIFT MIN ACT- CUSTODIAN
----------------------- ----------------------------
(CUST) (MINOR)
UNDER UNIFORM GIFTS TO MINORS ACT
-------------------
(STATE)
UNIF TRF MIN ACT- CUSTODIAN (UNTIL AGE __)
----------------------- --------------
(CUST) (MINOR)
UNDER UNIFORM TRANSFER TO MINOR ACT
------------------
(STATE)
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN ABOVE LIST.
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
-----------------------
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN
- -----------------------
CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
------------------
ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION
WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
----------------------------
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST X
CORRESPOND WITH THE NAME(S) AS WRITTEN ON -----------------------------------
THE FACE OF THE CERTIFICATE IN EVERY (SIGNATURE
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. X
-----------------------------------
(SIGNATURE)
-----------------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM.)
-----------------------------------
SIGNATURE(S) GUARANTEED BY:
<PAGE>
CYNET, INC.
STATEMENT OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
SERIES C REDEEMABLE CALLABLE PREFERRED STOCK,
NO PAR VALUE
Pursuant to Section 2.13 of the Texas Business Corporation Act
The following resolution was duly adopted by the Board of Directors of
CyNet, Inc. (the "Corporation"), pursuant to the provisions of Section 2.13 of
the Texas Business Corporation Act (the "TBCA"), on January 31, 2000, by the
unanimous written consent of the Board of Directors:
WHEREAS, the Board of Directors is authorized, within the limitations
and restrictions stated in the Articles of Incorporation of the Corporation, to
provide by resolution or resolutions for the issuance of shares of preferred
stock, no par value, of the Corporation, in one or more series with such voting
powers, full or limited, or without voting powers, and such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions as shall be stated and expressed in
the resolution or resolutions providing for the issuance thereof adopted by the
Board of Directors, and as are not stated and expressed in the Articles of
Incorporation, or any amendment thereto, including (but without limiting the
generality of the foregoing) such provisions as may be desired concerning
voting, redemption, dividends, dissolution or the distribution of assets and
such other subjects or matters as may be fixed by resolution or resolutions of
the Board of Directors under the TBCA; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares consisting such series.
NOW, THEREFORE, BE IT RESOLVED:
1. DESIGNATION AND NUMBER OF SHARES. There shall be hereby created and
established a series of Preferred Stock designated as "Series C Redeemable
Callable Preferred Stock" (the "Series C Preferred Stock"). The authorized
number of shares of Series C Preferred Stock shall be one million six hundred
thousand (1,600,000) shares.
-1-
<PAGE>
2. RANK. The Series C Preferred Stock shall with respect to
distributions of assets and rights upon the occurrence of a Liquidation rank (i)
senior to (A) all classes of common stock of the Corporation (including, without
limitation, the Class A Common Stock, no par value (the " Class A Common
Stock"), of the Corporation and the Class B Common Stock, no par value (the
"Class B Common Stock"), of the Corporation, (B) the Series D Redeemable
Convertible Preferred Stock, no par value, of the Corporation (the "Series D
Preferred Stock") and (C) each other class or series of Capital Stock of the
Corporation hereafter created which does not expressly rank PARI PASSU with or
senior to the Series C Preferred Stock (the "Junior Stock") and (ii) junior to
(A) all currently outstanding shares of Series A Convertible Non Voting
Preferred Stock, no par value, of the Corporation (the "Series A Preferred
Stock"), and (B) all currently outstanding shares of Series B Cumulative Non
Voting Preferred Stock, no par value, of the Corporation (the " Series B
Preferred Stock").
3. DIVIDENDS. The shares of Series C Preferred Stock shall not be
entitled to any dividends except liquidating dividends as provided in Section 4
below. Except as provided for in Section 4 below, the Series C Preferred Stock
shall be entitled to no other dividends.
4. LIQUIDATION PREFERENCE.
(a) In the event of a Liquidation, the holders of shares of
Series C Preferred Stock then outstanding shall be entitled to be paid for each
share of Series C Preferred Stock held thereby, out of the assets of the
Corporation available for distribution to its stockholders, before any payment
shall be made or any assets distributed to the holders of any shares of Junior
Stock, an amount (the "Liquidation Amount") in cash equal to the Call Redemption
Price per share (the "Liquidation Preference") (subject to adjustment under
conditions analogous to those provided in Section 7(d)). If the assets of the
Corporation are not sufficient to pay in full the foregoing Liquidation Amounts
to the holders of outstanding shares of the Series C Preferred Stock, then the
holders of all shares of Series C Preferred Stock shall share ratably in such
distribution of assets in accordance with the amount that would be payable on
such distribution if the amounts to which the holders of outstanding shares of
Series C Preferred Stock are entitled were paid in full.
(b) Upon completion of the distribution required by subsection
(a) of this Section 4, the holders of shares of Series C Preferred Stock shall
not be entitled to any further participation in any distribution of assets by
the Corporation.
5. REDEMPTION. (a) On or after the date of issuance of the Series C
Preferred Stock, unless a Notice of Redemption (defined herein in Section
5(c) below) has been given by the holders of the Series C Preferred Stock
pursuant to Section 5(b) below, the Corporation may redeem all or any portion
of the shares of Series C Preferred Stock then outstanding at the applicable
Call Redemption Price.
(b) On or after February 3, 2001, the holders of the Series C Preferred Stock
may put to the Corporation for mandatory redemption all or any portion of the
shares of Series C Preferred Stock then outstanding held by each such holder at
the applicable Redemption Price. If the funds of the
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<PAGE>
Corporation legally available for redemption of shares of Series C Preferred
Stock are insufficient to redeem the total number of shares of Series C
Preferred Stock on a redemption date set pursuant to this Section 5(b), those
funds which are legally available will be used to redeem the maximum possible
number of whole shares ratably among the holders of such shares. The shares
of Series C Preferred Stock not redeemed shall remain outstanding and
entitled to all rights and preferences provided herein.
(c) Notice of a redemption of shares of Series C Preferred
Stock pursuant to either subparagraph (a) or (b of this Section 5 shall be
delivered by the requesting party to the other party not less than ten (10) nor
more than thirty (30) days prior to the date proposed by the requesting party
for the redemption. Notices to be delivered to the holders of Series C Preferred
Stock shall be made to each such holder at its addresses as it appears on the
transfer books of the Corporation. Notices to be delivered to the Corporation
shall be sent to 12777 Jones Road, Suite 400, Houston, Texas 77070, attention
President. All notices placed in the mail shall be deemed delivered on the date
it is placed into the custody of any office of the United States Post Office,
properly addressed and stamped.
(d) A notice of redemption shall include (i) the name of the
requesting party, (ii) the number of shares of Series C Preferred Stock to be
redeemed, (iii) the proposed date of redemption, (iv) the aggregate and per
share redemption prices and (iv) if the notice is for a redemption pursuant to
Section 5(b), the certificate(s) evidencing the shares of Series C Preferred
Stock to be redeemed.
(e) The redemption date with respect to any shares of Series C
Preferred Stock shall be the day in which such redemption occurs.
5A. MANDATORY AUTOMATIC REDEMPTION. After the date hereof, the Corporation
shall redeem shares of Series C Preferred Stock then outstanding at the
applicable Call Redemption Price upon each issuance of any equity or debt
security of the Corporation. The amount of shares of Series C Preferred Stock
to be redeemed pursuant to this Section 5A shall equal the aggregate dollar
amount of consideration received by the Corporation, other than for
outstanding stock options and warrants, from any such equity or debt issuance
divided by the applicable Call Redemption Price on the date of redemption.
Any redemption required by this Section 5A shall occur within five (5)
business days after each issuance of debt or equity by the Corporation. Each
issuance of debt or equity of the Corporation shall automatically, without
notice or confirmation, give rise to the obligation of the Corporation to
redeem shares of Series C Preferred Stock pursuant to this Section 5A.
6. VOTING RIGHTS: ELECTION OF DIRECTOR. The holders of Series C
Preferred Stock shall not be entitled or permitted to vote on any matter
required or permitted to be voted upon by the shareholders of the Corporation.
7. CONVERSION. The Shares of Series C Preferred Stock shall not be
convertible, whether at the option of the holder therefore or the Corporation
-3-
<PAGE>
8. PROTECTIVE PROVISIONS. So long as any shares of Series C Preferred
Stock remain outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least sixty six and two thirds of the then outstanding shares of Series C
Preferred Stock:
(a) sell, convey or otherwise dispose of all or substantially
all of its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which more than (50%) of the
voting power of the Corporation is disposed of;
(b) alter or change the rights, preferences or privileges of
the shares of Series C Preferred Stock so as to affect adversely the shares;
(c) increase or decrease the total number of authorized shares
of Series C Preferred Stock (other than by redemption);
(d) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security, except for any securities to be issued pursuant to (i)
that certain Subscription Agreement, dated July 22, 1998 and amended on January
3, 2000, by and between the Corporation and CyNet Holding, L.LC. or (ii) any
options, warrants or other commitments to issue equity securities of the
Corporation, in each such case, issued and outstanding as of January 31, 2000;
(e) declare or pay dividends on its Class A Common Stock or
Class B Common Stock;
(f) redeem, purchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purpose) any share or shares of Series A
Preferred Stock (except upon conversion thereof), Series B Preferred Stock
(except upon conversion thereof), Class A Common Stock or Class B Common Stock
(except upon the exchange thereof for shares of Class A Common Stock); PROVIDED,
HOWEVER, that this restriction shall not apply to the repurchase of shares of
Common Stock from employees, officers, directors, consultants or other persons
performing services for the Corporation or any subsidiary pursuant to agreements
under which the Corporation has the option to repurchase such shares at cost
upon the occurrence of certain events, such as the termination of employment;
(g) increase the authorized number of directors of the
Corporation to a number greater than nine (9); or
(h) incur any debt, obligation or other liabilities of the
Corporation, except ordinary trade payable and accrued operating expenses.
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<PAGE>
9. REACQUIRED SHARES. Any shares of Series C Preferred Stock redeemed,
converted, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
No such shares of Series C Preferred Stock shall upon their cancellation be
reissued or restored by the Corporation to the status of authorized but unissued
capital stock.
10. CERTAIN REMEDIES. Any registered holder of Series C Preferred Stock
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Statement of Designations and to enforce specifically the
terms and provisions of this Statement of Designations in any court of the
United States or any state thereof having jurisdiction, this being in addition
to any other remedy to which such holder may be entitled at law or in equity.
11. BUSINESS DAY. If any payment shall be required by the terms hereof
to be made on a day that is not a Business Day, such payment shall be made on
the immediately succeeding Business Day.
12. DEFINITIONS. As used in this Statement of Designations, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"Articles of Incorporation" shall mean the Articles of Incorporation
of the Corporation as filed with the Secretary of State of the State of Texas.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day except a Saturday, a Sunday, or other day
on which commercial banks in the State of Texas are authorized or required by
law or executive order to close.
"Call Redemption Price" means, with respect to a Call Redemption, (i)
from the date of issuance to July 31, 2000, $1.09, (ii) from August 1, 2000 to
January 31, 2001, $1.18, (iii) from February 1, 2001 to July 31, 2001, $1.31,
(iv) from August 1, 2001 to January 31, 2002, $1.45, (v) from February 1, 2002
to July 31, 2002, $1.64 and (vi) on and after August 1, 2002, $1.86.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock and any and
all rights, warrants or options exchangeable for or convertible into such
capital stock (but excluding any debt security that is exchangeable for or
convertible into such capital stock).
"Commission" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"Corporation" shall have the meaning ascribed to it in the first
paragraph of this Resolution.
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<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, and the
rules and regulations of the Commission promulgated thereunder.
"Junior Stock" shall have the meaning ascribed to it in Section 2 hereof.
"Liquidation" shall mean the voluntary or involuntary liquidation under
applicable bankruptcy or reorganization legislation, dissolution or winding up
of the Corporation. For purposes of Section 4, "Liquidation" shall be deemed to
be occasioned by, or to include (unless the holders of at least a majority of
the them outstanding shares of Series C Preferred Stock shall determine
otherwise), (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer of fifty percent (50%) or more of the outstanding voting power of the
Corporation; or (B) a sale of all or substantially all of the assets of the
Corporation.
"Liquidation Amount" shall have the meaning ascribed to it in Section
4(a) hereof.
"Liquidation Preference" shall have the meaning ascribed to it in
Section 4(a) hereof.
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, governmental body or other entity of any kind.
"Redemption Price" means (i) from February 1, 2001 to July 31, 2001,
$1.31, (ii) from August 1, 2001 to January 31, 2002, $1.45, (iii) from February
1, 2002 to July 31, 2002, $1.64 and (iv) on and after August 1, 2002, $1.86.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Series C Preferred Stock" shall have the meaning ascribed to it in
Section 1 hereof.
"Statement of Designations" shall mean this statement of the Powers,
Designations, Preferences and Rights of the Series C Redeemable Callable
Preferred Stock, no par value, adopted by the Board of Directors and filed with
the Secretary of State of State of Texas.
IN WITNESS WHEREOF, the undersigned authorized officer of the Company
has executed and subscribed this statement and does affirm the foregoing as true
this 3rd day of February, 2000.
CYNET, INC.
By: /s/ Bernard B. Beale
-----------------------------------
Bernard B. Beale, Vice President
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<PAGE>
CYNET, INC.
STATEMENT OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE
SERIES D REDEEMABLE CONVERTIBLE PREFERRED STOCK,
NO PAR VALUE
Pursuant to Section 2.13 of the Texas Business Corporation Act
The following resolution was duly adopted by the Board of Directors of
CyNet, Inc. (the "Corporation"), pursuant to the provisions of Section 2.13 of
the Texas Business Corporation Act (the "TBCA"), on January 31, 2000, by the
unanimous written consent of the Board of Directors:
WHEREAS, the Board of Directors is authorized, within the limitations
and restrictions stated in the Articles of Incorporation of the Corporation, to
provide by resolution or resolutions for the issuance of shares of preferred
stock, no par value, of the Corporation, in one or more series with such voting
powers, full or limited, or without voting powers, and such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions as shall be stated and expressed in
the resolution or resolutions providing for the issuance thereof adopted by the
Board of Directors, and as are not stated and expressed in the Articles of
Incorporation, or any amendment thereto, including (but without limiting the
generality of the foregoing) such provisions as may be desired concerning
voting, redemption, dividends, dissolution or the distribution of assets and
such other subjects or matters as may be fixed by resolution or resolutions of
the Board of Directors under the TBCA; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its
authority as aforesaid, to authorize and fix the terms of a series of preferred
stock and the number of shares consisting such series.
NOW, THEREFORE, BE IT RESOLVED:
1. DESIGNATION AND NUMBER OF SHARES. There shall be hereby created and
established a series of Preferred Stock designated as "Series D Redeemable
Convertible Preferred Stock" (the "Series D Preferred Stock"). The authorized
number of shares of Series D Preferred Stock shall be one million seven hundred
sixty six thousand four hundred twenty three (1,766,423) shares.
2. RANK. The Series D Preferred Stock shall with respect to
distributions of assets and rights upon the occurrence of a Liquidation rank (i)
senior to (A) all classes of common stock of the Corporation (including, without
limitation, the Class A voting Common Stock, no par value (the "Class A Common
Stock"), of the Corporation and the Class B non voting Common Stock, no par
value (the "Class B Common Stock"), of the Corporation) and (B) each other class
or series of Capital Stock of the Corporation hereafter created which does not
expressly rank PARI PASSU with
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<PAGE>
or senior to the Series D Preferred Stock (the "Junior Stock") and (ii)
junior to (A) all currently outstanding shares of Series A Convertible Non
Voting Preferred Stock, no par value, of the Corporation (Series A Preferred
Stock"), (B) all currently outstanding shares of Series B Cumulative Non
Voting Preferred Stock, no par value, of the Corporation (the " Series B
Preferred Stock") and (C) all shares of the Series C Redeemable Callable
Preferred Stock, no par value, of the Corporation (the "Series C Preferred
Stock").
3. DIVIDENDS. Beginning on the date of issuance of the Series D
Preferred Stock, if the Board of Directors of the Corporation shall declare a
dividend or make any other distribution (including, without limitation, in cash
or other property or assets), to holders of shares of Class A Common Stock, then
the holders of each share of Series D Preferred Stock shall be entitled to
receive, out of funds legally available therefore, a dividend or distribution in
an amount equal to the amount of such dividend or distribution which such holder
would be entitled to receive if such holder were the holder of the number of
shares of Class A Common Stock for which such share of Series D Preferred Stock
is convertible on the record date for such dividend or distribution. Any such
amount shall be paid to the holders of shares of Series D Preferred Stock at the
same time such dividend or distribution is made to holders of Class A Common
Stock. Except as provided for above, the Series D Preferred Stock shall be
entitled to no other dividends.
4. LIQUIDATION PREFERENCE.
In the event of a Liquidation, the holders of shares of Series
D Preferred Stock then outstanding shall be entitled to be paid for each share
of Series D Preferred Stock held thereby, out of the assets of the Corporation
available for distribution to its stockholders, before any payment shall be made
or any assets distributed to the holders of any shares of Junior Stock, an
amount (the "Liquidation Amount") in cash equal to (i) $1.51 per share (the
"Liquidation Preference") (subject to adjustment under conditions analogous to
those provided in Section 7(d)) plus (ii) all declared and unpaid dividends
thereon to the date fixed for the Liquidation. If the assets of the Corporation
are not sufficient to pay in full the foregoing Liquidation Amounts to the
holders of outstanding shares of the Series D Preferred Stock, then the holders
of all shares of Series D Preferred Stock shall share ratably in such
distribution of assets in accordance with the amount that would be payable on
such distribution if the amounts to which the holders of outstanding shares of
Series D Preferred Stock are entitled were paid in full.
5. REDEMPTION. (a) From the date of issuance of the Series D Preferred
Stock until the day prior to the second annual anniversary after the date of
issuance of the Series D Preferred Stock, the holders of the Series D Preferred
Stock may put to the Corporation for mandatory redemption all or any portion of
the shares of Series D Preferred Stock then outstanding held by each such holder
at a redemption price of $1.51 per share (the "Redemption Price").
(b) Notice of a redemption of shares of Series D Preferred
Stock pursuant to subparagraph (a) of this Section 5 shall be delivered by the
holder of the Series D Preferred Stock to the Corporation not less than ten (10)
nor more than thirty (30) days prior to the date proposed by such holder for the
redemption. Such notice shall be made to 12777 Jones Road, Suite 400,
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<PAGE>
Houston, Texas 77070, attention President. All notices placed in the mail
shall be deemed delivered on the date it is placed into the custody of any
office of the United States Post Office, properly addressed and stamped.
(c) A notice of redemption shall include (i) the name of the
holder, (ii) the number of shares of Series D Preferred Stock to be redeemed,
(iii) the proposed date of redemption, (iv) the aggregate and per share
redemption prices and (iv) the certificate(s) evidencing the shares of Series D
Preferred Stock to be redeemed.
(d) The redemption date with respect to any shares of Series D
Preferred Stock shall be the day in which such redemption occurs.
6. VOTING RIGHTS: ELECTION OF DIRECTOR.
(a) The holders of Series D Preferred Stock, except as set
forth in subsection (b) below, shall not be entitled or permitted to vote on any
matter required or permitted to be voted upon by holders of the Class A Common
Stock of the Corporation.
(b) Each outstanding share of Series D Preferred Stock shall
entitle the holder thereof to vote, in person or by proxy, at a special or
annual meeting of stockholders, on all matters entitled to be voted on by
holders of Class A Common Stock voting together as a single class with other
shares entitled to vote thereon. With respect to any such vote, each share of
Series D Preferred Stock shall entitle the holder thereof to cast that number of
votes per share as is equal to the number of votes that such holder would be
entitled to cast had such holder converted its shares of Series D Preferred
Stock into shares of Class A Common Stock on the record date for determining the
stockholders of the Corporation eligible to vote on any such matters. Except as
provided below, the Series D Preferred Stock shall not be entitled to vote as a
separate class.
(c) For so long as any authorized shares of Series D Preferred
Stock remain outstanding, then the holders of the Series D Preferred Stock or
its representative shall be entitled to attend meetings of the Corporation's
Board of Directors as a non voting observer. The Corporation agrees to notify
such holder's designated representative of the time and place of any such
meetings in the same manner as Directors of the Corporation are notified and to
deliver to such holder's designated representative all materials that are made
available to Directors of the Corporation at the same time that such material is
made available to Directors.
7. CONVERSION.
(a) Each holder of the Series D Preferred Stock shall have the
right, at its option, at any time and from time to time after the issuance
hereof, to convert, subject to the terms and provisions of this Section 7, all
or any portion of such holder's shares of Series D Preferred Stock into such
number of fully paid and non-assessable shares of Class A Common Stock at the
rate of one (1) share of Class A Common Stock for each share of Series D
Preferred Stock surrendered for conversion, subject to adjustment as provided in
Section 7(d). Such conversion right shall be
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<PAGE>
exercised by the surrender of the shares of Series D Preferred Stock to be
converted to the Corporation at any time during usual business hours at its
principal place of business to be maintained by it, accompanied by written
notice that the holder elects to convert such shares of Series D Preferred
Stock and specifying the name or names (with address) in which a certificate
or certificates for shares of Class A Common Stock are to be issued and (if
so required by the Corporation) by a written instrument or instruments of
transfer in form reasonably satisfactory to the Corporation duly executed by
the holder or its duly authorized legal representative and transfer tax
stamps or funds therefore, if required pursuant to Section 7(j). All shares
of Series D Preferred Stock surrendered for conversion shall be delivered to
the Corporation for cancellation and canceled by it and no shares of Series D
Preferred Stock shall be issued in lieu thereof.
(b) As promptly as practicable after the surrender, as herein
provided, of any shares of Series D Preferred Stock for conversion pursuant to
Section 7(a), the Corporation shall deliver to or upon the written order of the
holder of such shares of Series D Preferred Stock so surrendered a certificate
or certificates representing the number of fully paid and non-assessable shares
of Class A Common Stock into which such shares of Series D Preferred Stock may
be or have been converted in accordance with the provisions of this Section 7.
Subject to the following provisions of this Section and of Section 7(d), such
conversion shall be deemed to have been made immediately prior to the close of
business on the date that such shares of Series D Preferred Stock shall have
been surrendered in satisfactory form for conversion, and the Person or Persons
entitled to receive the shares of Class A Common Stock deliverable upon
conversion of such shares of Series D Preferred Stock shall be treated for all
purposes as having become the record holder or holders of such shares of Class A
Common Stock at such appropriate time, and such conversion shall be at one to
one subject to all adjustments in effect at such time; PROVIDED, HOWEVER, that
no surrender shall be effective to constitute the Person or Persons entitled to
receive the shares of Class A Common Stock deliverable upon such conversion as
the record holder or holders of such shares of Class A Common Stock while the
share transfer books of the Corporation shall be closed (but not for any period
in excess of five days), but such surrender shall be effective to constitute the
Person or Persons entitled to receive such shares of Class A Common Stock as the
record holder or holders thereof for all purposes immediately prior to the close
of business on the next succeeding day on which such share transfer books are
open, and such conversion shall be deemed to have been made at, and shall be
made at one to one subject to all adjustments in effect at, such time on such
next succeeding day.
(c) To the extent permitted by law, when shares of Series D
Preferred Stock are converted, all dividends declared and unpaid on the shares
of Series D Preferred Stock so converted to the date of conversion shall be
immediately due and payable and must accompany the shares of Class A Common
Stock issued upon such conversion.
(d) The conversion of the Series D Preferred Stock shall be
subject to adjustment as follows:
(i) In the event that the Corporation shall at any
time or from time to time (w) pay a dividend or make a distribution (other than
a dividend or distribution paid or made to
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<PAGE>
holders of shares of Series D Preferred Stock in the manner provided in
Section 3) on the outstanding shares of Class A Common Stock in Capital
Stock, (x) subdivide the outstanding shares of Class A Common Stock into a
larger number of shares, (y) combine the outstanding shares of Class A Common
Stock into a smaller number of shares or (z) issue any shares of its Capital
Stock in a reclassification of the Class A Common Stock, then, and in each
such case, the number of shares of Class A Common Stock to be received by the
holder of any share of Series D Preferred Stock immediately prior to such
event shall be adjusted (and any other appropriate actions shall be taken by
the Corporation) so that the holder of any share of Series D Preferred Stock
thereafter surrendered for conversion shall be entitled to receive the number
of shares of Class A Common Stock or other securities of the Corporation that
such holder would have owned or would have been entitled to receive upon or
by reason of any of the events described above, had such share of Series D
Preferred Stock been converted immediately prior to the occurrence of such
event. An adjustment made pursuant to this Section 7(d)(i) shall become
effective retroactively (x) in the case of any such dividend or distribution,
to a date immediately following the close of business on the record date for
the determination of holders of Class A Common Stock entitled to receive such
dividend or distribution or (y) in the case of any such subdivision,
combination or reclassification, to the close of business on the day upon
which such corporate action becomes effective.
(ii) In case the Corporation shall at any time or
from time to time distribute to all holders of shares of its Class A Common
Stock (including any such distribution made in connection with a merger or
consolidation in which the Corporation is the resulting or surviving Person and
the Class A Common Stock is not changed or exchanged) cash, evidences of
indebtedness of the Corporation or another issuer, securities of the Corporation
or another issuer or other assets (excluding dividends or distributions paid or
made to holders of shares of Series D Preferred Stock in the manner provided in
Section 3, and dividends payable in shares of Class A Common Stock for which
adjustment is made under Section 7(d)(i)) or rights or warrants to subscribe for
or purchase securities of the Corporation (excluding those distributions in
respect of which an adjustment is made pursuant to Section 7(d)(i)), then, the
holders of Series D Preferred shall be entitled to a proportionate share of any
such distribution as though they were the holders of the number of shares of
Class A Common Stock of the Corporation into which their shares of Series D
Preferred Stock are convertible as of the record date fixed for the
determination of Class A Common Stock of the Corporation entitled to receive
such distribution.
(iii) In the case the Corporation, at any time or
from time to time, shall take any action affecting its Class A Common Stock
similar to or having an effect similar to any of the actions described in any of
Section 7(d)(i) or Section 7(d)(ii), inclusive, or Section 7(g) (but not
including any action described in any such Section) and the Board of Directors
in good faith determines that it would be equitable in the circumstances to
adjust the one to one conversion rate as a result of such action, then, and in
each such case, such conversion rate shall be adjusted in such manner and at
such time as the Board of Directors of the Corporation in good faith determines
would be equitable in the circumstances (such determination to be evidenced in a
resolution, a certified copy of which shall be mailed to the holders of the
shares of Series D Preferred Stock).
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<PAGE>
(iv) Notwithstanding anything herein to the contrary,
no adjustment under this Section 7(d) shall be made upon the grant of options to
employees, consultants or directors of the Corporation pursuant to benefit plans
approved by the Board of Directors.
(v) (A) If the Corporation shall issue, after the
date upon which any shares of Series D Preferred Stock were first issued (the
"Purchase Date"), any Additional Stock (as defined below) without consideration,
the number of shares of Class A Common Stock to be received by the holder of
each share of Series D Preferred Stock shall forthwith be adjusted by
multiplying such number of shares of Class A Common Stock by a fraction, the
numerator of which shall be the number of shares of Class A Common Stock
outstanding immediately prior to such issuance plus the number of shares of such
Additional Stock; and the denominator of which shall be the number of shares of
Class A Common Stock outstanding immediately prior to such issuance.
(B) In the case of the issuance of Class A
Common Stock for cash, the consideration shall be deemed to be the amount of
cash paid therefore before deducting any reasonable discounts, commissions or
other expenses allowed, paid or incurred by this corporation for any
underwriting or otherwise in connection with the issuance and sale thereof.
() In the case of the issuance of the Class A Common Stock
for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as determined by
the Board of Directors irrespective of any accounting treatment.
() In the case of the issuance (whether on or after the
applicable Purchase Date) of options to purchase or rights to subscribe for
Class A Common Stock, securities by their terms convertible into or
exchangeable for Class A Common Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities, the following
provisions shall apply for all purposes of this Section 7(d)(v) and Section
7(d)(vi):
(1) The aggregate maximum number of shares of Class A
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of
time, but without taking into account potential antidilution adjustments) of
such options to purchase or rights to subscribe for Class A Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in Sections 7(d)(v)(B) and (d)(v)(C)), if any, received by
the Corporation upon the issuance of such options or rights plus the minimum
exercise price provided in such options or rights (without taking into
account potential antidilution adjustments) for the Class A Common Stock
covered thereby.
(2) The aggregate maximum number of shares of Class A
Common Stock deliverable upon conversion of, or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability,
including, without limitation, the passage of time, but without taking into
account potential antidilution adjustments) for, any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such
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<PAGE>
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Corporation (without
taking into account potential antidilution adjustments) upon the conversion
or exchange of such securities or the exercise of any related options or
rights (the consideration in each case to be determined in the manner
provided in Sections 7(d)(v)(B) and (d)(v)(C)).
(3) In the event of any change in the number of shares
of Class A Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or
in exchange for such convertible or exchangeable securities, including, but
not limited to, a change resulting from the antidilution provisions thereof
(unless such options or rights or convertible or exchangeable securities were
merely deemed to be included in the numerator and denominator for purposes of
determining the number of shares of Class A Common Stock outstanding for
purposes of Section 7(d)(v)(A)), the number of shares of Class A Common Stock
to be received by a holder of one share of Series D Preferred Stock, to the
extent in any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Class A Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration
of any options or rights related to such convertible or exchangeable
securities, the number of shares of Class A Common Stock to be received by a
holder of one share of the Series D Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities or options
or rights related to such securities (unless such options or rights were
merely deemed to be included in the numerator and denominator for purposes of
determining the number of shares of Class A Common Stock outstanding for
purposes of Section 7(d)(v)(A)), shall be recomputed to reflect the issuance
of only the number of shares of Class A Common Stock (and convertible or
exchangeable securities that remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
(5) The number of shares of Class A Common Stock deemed
issued and the consideration deemed paid therefor pursuant to Sections
7(d)(v)(D)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either Section
7(d)(v)(D)(3) or (4).
(vii) "Additional Stock" shall mean any shares of Class A Common
Stock issued (or deemed to have been issued pursuant to Section 7(d)(v)(D))
by the Corporation after the Purchase Date other than:
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<PAGE>
(A) Class A Common Stock issued pursuant to
a transaction described in Section 7(d)(i) hereof;
(B) shares of Class A Common Stock issuable
or issued to (i) employees, consultants, directors or vendors (if in
transactions with primarily non-financing purposes) of the Corporation directly
or pursuant to a stock option plan or restricted stock plan approved by the
Board of Directors of the Corporation or (ii) CyNet Holdings, LLC pursuant to
the Subscription Agreement, dated July 22, 1998, as amended on January 3, 2000,
between the Corporation and CyNet Holdings, LLC (the "Subscription Agreement");
(C) shares of Class A Common Stock issuable
or issued in a firm commitment underwritten public offering;
(D) shares of Class A Common Stock issuable
or issued upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, or Series D Preferred Stock or as dividends or distributions on the
Series D Preferred Stock;
(E) the issuance of securities in connection
with a bona fide business acquisition of or by the Company, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise;
(F) the issuance of stock, warrants or other
securities or rights to persons or entities with which the Corporation has
business relationships, provided such issuances are for other than primarily
equity financing purposes and are approved by the Board of Directors;
(G) the issuance of shares of Class A Common
Stock solely in exchange for an equal number of shares of outstanding Class B
Common Stock; or
(H) the issuance of shares of Class A Common
Stock upon conversion of the Corporation's Series A Eight Percent (8%)
Convertible Notes Due January 31, 2002.
(e) If the Corporation shall take a record of the holders of its Class
A Common Stock for the purpose of entitling them to receive a dividend or other
distribution, and shall thereafter and before the distribution to stockholders
thereof legally abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment in the conversion rate then in
effect shall be required by reason of the taking of such record.
(f) Upon any change in the conversion rate, then, and in each such
case, the Corporation shall within a reasonable period (not to exceed 45 days)
following any of the foregoing transactions deliver to each registered holder of
Series D Preferred Stock a certificate, signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Corporation, setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment was
calculated and specifying the change in the number of
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<PAGE>
shares of Class A Common Stock to be received by a holder of one share of
Series D Preferred Stock then in effect following such adjustment.
(g) In case of (x) any capital reorganization or reclassification or
other change of outstanding shares of Class A Common Stock (other than a change
in par value, or from par value to no par value, or from no par value to par
value), (y) any merger or consolidation of the Corporation with or into another
Person (other than a merger or consolidation in which the Corporation is the
resulting or surviving Person and which does not result in any reclassification
or change of outstanding Class A Common Stock) or (z) any sale or other
disposition to another Person of all or substantially all of the assets of the
Corporation (any of the foregoing, a "Transaction"), the Corporation, or such
successor or purchasing Person, as the case may be, shall execute and deliver to
each holder of Series D Preferred Stock at least fifteen (15) Business Days
prior to effecting any of the foregoing Transactions a certificate that the
holder of each share of Series D Preferred Stock then outstanding shall have the
right thereafter to convert such share of Series D Preferred Stock into the kind
and amount of shares of stock or other securities (of the Corporation or another
issuer) or property or cash receivable upon such Transaction by a holder of the
number of shares of Class A Common Stock into which such share of Series D
Preferred Stock could have been converted immediately prior to such Transaction.
Such certificate shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
7. If, in the case of any such Transaction, the stock, other securities, cash or
property receivable thereupon by a holder of Class A Common Stock includes
shares of stock or other securities of a Person other than the successor or
purchasing Person and other than the Corporation, which controls or is
controlled by the successor or purchasing Person or which, in connection with
such Transaction, issues stock, securities, other property or cash to holders of
Class A Common Stock, then such certificate also shall be executed by such
Person, and such Person shall, in such certificate, specifically acknowledge the
obligations of such successor or purchasing Person and acknowledge its
obligations to issue such stock, securities, other property or cash to the
holders of Series D Preferred Stock upon conversion of the shares of Series D
Preferred Stock as provided above. The provisions of this Section 7(g) and any
equivalent thereof in any such certificate similarly shall apply to successive
Transactions.
(h) In case at any time or from time to time:
(w) the Corporation shall declare a dividend (or any other
distribution) on its shares of Class A Common Stock;
(x) the Corporation shall authorize the granting to the
holders of its Class A Common Stock of rights or warrants to subscribe for or
purchase any shares of stock of any class or of any other rights or warrants
other than as issued to the holder of the Series D Preferred Stock;
(y) there shall be any reorganization or reclassification of
the Class A Common Stock; or
(z) there shall occur a Liquidation, merger or sale of assets
of the Corporation;
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<PAGE>
then the Corporation shall mail to each holder of shares of Series D Preferred
Stock at such holder's address as it appears on the transfer books of the
Corporation, as promptly as possible but in any event at least ten (10) days
prior to the applicable date hereinafter specified, a notice stating (A) the
date on which a record is to be taken for the purpose of such dividend,
distribution or rights or warrants or, if a record is not to be taken, the date
as of which the holders of Class A Common Stock of record to be entitled to such
dividend, distribution or rights are to be determined, or (B) the date on which
such reclassification or Liquidation, merger or sale of assets is expected to
become effective; provided that in the case of any event to which Section 7(g)
applies, the Corporation shall give at least ten (10) Business Days' prior
written notice as aforesaid. Such notice also shall specify the date as of which
it is expected that holders of Class A Common Stock of record shall be entitled
to exchange their Class A Common Stock for shares of stock or other securities
or property or cash deliverable upon such reclassification or Liquidation, sale
of assets or merger.
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<PAGE>
(i) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series D Preferred Stock, such number of its
authorized but unissued shares of Class A Common Stock as will from time to time
be sufficient to permit the conversion of all outstanding shares of Series D
Preferred Stock, and shall take all action required to increase the authorized
number of shares of Class A Common Stock if at any time there shall be
insufficient authorized but unissued shares of Class A Common Stock to permit
such reservation or to permit the conversion of all outstanding shares of Series
D Preferred Stock.
(j) The issuance or delivery of certificates for Class A Common Stock
upon the conversion of shares of Series D Preferred Stock shall be made without
charge to the converting holder of shares of Series D Preferred Stock for such
certificates or for any tax in respect of the issuance or delivery of such
certificates or the securities represented thereby, and such certificates shall
be issued or delivered in the respective names of, or (subject to compliance
with the applicable provisions of federal and state securities laws) in such
names as may be directed by, the holders of the shares of Series D Preferred
Stock converted; PROVIDED, HOWEVER, that the Corporation shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate in a name other than that of the
holder of the shares of Series D Preferred Stock converted, and the Corporation
shall not be required to issue or deliver such certificate unless or until the
Person or Persons requesting the issuance or delivery thereof shall have paid to
the Corporation the amount of such tax or shall have established to the
reasonable satisfaction of the Corporation that such tax has been paid.
8. CERTAIN REMEDIES. Any registered holder of Series D Preferred Stock
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Statement of Designations and to enforce specifically the
terms and provisions of this Statement of Designations in any court of the
United States or any state thereof having jurisdiction, this being in addition
to any other remedy to which such holder may be entitled at law or in equity.
9. BUSINESS DAY. If any payment shall be required by the terms hereof
to be made on a day that is not a Business Day, such payment shall be made on
the immediately succeeding Business Day.
10. DEFINITIONS. As used in this Statement of Designations, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"Affiliate" shall mean, with respect to any Person, any other Person
who is an "affiliate" as defined in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act.
"Articles of Incorporation" shall mean the Articles of Incorporation of
the Corporation as filed with the Secretary of State of the State of Texas.
"Board of Directors" means the Board of Directors of the Corporation.
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"Business Day" means any day except a Saturday, a Sunday, or other day
on which commercial banks in the State of Texas are authorized or required by
law or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting or non-voting) of, such Person's capital stock and any and
all rights, warrants or options exchangeable for or convertible into such
capital stock (but excluding any debt security that is exchangeable for or
convertible into such capital stock).
"Commission" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"Class A Common Stock" shall have the meaning ascribed to it in Section
2 hereof.
"Corporation" shall have the meaning ascribed to it in the first
paragraph of this Resolution.
"Exchange Act" means the Securities Exchange Act of 1934, and the rules
and regulations of the Commission promulgated thereunder.
"Junior Stock" shall have the meaning ascribed to it in Section 2 hereof.
"Liquidation" shall mean the voluntary or involuntary liquidation under
applicable bankruptcy or reorganization legislation, dissolution or winding up
of the Corporation. For purposes of Section 4, "Liquidation" shall be deemed to
be occasioned by, or to include (unless the holders of at least a majority of
the them outstanding shares of Series D Preferred Stock shall determine
otherwise), (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer of fifty percent (50%) or more of the outstanding voting power of the
Corporation; or (B) a sale of all or substantially all of the assets of the
Corporation.
"Liquidation Amount" shall have the meaning ascribed to it in Section
4(a) hereof.
"Liquidation Preference" shall have the meaning ascribed to it in
Section 4(a) hereof.
"Person" means any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, governmental body or other entity of any kind.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Series D Preferred Stock" shall have the meaning ascribed to it in
Section 1 hereof.
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<PAGE>
"Statement of Designations" shall mean this statement of the Powers,
Designations, Preferences and Rights of the Series D Redeemable Convertible
Preferred Stock, no par value, adopted by the Board of Directors and filed with
the Secretary of State of State of Texas.
"Transaction" shall have the meaning ascribed to it in Section 7(g) hereof.
IN WITNESS WHEREOF, the undersigned authorized officer of the Company
has executed and subscribed this statement and does affirm the foregoing as true
this 3rd day of February, 2000.
CYNET, INC.
By: /s/ Bernard B. Beale
------------------------------------
Bernard B. Beale, Vice President
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<PAGE>
SECOND AMENDMENT
TO
SUBSCRIPTION AGREEMENT
This Second Amendment to Subscription Agreement ("Second Amendment") is
made as of January 12, 2000, by and between CYNET, Inc., a Texas corporation
(the "Company") and Cynet Holdings, LLC, a Texas limited liability company
("Subscriber").
WHEREAS, the undersigned parties have entered into that certain
Subscription Agreement dated as of July 22, 1998 (the "Subscription Agreement"),
providing, among other things, for the Subscriber's agreement to provide the
Company up to $10,000,000 of equity capital in exchange for shares of the
Company's Class A Common Stock, which Agreement was amended July 31, 1999
extending the expiration date to December 31, 1999 and allowing the Company to
issue Class B Common Stock to the extent that Class A Common Stock is not
available for issuance; and
WHEREAS, the parties desire to amend the Subscription Agreement as set
forth below.
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Extension of Deadline for Installments. Section 1(a) is amended to
provide that the date on which all outstanding installments for the
subscription for the shares are due and payable is June 30, 2000, in
lieu of December 31, 1999.
2. Increase of Purchase Price. Section 1 is further amended to provide
that the purchase price per share is increased from $1.00 to $1.51 per
share for each share Cynet Holdings, LLC purchases after December 31,
1999 and prior to the expiration of this Subscription Agreement.
3. Miscellaneous.
(a) This Second Amendment is irrevocable, and may not be amended,
modified or supplemented except by written instrument executed
by the parties hereto.
(b) This Second Amendment shall inure to the benefit of the
parties hereto, their respective successors and assigns.
(c) This First Amendment shall be governed by and construed in
accordance with the laws of the State of Texas.
(d) Any capitalized term not otherwise defined herein shall have
the meaning given to it in the Subscription Agreement.
<PAGE>
(e) Except as expressly amended by this Amendment, the terms,
provisions and conditions of the Subscription Agreement, as so
amended, shall remain in full force and effect and is hereby
confirmed and ratified.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed effective as of the date of first above written.
SUBSCRIBER:
CYNET HOLDINGS, LLC
By: /s/ Vincent W. Beale, Sr.
-------------------------------------
Vincent W. Beale, Sr., President
THE COMPANY:
CYNET, INC.
By: /s/ Samuel C. Beale
-------------------------------------
Samuel C. Beale, Vice President
And General Counsel
2
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is made as of
January 31, 2000, by and between CYNET, Inc., a corporation organized under the
laws of the State of Texas, U.S.A., with headquarters located at 12777 Jones
Road, Suite 400, Houston, Texas 77070 (the "Company") and the Augustine Fund,
L.P., an Illinois limited partnership with its headquarters at 141 West Jackson
Boulevard, Suite 2181, Chicago, Illinois 60604 (the "Buyer").
RECITALS
A. The Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act") and Section 4(2) under the 1933 Act;
B. The Buyer desires to purchase from the Company, and the Company
desires to sell to the Buyer, for the amounts and upon the terms and conditions
stated in this Agreement, in a closing (the "Closing") as herein described,
certain of the Company's convertible notes as listed and described in Recital
B(i) immediately below, and certain warrants as listed and described in Recital
B(ii) below.
(i) At the Closing (the "Closing"), the Company's Series
A Eight Percent (8%) Convertible Notes, the form of
which is attached hereto as Exhibit A (the "Notes"),
which may be converted into Class A voting common
stock of the Company, no par value per share ("Common
Stock"), upon the terms and conditions hereof and
upon the terms and conditions of the Notes. The
purchase price for the Notes sold pursuant to this
Agreement shall be as stated in Section 1(a) below.
The total aggregate face amount of the Notes to be
issued and sold by the Company at the Closing is One
Million Six Hundred Thousand and no/100 United States
Dollars ($1,600,000.00), all in accordance with the
terms of this Agreement and of the Notes.
(ii) At the Closing, as additional consideration for
Buyer's purchase of the Notes, a warrant (the
"Warrants") to purchase 160,000 shares of Common
Stock at a purchase price per share equal to one
hundred twenty percent (120%) of the average of the
closing bid prices for the Common Stock during the
five (5) trading days prior to the Closing Date
(defined below), which Warrants must be exercised if
at all within three (3) years after the date of
issuance. The Warrants shall be substantially in the
form attached hereto as Exhibit B.
The Common Stock into which the Notes may (in accordance with their
terms) be convertible shall be collectively referred to herein as the
"Conversion Shares." Certain shares of Common Stock may (at the Company's option
as described in the Notes) be issued to the Buyer in payment of interest (the
"Interest Shares"). The Common Stock received upon exercise of the
<PAGE>
Warrants shall be referred to as the "Warrant Shares." The Notes, the
Conversion Shares, the Interest Shares (if any), the Warrants and the Warrant
Shares may be collectively referred to herein as the "Securities."
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
(the "Registration Rights Agreement") substantially in the form of Exhibit C
attached hereto pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the parties, the Company and the Buyer hereby
agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
a. PURCHASE. The Buyer hereby agrees to purchase from the Company, and
the Company agrees to sell to the Buyer, $1,600,000.00 in aggregate principal
amount of Notes at the Closing. The purchase price (the "Purchase Price") for
the Notes purchased at the Closing shall be $1,600,000.00.
b. THE CLOSING. The date of the Closing (the "Closing Date") shall be
January 31, 2000. The Purchase Price for the Notes being purchased at the
Closing shall be delivered to the Escrow Agent (as defined in the Escrow
Agreement substantially in the form of Exhibit D attached hereto (the "Escrow
Agreement")) on behalf of the Company on or before the Closing Date. On or
before the Closing Date, the Company shall deliver the original Notes and
Warrants (or a facsimile of the signature pages thereof, with the originals to
follow via express courier within one (1) business day) being purchased at the
Closing, duly issued, authorized and executed by the authorized officers on
behalf of the Company, to the Escrow Agent (as defined in the Escrow Agreement)
on behalf of the Buyer.
c. FORM OF PAYMENT. The Buyer shall pay the Purchase Price for the
Securities purchased at the Closing by wire transfer of immediately available
funds in United States Dollars, to be deposited into the Escrow Account as
defined in the Escrow Agreement, against delivery to the Escrow Agent of duly
executed Notes and Warrants being purchased by the Buyer hereunder at such
Closing. The Escrow Agent shall be responsible for delivery of the Purchase
Price to the Company and the Notes and Warrants to the Buyer in accordance with
the terms of the Escrow Agreement and with the instructions of the said parties.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
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The Buyer understands, agrees with, and represents and warrants to the
Company with respect to its purchase hereunder, that:
a. INVESTMENT PURPOSES; COMPLIANCE WITH 1933 ACT. The Buyer is
purchasing the Securities for its own account for investment only and not with a
view towards, or in connection with, the public sale or distribution thereof,
except pursuant to sales registered under or exempt from the 1933 Act and
applicable state securities laws. The Buyer is not purchasing the Securities for
the purpose of covering short sale positions in the Common Stock established on
or prior to the Closing Date. The Buyer agrees to offer, sell or otherwise
transfer the Securities only (i) in accordance with the terms of this Agreement,
the Notes and the Warrants, as applicable, and (ii) pursuant to registration
under the 1933 Act or to an exemption from registration under the 1933 Act and
any other applicable securities laws. The Buyer does not by its representations
contained in this Section 2(a) agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time pursuant to a registration statement or in accordance with an exemption
from registration under the 1933 Act, in all cases in accordance with applicable
state and federal securities laws. The Buyer understands that it shall be a
condition to the issuance of the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) that the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) be and are subject to the representations set forth in
this Section 2(a).
b. ACCREDITED INVESTOR STATUS. The Buyer is an "accredited investor" as
that term is defined in Rule 501 (a) of Regulation D. The Buyer has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of an investment made pursuant to this
Agreement. The Buyer is aware that it may be required to bear the economic risk
of an investment made pursuant to this Agreement for an indefinite period of
time, and is able to bear such risk for an indefinite period.
c. RELIANCE ON EXEMPTIONS. The Buyer understands the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of the applicable United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties,
acknowledgments, understandings, agreements and covenants of the Buyer set forth
herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.
d. INFORMATION. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities that have
been requested by the Buyer. The Buyer and its advisors, if any, have been
afforded the opportunity to ask all such questions of the Company as they have
in their discretion deemed advisable. The Buyer understands that its investment
in the Securities involves a high degree of risk. The Buyer has sought such
accounting, legal and tax advice as it has considered necessary to an informed
investment decision with respect to the investment made pursuant to this
Agreement.
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e. NO GOVERNMENT REVIEW. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
approved or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities, nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. TRANSFER OR RESALE. The Buyer understands that: (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the 1933 Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless either (a)
subsequently registered thereunder or (b) the Buyer shall have delivered to the
Company an opinion by counsel reasonably satisfactory to the Company, in form,
scope and substance reasonably satisfactory to the Company, to the effect that
the securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, (ii) any sale of
such securities made in reliance on Rule 144 (as hereafter defined) may be made
only in accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of such securities under circumstances in which the
seller (or the person though whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder and applicable state securities laws, and (iii) neither the
Company nor any other person is under any obligation to register such securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to
this Agreement or the Registration Rights Agreement).
g. LEGEND. The Buyer understands that the Notes, the Warrants, and
until such time as the Conversion Shares, the Warrant Shares and the Interest
Shares (if any) (collectively, the "Registrable Securities"), have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement or otherwise may be sold by the Buyer pursuant to Rule 144 (as
amended, or any applicable rule which operates to replace said Rule) promulgated
under the 1933 Act ("Rule 144"), the stock certificates representing the
Registrable Securities will bear a restrictive legend (the "Legend") in
substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
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The Legend shall be removed and the Company will issue certificates
without the Legend to the holder of the applicable Notes or any Registrable
Securities upon which the Legend is stamped, in accordance with Section 5(b).
h. AUTHORIZATION; ENFORCEMENT. This Agreement, the Registration Rights
Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered by the Buyer and are each and collectively valid and
binding agreements of the Buyer enforceable in accordance with their terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement of
creditors' rights generally.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company understands, agrees with, and represents and warrants to
the Buyer that:
a. ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized and existing in good standing under the laws of the jurisdiction in
which it is incorporated, except as would not have a Material Adverse Effect (as
defined below), and has the requisite corporate power to own its properties and
to carry on its business as now being conducted. The Company is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary and where the failure so to qualify would have a
Material Adverse Effect. "Material Adverse Effect" means any material adverse
effect on the operations, properties or financial condition of the Company taken
as a whole. The Common Stock is eligible to trade and is listed for trading on
the OTC BULLETIN BOARD MARKET. The Company has received no notice, either
written or oral, with respect to the continued eligibility of the Common Stock
for such listing, and the Company has maintained all requirements for the
continuation of such listing, and the Company does not reasonably anticipate
that the Common Stock will be delisted from the OTC BULLETIN BOARD MARKET for
the foreseeable future. The Company has complied or will timely comply with all
requirements of the National Association of Securities Dealers and the OTC
BULLETIN BOARD MARKET with respect to the issuance of the Securities.
b. AUTHORIZATION; ENFORCEMENT. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the Escrow Agreement, to issue and sell the
Notes and the Registrable Securities in accordance with the terms hereof, and to
perform its obligations under the Notes in accordance with the requirements of
the same, (ii) the execution, delivery and performance of this Agreement, the
Notes, the Warrants, the Registration Rights Agreement and the Escrow Agreement
by the Company and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board of Directors,
or its stockholders is required, (iii) this Agreement, the Registration Rights
Agreement, the Escrow Agreement and, on the Closing Date, the Notes and Warrants
sold at the Closing, have been duly and validly authorized, executed and
delivered by the Company, and (iv) this Agreement, the Notes (when issued), the
Warrants (when issued), the Registration Rights
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Agreement and the Escrow Agreement constitute the valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting, generally, the enforcement of
creditors' rights and remedies or by other equitable principles of general
application. The Company (and its legal counsel) has examined this Agreement
and is satisfied in its sole discretion that this Agreement and the
accompanying Exhibits, Schedules and the Addenda, if any, are in accordance
with Regulation D and the 1933 Act and are effective to accomplish the
purposes set forth herein and therein.
c. CAPITALIZATION. As of December 1, 1999, the authorized Class A
common stock of the Company consists of 40,000,000 shares of Common Stock of
which 26,665,000 shares were issued and outstanding. There are 116,000 shares of
preferred stock that are convertible on a "one for one" basis into Common Stock.
All of such outstanding shares have been validly issued and are fully paid and
nonassessable. No shares of Common Stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances. Except for the
above-referenced preferred stock and as disclosed in Schedule 3(c) (attached if
applicable), as of the effective date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or arrangements by which the Company or any of its subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its subsidiaries, (ii) there are no outstanding debt securities except
those issued or to be issued to Houston Equal Opportunity Fund, LP ("HEOF" whose
general partner is Enron Economic Development Corporation) in a transaction
parallel to Buyer's transaction and whose terms are pari passu or junior to
those of the Buyer, and (iii) there are no agreements or arrangements under
which the Company or any of its subsidiaries is obligated to register the sale
of any of its or their securities under the 1933 Act (except as provided herein,
in Schedule 3 and in the Registration Rights Agreement). If requested by the
Buyer, the Company has furnished to the Buyer, and the Buyer acknowledges
receipt of same by its signature hereafter, true and correct copies of the
Company's Articles of Incorporation, as amended, as in effect on the date hereof
("Articles of Incorporation"), and the Company's Bylaws, as in effect on the
date hereof (the "Bylaws").
d. ISSUANCE OF SECURITIES. The Registrable Securities are all duly
authorized and reserved for issuance, and in all cases upon issuance shall be
validly issued, fully paid and non-assessable, free from all taxes, liens and
charges with respect to the issue thereof, and will not be subject to preemptive
rights or other similar rights of stockholders of the Company.
e. ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF THE SECURITIES. The
Company acknowledges and agrees that the Buyer is not acting as financial
advisor to or fiduciary of the Company (or in any similar capacity with respect
to this Agreement or the transactions contemplated hereby), that this Agreement
and the transactions contemplated hereby, and the relationship between the Buyer
and the Company, are and will be considered "arms-length" notwithstanding any
other or prior agreements or nexus between the Buyer and the Company, whether or
not disclosed, and that any statement made by the Buyer, or any of its
representatives or agents, in connection with this
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Agreement and the transactions contemplated hereby is not advice or a
recommendation, is merely incidental to the Buyer's purchase of the
Securities and has not been relied upon in any way by the Company, its
officers or directors. The Company further represents to the Buyer that the
Company's decision to enter into this Agreement and the transactions
contemplated hereby have been based solely upon an independent evaluation by
the Company, its officers and directors.
f. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances which would prevent the parties hereto from
consummating the transactions contemplated hereby pursuant to an exemption from
registration under the 1933 Act and specifically in accordance with the
provisions of Regulation D. The transactions contemplated hereby are exempt from
the registration requirements of the 1933 Act, assuming the accuracy of the
representations and warranties contained herein of the Buyer.
g. NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Articles of
Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Except as set forth in Schedule 3(g)
(attached if applicable), neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or other organizational documents,
and neither the Company nor any of its/subsidiaries is in default (and no event
has occurred which, with notice or lapse of time or both, would put the Company
or any of its subsidiaries in default) under, nor has there occurred any event
giving others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, except
for possible defaults or rights as would not, in the aggregate or individually,
have a Material Adverse Effect. The business of the Company and its subsidiaries
is not being conducted, and shall not be conducted so long as the Buyer owns any
of the Securities, in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations which neither singly or in
the aggregate would have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws (any of which exceptions are set forth in
Schedule 3(g)), the Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement, the Notes, the Warrants, the Registration Rights Agreement
or the Escrow Agreement in accordance with the terms hereof and thereof, or to
perform its
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obligations with respect to the Notes exactly as described in the Notes (once
issued), and with respect to the Warrants exactly as described in the
Warrants (once issued).
h. SEC DOCUMENTS; FINANCIAL STATEMENTS. Except as disclosed on Schedule
3(h) hereof, since at least September 30, 1999, the Company has timely filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the
foregoing filed prior to the date hereof and all exhibits included therein
and financial statements and schedules thereto and documents (other than
exhibits) incorporated by reference therein, being hereinafter referred to as
the "SEC Documents"). The Company has delivered to the Buyer as requested by
the Buyer true and complete copies of the SEC Documents, except for such
exhibits, schedules and incorporated documents. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of
the 1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto, or (ii) in the
case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in
all material respects the financial position of the Company as of the dates
thereof and the results of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyer (including the information referred to in Section 2(d) of this
Agreement) contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made, not misleading.
Except as set forth in the financial statements of the Company included in
the SEC Documents, the Company has no liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to the date of such financial statements and (ii) obligations
under contracts and commitments incurred in the ordinary course of business
and not required under generally accepted accounting principles to be
reflected in such financial statements, in each case of clause (i) and (ii)
next above which, individually or in the aggregate, are not material to the
financial condition, business, operations, properties, operating results or
prospects of the Company. The SEC Documents contain a complete and accurate
list of all written and oral contracts, agreements, leases or other
instruments to which the Company or any subsidiary is a party or by which the
Company or any subsidiary is subject which are required by the rules and
regulations promulgated by the SEC to be so listed (each a "Contract"). None
of the Company, its subsidiaries or, to the best of the Company's knowledge,
any of the other parties thereto, is in breach or violation of any Contract,
which breach
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<PAGE>
or violation would, or with the lapse of time, the giving of notice, or both,
have a Material Adverse Effect.
i. ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC
Documents, since at least January 1, 1999, there has been no material adverse
change and no material adverse development in the business, properties,
operation, financial condition, results of operations or prospects of the
Company. The Company has not taken any steps, and does not currently have any
reasonable expectation of taking any steps, to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge that its creditors intend
to initiate involuntary bankruptcy proceedings. The Company shall, at least
until Buyer no longer holds any of the Securities, maintain its corporate
existence in good standing and shall pay all taxes when due except for taxes it
reasonably disputes.
j. ABSENCE OF LITIGATION. Except as set forth in Schedule 3(j)
(attached if applicable), there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to the
knowledge of the Company, threatened against or affecting the Company, wherein
an unfavorable decision, ruling or finding would have a Material Adverse Effect
or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of the documents contemplated herein.
k. FOREIGN CORRUPT PRACTICES. Neither the Company nor any of its
subsidiaries, nor any officer, director or other person acting on behalf of the
Company or any subsidiary has, in the course of his actions for or on behalf of
the Company, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity, made any
direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made
any bribe, rebate, payoff, influence payment, kickback or other unlawful payment
to any foreign or domestic government official or employee.
l. BROKERS; NO GENERAL SOLICITATION. The Company has taken no action
that would give rise to any claim by any person for brokerage commissions,
finder's fees or similar payments relating to this Agreement and the
transactions contemplated hereby, other than to Delano Group Securities and to
Wall Street Concepts. The Company and the Buyer both acknowledge that no other
broker or finder was involved with respect to the transactions contemplated
hereby, other than Delano Group Securities and Wall Street Concepts. Neither the
Company nor any distributor participating on the Company's behalf in the
transactions contemplated hereby nor any person acting for the Company, or any
such distributor, has conducted any "general solicitation," as described in Rule
502(c) under Regulation D, with respect to the Securities being offered hereby.
The Company has agreed to compensate Delano Group Securities by delivering to it
10,000 shares of Common Stock, which shares shall be delivered to the Escrow
Agent within five (5) business days after the Closing Date, and which shares
shall be included for registration along with the securities subject to the
Registration Rights Agreement. The Company has agreed to compensate Wall Street
Concepts with
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a cash payment or payments to be made separate from the closing of the
transactions contemplated herein.
m. ACKNOWLEDGMENT OF DILUTION. The number of Conversion Shares issuable
upon conversion of the Notes may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the securities being sold hereunder
and recognize they have a potential dilutive effect. The board of directors of
the Company has concluded in its good faith business judgment that such issuance
is in the best interests of the Company. The Company acknowledges that its
obligation to issue Conversion Shares upon conversion of the Notes is binding
upon it and enforceable regardless of the dilution that such issuance may have
on the ownership interests of other stockholders.
n. ELIGIBILITY TO FILE REGISTRATION STATEMENT. The Company is currently
eligible to file a registration statement with the SEC either on Form SB-1 or
Form SB-2 under the 1933 Act.
o. (Intentionally Omitted.)
p. NON-DISCLOSURE OF NON-PUBLIC INFORMATION. (a) The Company shall in
no event disclose non-public information to the Buyer, advisors to or
representatives of the Buyer unless prior to such disclosure of information the
Company marks such information as "non-public information - confidential" and
provides the Buyer, such advisors and representatives with the opportunity to
accept or refuse to accept such non-public information for review. The Company
may, as a condition to disclosing any non-public information hereunder, require
the Buyer, its advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Buyer.
(b) Nothing herein shall require the Company to disclose
non-public information to the Buyer, its advisors or representatives, and the
Company represents that it does not disseminate non-public information to
investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts; provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Buyer and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting non-public information (whether or not requested of the
Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
registration statement to be filed pursuant to the Registration Rights
Agreement, would cause such prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing herein shall be construed to mean that such persons or
entities other than the Buyer (without the written consent of the Buyer prior to
disclosure of such information) may not obtain non-public information in the
course of conducting due diligence in accordance with the terms of this
Agreement and nothing herein shall
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prevent any such persons or entities from notifying the Company of their
opinion that, based upon such due diligence by such persons or entities, that
the registration statement contains an untrue statement of a material fact or
omits a material fact required to be stated in such registration statement or
necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading.
4. COVENANTS.
a. BEST EFFORTS. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. SECURITIES LAWS. The Company agrees to timely file a Form D (or
equivalent form required by applicable state law) with respect to the Securities
if and as required under Regulation D and applicable state securities laws and
to provide a copy thereof to the Buyer promptly after such filing. The Company
shall, on or before the Closing Date, take such action as is necessary to sell
the Securities being sold to the Buyer on each such date under applicable
securities laws of the United States and the relevant state(s), and shall if
specifically so requested provide evidence of any such action so taken to the
Buyer on or prior to the Closing Date.
c. REPORTING STATUS. So long as the Buyer beneficially owns any of the
Securities, the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations hereunder would permit such termination.
d. USE OF PROCEEDS. The Company will use the proceeds from the sale of
the Securities for the payment of production expenses, securities issuance and
legal expenses and general operational expenses.
e. FINANCIAL INFORMATION. Until such time as the Buyer no longer
beneficially owns Notes and Warrants, or the Common Stock into which the Notes
are convertible and/or the Warrants are exercisable, the Company agrees to send
the following reports to the Buyer: (i) after filing with the SEC, a copy of
each of its Annual Reports, its quarterly Reports, and any reports filed on Form
8-K; and (ii) as soon as practicable after release thereof, copies of all press
releases issued by the Company or any of its subsidiaries.
f. RESERVATION OF SHARES. The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the issuance of all of the Conversion
Shares, the Warrant Shares and the Interest Shares (if any). Prior to complete
conversion of the Notes and exercise of the Warrants, the Company shall not
reduce the number of shares of Common Stock reserved for issuance hereunder
without the written consent of the Buyer except for a reduction proportionate to
a reverse stock split effected for a business purpose other than affecting the
requirements of this Section, which reverse stock split affects all shares of
Common Stock equally.
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g. LISTING. Upon the Closing, the Company shall promptly secure the
listing of the Common Stock underlying the Notes and the Warrants upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of shares of Registrable Securities from time to time
issued under the terms of this Agreement and the Registration Rights Agreement.
The Company shall at all times comply in all respects with the Company's
reporting, filing and other obligations under the by-laws or rules of the
National Association of Securities Dealers and the OTC BULLETIN BOARD MARKET (or
such other national securities exchange or market on which the Common Stock may
then be listed, as applicable).
h. PROSPECTUS DELIVERY REQUIREMENT. The Buyer understands that the 1933
Act requires delivery of a prospectus relating to the Common Stock in connection
with any sale thereof pursuant to a registration statement under the 1933 Act
covering any resale by the Buyer of the Common Stock being sold, and the Buyer
shall comply with any applicable prospectus delivery requirements of the 1933
Act in connection with any such sale. The Company shall have the unequivocal
right to rely upon the Buyer's representation contained in this Section 4(h),
and thus, with respect to any resales by the Buyer pursuant to a registration
statement of Common Stock issued to the Buyer upon conversion of the Notes (or
in payment of interest on the Notes) or upon exercise of the Warrants, such
Common Stock shall not contain a restrictive legend of any kind.
i. INTENTIONAL ACTS OR OMISSIONS. Neither party shall intentionally
perform any act that if performed, or omit to perform any act which if omitted
to be performed, would prevent or excuse the performance of this Agreement or
any of the transactions contemplated hereby.
j. NO SHORTING. As a material inducement for the Company to enter into
this Agreement, the Buyer represents that it has not as of the date hereof, and
covenants on behalf of itself and its affiliates that neither Buyer nor any
affiliate of Buyer will at any time in which the Buyer or any affiliate of the
Buyer beneficially owns any of the Securities, engage in any short sales of, or
hedging or arbitrage transactions with respect to, the Common Stock, or sell
"put" options or similar instruments with respect to the Common Stock. The
Company acknowledges that a sale of Conversion Shares (or Warrant Shares) on the
date a conversion of the Notes (or exercise notice for the Warrants) is made,
even if such sale is made prior to delivery of the notice of conversion with
respect to such Conversion Shares (or exercise notice with respect to such
Warrant Shares), is not a "short sale" for purposes of this Section 4(j).
k. EXPENSES. The Company agrees to pay to or at the direction of the
Buyer the sum of $10,000.00 at the Closing as reimbursement for the attorney's
fees and expenses of the Buyer incurred by it in connection with the
transactions contemplated by this Agreement.
l. LOWEST CLOSING BID. The Buyer represents that it has not as of the
date hereof, and covenants on behalf of itself, its affiliates and/or agents
that neither Buyer, any affiliate, person or
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entity acting directly or indirectly in Buyer's behalf will at any time from
the Closing Date until after the date (in this Section 4(l), the "Final
Conversion Date") of the conversion into Common Stock of the last of the
Notes eligible to be sold to Buyer under this Agreement, will make or has
made a bid or purchase of Common Stock in an amount equal to the closing bid
on the day of such purchase, or will sell Common Stock at the bid price, in
either case, for the purpose of lowering the closing bid price for the Common
Stock in order to obtain a better conversion price. In the event that Buyer,
Buyer's affiliate, or a person or entity acting directly or indirectly on
Buyer's behalf makes a purchase of Common Stock during the interval between
the Closing Date and the Final Conversion Date, or sells Common Stock at the
lowest bid price for the Common Stock for that trading day, unless the low
bid price is also the high bid price for the Common Stock for that day, then
on the subsequent trading day for the Common Stock, the Buyer may not sell
more than five percent (5%) of the trading volume for the Common Stock on
such subsequent trading day.
m. RESTRICTION ON BELOW MARKET ISSUANCE OF SECURITIES. Until the date
which is the earlier of nine (9) months from the Closing Date or the date the
Notes have been paid or converted in full, the Company shall not issue or agree
to issue {other than (i) to the Buyer pursuant to the transactions contemplated
herein, (ii) pursuant to any employee stock option plan or employee stock
purchase plan of the Company established during the term of this restriction for
a legitimate business purpose and not to avoid the restrictions imposed in this
Section 4(m), (iii) pursuant to any existing security, option, warrant, scrip,
call or commitment or right in each case as disclosed on Schedule 3(c) hereof,
or (iv) with the consent of the Buyer, not to be unreasonably withheld} any
equity securities of the Company (or any security convertible into or
exercisable or exchangeable, directly or indirectly, for equity securities of
the Company) or debt securities of the Company if such securities are issued at
a price (or provide for a conversion, exercise or exchange price) which may be
less than the current market price for the Common Stock on the date of issuance
(in the case of Common Stock) or the date of conversion, exercise or exchange
(in the case of securities convertible into or exercisable or exchangeable,
directly or indirectly, for Common Stock). Except as provided with respect to
the transactions contemplated herein and in subsections (i), (ii), (iii), or
(iv) above of this Section 4(m), until such time as the Notes have been paid or
converted in full, the Company shall not grant any additional so-called
"registration rights."
5. LEGEND AND TRANSFER INSTRUCTIONS.
a. TRANSFER AGENT INSTRUCTIONS. The Company shall instruct its transfer
agent to issue certificates, registered in the name of the Buyer or its
permitted nominee, for the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) in accordance with the terms of the applicable Notes
and Warrants and in such amounts as specified from time to time by the Buyer to
the Company, upon conversion of the Notes or exercise of the Warrants (as
applicable). All such certificates shall bear the restrictive legend specified
in Section 2(g) of this Agreement only to the extent required by applicable law
and as specified in this Agreement and the Exhibits and Addenda hereto. The
Company warrants that no instruction other than such instructions referred to in
this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof in the case of the Conversion Shares, the Warrant Shares and the Interest
Shares (if any) prior to the registration of
-13-
<PAGE>
same under the 1933 Act, will be given by the Company to its transfer agent
and that the Conversion Shares, the Warrant Shares and the Interest Shares
(if any) shall otherwise be freely transferable on the books and records of
the Company as and to the extent permitted by applicable law and provided by
this Agreement, the Warrants and the Registration Rights Agreement. Nothing
in this Section shall affect in any way the Buyer's obligations and agreement
to comply with all applicable securities laws upon resale of the Conversion
Shares, the Warrant Shares and/or the Interest Shares (if any). If the Buyer
(x) provides the Company with an opinion of counsel reasonably satisfactory
to Company that registration by the Buyer of the Notes, the Warrants, the
Warrant Shares, the Conversion Shares and/or the Interest Shares (if any) is
not required under the 1933 Act, or (y) transfers Securities to an affiliate
which is an accredited investor (in accordance with the provisions of this
Agreement) or in compliance with Rule 144, then in either instance the
Company shall permit the said transfer, and if applicable promptly (and in
all events within two (2) trading days) instruct its transfer agent to issue
one or more certificates in such name and in such denominations as specified
by the Buyer.
b. REMOVAL OF LEGENDS. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (x)
the sale of such Security is registered under the 1933 Act, or (y) such holder
provides the Company with an opinion by counsel reasonably satisfactory to the
Company, that is in form, substance and scope reasonably satisfactory to the
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act or (z) such holder provides the
Company with assurances reasonably satisfactory to the Company and its counsel,
that such Security can be sold pursuant to Rule 144. The Buyer agrees that its
sale of all Securities, including those represented by a certificate(s) from
which the Legend has been removed, or which were originally issued without the
Legend, shall be made only pursuant to an effective registration statement (and
to deliver a prospectus in connection with such sale) or in compliance with an
exemption from the registration requirements of the 1933 Act. In the event the
Legend is removed from any Security or any Security is issued without the Legend
and thereafter the effectiveness of a registration statement covering the sales
of such Security is suspended or the Company determines that a supplement or
amendment thereto is required by applicable securities laws, then upon
reasonable advance notice to the holder of such Security, the Company shall be
entitled to require that the Legend be placed upon any such Security which
cannot then be sold pursuant to an effective registration statement or Rule 144
or with respect to which the opinion referred to in clause (y) next above has
not been rendered, which Legend shall be removed when such Security may be sold
pursuant to an effective registration statement or Rule 144 (or such holder
provides the opinion with respect thereto described in clause (y) next above.
c. CONVERSION OF NOTES. The Buyer shall have the right to convert the
Notes sold hereunder by delivering via facsimile an executed and completed
Notice of Conversion (as defined in the Notes) to the Company and delivering
within two (2) business days thereafter the original Notice of Conversion and
the original Note being converted (but only at such time as it is converted in
full into Common Stock) by express courier to the Company. Each date on which a
Notice of
-14-
<PAGE>
Conversion is faxed to the Company in accordance with the provisions hereof
shall be deemed a "Conversion Date." The Company will transmit the
certificates representing the shares of Common Stock issuable upon conversion
of any Notes (along with a replacement Note representing the amount of
principal of said Note not so converted, if applicable) to the Buyer via
express courier, within five (5) business days after the relevant Conversion
Date (with respect to each conversion, the "Deadline"). Time is of the
essence with respect to the requirements of the immediately preceding
sentence.
d. INJUNCTIVE RELIEF FOR BREACH. The Company acknowledges that a breach
of its obligations under Sections 5(a), 5(b) and 5(c) above will cause
irreparable harm to the Buyer by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly the Company agrees that the remedy
at law for a breach of its obligations under such Sections would be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of such Sections, the Buyer shall be entitled, in addition to all
other remedies at law or in equity, to an injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
e. LIQUIDATED DAMAGES FOR NON-DELIVERY OF CERTIFICATES. In addition to
the provisions of Section 5(d) above, the Company understands and agrees that a
delay in the issuance of the Certificates beyond the Deadline will result in
substantial economic loss and other damages to the Buyer. As partial
compensation to the Buyer for such loss, the Company agrees to pay liquidated
damages (and which the Company acknowledges is not a penalty) to the Buyer for
issuance and delivery of the Certificates after the Deadline, in accordance with
the following schedule (where "No. Business Days Late" is defined as the number
of business days beyond five (5) business days from the date of delivery by the
Buyer to the Company of a facsimile Notice of Conversion (or, if later, from the
date on which all other necessary documentation duly executed and in proper form
required for conversion of Notes as described in this Agreement, including the
original Notice of Conversion, all in accordance with this Agreement ONLY IF
such necessary documentation has not been delivered to the Company within the
two (2) business day period after the facsimile delivery to the Company of the
Notice of Conversion required in this Agreement)):
<TABLE>
<CAPTION>
NO. BUSINESS DAYS LATE LIQUIDATED DAMAGES
---------------------- ------------------
(in US$)
<C> <C>
1 $300
2 $400
3 $500
4 $600
5 $700
6 $800
7 $900
8 $1,000
9 $1,000
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
10 $1,500
11+ $1,500 + $500 for
each Business Day Late
beyond 11 days
</TABLE>
The Company shall pay the Buyer any liquidated damages incurred as
called for under this Section 5(e) by certified or cashier's check upon the
earlier of (i) issuance of the Certificates to the Buyer or (ii) each monthly
anniversary of the receipt by the Company of the Buyer's Notice of Conversion.
Nothing herein shall limit the Buyer's right to pursue actual damages for the
Company's failure to issue and deliver the Certificates to the Buyer in
accordance with the terms of this Agreement or for breach by the Company of this
Agreement.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to sell Notes and Warrants at
the Closing is subject to the satisfaction, on or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion:
a. The parties shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, and the parties shall have delivered
the respective documents or signature pages thereof (via facsimile or otherwise
as permitted in the Escrow Agreement) to the Escrow Agent.
b. The Buyer shall have delivered to the Escrow Agent on behalf of the
Company the Purchase Price for the Notes and Warrants purchased at the Closing,
by wire transfer of immediately available funds pursuant to the wiring
instructions provided by the Escrow Agent.
c. The representations and warranties of the Buyer shall be true and
correct in all material respects as of the date made and as of the Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date), and the Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer at or prior to the Closing Date.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
e. The Company's Board of Directors shall have approved this Agreement
and the related documentation referred to herein.
-16-
<PAGE>
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The obligation of the Buyer to purchase Notes and Warrants is subject
to the satisfaction, on or before the Closing Date, of each of the following
conditions, provided that these conditions are for the sole benefit of the Buyer
and may be waived by the Buyer at any time in its sole discretion:
a. The parties shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, the parties shall have delivered the
respective documents or signature pages thereof (via facsimile or otherwise as
permitted in the Escrow Agreement) to the Escrow Agent on behalf of each other.
b. The representations and warranties of the Company shall be true and
correct in all material respects as of the date made and as of Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. The Buyer may require a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be reasonably
requested by the Buyer.
c. With respect to the Closing, the Company shall have issued and have
duly executed by the authorized officers of the Company, and delivered to the
Escrow Agent on behalf of the Buyer, the Note and Warrant being sold at the
Closing (via facsimile or otherwise as required by the Escrow Agreement,
provided that any permitted facsimile of such documents shall be followed with
physical delivery to the Escrow Agent of the original instrument or security
within one (1) business day after facsimile of same to the Escrow Agent).
d. The Common Stock shall be authorized for quotation on the OTC
BULLETIN BOARD MARKET (or another national securities exchange or market) and
trading in the Common Stock on such market shall not have been suspended by the
SEC or other relevant regulatory agency.
e. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
f. The Escrow Agent shall have received on behalf of the Buyer the
opinion of Company counsel, dated as of the Closing Date, substantially in the
form attached hereto as Exhibit E.
8. GOVERNING LAW; MISCELLANEOUS.
-17-
<PAGE>
a. GOVERNING LAW. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Delaware without regard to the
principles of conflict of laws. In the event of any litigation regarding the
interpretation or application of this Agreement, the parties irrevocably consent
to jurisdiction in any of the state or federal courts located in the City of
Chicago, State of Illinois and waive their rights to object to venue in any such
court, regardless of the convenience or inconvenience thereof to any party.
Service of process in any civil action relating to or arising out of this
Agreement (including also all Exhibits or Addenda hereto) or the transaction(s)
contemplated herein may be accomplished in any manner provided by law. The
parties hereto agree that a final, non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
b. COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and signature pages from such counterparts have been delivered to the
Escrow Agent on behalf of the other party. In the event any signature page is
delivered by facsimile transmission (which the parties agree is an acceptable
form of delivery), the party using such means of delivery shall cause three (3)
additional originally executed signature pages to be physically delivered to the
Escrow Agent on behalf of the other party within one (1) business day of the
execution and delivery hereof.
c. HEADINGS; GENDER, ETC. The headings of this Agreement are for
convenience of reference and shall not form a part of, or affect the
interpretation of this Agreement. As used herein, the masculine shall refer to
the feminine and neuter, the feminine to the masculine and neuter, and the
neuter to the masculine and feminine, as the context may require. As used
herein, unless the context clearly requires otherwise, the words "herein,"
"hereunder" and "hereby," shall refer to this entire Agreement and not only to
the Section or paragraph in which such word appears. If any date specified
herein falls upon a Saturday, Sunday or public or legal holidays, the date shall
be construed to mean the next business day following such Saturday, Sunday or
public or legal holiday. For purposes of this Agreement, a "business day" is any
day other than a Saturday, Sunday or public or legal holiday.
d. SEVERABILITY. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
-18-
<PAGE>
f. NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by U. S. Mail or delivered personally or
by courier or via facsimile (if via facsimile, to be followed within three (3)
business days by an original of the notice document via U.S. Mail or courier)
and shall be effective five (5) days after being placed in the mail, if mailed,
certified or registered, return receipt requested, or upon receipt, if delivered
personally or by courier or by facsimile, in each case properly addressed to the
party to receive the same. The addresses for such communications shall be:
If to the Company: CYNET, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Telephone: 281.897.8317 ext. 332
Facsimile: 281.894.7952
Attention: Mr. Samuel Beale, General Counsel
If to the Buyer, at the address on the signature page of this Agreement. Each
party shall provide written notice to the other party of any change in address.
g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
Neither the Company nor the Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other (which
consent shall not be unreasonably withheld), and in any event any assignee of
the Buyer shall be an accredited investor (as defined in Regulation D), in the
written opinion of counsel who is reasonably satisfactory to the Company and in
form, substance and scope reasonably satisfactory to the Company.
Notwithstanding the foregoing, if applicable, any of the entities constituting
the Buyer (if greater than one (1) entity) may assign its rights hereunder to
any of its "affiliates," as that term is defined under the 1934 Act, without the
consent of the Company; provided, however, that any such assignment shall not
release such assigning entity from its obligations hereunder unless such
obligations are assumed by such affiliate and the Company has prior to such
assignment and assumption consented in writing to the same; and no such
assignment shall be made unless it is made in accordance with any applicable
securities laws of any applicable jurisdiction. Any request for an assignment
made hereunder by the Buyer shall be accompanied by a legal opinion in form,
substance and scope reasonably satisfactory to the Company, that such assignment
is proper under applicable law. Notwithstanding anything herein to the contrary,
Buyer may pledge the Securities as collateral for a bona fide loan pursuant to a
security agreement with a third party lender, and such pledge shall not be
considered an assignment in violation of this Agreement so long as it is made in
compliance with all applicable law.
h. NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
-19-
<PAGE>
i. SURVIVAL. Unless this Agreement is terminated under Section 8(1),
the representations and warranties of the Company and the Buyer contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
8 shall survive the Closing of the purchase and sale of Securities purchased and
sold hereby.
j. PUBLICITY. The Company and the Buyer shall have the right to review
before issuance by the other, any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without prior consultation with or approval of
the Buyer, to make any press release or other public disclosure with respect to
such transactions as is required by applicable law and regulations.
k. FURTHER ASSURANCE. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. TERMINATION. In the event that the Closing shall not have occurred
on or before ten (10) business days from the date hereof, this Agreement shall
terminate at the close of business on such date. Neither party may unilaterally
terminate this Agreement after the Closing for any reason other than a material
breach of this Agreement by the non- breaching party. Such termination shall not
be the sole remedy for a breach of this Agreement by the non-breaching party,
and each party shall retain all of its rights hereunder at law or in equity.
Notwithstanding anything herein to the contrary, a party whose breach of a
covenant or representation and warranty or failure to satisfy a condition
prevented the Closing shall not be entitled to terminate this Agreement.
m. REMEDIES. No provision of this Agreement providing for any specific
remedy to a party shall be construed to limit such party to the specific remedy
described, and any other remedy that would otherwise be available to such party
at law or in equity shall be so available. Nothing in this Agreement shall limit
any rights a party may have with any applicable federal or state securities laws
with respect to the transactions contemplated hereby.
IN WITNESS WHEREOF, the Buyer and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
[SIGNATURE PAGE FOLLOWS]
List of Exhibits
Exhibit A Form of Note
-20-
<PAGE>
Exhibit B Warrant to Purchase Common Stock
Exhibit C Registration Rights Agreement
Exhibit D Escrow Agreement
Exhibit E Opinion of Counsel for CYNET, Inc.
-21-
<PAGE>
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED
AS OF JANUARY 31, 2000]
COMPANY:
CYNET, INC.
By: /s/ Vincent W. Beale, Sr.
----------------------------------------------------
Mr. Vincent W. Beale, Sr., Chairman
BUYER:
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc., its General Partner
By: /s/ Thomas F. Duszynski
----------------------------------------------------
Mr. Thomas F. Duszynski, Chief Operating Officer
BUYER'S ADDRESS:
141 West Jackson Blvd.
Suite 2182
Chicago, Illinois 60604
Telephone: 312.427.5457
Telecopier: 312.427.5396
-22-
<PAGE>
SECURITIES PURCHASE AGREEMENT
Schedule 3(c)
OUTSTANDING OPTIONS TO PURCHASE COMMON STOCK:
Cynet Holdings, LLC subscription agreement disclosed in the October 18, 1999 and
December 6, 1999 Prospectuses and subsequently amended to extend the expiration
date of June 30, 2000 and raise the exercise price to $1.51 for all exercises
after December 31, 1999.
Houston Economic Opportunity Fund, LP (Enron Economic Development Corporation,
general partner) Debenture for $1,600,000 [changed from Preferred Stock after
receiving the summary of Buyer's terms] the terms of which are pari passu or
junior to Buyer's terms. In addition, their conversion of some or all of their
existing Common Stock into a class of Non-voting Preferred with conversion
rights back into Common Stock as additional condition for the $1,600,000
debenture.
OUTSTANDING WARRANTS TO PURCHASE COMMON STOCK:
Warrants to be issued to Houston Economic Opportunity Fund, LP pursuant to the
$1,600,000 transaction (if any).
All Warrants disclosed in the October 18, 1999 and December 6, 1999 Prospectuses
including warrants for 100,000 shares to be issued to Michael Silvert [see
Prospectus].
OTHER STOCK PURCHASE RIGHTS
-23-
<PAGE>
SECURITIES PURCHASE AGREEMENT
Schedule 3(g)
Registration of all the Registrable Securities under the Securities Act
of 1933, as amended, requires the filing of a registration statement with the
Securities and Exchange Commission and a declaration of effectiveness of the
registration statement by the Securities and Exchange Commission.
Houston Economic Opportunity Fund, LP Common Stock including any Common
Stock received in the conversion from Preferred Stock.
All of the shares issued to Holdings under its Subscription Agreement
as amended, all of the stock underlying warrants issued to all parties prior to
this Closing and the warrants to be issued to Michael Silvert per the October
18, 1999 and December 6, 1999 Prospectuses.
-24-
<PAGE>
EXHIBIT A (Form of Note)
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
DATE: JANUARY 31, 2000
NOTE # 01 U.S.$1,600,000.00
CYNET, INC.
SERIES A EIGHT PERCENT (8%) CONVERTIBLE PROMISSORY NOTE
DUE JANUARY 31, 2002
THIS NOTE is one of a duly authorized issue of Notes (a "Note" or the
"Notes") of CYNET, Inc., a corporation duly organized and validly existing under
the laws of the State of Texas, U.S.A. (the "Company") designated as its Series
A Eight Percent (8%) Convertible Notes Due January 31, 2002, in an aggregate
principal face value for all Notes of this series of One Million Six Hundred
Thousand and no/100 United States Dollars (US$1,600,000.00).
FOR VALUE RECEIVED, the Company promises to pay to THE AUGUSTINE FUND,
L.P., the registered holder hereof and its successors and assigns (the
"Holder"), the principal sum of One Million Six Hundred Thousand and no/100
United States Dollars ($1,600,000.00) on January 31, 2002 (the "Maturity Date"),
and to pay interest on the principal sum outstanding, at the rate of eight
percent (8%) per annum due and payable in quarterly installments in arrears, on
June 30, September 30, December 31 and March 31 of each year during the term of
this Note, with the first such payment to be made on June 30, 2000. Accrual of
interest on the outstanding principal amount, payable in cash or Common Stock
(defined hereinafter) at the Company's option, shall commence on the date hereof
and shall continue until payment in full of the outstanding principal amount has
been made or duly provided for. The interest so payable will be paid to the
person in whose name this Note (or one or more predecessor Notes) is registered
on the records of the
<PAGE>
Company regarding registration and transfers of the Note (the "Note
Register"); provided, however, that the Company's obligation to a transferee
of this Note arises only if such transfer, sale or other disposition is made
in accordance with the terms and conditions of that Securities Purchase
Agreement of even date herewith between the Company and The Augustine Fund,
L.P. (the "Securities Purchase Agreement").
The principal of, and interest on, this Note are payable in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address last appearing on
the Note Register of the Company as designated in writing by the Holder hereof
from time to time. The Company will pay the outstanding principal of and any and
all accrued and unpaid interest due upon this Note on the Maturity Date, less
any amounts required by law to be deducted or withheld, to the record Holder of
this Note as of the fifth business day (as defined in the Securities Purchase
Agreement) prior to the Maturity Date and addressed to such Holder at the last
address appearing on the Note Register. The forwarding of such funds shall
constitute a payment of outstanding principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Note to
the extent of the sum represented by such payment plus any amounts so deducted
or withheld. Except as herein provided, this Note may not be prepaid without the
prior written consent of the Holder. Interest may at the Company's option be
paid in Common Stock, with the number of shares of Common Stock to be delivered
in payment of such interest determined by taking the dollar amount of interest
being paid divided by the applicable Conversion Price (defined below).
This Note is subject to the following additional provisions:
1. NOTE EXCHANGEABLE. The Note is exchangeable commencing thirty (30)
days from the date hereof for an equal aggregate principal amount of Notes of
different authorized denominations, as requested by the Holder surrendering the
same, but not of denominations of less than Fifty Thousand United States Dollars
(US$50,000.00) without the Company's written consent. No service charge will be
made for such registration or transfer or exchange.
2. WITHHOLDING. The Company shall be entitled to withhold from all
payments of principal or interest pursuant to this Note any amounts required to
be withheld under the applicable provisions of the United States income tax or
other applicable laws at the time of such payments.
3. TRANSFER/EXCHANGE OF NOTE; REGISTERED HOLDER; OPINION OF COUNSEL;
LEGEND. This Note has been issued subject to investment representations of the
original purchaser hereof and may be transferred or exchanged only in compliance
with the Securities Act of 1933, as amended (the "1933 Act") and applicable
state securities laws. Prior to due presentment for transfer of this Note, the
Company and any agent of the Company may treat the person in whose name this
Note is duly registered on the Company's Note Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Note be overdue, and neither the Company nor any such agent
shall be affected or bound by notice to the contrary.
2
<PAGE>
The Holder understands and acknowledges by its acceptance hereof that
(i) except as provided in the Securities Purchase Agreement and in that
Registration Rights Agreement attached as Exhibit C to the Securities Purchase
Agreement (the "Registration Rights Agreement"), both such documents
incorporated herein by reference, this Note and the shares of common stock in
the Company issuable upon conversion thereof as herein provided ("Conversion
Shares") and any shares of Common Stock payable as interest hereunder have not
been and are not being registered under the 1933 Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless (a)
subsequently registered thereunder, or (b) the Holder shall have delivered to
the Company an opinion of counsel, reasonably satisfactory in form, substance
and scope to the Company, to the effect that the securities to be sold, assigned
or transferred may be sold, assigned or transferred pursuant to an exemption
from such registration; (ii) any sale of such securities made in reliance on
Rule 144 promulgated under the 1933 Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other regulation
and/or exemption under the 1933 Act or the rules and regulations of the United
States Securities and Exchange Commission (the "SEC") thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such securities under the 1933 Act or any state securities laws (other than
pursuant to the terms of the Securities Purchase Agreement and the Registration
Rights Agreement) or to comply with the terms and conditions of any exemption
thereunder.
Any Conversion Shares issued upon conversion of this Note, and if
applicable, any Common Stock issued in payment of interest as herein provided,
shall, if and only to the extent required by law, bear legends in similar form
to the legends set forth on the first page of this Note.
4. CONVERSION OF NOTE INTO COMMON STOCK.
The Holder of this Note is entitled, at its option, at any time
commencing the earlier of (i) the date on which the Registration Statement (as
defined in the Registration Rights Agreement) is declared effective by the SEC;
or (ii) the date which is one hundred twenty (120) days after the date first
written at the top of this Note, to convert all or a portion of the original
principal face amount of this Note into shares of Class A voting common stock in
the Company, no par value per share (defined herein as "Common Stock"), at a
conversion price (the "Conversion Price") for each share of Common Stock equal
to the lesser of (x) one hundred ten percent (110%) of the average of the
closing bid prices for the Common Stock for the five (5) trading days prior to
the date of this Note, or (y) a percentage (the "Applicable Percentage") of the
average of the three (3) lowest closing bid prices for the Common Stock for the
thirty (30) trading days immediately preceding the Conversion Date (as
hereinafter defined), as reported on the National Association of Securities
Dealers OTC Bulletin Board Market (or on such other national securities exchange
or market as the Common Stock may trade at such time). The Applicable Percentage
shall be equal to the following: (i) for conversions made on or before 120 days
after the date of this Note, 75%; or (ii) for conversions made 121 or more days
after the date of this Note, 75%, so long as the Registration Statement (as
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defined in the Registration Rights Agreement) has been declared effective by the
SEC and remains effective as of the date of conversion. Notwithstanding anything
herein to the contrary, if the Registration Statement is not declared effective
by the SEC within 120 days after the date of this Note (or does not remain
effective on the date of conversion if such date is more than 120 days after the
date of this Note), the Applicable Percentage shall decrease by two percent (2%)
for each thirty (30) day period (pro-rated for partial periods and rounded to
the nearest half-month) beginning on the date which is 121 days after the date
of this Note and ending on the date the Registration Statement is declared
effective by the SEC; and if the Registration Statement has not been declared
effective by the SEC within one (1) year after the date of this Note (or does
not remain effective until the Holder has converted this Note in full into
non-restricted Common Stock), the Applicable Percentage shall from the date
which is one (1) year after the date of this Note be fifty percent (50%). As an
example, and not by way of limitation, if the Registration Statement is declared
effective by the SEC 192 days after the date of this Note, then the Applicable
Percentage will be equal to seventy percent (70%) [75% less {2% X 2.5 months)].
For purposes of determining the Conversion Price as described in this Section 4,
the provisions of Section 4(l) of the Securities Purchase Agreement shall apply
(if applicable).
Any conversion of this Note shall be achieved by submitting to the
Company the fully completed form of conversion notice attached hereto as Exhibit
I (a "Notice of Conversion"), executed by the Holder of this Note evidencing
such Holder's intention to convert this Note or the specified portion (as herein
provided) hereof. A Notice of Conversion may be submitted via facsimile to the
Company at the telecopier number for the Company provided in the Securities
Purchase Agreement (or at such other number as requested in advance of such
conversion in writing by the Company), and if so submitted the original Notice
of Conversion shall be delivered to the Company within two (2) business days
thereafter. The Company and the Holder shall each keep records with respect to
the portion of this Note then being converted and all portions previously
converted; upon receipt by the Holder of the requisite Conversion Shares, the
outstanding principal amount of the Note shall be reduced by the amount
specified in the Notice of Conversion resulting in such Conversion Shares. The
Company may from time to time, but is not required to, instruct the Holder and
the Holder shall surrender this Note along with the Notice of Conversion for the
purposes of making a notation thereon as to the amount of principal being
converted, or of canceling this Note and issuing a new Note in the same form
with the principal amount of such Note reduced by the amount converted. Such new
or notated Note shall be delivered to the Holder within three (3) business days
after such Holder's surrender to the Company. No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded to the nearest whole share. Accrued interest on
the converted portion of the Note shall be payable upon conversion thereof, in
cash or Common Stock at the Conversion Price, at the Company's option. The date
on which a notice of conversion is given (the "Conversion Date") shall be deemed
to be either the date on which the Company receives from the Holder an original
Notice of Conversion duly executed, or, if earlier, the date set forth in such
Notice of Conversion if the original Notice of Conversion is received by the
Company within two (2) business days thereafter.
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In all cases, the Company shall deliver the Conversion Shares to the
Holder within five (5) business days after the Conversion Date with respect to
such Conversion Shares being delivered, and at the address specified in the
Notice of Conversion. The Company acknowledges that the Securities Purchase
Agreement requires that the Company pay liquidated damages for late or
non-delivery of Conversion Shares.
Subject to the provisions of Paragraph 4(b) hereof, at the Maturity
Date, the remaining portion of this Note which remains unconverted, if any, plus
accrued interest shall be automatically converted into shares of Common Stock as
of the Maturity Date, as if the Holder had converted the remaining portion of
this Note according to the provisions of this Section 4, with the Conversion
Date being equivalent in such event to the Maturity Date, as if the Holder had
provided the Company with a Notice of Conversion with respect to the outstanding
principal amount of this Note on the Maturity Date. Other than a conversion made
on the Maturity Date in accordance with this paragraph, conversions of this Note
must be effected in increments of at least Ten Thousand U.S. Dollars ($10,000)
of principal amount of this Note (or such lesser outstanding principal amount of
this Note).
5. OBLIGATIONS OF THE COMPANY HEREIN ARE UNCONDITIONAL. No provision of
this Note shall alter or impair the obligation of the Company, which obligation
is absolute and unconditional, to repay the principal amount of this Note at the
time, place, rate, and in the coin currency, hereinabove stated. This Note and
all other Notes now or hereafter issued in replacement of this Note on the same
or similar terms are direct obligations of the Company. This Note ranks at least
equally with all other Notes now or hereafter issued under the terms set forth
herein. The Conversion Price and number of shares of Common Stock issuable upon
conversion shall be subject to adjustment from time to time as provided in
Section 6 below.
6. ADJUSTMENTS.
(a) In the event the Company should at any time or from time to time,
after the date of this Note, fix a record date for the effectuation of a split
or subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock (equal to at least ten percent
(10%) or more of the Company's then issued and outstanding shares of Common
Stock) or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of any
consideration by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend, distribution, split or subdivision if no record date
is fixed), then unless the Conversion Price is otherwise automatically adjusted
in accordance with the terms of this Note, the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of this Note shall be increased in proportion to such increase in the
aggregate number of
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shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents.
(b) If the number of shares of Common Stock outstanding at any time
after the date of this Note is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price shall be appropriately increased so that the number of shares
of Common Stock issuable upon conversion of this Note shall be decreased in
proportion to such decrease in outstanding shares.
(c) In the event the Company, at any time while all or any portion of
this Note is outstanding, shall be consolidated with or merged into any other
corporation or corporations or shall sell or lease all or substantially all of
its property and business as an entirety, then lawful provisions shall be made
as part of the terms of such consolidation, merger, sale or lease so that the
holder of this Note may thereafter receive in lieu of such Common Stock
otherwise issuable to such holder upon conversion of this Note, but at the
conversion rate which would otherwise be in effect at the time of conversion, as
hereinbefore provided, the same kind and amount of securities or assets as may
be issuable, distributable or payable upon such consolidation, merger, sale or
lease with respect to Common Stock of the Company.
7. RESERVATION OF SHARES. The Company shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of this Note, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the outstanding principal amount, and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of this Note, in addition to such other remedies as
shall be available to Holder, the Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase the number of
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes, including without limitation, using its best
efforts to obtain the requisite stockholder approval necessary to increase the
number of authorized shares of the Company's Common Stock.
8. NOTE HOLDER NOT DEEMED A STOCKHOLDER. No Holder, as such, of this
Note shall be entitled (prior to conversion of this Note into Common Stock, and
only then to the extent of such conversion) to vote or receive dividends or be
deemed the holder of shares of the Company for any purpose, nor shall anything
contained in this Note be construed to confer upon the Holder hereof, as such,
any of the rights of a stockholder of the Company or any right to vote, give or
withhold consent to any corporate action (whether any reorganization, issue of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the holder of this Note of the
Conversion Shares which he or she is then entitled to receive upon the due
conversion of all or a portion of this Note. Notwithstanding the foregoing, the
Company will provide the Holder with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
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9. NO LIMITATION ON CORPORATE ACTION. No provisions of this Note and no
right or option granted or conferred hereunder shall in any way limit, affect or
abridge the exercise by the Company of any of its corporate rights or powers to
recapitalize, amend its Certificate of Incorporation, reorganize, consolidate or
merge with or into another corporation, or to transfer all or any part of its
property or assets, or the exercise of any other of its corporate rights and
powers.
10. REPRESENTATIONS OF HOLDER.Upon conversion of all or a portion of
this Note, the Holder shall confirm in writing, in a form reasonably
satisfactory to the Company, that the Conversion Shares so purchased are being
acquired solely for the Holder's own account and not as a nominee for any other
party, and that such Holder is an Accredited Investor (as defined in Rule 501(a)
of Regulation D promulgated under the 1933 Act). The Company acknowledges that
Holder's duly executed certification on the Notice of Conversion is satisfactory
confirmation of the facts set forth in the immediately preceding sentence. If
such Holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such Holder's conversion of all or a
portion of the Note that the Company receive such other representations as the
Company considers reasonably necessary to assure the Company that the issuance
of its securities upon conversion of the Note shall not violate any United
States or state securities laws.
11. WAIVER OF DEMAND, PRESENTMENT, ETC. The Company hereby expressly
waives demand and presentment for payment, notice of nonpayment, protest, notice
of protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereunder, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
12. ATTORNEY'S FEES. The Company agrees to pay all costs and expenses,
including without limitation reasonable attorney's fees, which may be incurred
by the Holder in collecting any amount due under this Note or in enforcing any
of Holder's conversion rights as described herein.
13. DEFAULT. If one or more of the following described "Events of
Default" shall occur:
(a) The Company shall continue in default in the payment of principal
or interest on this Note for a period of ten (10) days after a notice
of default is received by the Company with respect to any such payment,
or the Company shall not timely honor any Notice of Conversion as
specified herein and in the Securities Purchase Agreement; or
(b) Any of the representations or warranties made by the Company
herein, in the Securities Purchase Agreement, the Registration Rights
Agreement, or in any certificate or financial or other written
statement heretofore or hereafter furnished by or on behalf of the
Company in connection with the execution and delivery of this Note or
the Securities Purchase Agreement or the Registration Rights Agreement
shall be false or misleading in any material respect at the time made
and the Holder shall have provided seven (7) days
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<PAGE>
prior written notice to the Company of the alleged misrepresentation
or breach of warranty and the same shall continue uncured for a period of
seven (7) days after such written notice from the Holder; or
(c) The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or
obligation of the Company under this Note or the Securities Purchase
Agreement and such failure shall continue uncured for a period of seven
(7) days after written notice from the Holder of such failure; or
(d) The Company shall either: (i) become insolvent; (ii) admit in
writing its inability to pay its debts generally or as they become due;
(iii) make an assignment for the benefit of creditors or commence
proceedings for its dissolution; or (iv) apply for, or consent to the
appointment of, a trustee, liquidator, or receiver for its or for a
substantial part of its property or business; or
(e) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without
the Company's consent and such appointment is not discharged within
sixty (60) days after such appointment; or
(f) Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control
of the whole or any substantial portion of the properties or assets of
the Company and shall not be dismissed within sixty (60) days
thereafter; or
(g) Any money judgment, writ or Note of attachment, or similar process
in excess of Two Hundred Thousand United States Dollars (US$200,000.00)
in the aggregate shall be entered or filed against the Company or any
of its properties or assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of fifteen (15) days or in any event
later than five (5) days prior to the date of any proposed sale
thereunder; or
(h) Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Company
and, if instituted against the Company, shall not be dismissed within
sixty days after such institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any such proceedings or
admit the material allegations of, or default in answering a petition
filed in, any such proceeding; or
(i) The Company shall have its Common Stock delisted from the OTC
BULLETIN BOARD Market or suspended from trading thereon, and shall not
have its Common Stock relisted on the same or another national
securities exchange (other than the National Quotation Bureau, Inc.,
"pink sheets" market), or have such suspension lifted, as the case may
be, within ninety days after such delisting or suspension; or
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<PAGE>
(j) The Company shall have received a notice of default on the payment
of any debt(s) aggregating in excess of Two Hundred Thousand United
States Dollars (US$200,000.00) beyond any applicable grace period;
then, or at any time thereafter, and in any and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
in one instance shall not be deemed to be a waiver in another instance or for
any other prior or subsequent Event of Default) at the option of the Holder and
in the Holder's sole discretion, the Holder may immediately accelerate the
maturity hereof, whereupon all principal and interest hereunder shall be
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived by the Company, anything
herein or in any Note or other instrument contained to the contrary
notwithstanding, and the Holder may immediately, and upon the expiration of any
period of grace, enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law or equity.
14. NOTE A GENERAL UNSECURED OBLIGATION OF THE COMPANY. This Note
represents a general unsecured obligation of the Company. No recourse shall be
had for the payment of the principal of, or the interest on, this Note, or for
any claim based thereon, or otherwise in respect hereof, against any
incorporator, shareholder, officer, director, or agent of the Company or any
successor corporation, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
15. ENFORCEABILITY. In case any provision of this Note is held by a
court of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Note will not in any way be
affected or impaired thereby.
16. ENTIRE AGREEMENT. This Note and Exhibit I attached hereto, the
Securities Purchase Agreement and the Exhibits attached thereto and the
Registration Rights Agreement and the Exhibits attached thereto (if any)
constitute the full and entire understanding between the Company and the Holder
with respect to the subject matter hereof and thereof. Neither this Note nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the Company and the Holder.
17. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the state of Delaware without giving effect to
applicable principles of conflict of law.
18. HEADINGS. Headings in this Note are for convenience only, and shall
not be used in the construction of this Note.
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized, all as of the date first
hereinabove written.
CYNET, INC.
By:
------------------------------------------
Mr. Vincent W. Beale, Chairman
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EXHIBIT I
NOTICE OF CONVERSION
(To Be Executed by the Registered Holder in Order to Convert the Note)
The Undersigned hereby irrevocably elects to convert $________ of the Eight
Percent (8%) Convertible Note Due January 31, 2002, No. 01, into shares of
Common Stock of CYNET, Inc. (the "Company"), according to the terms and
conditions set forth in such Note, as of the date written below. If securities
are to be issued to a person other than the Undersigned, the Undersigned agrees
to pay all applicable transfer taxes with respect thereto.
The Undersigned represents that it, as of this date, is an "accredited
investor" as such term is defined in Rule 501(a) of Regulation D promulgated by
the SEC under the 1933 Act.
The Undersigned also represents that the Conversion Shares are being
acquired for the Holder's own account and not as a nominee for any other party.
The Undersigned represents and warrants that all offers and sales by the
Undersigned of the Conversion Shares shall be made pursuant to registration of
the same under the 1933 Act, or pursuant to an exemption from registration under
the 1933 Act. The Undersigned acknowledges that the Conversion Shares shall if
(and only if) required by law contain the legend contained on page 1 of the
Note.
Conversion Date:* _____________________
Applicable Conversion Price: ______________________________
Holder (Print True Legal Name): ______________________________________
- --------------------------------------------------
(Signature of Duly Authorized Representative of Holder)
Address of Holder:
----------------------------
----------------------------
----------------------------
----------------------------
* This original Notice of Conversion must be received by the Company by the
second business day following the Conversion Date.
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EXHIBIT B
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
CYNET, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No. 218 Number of Shares: 160,000
Date of Issuance: January 31, 2000
CYNET, Inc., a Texas corporation (the "Company"), hereby certifies that,
for value received, the Augustine Fund, L.P., and permitted assigns, the
registered holder hereof ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant, at any time
after the date hereof, but not after 5:00 P.M. Chicago time on the Expiration
Date (as defined herein) 160,000 fully paid and nonassessable shares of Common
Stock (as defined herein) of the Company (each a "Warrant Share" and
collectively the "Warrant Shares") at a purchase price per share equal to one
hundred twenty percent (120%) of the average of the closing bid prices for the
Common Stock for the five (5) trading days prior to the date of this Warrant
(the "Exercise Price") in lawful money of the United States. The number of
Warrant Shares purchasable hereunder and the Exercise Price are subject to
adjustment as provided in Section 9 below.
Section 1.
(a) Definitions. The following words and terms used in this Warrant shall
have the following meanings:
"Common Stock" means (a) the Company's Class A voting common stock and
(b) any capital stock into which such Common Stock shall have been changed or
any capital stock resulting from a reclassification of such Common Stock.
"Convertible Securities" mean any securities issued by the Company which
are convertible into or exchangeable for, directly or indirectly, shares of
Common Stock.
<PAGE>
"Expiration Date" means the date which is three (3) years from the date
of this Warrant or, if such date falls on a Saturday, Sunday or other day on
which banks are required or authorized to be closed in the City of Chicago or
the State of Illinois (a "Holiday"), the next preceding date that is not a
Holiday.
"Market Price" means the closing bid price on the day prior to the date
on which the Exercise Form is delivered to the Company, as quoted on the
National Association of Securities Dealers' OTC Bulletin Board Market or such
other national securities exchange or market on which the Common Stock may then
be listed.
"Registration Rights Agreement" shall have the meaning assigned to it in
the Securities Purchase Agreement (defined below).
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Purchase Agreement" shall mean the Securities Purchase
Agreement between the holder hereof (or its predecessor in interest) and the
Company for the purchase of this Warrant and the other Securities (as defined in
the Securities Purchase Agreement).
"Transfer" shall include any disposition of this Warrant or any Warrant
Shares, or of any interest in either thereof which would constitute a sale
thereof within the meaning of the Securities Act of 1933, as amended, or
applicable state securities laws.
"Warrant" shall mean this Warrant and all Warrants issued in exchange,
transfer or replacement of any thereof.
"Warrant Exercise Price" per share shall be equal to one hundred twenty
percent (120%) of the average of the closing bid prices for the Common Stock for
the five (5) trading days prior to the date of this Warrant.
(b) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors; and (B) to any
applicable law defined or referred to herein, shall be deemed references to such
applicable law as the same may have been or may be amended or supplemented from
time to time.
(ii) When used in this Warrant, unless the otherwise specified in a
particular instance, the words "herein," "hereof," and "hereunder," and words of
similar import, shall refer to this Warrant as a whole and not to any provision
of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer
to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise
specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
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Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the Holder, as a whole or in part, at any time prior to 5:00 P.M.
Chicago Time on the Expiration Date. The rights represented by this Warrant may
be exercised by the Holder, as a whole or from time to time in part (except that
this Warrant shall not be exercisable as to a fractional share) by (i) delivery
of a written notice, in the form of the exercise form attached as Exhibit I
hereto (an "Exercise Form"), of the Holder's election to exercise this Warrant,
which notice shall specify the number of Warrant Shares to be purchased, (ii)
payment to the Company of an amount equal to the Warrant Exercise Price
multiplied by the number of Warrant Shares as to which the Warrant is being
exercised (plus any applicable issue or transfer taxes) in immediately available
funds (either by wire transfer or a certified or cashier's check drawn on a
United States bank), for the number of Warrant Shares as to which this Warrant
shall have been exercised, and (iii) the surrender of this Warrant, properly
endorsed, at the principal office of the Company (or at such other agency or
office of the Company as the Company may designate by notice to the Holder).
In addition, and notwithstanding anything to the contrary contained in
this Warrant, this Warrant may be exercised by presentation and surrender of
this Warrant to the Company in a cashless exercise, including a written
calculation of the number of Warrant Shares to be issued upon such exercise in
accordance with the terms hereof (a "Cashless Exercise"). In the event of a
Cashless Exercise, in lieu of paying the Exercise Price, the Holder shall
surrender this Warrant for, and the Company shall issue in respect thereof, the
number of Warrant Shares determined by multiplying the number of Warrant Shares
to which the Holder would otherwise be entitled by a fraction, the numerator of
which shall be the difference between the then current Market Price per share of
the Common Stock and the Exercise Price, and the denominator of which shall be
the then current Market Price per share of Common Stock.
The Warrant Shares so purchased shall be deemed to be issued to the
Holder or Holder's designees, as the record owner of such Warrant Shares, as of
the date on which this Warrant shall have been surrendered, the completed
Exercise Form shall have been delivered, and payment (or notice of an election
to effect a Cashless Exercise) shall have been made for such Warrant Shares as
set forth above.
In the event of any exercise of the rights represented by this Warrant
in compliance with this Section 2(a), a certificate or certificates for the
Warrant Shares so purchased, registered in the name of, or as directed by, the
Holder, shall be delivered to, or as directed by, the Holder within three (3)
business days after such rights shall have been so exercised.
(b) Unless this Warrant shall have expired or shall have been fully
exercised, the Company shall issue a new Warrant identical in all respects to
the Warrant exercised except (i) it shall represent rights to purchase the
number of Warrant Shares purchasable immediately prior to such exercise under
the Warrant exercised, less the number of Warrant Shares with respect to which
such Warrant is exercised, and (ii) the holder thereof shall be deemed to have
become the holder of record of such Warrant Shares immediately prior to the
close of business on the date on which the Warrant is surrendered and payment of
the amount due in respect of such exercise and any applicable taxes is made,
irrespective of the date of delivery of such share certificate, except that, if
the date of such surrender and payment
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is a date when the stock transfer books of the Company are properly closed,
such person shall be deemed to have become the holder of such Warrant Shares
at the opening of business on the next succeeding date on which the stock
transfer books are open.
(c) In the case of any dispute with respect to an exercise, the Company
shall promptly issue such number of Warrant Shares as are not disputed in
accordance with this Section. If such dispute only involves the number of
Warrant Shares receivable by the Holder under a Cashless Exercise, the Company
shall submit the disputed calculations to an independent accounting firm of
national standing via facsimile within two (2) business days of receipt of the
Exercise Form. The accountant shall audit the calculations and notify the
Company and the Holder of the results no later than two (2) business days from
the date it receives the disputed calculations. The accountant's calculation
shall be deemed conclusive absent manifest error. The Company shall then issue
the appropriate number of shares of Common Stock in accordance with this
Section.
Section 3. Covenants as to Common Stock. The Company covenants and agrees
that all Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the rights then
represented by this Warrant and that the par value of said shares will at all
times be less than or equal to the applicable Warrant Exercise Price.
Section 4. Taxes. The Company shall not be required to pay any tax or
taxes attributable to the initial issuance of the Warrant Shares or any
permitted transfer involved in the issue or delivery of any certificates for
Warrant Shares in a name other than that of the registered holder hereof or upon
any permitted transfer of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. No holder, as such,
of this Warrant shall be entitled to vote or receive dividends or be deemed the
holder of shares of the Company for any purpose, nor shall anything contained in
this Warrant be construed to confer upon the holder hereof, as such, any of the
rights of a stockholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of this
Warrant. Notwithstanding the foregoing, the Company will provide the holder of
this Warrant with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.
Section 6. No Limitation on Corporate Action. No provisions of this
Warrant and no right or option granted or conferred hereunder shall in any way
limit, affect or abridge the exercise by the Company of any of its corporate
rights or powers to recapitalize, amend its Certificate of Incorporation,
reorganize, consolidate or merge with or into another corporation, or to
transfer all or any part of its property or assets, or the exercise of any other
of its corporate rights and powers.
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Section 7. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment and not with a view to, or for sale in
connection with, any distribution hereof or of any of the shares of Common Stock
or other securities issuable upon the exercise thereof, and not with any present
intention of distributing any of the same. Upon exercise of this Warrant, the
holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Warrant Shares so purchased are being
acquired solely for the holder's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale. If
such holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such holder's exercise of the Warrant that
the Company receive such other representations as the Company considers
reasonably necessary to assure the Company that the issuance of its securities
upon exercise of the Warrant shall not violate any United States or state
securities laws.
Section 8. Transfer; Opinions of Counsel; Restrictive Legends.
(a) The holder of this Warrant understands that (i) this Warrant and the
Warrant Shares have not been and are not being registered under the Securities
Act or any state securities laws (other than as described in the Securities
Purchase Agreement and the Registration Rights Agreement), and may not be
offered for sale, sold, assigned or transferred unless (a) subsequently
registered thereunder, or (b) pursuant to an exemption from such registration;
(ii) any sale of such securities made in reliance on Rule 144 promulgated under
the Securities Act may be made only in accordance with the terms of said Rule
and further, if said Rule is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the Securities and Exchange Commission
thereunder; and (iii) neither the Company nor any other person is under any
obligation to register such securities (other than as described in the
Securities Purchase Agreement and the Registration Rights Agreement) under the
Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
Section 9. Adjustments.
(a) Reclassification and Reorganization. In case of any reclassification,
capital reorganization or other change of outstanding shares of the Common
Stock, or in case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock),
the Company shall cause effective provision to be made so that the Holder shall
have the right thereafter, by exercising this Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation or merger by a holder of the number of shares of Common Stock that
could have been purchased upon exercise of the Warrant immediately prior to such
reclassification, capital reorganization or other change, consolidation or
merger. Any such provision shall include provision for adjustments that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 9. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations or mergers. If
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the consideration received by the holders of Common Stock is other than cash,
the value shall be as determined by the Board of Directors of the Company
acting in good faith.
(b) Dividends and Stock Splits. If and whenever the Company shall effect
a stock dividend, a stock split, a stock combination, or a reverse stock split
of the Common Stock, the number of Warrant Shares purchasable hereunder and the
Warrant Exercise Price shall be proportionately adjusted in the manner
determined by the Company's Board of Directors acting in good faith. The number
of shares, as so adjusted, shall be rounded down to the nearest whole number and
the Warrant Exercise Price shall be rounded to the nearest cent.
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen or destroyed, the Company shall, on receipt of an
indemnification undertaking reasonably satisfactory to the Company, issue a new
Warrant of like denomination and tenor as the Warrant so lost, stolen or
destroyed. In the event the holder hereof asserts such loss, theft or
destruction of this Warrant, the Company may require such holder to post a bond
issued by a surety reasonably satisfactory to the Company with respect to the
issuance of such new Warrant.
Section 11. Notice. Any notices required or permitted to be given under
the terms of this Warrant shall be sent by mail or delivered personally or by
courier and shall be effective five days after being placed in the mail, if
mailed, certified or registered, return receipt requested, or upon receipt, if
delivered personally or by courier or by facsimile, in each case properly
addressed to the party to receive the same. The addresses for such
communications shall be as provided in the Securities Purchase Agreement (Holder
is defined therein as the "Buyer"). Each party shall provide notice to the other
party of any change in address.
Section 12. Registration Right. Notwithstanding anything herein to the
contrary, unless the Warrant Shares have been registered in accordance with the
Registration Rights Agreement, during the three (3) year period commencing on
the date of this Warrant, if the Company proposes to file a registration
statement for a public offering of any of its securities under the Securities
Act of 1933, as amended, it will give written notice, at least twenty (20) days
prior to the filing of each such registration statement, to the holder of the
Warrant and/or the Common Stock previously received upon exercise hereof (and
not previously sold by such holder) of its intention to do so. Upon the holder's
request within ten (10) days after it has received such notice from the Company,
the Company shall include the Common Stock received or receivable upon exercise
of this Warrant owned in such registration statement such that said Common Stock
received or receivable upon such exercise shall be registered or qualified under
such registration statement. This provision is not applicable to a registration
statement filed on Form S-4 or Form S-8, nor is it applicable to the Warrant
once it has expired under the terms hereof or has been exercised and the holder
received non-restricted Common Stock upon such exercise. The rights described in
this Section 12 are in addition to the rights afforded the Holder by the
applicable provisions of the Securities Purchase Agreement.
Section 13. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought. This Warrant shall be governed by
and interpreted under the laws of the State of Delaware. Headings are for
convenience only and shall not affect the meaning or construction of any of the
provisions hereof. This Warrant
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shall be binding upon the Company and its successors and assigns and shall
inure to the benefit of the Holder and its successors and assigns. The Holder
may not assign this Warrant except in accordance with applicable federal and
state securities laws. The Holder shall immediately notify the Company with
respect to any permitted assignment of this Warrant.
Section 14. Date. The date of this Warrant is January 31, 2000. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 8 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
CYNET, INC.
By:
----------------------------------------
Mr. Vincent W. Beale, Sr., Chairman
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EXHIBIT I TO WARRANT
EXERCISE FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
CYNET, INC.
The undersigned hereby exercises the right to purchase the number of
Warrant Shares covered by the Warrant attached hereto as specified below
according to the conditions thereof and herewith makes payment of U.S.
$_______ (unless effected by a Cashless Exercise in accordance with the terms
of the Warrant), the aggregate Warrant Exercise Price of such Warrant Shares
in full pursuant to the terms and conditions of the Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained upon exercise of the Warrant, except under
circumstances that will not result in a violation of the 1933 Act or applicable
state securities laws.
(ii) The undersigned requests that the stock certificates for the Warrant
Shares be issued, and a Warrant representing any unexercised portion hereof be
issued, pursuant to the terms of the Warrant in the name of the Holder (or such
other person(s) indicated below) and delivered to the undersigned (or
designee(s)) at the address or addresses set forth below.
Dated: _____________ , _____.
HOLDER: ____________________________________
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
Address: ___________________________________
___________________________________
___________________________________
Number of Warrant Shares
Being Purchased: ________________________
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EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made
as of January 31, 2000, by and between CYNET, Inc., a corporation organized
under the laws of the State of Texas, U.S.A., with headquarters located at 12777
Jones Road, Suite 400, Houston, Texas 77070 (the "COMPANY") and the Augustine
Fund, L.P., an Illinois limited partnership with its headquarters at 141 West
Jackson Boulevard, Suite 2181, Chicago, Illinois 60604. (the "PURCHASER").
This Agreement is being entered into pursuant to that
Securities Purchase Agreement, dated as of the date hereof, by and between the
Company and the Purchaser (the "PURCHASE AGREEMENT").
The Company and the Purchaser hereby agree as follows:
1. DEFINITIONS.
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"ADVICE" shall have the meaning set forth in Section 3(m).
"AFFILIATE" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "CONTROL," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have
meanings correlative to the foregoing.
"BLACKOUT PERIOD" shall have the meaning set forth in
Section 3(n).
"BOARD" shall have the meaning set forth in Section 3(n).
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of Delaware generally are authorized or required by law or other
government actions to close.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's Class A Voting Common
Stock, no par value per share.
"EFFECTIVENESS DATE" means with respect to the Registration
Statement the 120th day following the Closing Date.
<PAGE>
"EFFECTIVENESS PERIOD" shall have the meaning set forth in
Section 2(a).
"EVENT" shall have the meaning set forth in Section 7(e)(i).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FILING DATE" means the 30th day following the Closing Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in
Section 5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"NOTE" or "NOTES" means the Series A Eight Percent (8%)
Convertible Notes of the Company, the form of which is shown as Exhibit A to the
Purchase Agreement, issued or to be issued to the Purchaser pursuant to the
Purchase Agreement.
"OTC BULLETIN BOARD" shall mean the over-the-counter
electronic bulletin board market or exchange.
"PERSON" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
"REGISTRABLE SECURITIES" means (i) the shares of Common Stock
issuable upon conversion of the Note (the "Conversion Shares") or in payment of
interest in accordance with the terms of the Note ("Interest Shares") and
exercise of the Warrants (the "Warrant Shares"), and upon any stock split, stock
dividend, recapitalization or similar event with respect to such Conversion
Shares, Interest Shares, Warrant Shares or any Note, (ii) the shares of Common
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Stock issued upon any redemption of Note pursuant to the terms of the Notes and
(iii) any other dividend or other distribution with respect to, conversion or
exchange of, or in replacement of, Registrable Securities; PROVIDED, HOWEVER,
that Registrable Securities shall include (but not be limited to) a number of
shares of Common Stock (the "Required Number") equal to no less than the greater
of (x) 900,000 shares of Common Stock, or (y) 200% of the maximum number of
shares of Common Stock which would be issuable upon conversion of the Note and
upon exercise of the Warrants, assuming such conversion and exercise occurred on
the Closing Date or the Filing Date, whichever date would result in the greater
number of Registrable Securities. Notwithstanding anything contained herein to
the contrary, if the actual number of shares of Common Stock issuable upon
conversion of the Note and upon exercise of the Warrants exceeds the Required
Number, the term "Registrable Securities" shall be deemed to include such
additional shares of Common Stock as are necessary to include all of the shares
of Common Stock issuable upon conversion of the Note (and in payment of
Interest, if applicable) and upon exercise of the Warrants.
"REGISTRATION STATEMENT" means the registration statements and
any additional registration statements contemplated by Section 2(a), including
(in each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement.
"RULE 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SPECIAL COUNSEL" means any special counsel to the Holder, for
which the Holder will be reimbursed by the Company pursuant to Section 4.
2. REGISTRATION.
(a) REQUIRED REGISTRATION. On or prior to the Filing Date the
Company shall prepare and file with the Commission a Registration Statement
covering all Registrable Securities for an offering to be made on a continuous
basis pursuant to Rule 415. The Registration Statement shall be on Form SB-1,
Form SB-2 or Form S-3 (except if the Company is not then eligible to register
for resale the Registrable Securities on Form SB-1, Form SB-2 or Form S-3, in
which case such registration shall be on another appropriate form in accordance
herewith). The Company shall use its best efforts to cause the Registration
Statement to be
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declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event prior to the Effectiveness Date, and to keep
such Registration Statement continuously effective under the Securities Act
until such date as is the earlier of (x) the date when all Registrable
Securities covered by such Registration Statement have been sold or (y) the
date on which the Registrable Securities may be sold without any restriction
pursuant to Rule 144(k) as determined by the counsel to the Company pursuant
to a written opinion letter, addressed to the Company's transfer agent to
such effect (the "EFFECTIVENESS PERIOD"). If an additional Registration
Statement is required to be filed because the actual number of shares of
Common Stock into which the Note is convertible and the Warrants are
exercisable exceeds the number of shares of Common Stock initially registered
in respect of the Conversion Shares and the Warrant Shares based upon the
computation on the Closing Date, the Company shall have twenty (20) Business
Days to file such additional Registration Statement, and the Company shall
use its best efforts to cause such additional Registration Statement to be
declared effective by the Commission as soon as possible, but in no event
later than ninety (90) days after filing.
(b) SHELF REGISTRATION. If the Company is not on the Filing
Date eligible to file a registration statement on Form S-3, then as soon as
possible but no later than thirty (30) days after becoming eligible to file a
registration statement for a secondary or resale offering of the Registrable
Securities on Form S-3, the Company shall prepare and file with the Commission a
post-effective amendment to Form SB-2 (or such other applicable form filed in
accordance with Section 2(a) above) on Form S-3 to continue the registration of
all Registrable Securities pursuant to a "shelf" Registration Statement on Form
S-3 covering all Registrable Securities for an offering to be made on a
continuous basis pursuant to Rule 415. Notwithstanding anything to the contrary
contained herein, at no time during the Effectiveness Period shall any of the
Registrable Securities cease being registered.
3. REGISTRATION PROCEDURES.
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement on Form SB-1 or Form SB-2 (or if the
Company is not then eligible to register for resale the Registrable Securities
on Form SB-1 or Form SB-2 such registration shall be on another appropriate form
in accordance herewith) in accordance with the method or methods of distribution
thereof as specified by the Holder (except if otherwise directed by the Holder),
and cause the Registration Statement to become effective and remain effective as
provided herein; PROVIDED, HOWEVER, that not less than five (5) Business Days
prior to the filing of the Registration Statement or any related Prospectus or
any amendment or supplement thereto (including any document that would be
incorporated therein by reference), the Company shall (i) furnish to the Holder
and any Special Counsel, copies of all such documents proposed to be filed,
which documents (other than those incorporated by reference) will be subject to
the review of the Holder and such Special Counsel, and (ii) at the request of
the Holder cause its officers and directors, counsel and independent certified
public accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of counsel to such Holder, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to
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which the Holder or any Special Counsel shall reasonably object in writing
within three (3) Business Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as possible to any comments received
from the Commission with respect to the Registration Statement or any amendment
thereto and as promptly as possible provide the Holder true and complete copies
of all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holder thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holder of Registrable Securities to be sold and
any Special Counsel as promptly as possible (and, in the case of (i)(A) below,
not less than five (5) Business Days prior to such filing) and (if requested by
any such Person) confirm such notice in writing no later than one (1) Business
Day following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement and (C) with respect to the Registration Statement
or any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
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(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of, (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by the Holders of a majority in interest of
the Registrable Securities, (i) promptly incorporate in a Prospectus supplement
or post-effective amendment to the Registration Statement such information as
the Company reasonably agrees should be included therein and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(f) Furnish to the Holder and any Special Counsel, without
charge, at least one conformed copy of each Registration Statement and each
amendment thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference, and all exhibits
to the extent requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents with the
Commission.
(g) Promptly deliver to the Holder and any Special Counsel,
without charge, as many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders and any Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder reasonably requests
in writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration Statement;
PROVIDED, HOWEVER, that the Company shall not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holder to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold pursuant to a Registration Statement, which certificates shall be free
of all restrictive legends, and to enable such Registrable Securities to be in
such denominations and registered in such names as any Holder may request at
least two (2) Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment, including
a post-effective
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amendment, to the Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be incorporated therein
by reference, and file any other required document so that, as thereafter
delivered, neither the Registration Statement nor such Prospectus will
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the OTC Bulletin Board
and any other securities exchange, quotation system, market or over-the-counter
bulletin board, if any, on which similar securities issued by the Company are
then listed as and when required pursuant to the Purchase Agreement.
(l) Comply in all material respects with all applicable rules
and regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) Require each selling Holder to furnish to the Company
information regarding such Holder and the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement,
and the Company may exclude from such registration the Registrable Securities of
any such Holder who fails to furnish such information within a reasonable time
prior to the filing of each Registration Statement, supplemented Prospectus
and/or amended Registration Statement.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement
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contemplated by Section 3(j), or until it is advised in writing (the
"ADVICE") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement.
(n) If (i) there is material non-public information regarding
the Company which the Company's Board of Directors (the "BOARD") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose and which the Company would be required to disclose
under the Registration Statement, then the Company may postpone or suspend
filing or effectiveness of a registration statement for a period not to exceed
20 consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 12 month period (each, a "BLACKOUT PERIOD"); PROVIDED, HOWEVER, that no such
postponement or suspension shall be permitted for consecutive 20 day periods,
arising out of the same set of facts, circumstances or transactions.
4. REGISTRATION EXPENSES
All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company
whether or not the Registration Statement is filed or becomes effective and
whether or not any Registrable Securities are sold pursuant to the Registration
Statement. The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to be
made with the OTC Bulletin Board and each other securities exchange or market on
which Registrable Securities are required hereunder to be listed, (B) with
respect to filings required to be made with the Commission, (C) with respect to
filings required to be made under the OTC Bulletin Board and (D) in compliance
with state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Holder in connection with Blue Sky
qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the Holders of a majority of Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holder, in the case of the Special Counsel,
to a maximum amount of $2,500.00, (v) Securities Act liability insurance, if the
Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, the
Company's independent public accountants (including the expenses of any comfort
letters or costs associated with the delivery by independent public accountants
of a comfort letter or comfort letters). In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation
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of the transactions contemplated by this Agreement (including, without
limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "LOSSES"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, which information was
reasonably relied on by the Company for use therein or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto.
The Company shall notify the Holder promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of an
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Holder.
(b) INDEMNIFICATION BY HOLDER. The Holders shall, severally
and not jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in or omitted from any information so
furnished in writing by such Holder to the
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<PAGE>
Company specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably relied upon by the
Company for use in the Registration Statement, such Prospectus or such form
of prospectus or to the extent that such information relates to such Holder
or such Holder's proposed method of distribution of Registrable Securities
and was reviewed and expressly approved in writing by such Holder expressly
for use in the Registration Statement, such Prospectus or such form of
Prospectus Supplement. Notwithstanding anything to the contrary contained
herein, the Holder shall be liable under this Section 5(b) for only that
amount as does not exceed the net proceeds to such Holder as a result of the
sale of Registrable Securities pursuant to such Registration Statement.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "INDEMNIFIED PARTY"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "INDEMNIFYING PARTY) in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party
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(regardless of whether it is ultimately determined that an Indemnified Party
is not entitled to indemnification hereunder; provided, that the Indemnifying
Party may require such Indemnified Party to undertake to reimburse all such
fees and expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying, Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms. Notwithstanding anything to the contrary contained
herein, the Holder shall be liable or required to contribute under this Section
5(c) for only that amount as does not exceed the net proceeds to such Holder as
a result of the sale of Registrable Securities pursuant to such Registration
Statement.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties
6. RULE 144.
As long as any Holder owns Notes, Interest Shares, Conversion
Shares, Warrants or Warrant Shares, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish
the Holder with true and complete copies of all such filings. As long as any
Holder owns Notes, Interest Shares, Conversion Shares, Warrants or Warrant
Shares, if the Company is not required to file reports pursuant to Section 13(a)
or 15(d) of the Exchange Act, it will prepare and furnish
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<PAGE>
to the Holder and make publicly available in accordance with Rule 144(c)
promulgated under the Securities Act annual and quarterly financial
statements, together with a discussion and analysis of such financial
statements in form and substance substantially similar to those that would
otherwise be required to be included in reports required by Section 13(a) or
15(d) of the Exchange Act, as well as any other information required thereby,
in the time period that such filings would have been required to have been
made under the Exchange Act. The Company further covenants that it will take
such further action as any Holder may reasonably request, all to the extent
required from time to time to enable such Person to sell Interest Shares,
Conversion Shares and Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including providing any legal opinions
of counsel to the Company referred to in the Purchase Agreement. Upon the
request of any Holder, the Company shall deliver to such Holder a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
7. MISCELLANEOUS.
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of
its subsidiaries has, as of the date hereof entered into and currently in
effect, nor shall the Company or any of its subsidiaries, on or after the date
of this Agreement, enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holder in this Agreement or
otherwise conflicts with the provisions hereof except for registration rights
provisions disclosed in the Company's Disclosure Schedule to the Purchase
Agreement. Except for registration rights provisions disclosed in the Company's
Disclosure Schedule to the Purchase Agreement, neither the Company nor any of
its subsidiaries has previously entered into any agreement currently in effect
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holder set forth herein, and are not otherwise in conflict with the
provisions of this Agreement. This Section 7(b) shall not prohibit the Company
from entering into any agreements concerning the registration of securities on
Form S-8 or Form S-4.
(c) [INTENTIONALLY OMITTED.]
(d) PIGGY-BACK REGISTRATIONS. If at any time when there is not
an effective Registration Statement covering (i) Conversion Shares or (ii)
Warrant Shares, the Company shall
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determine to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under
the Securities Act of any of its equity securities, other than on Form S-4 or
Form S-8 (each as promulgated under the Securities Act) or its then
equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable
in connection with stock option or other employee benefit plans, the Company
shall send to each holder of Registrable Securities written notice of such
determination and, if within thirty (30) days after receipt of such notice,
any such holder shall so request in writing (which request shall specify the
Registrable Securities intended to be disposed of by the Purchaser), the
Company will cause the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the holder, to the extent requisite to permit the disposition of the
Registrable Securities so to be registered, provided that if at any time
after giving written notice of its intention to register any securities and
prior to the effective date of the registration statement filed in connection
with such registration, the Company shall determine for any reason not to
register or to delay registration of such securities, the Company may, at its
election, give written notice of such determination to such holder and,
thereupon, (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay
expenses in accordance with Section 4 hereof), and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering
any Registrable Securities being registered pursuant to this Section 7(d) for
the same period as the delay in registering such other securities. The
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; PROVIDED,
HOWEVER, that the Company shall not be required to register any Registrable
Securities pursuant to this Section 7(d) that are eligible for sale pursuant
to Rule 144(k) of the Securities Act. In the case of an underwritten public
offering, if the managing underwriter(s) or underwriter(s) should reasonably
object to the inclusion of the Registrable Securities in such registration
statement, then if the Company after consultation with the managing
underwriter should reasonably determine that the inclusion of such
Registrable Securities, would materially adversely affect the offering
contemplated in such registration statement, and based on such determination
recommends inclusion in such registration statement of fewer or none of the
Registrable Securities of the Holder, then (x) the number of Registrable
Securities of the Holders included in such registration statement shall be
reduced pro-rata among such Holders (based upon the number of Registrable
Securities requested to be included in the registration), if the Company
after consultation with the underwriter(s) recommends the inclusion of fewer
Registrable Securities, or (y) none of the Registrable Securities of the
Holder shall be included in such registration statement, if the Company after
consultation with the underwriter(s) recommends the inclusion of none of such
Registrable Securities; PROVIDED, HOWEVER, that if securities are being
offered for the account of other persons or entities as well as the Company,
such reduction shall not represent a greater fraction of the number of
Registrable Securities intended to be offered by the Holder than the fraction
of similar reductions imposed on such other persons or entities (other than
the Company).
(e) FAILURE TO FILE REGISTRATION STATEMENT AND OTHER EVENTS.
The Company and the Purchaser agree that the Holder will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Period or
if certain other events occur. The Company and the Holder further agree
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<PAGE>
that it would not be feasible to ascertain the extent of such damages with
precision. Accordingly, if (i) the Registration Statement is not filed on or
prior to the Filing Date, or is not declared effective by the Commission on
or prior to the Effectiveness Date (or in the event an additional
Registration Statement is filed because the actual number of shares of Common
Stock into which the Note is convertible and the Warrants are exercisable
exceeds the number of shares of Common Stock initially registered is not
filed and declared effective within the time periods set forth in Section
2(a)), or (ii) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12dl-2 promulgated under the Exchange
Act within five (5) Business Days of the date that the Company is notified
(orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not subject to further
review, or (iii) the Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities at any time prior to the expiration of the
Effectiveness Period, without being succeeded immediately by a subsequent
Registration Statement filed with and declared effective by the Commission,
or (iv) trading in the Common Stock shall be suspended or if the Common Stock
is delisted from the OTC Bulletin Board for any reason for more than ninety
(90) days in the aggregate, or (v) the conversion rights of the Holder are
suspended for any reason, including by the Company, or (vi) the Company
breaches in a material respect any covenant or other material term or
condition to this Agreement, the the Notes, the Purchase Agreement (other
than a representation or warranty contained therein) or any other agreement,
document, certificate or other instrument delivered in connection with the
transactions contemplated hereby and thereby, and such breach continues for a
period of thirty days after written notice thereof to the Company, or (vii)
the Company has breached Section 3(n) of this Agreement (any such failure or
breach being referred to as an "EVENT"), the Company shall pay in cash as
liquidated damages for such failure and not as a penalty to the Holder an
amount equal to 1% of the Purchase Price paid by the Holder for all Notes and
Warrants purchased and then outstanding pursuant to the Purchase Agreement
for each thirty (30) day period until the applicable Event has been cured,
which shall be pro rated for such periods less than thirty (30) days (the
"Periodic Amount"). Payments to be made pursuant to this Section 7(e) shall
be due and payable immediately upon demand in immediately available funds.
The parties agree that the Periodic Amount represents a reasonable estimate
on the part of the parties, as of the date of this Agreement, of the amount
of damages that may be incurred by the Holder if the Registration Statement
is not filed on or prior to the Filing Date or has not been declared
effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Period
or if any other Event as described herein has occurred.
(f) SPECIFIC ENFORCEMENT, CONSENT TO JURISDICTION.
(i) The Company and the Purchaser acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Registration Rights Agreement or the Purchase Agreement were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Registration Rights Agreement or the Purchase Agreement and to enforce
specifically the terms and provisions hereof or thereof, this being in addition
to any other remedy to which any of them may be entitled by law or equity.
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(ii) Each of the Company and the Purchaser (i) hereby
irrevocably submits to the jurisdiction of the United States District Court
sitting in the County of Cook, State of Illinois for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement or the
Purchase Agreement and (ii) hereby waives, and agrees not to assert in any such
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and the Purchaser consents to process being served
in any such suit, action or proceeding by mailing a copy thereof to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 7(f) shall affect or limit any right to serve
process in any other manner permitted by law.
(g) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holder. Notwithstanding the foregoing, a waiver or consent to depart
from the provisions hereof with respect to a matter that relates exclusively to
the rights of Holder and that does not directly or indirectly affect the rights
of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates; PROVIDED,
HOWEVER, that the provisions of this sentence may not be amended, modified, or
supplemented except in accordance with the provisions of the immediately
preceding sentence.
(h) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice prior to 5:00 p.m., pacific
standard time, on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice later than 5:00 p.m., pacific
standard time, on any date and earlier than 11:59 p.m., pacific time, on such
date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service or (iv) actual receipt by the
party to whom such notice is required to be given. The addresses for such
communications shall be with respect to the Holder at its address set forth in
the Purchase Agreement, or with respect to the Company, addressed to:
CYNET, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: Mr. Samuel Beale, General Counsel
Telephone No.: 281.897.8317 ext. 332
Facsimile No.: 281.894.7952
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice.
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(i) SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of the Holder and its successors and
assigns. The Company may not assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of the Holder. The
Purchaser may assign its rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(j) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of each
Holder hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any transferee of such Holder of all
or a portion of the Notes or the Registrable Securities if: (i) the Holder
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company within a reasonable time
after such assignment, (ii) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (a) the name and
address of such transferee or assignee, and (b) the securities with respect to
which such registration rights are being transferred or assigned, (iii)
following such transfer or assignment the further disposition of such securities
by the transferee or assignees is restricted under the Securities Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this Section, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. In
addition, each Holder shall have the right to assign its rights hereunder to any
other Person with the prior written consent of the Company, which consent shall
not be unreasonably withheld. The rights to assignment shall apply to the
Holders (and to subsequent) successors and assigns.
(k) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(l) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to principles of conflicts of law thereof.
(m) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(n) SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held to be invalid, illegal, void or
unenforceable in any respect, the remainder of the terms, provisions, covenants
and restrictions set forth herein shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and the parties hereto
shall use their reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would
16
<PAGE>
have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid,
illegal, void or unenforceable.
(o) HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
(p) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage and shall not be counted as outstanding.
(q) NOTICE OF EFFECTIVENESS. Within two (2) business days
after the Registration Statement which includes the Registrable Securities is
ordered effective by the Commission, the Company shall deliver, and shall cause
legal counsel for the Company to deliver, to the transfer agent for such
Registrable Securities and to the Purchaser (with copies to the Holders whose
Registrable Securities are included in such Registration Statement, if other
than the Purchaser) confirmation that the Registration Statement has been
declared effective by the Commission in the form attached hereto as EXHIBIT A.
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed by their respective authorized persons as
of the date first indicated above.
[SIGNATURE PAGE FOLLOWS]
17
<PAGE>
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT DATED AS OF JANUARY 31, 2000]
CYNET, INC.
By:
---------------------------------
Name: Mr. Vincent W. Beale, Sr.
Title: Chairman
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc.
By:
---------------------------------
Mr. Thomas F. Duszynski, Chief
Operating Officer
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT
[NAME AND ADDRESS OF TRANSFER AGENT]
Attn: _____________
The Augustine Fund, L.P.
C/o Augustine Capital Mangement, Inc.
141 West Jackson Blvd., Suite 2182
Chicago, Illinois 60604
Attn: Mr. Thomas F. Duszynski
Re: CYNET, INC.
-----------
Ladies and Gentlemen:
We are counsel to CYNET, Inc., a Texas corporation (the "COMPANY"), and
have represented the Company in connection with that certain Securities Purchase
Agreement (the "PURCHASE AGREEMENT"), dated as of January 31, 2000, by and among
the Company and the Purchaser named therein (the "HOLDER") pursuant to which the
Company issued to the Holder its Series A Eight Percent (8%) Convertible Notes
(the "NOTES") along with warrants (the "WARRANTS") to purchase shares of the
Company's Class A voting common stock, no par value per share (the "COMMON
STOCK"). Pursuant to the Purchase Agreement, the Company has also entered into a
Registration Rights Agreement with the Holder (the "REGISTRATION RIGHTS
AGREEMENT"), dated of even date with the Purchase Agreement, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon conversion of the Notes and exercise of the Warrants,
under the Securities Act of 1933, as amended (the "1933 ACT"). In connection
with the Company's obligations under the Registration Rights Agreement, on
__________, 2000, the Company filed a Registration Statement on Form _____
(File No. 333-______) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission (the "SEC") relating to the resale of the Registrable
Securities which names the Holder as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
<PAGE>
EXHIBIT D
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is dated as of January 31,
2000, by and among CYNET, Inc., a corporation organized under the laws of the
State of Texas, U.S.A. (the "Company"), the buyer set forth on the execution
page hereof (the "Buyer") and H. GLENN BAGWELL, JR., a duly licensed attorney
who practices law in the State of North Carolina, U.S.A., as Escrow Agent (the
"Escrow Agent").
Capitalized terms used herein and not otherwise defined herein shall
have the meanings set forth in that Securities Purchase Agreement between the
Company and the Buyer dated of even date herewith (the "Securities Purchase
Agreement").
W I T N E S S E T H:
WHEREAS, the Buyer and the Company have entered into the Securities
Purchase Agreement, pursuant to which the Company has agreed to sell, and the
Buyer has agreed to purchase, at the Closing, a number of Notes along with a
number of Warrants (collectively, the "Securities"); and
WHEREAS, the Buyer and the Company have agreed to effectuate the
Closing utilizing an escrow arrangement as described in this Agreement; and
WHEREAS, it is a condition of the Company's obligation to sell, and the
Buyer's obligation to purchase, the Securities, that this Agreement be executed
and delivered; and
WHEREAS, the Escrow Agent is willing to act hereunder on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth below, the parties hereto hereby agree as follows:
1. ESCROW ACCOUNT.
1.1 DEPOSIT. On the Closing Date, by wire transfer of immediately
available funds in United States Dollars, Buyer shall deposit the full Purchase
Price (the "Escrow") with the Escrow Agent, to be held by the Escrow Agent in a
separate non-interest bearing account (the "Escrow Account"), established at
Wachovia Bank, N.A., (the "Bank"), subject to the terms and provisions contained
herein. At the request of the Company the Escrow Agent shall provide the Company
with all Bank statements, notices and other writings that it receives from the
Bank in connection with the Escrow Account.
2. DISBURSEMENT OF ESCROW/SECURITIES.
<PAGE>
2.1 DISBURSEMENT. At the Closing, upon receipt by the Escrow Agent of
all of the moneys, documents, and things from the respective parties with
respect to such Closing as described in the Securities Purchase Agreement and as
further described in Sections 2.1(a) and 2.1(b) below, the Escrow Agent shall
deliver to each party via facsimile the documents and things (or if requested by
the parties, only the signature pages thereto) to have been delivered by the
other party in accordance with the Securities Purchase Agreement and this
Agreement. The Escrow Agent shall transfer, by the next business day following
the Closing, by wire transfer to the Company the full Escrow then held, less any
charges and fees agreed to be paid by the Company. The Escrow Agent shall, upon
receipt thereof, deliver (via overnight delivery service) to the Company
originals of all other documents and things listed in Section 2.1(b) below. The
Escrow Agent shall, upon receipt thereof, deliver (via overnight delivery
service) originals of all of the documents and things listed in Section 2.1(a)
below to the Buyer at the address provided in writing by the Buyer to the Escrow
Agent.
The Closing may take place via facsimile. This shall be accomplished in
the following manner. Each party shall deliver via facsimile to the Escrow
Agent, at the telecopier number provided on the signature page to this
Agreement, the first page and the fully executed signature page to each of the
documents and things to be executed by such party at the Closing. If stock
certificates, Notes or Warrants are to be delivered, each such certificate or
document shall be delivered via overnight courier to the Escrow Agent. Upon
receipt of the requisite documents and things via facsimile or otherwise from
each party, the Escrow Agent shall in turn send to each party the documents and
things received from the other party. Thereafter, upon receipt by the Escrow
Agent of the Purchase Price and the original Notes and Warrants being sold at
such Closing, the Escrow Agent shall wire transfer the Escrow (less any charges
and fees agreed to be paid by the Company to third parties) to the Company. Each
party closing the transactions contemplated herein via facsimile shall deliver
via overnight courier service to the Escrow Agent complete originals of all
documents and things (as called for in Sections 2.1(a) and 2.1(b) below) within
one (1) business day after such delivery via facsimile. Each party hereby agrees
that a facsimile of each document and thing to be delivered hereunder, once
delivered to the Escrow Agent, shall be binding upon such party in the same
manner as would an original to the full extent allowed by applicable law.
(a). ITEMS TO BE DELIVERED BY THE COMPANY TO THE ESCROW AGENT.
AT THE CLOSING. On the Closing Date, the Company shall deliver to the
Escrow Agent on behalf of the Buyer, unless otherwise stated, three (3) fully
executed (by the authorized officer(s) of the Company) originals of each of the
following documents: (I) the Securities Purchase Agreement, (II) the
Registration Rights Agreement, (III) one (1) original of each Note, as
applicable, fully executed, along with two (2) copies of each Note issued by the
Company; (IV) one (1) original fully executed Warrant along with two (2) copies
of the Warrant; (V) the executed original Legal Opinion (Exhibit E to the
Securities Purchase Agreement) along with two (2) copies thereof; (VII) this
Agreement; and, within five (5) business days after the Closing Date, a stock
certificate representing 10,000 shares of Common Stock issued in the name of
Delano Group Securities.
(b) ITEMS TO BE DELIVERED BY THE BUYER TO THE ESCROW AGENT.
2
<PAGE>
AT THE CLOSING. On or before the Closing Date, the Buyer shall deliver
to the Escrow Agent on behalf of the Company, unless otherwise stated, three (3)
fully executed originals of each of the following documents: (I) the Securities
Purchase Agreement, (II) the Registration Rights Agreement, (III) this
Agreement; and (IV) the full purchase price for the Securities being purchased
at such Closing, via wire transfer to the Escrow Account.
2.2 CONTROVERSIES. If any controversy arises between two or more of the
parties hereto, or between any of the parties hereto and any person not a party
hereto, as to whether or not or to whom the Escrow Agent shall deliver the
Escrow or any portion thereof or as to any other matter arising out of or
relating to this Escrow Agreement, the Escrow Agent shall not be required to
determine the same and need not make any delivery of the Escrow concerned or any
portion thereof but may retain the same until the rights of the parties to the
dispute shall have been finally determined by agreement or by final judgment of
a court of competent jurisdiction after all appeals have been finally determined
(or the time for further appeals has expired without an appeal having been
made). The Escrow Agent shall deliver that portion of the Escrow concerned
covered by such agreement or final order within five (5) days after the Escrow
Agent receives a copy thereof. The Escrow Agent shall assume that no such
controversy has arisen unless and until it receives written notice from the
Buyer or the Company that such controversy has arisen, which refers specifically
to this Agreement and identifies the adverse claimants to the controversy.
2.3 NO OTHER DISBURSEMENTS. No portion of the Escrow monies shall be
disbursed or otherwise transferred except in accordance with this Section 2,
Section 4 or Section 5.1(b). Without limiting the foregoing, neither Escrow
Agent nor the Buyer shall be entitled to any right of offset against the Escrow
or otherwise entitled to receive any portion of the Escrow.
3. ESCROW AGENT. The acceptance by the Escrow Agent of his duties
hereunder is subject to the following terms and conditions, which the parties to
this Agreement hereby agree shall govern and control with respect to the rights,
duties, liabilities and immunities of the Escrow Agent:
3.1 The Escrow Agent shall not be responsible or liable in any manner
whatever for the sufficiency, correctness, genuineness or validity of any cash,
investments or other amounts deposited with or held by the Escrow Agent.
3.2 The Escrow Agent shall be protected in acting upon any written
notice, certificate, instruction, request or other paper or document believed by
the Escrow Agent to be genuine and to have been signed or presented by the
proper party or parties.
3.3 The Escrow Agent shall not be liable for any act done hereunder
except in the case of the Escrow Agent's willful misconduct or bad faith.
3.4 The Escrow Agent shall not be obligated or permitted to investigate
the correctness or accuracy of any document or to determine whether or not the
signatures contained
3
<PAGE>
in said documents are genuine or to require documentation or evidence
substantiating any such document or signature.
3.5 The Escrow Agent shall have no duties as Escrow Agent except those
that are expressly set forth herein, and in any modification or amendment
hereof; provided, however, that no such modification or amendment hereof shall
affect his duties unless it shall have given his written consent thereto. The
Escrow Agent shall not be prohibited from owning an equity interest in the
Company, the Buyer, another buyer, any of their respective subsidiaries or any
third party that is in any way affiliated with or conducts business with either
the Company, the Buyer or another buyer.
3.6 The Company and the Buyer specifically acknowledge that the Escrow
Agent is a practicing attorney in Raleigh, North Carolina U.S.A., and may have
worked with or be affiliated with the Company, the Buyer, or affiliates of
either of them on other unrelated transactions, and that they and each of them
has specifically requested that the Escrow Agent draft the documents for the
said transactions and act as Escrow Agent with respect to the said transactions.
Each party represents that it has retained legal and other counsel of its
choosing with respect to the transac-tions contemplated herein and in the
Securities Purchase Agreement, and is satisfied in its sole discretion with the
form and content of the documentation drafted by the Escrow Agent, as the same
has been approved prior to closing by the parties and their respective counsel.
The Escrow Agent may own an equity interest in the Company and/or may be an
equity owner of the Buyer or another buyer, and may increase or sell any such
interest, so long as in accordance with any and all applicable law. The said
parties hereby waive any objection to the Escrow Agent so acting based upon
conflict of interest or lack of impartiality. The Escrow Agent agrees to act
impartially and in accordance with the terms of this Agreement and with the
parties' respective instructions, so long as they are not in conflict with the
terms of this Agreement.
4. TERMINATION. This Agreement shall terminate on the earlier of (a)
the date on which the Escrow and all other escrowed documents and things
described herein shall have been fully disbursed in accordance with the terms
and conditions of this Agreement, (b) any other date agreed to by the Buyer and
the Company, or (c) the next business day after the expiration of the last of
the Notes and the Warrants to be issued by the Company in accordance with the
terms of the Securities Purchase Agreement, in which event the Escrow shall be
disbursed in full to the Company.
5. MISCELLANEOUS.
5.1 INDEMNIFICATION OF ESCROW AGENT.
(a) The Company and the Buyer each agree, jointly and severally, to
indemnify the Escrow Agent for, and to hold him harmless against, any loss
incurred without willful misconduct or bad faith on the Escrow Agent's part,
arising out of or in connection with the administration of this Agreement,
including the costs and expenses of defending himself against any claim or
liability in connection with the exercise or performance of any of his powers or
duties hereunder. This indemnification shall not apply to a party with respect
to a direct claim against the Escrow Agent by such party alleging in good faith
a breach of this Agreement by the
4
<PAGE>
Escrow Agent, which claim results in a final non-appealable judgment against
the Escrow Agent with respect to such claim.
(b) In the event of any dispute as to the nature of the rights or
obligations of the Buyer, the Company or the Escrow Agent hereunder, the Escrow
Agent may at any time or from time to time interplead, deposit and/or pay all or
any part of the Escrow Funds with or to a court of competent jurisdiction
sitting in Wake County, North Carolina or in any appropriate federal court, in
accordance with the procedural rules thereof. The Escrow Agent shall give notice
of such action to the Company and the Buyer. Upon such interpleader, deposit or
payment, the Escrow Agent shall immediately and automatically be relieved and
discharged from all further obligations and responsibilities hereunder,
including the decision to interplead, deposit or pay such funds.
5.2 AMENDMENTS. This Agreement may be modified or amended only by a
written instrument executed by each of the parties hereto.
5.3 NOTICES. All communications required or permitted to be given under
this Agreement to any party hereto shall be sent by first class mail or
facsimile to such party at the address, except in the case of the Escrow Agent,
of such party set forth in the Securities Purchase Agreement and, in the case of
the Escrow Agent, at 3005 Anderson Drive, Suite 204, Raleigh, North Carolina
U.S.A. 27609.
5.5 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Escrow Agent shall not assign his duties under this
Agreement.
5.6 GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of North Carolina.
5.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be an original, and all of which together
shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
[SIGNATURE PAGE FOLLOWS]
5
<PAGE>
[SIGNATURE PAGE TO ESCROW AGREEMENT DATED AS OF JAN. 31, 2000]
THE COMPANY:
CYNET, INC.
By:
----------------------------------------
Mr. Vincent W. Beale, Chairman
THE BUYER:
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc.,
its General Partner
By:
----------------------------------------
Mr. Thomas F. Duszynski,
Chief Operating Officer
ESCROW AGENT:
------------------------------------------
H. GLENN BAGWELL, JR., ESQ.
Address: 3005 Anderson Drive, Suite 204
Raleigh, North Carolina USA 27609
Telephone 919.785.3113
Telecopier 919.785.3116
6
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
HOUSTON ECONOMIC OPPORTUNITY FUND, L.P.,
AND
CYNET, INC.
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of this 3rd day
of February 2000, among Houston Economic Opportunity Fund, L.P., a Delaware
limited partnership ("HEOF"), and CyNet, Inc., a Texas corporation (the
"Company").
WITNESSETH:
WHEREAS, the Company and HEOF desire to memorialize (i) an investment
(the "Investment") by HEOF of one million six hundred thousand dollars
($1,600,000.00) into the Company in exchange for one million six hundred
thousand shares of Series C Redeemable Callable Preferred Stock, no par value
("Series "C Preferred Stock"), of the Company and (ii) an exchange (the
"Exchange") of one million seven hundred sixty six thousand four hundred twenty
three shares (the "Exchange Shares") of Class A voting common stock, no par
value ("Class A Common Stock"), of the Company for one million seven hundred
sixty six thousand four hundred twenty three shares of Series D Redeemable
Convertible Preferred Stock, no par value ("Series D Preferred Stock"), of the
Company;
NOW, THEREFORE, in consideration of their respective covenants,
agreements, representations and warranties contained herein, the sufficiency of
which are acknowledged by all parties, and intending to be legally bound, HEOF
and the Company agree as follows:
ARTICLE ONE
ISSUANCE OF THE SERIES C PREFERRED STOCK AND THE SERIES D PREFERRED STOCK
1.01 ISSUANCE OF SERIES C PREFERRED STOCK. Subject to the terms and conditions
of this Agreement, at the Closing, the Company shall issue and deliver the
Series C Preferred Stock to HEOF, and HEOF shall purchase the Series C Preferred
Stock from the Company for the subscription amount set forth in Section 2.01
below. At the Closing (defined below), the Company shall deliver to HEOF a stock
certificate evidencing ownership of one million six hundred thousand shares of
Series C Preferred Stock in the Company.
1.02 ISSUANCE OF SERIES D PREFERRED STOCK. Subject to the terms and conditions
of this Agreement, at the Closing, the Company shall issue and deliver the
Series D Preferred Stock to HEOF in exchange for receipt of the Exchange Shares,
duly endorsed for transfer. At the Closing, the Company shall deliver to HEOF a
stock certificate evidencing ownership of one million seven hundred sixty six
thousand four hundred twenty three shares of Series D Preferred Stock in the
Company.
ARTICLE TWO
INVESTMENT AMOUNT
2.01 INVESTMENT AMOUNT. In connection with the purchase of the Series C
Preferred Stock, HEOF shall pay One Million Six Hundred Thousand Dollars
($1,600,000.00) in cash to the Company (the "Subscription"). The Subscription
shall be made to the Company on the Closing Date by wire transfer to the
Company's bank account at "Wells Fargo Bank (12339 Jones Road, Houston, Texas
77070: Attn Bob Hastings) ABA# 121000248 for the account of CyNet, Inc., Account
No. 0744691932", or by cashiers check payable to the Company.
ARTICLE THREE
THE CLOSING
3.01 CLOSING. The closing of the transactions contemplated herein (the
"Closing") will take place at the offices of HEOF, 1400 Smith Street, Houston,
Texas 77002-7361 at 3:00 p.m. on February 3, 2000 or at a place or time agreed
upon by the parties (the "Closing Date").
-2-
<PAGE>
ARTICLE FOUR
DELIVERIES AT CLOSING
4.01 DELIVERIES AT CLOSING.
(i) THE COMPANY'S OBLIGATIONS. At the Closing, the Company shall
deliver to HEOF and its counsel the items set forth below against delivery of
the items by HEOF as provided in Section 2.01 and Sections 4.01 (ii) below:
(1) Fully executed Stock Purchase Agreement;
(2) Fully executed Secretary's Certificate (with
incumbency signatures), certifying that the Company
was incorporated and duly organized under Texas law,
that attached thereto is a certified copy of the
Articles of Incorporation (and all amendments
thereto) of the Company as of a recent date and that
no amendments have been made from the date thereof
until the date hereof, that attached thereto is a
copy of the Bylaws as in effect as of the date
hereof, and that attached thereto is a copy of the
Statements of the Powers, Designations, Preferences
and Rights for the Series C Preferred Stock and
Series D Preferred Stock adopted by the Board of
Directors of the Company and filed with the Secretary
of State of Texas
(3) Fully executed Stock Certificate - No. C-1 to HEOF
representing one million six hundred thousand shares
of Series C Preferred Stock of the Company; and
(4) Fully executed Stock Certificate - No. D-1 to HEOF
representing one million seven hundred sixty six
thousand four hundred twenty three shares of Series D
Preferred Stock of the Company.
(ii) HEOF OBLIGATIONS. At the Closing, HEOF shall deliver to the
Company the items set forth below against delivery of the items by the Company
and HEOF as provided in Section 4.01 (i):
(1) Fully executed Stock Purchase Agreement;
(2) Stock Certificate No. 1065, fully executed for
transfer in blank, representing one million seven
hundred sixty six thousand four hundred twenty three
shares of Class A Common Stock; and
(3) Fully executed Secretary's Certificate of HEOF
Management Corp. (with incumbency signatures).
ARTICLE FIVE A
COMPANY REPRESENTATIONS AND WARRANTIES
To induce HEOF to enter into this Agreement, the Company makes the following
representations and warranties to HEOF:
5A.01 ORGANIZATION.
The Company is a Texas corporation duly organized and validly existing under the
laws of the State of Texas. The Company has delivered to HEOF true, correct and
complete copies of the Articles of Incorporation and Bylaws of the Company and
such documents are in full force and effect as of the date of this Agreement.
5A.02 AUTHORITY.
The Company has duly authorized, executed and delivered this Agreement and this
Agreement constitutes a valid and binding obligation of the Company, enforceable
against the Company according to its terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally and (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies.
5A.03 GOVERNMENTAL AND OTHER AUTHORIZATIONS.
-3-
<PAGE>
Neither the Company's execution, delivery and performance of this Agreement, nor
the Company's consummation of the transactions contemplated by this Agreement,
require any consent, approval or action by or in respect of, or any declaration,
filing or registration with, any governmental or regulatory body, court, agency,
official or authority (each, a "Governmental Authority").
5A.04 NON-CONTRAVENTION.
Neither the Company's execution, delivery and performance of this Agreement, nor
the Company's consummation of the transactions contemplated by this Agreement,
with or without the giving of notice, the lapse of time or both: (i) contravene
or conflict with the Articles of Incorporation or Bylaws of the Company or the
terms of any series of preferred stock of the Company issued and outstanding,
(ii) contravene or conflict or constitute a violation of any provision of any
law, rule, regulation, judgment, injunction, order or decree currently in effect
and binding upon or applicable to the Company, (iii) require any consent,
approval or other action by any person, (iv) contravene or conflict with or
constitute a violation of or a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of the
Company or to a loss of any benefit to which the Company is entitled, under any
provision of (A) any agreement, contract, indenture, lease or other instrument
binding upon the Company or (B) any license, franchise, permit or other similar
authorization held by the Company or (v) result in the creation or imposition of
any mortgage, pledge, security interest, lien, claim, charge, restriction,
encumbrance or assessment of any kind (each, a "Lien") on any asset of the
Company, and that, in the case of clauses (ii) through (v), would individually
or in the aggregate have a Material Adverse Effect on the Company or its
business.
5A.05 CAPITALIZATION.
The capital stock of the Company consists of 70,000,000 authorized shares of
capital stock of which 60,000,000 are designated as common stock and 10,000,000
are designated as preferred stock, no par value ("Preferred Stock"). The common
stock consists of 40,000,000 shares designated as Class A Voting Common Stock,
no par value ("Class A Common Stock"), and 20,000,000 shares designated as Class
B Nonvoting Common Stock, no par value ("Class B Common Stock"). The Company has
27,574,735 shares of Class A Common Stock, 2,124,121 shares of Class B Common
Stock, 66,000 shares of Convertible Non voting Series A Preferred Stock, no par
value ("Series A Preferred Stock"), and 50,832 shares of Convertible Non voting
Series B Preferred Stock, no par value ("Series B Preferred Stock"), issued and
outstanding as of December 31, 2000. After the issuance contemplated herein, the
Company will have 27,574,735 shares of Class A Common Stock, 2,124,121 shares of
Class B Common Stock, 66,000 shares of Series A Preferred Stock, 50,832 shares
of Series B Preferred Stock, 1,600,000 shares of Series C Preferred Stock, and
the 1,766,423 shares of Series D Preferred Stock (the "Capital Stock") issued
and outstanding. All issued and outstanding shares of Capital Stock of the
Company are validly issued, fully paid and nonassessable, and have not been
issued in violation of any preemptive, first refusal or other subscription
rights of any shareholder of the Company. Other than the Capital Stock, there
are no outstanding (A) Class A Common Stock or Class B Common Stock
(collectively, the "Common Stock") of the Company or other voting or ownership
interests of the Company, (B) securities of the Company convertible into or
exchangeable for Common Stock or other voting or ownership interest of the
Company or (C) options, warrants, exchange rights, subscription rights or other
agreements, commitments or rights to purchase or otherwise acquire from the
Company, or agreements, commitments or obligations of the Company to issue or
sell, any Common Stock, other voting or ownership interests or securities
convertible into or exchangeable for Common Stock or other voting or ownership
interests of the Company (the items in clauses (A), (B) and (C) being referred
to collectively as the "Company Securities"), except for (i) the convertible
capital stock, options and warrants disclosed in the Company's Registration
Statement on Form SB-2 Registration No. 333-92099, dated December 3, 1999 (the
"Registration Statement"), (ii) the $1,600,000 principal amount of Series A 8%
Convertible Notes due 2002 (the "Debentures") to be issued on the date hereof
and the Warrant to Purchase 160,000 shares of Class A Common Stock issued in
connection with the Debentures and the Registration Right Agreement executed in
connection therewith, (iii) the conversion privileges of the Series D Preferred
Stock and the Debentures, (iv) the rights provided in the Investor Rights and
Preferential Purchase Rights Agreement, dated September 30, 1999 and amended on
November 29, 1999 and January 31, 2000, by and among the Company, certain
members of management of the Company and HEOF, (v) the rights provided in the
Registration Rights Agreement, dated September 30, 1999, by and among the
Company and HEOF and (vi) the Subscription Agreement, dated July 22, 1998 and
amended January 3, 2000, between the Company and CyNet Holdings, L.L.C. There
are no outstanding obligations of the Company to sell, issue or deliver, or to
repurchase, redeem or otherwise acquire, any Company Securities, except for (x)
the rights of HEOF to put shares of Class A Common Stock to the Company provided
in the Option Agreement, dated September 30, 1999 and amended on November 29,
1999, between the Company and HEOF and (y) the obligations of the Company to
issue shares of Class A Common Stock and Class B Common Stock to the holders of
the Series A Preferred Stock and the Series B Preferred Stock, respectively,
upon conversion thereof.
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5A.06 SUBSIDIARIES.
Except as set forth in the Registration Statement, there are no subsidiaries of
the Company.
5A.07 FINANCIAL INFORMATION.
The Company has delivered to HEOF a true, correct and complete copy of the
financial statements of the Company as of September 30, 1999 ("Financial
Statements"). The Financial Statements are unaudited and have been prepared in
accordance with generally accepted accounting principles and fairly present the
financial condition of the Company for the period indicated, subject to normal
year-end audit adjustments. The Company represents and warrants that since the
date of the Financial Statements no material changes have occurred within the
Company which would have a Material Adverse Affect on the financial condition of
the Company or its properties except as disclosed to HEOF in writing (the
"Additional Information").
5A.08 SOLVENCY. The Company represents that as of the date hereof it is solvent.
5A.09 ABSENCE OF UNDISCLOSED LIABILITIES.
The Company has no liabilities or obligations, except those liabilities
or obligations that are disclosed in the Registration Statement or the
Additional Information. To the best knowledge of the Company, there is no basis
for any assertion against the Company of any liability or obligation of any
nature or in any amount not disclosed in the Registration Statement or in the
Additional Information. For purposes of this Agreement, the phrase "liabilities
or obligations" includes any direct or indirect indebtedness, claim, loss,
damage, deficiency (including deferred income tax and other net tax
deficiencies), cost, expense, obligation, guarantee, or financial
responsibility, whether accrued, absolute or contingent, known or unknown, fixed
or unfixed, liquidated or unliquidated, secured or unsecured.
5A.10 PROPERTIES.
All of the material assets and properties of the Company are reflected on the
Financial Statements or disclosed in the Registration Statement. As of the
Closing Date the Company, except as otherwise noted in the Financial Statements
or disclosed in the Registration Statement, has good, valid and marketable title
to all of the assets and properties, whether real, personal or mixed, tangible
or intangible, of the Company free and clear of all Liens, except (a) Liens for
current Taxes (as defined hereinafter) not delinquent or being contested in good
faith by appropriate proceedings and for which appropriate reserves have been
established in accordance with generally accepted accounting principles as
disclosed in the Registration Statement, and (b) deposits or pledges to secure
bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary course of business with respect to
obligations which are not due or which are being contested in good faith as
disclosed in the Registration Statement.
5A.11 PROPRIETARY RIGHTS.
Except as disclosed in the Registration Statement, the Company does not own,
possess or use any patents, patent applications, trademarks, trademark
applications, service marks, trade names, franchises, permits, copyrights and
copyright registrations for its business (collectively, the "Patents and
Trademarks").
5A.12 LITIGATION.
Except as disclosed in the Registration Statement, there is no action, suit,
arbitration, investigation or legal, administrative or other proceeding
(collectively, "Claims and Litigation") pending against or, to the best
knowledge of the Company, threatened against or affecting, the Company before
any court or arbitrator or any Governmental Authority. The Company is not
subject to any judgment, order or decree entered in any lawsuit or proceeding or
issued by any Governmental Authority.
5A.13 MATERIAL CONTRACTS.
(i) Except for the agreements, contracts, plans, leases, arrangements and
commitments, oral or written, formal or informal, disclosed in the Registration
Statement, the Additional Information, the Financial Statements or any other
Exhibits to this Agreement (collectively, "Contracts"), the Company is not a
party to or subject to any other material contract.
(ii) Except as otherwise disclosed in the Registration Statement or the
Additional Information, each Contract is a valid and
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binding agreement of the Company and is in full force and effect. The Company
is not in default or breach under the terms of any Contract, and, to the best
knowledge of the Company, no other party to any Contract is in default or
breach under the terms of such Contract.
(iii) Except as otherwise disclosed in the Registration Statement or the
Additional Information, the copies of the Contracts delivered to HEOF set forth
the entire agreement between the parties to such Contracts pertaining to the
subject matter contained therein and are correct and complete. There are no
other material agreements, representations or understandings between or among
the Company and the parties to the Contracts except as set forth in the
Contracts.
(iv) Except as otherwise disclosed in the Registration Statement or the
Additional Information, the Company has not received notice that any party to
any of the Contracts intends to terminate any of the Contracts or to exercise or
not to exercise any option under any Contract.
5A.14 TAXES.
The Company has: (i) timely filed, or joined in the filing of, all returns
required to be filed by it with respect to all federal, state and local income,
payroll, withholding, excise, sales, use, personal property, use and occupancy,
business and occupation, mercantile, real estate, capital stock and franchise or
other taxes (all the foregoing taxes, including interest and penalties thereon
and including estimated taxes, being hereinafter collectively called "Taxes");
(ii) paid all Taxes due, whether pursuant to such returns or otherwise, except
those contested by it in good faith; (iii) paid all other Taxes for which a
notice of or assessment or demand for payment has been received, except those
contested in good faith; and (iv) adequately accrued and reserved for the
payment of all Taxes not yet due and payable. All such returns have been
prepared in accordance with all applicable laws and requirements and accurately
reflect the taxable income (or other measure of Tax) of the corporation or
person filing the same.
5A.15 INSURANCE.
The Company has obtained all required insurance and bonds necessary to operate
its business as it is currently operated or required by the terms of the
Company's Contracts.
5A.16 FULL DISCLOSURE.
To the best of the Company's knowledge, none of the representations and
warranties made by the Company in this Agreement, the Registration Statement or
in any Exhibit furnished by the Company, or on its behalf, contains any untrue
statement of material fact, or omits to state any material fact the omission of
which would be misleading considering the context in which such statements were
made, which would have a Material Adverse Effect on the Company or its
properties.
ARTICLE FIVE B
INVESTOR REPRESENTATIONS AND WARRANTIES
HEOF (INDIVIDUALLY, AN "INVESTOR") HEREBY REPRESENTS AND WARRANTS THAT:
5B.01 AUTHORIZATION. HEOF has full power and authority to enter into this
Agreement, and this Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
5B.02 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with HEOF in
reliance upon HEOF's representation to the Company, which by HEOF's execution of
this Agreement HEOF hereby confirms, that the Series C Preferred Stock and the
Series D Preferred Stock to be received by HEOF and the shares of Class A Common
Stock into which the Series D Preferred Stock may be converted (the "Conversion
Shares") (collectively, the "HEOF Securities") will be acquired for investment
for HEOF's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that HEOF has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, HEOF further represents that HEOF does
not have any contract, undertaking, agreement or
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arrangement with any person to sell, transfer or grant participations to HEOF
or to any third person, with respect to any of the HEOF Securities.
5B.03 DISCLOSURE OF INFORMATION. HEOF believes it has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Series C Preferred Stock or the Series D Preferred Stock. HEOF
further represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Series C Preferred Stock, the Series D Preferred Stock and the business,
properties, prospects and financial conditions of the Company.
5B.04 INVESTMENT EXPERIENCE. HEOF is a sophisticated investor in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment, and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Series C Preferred Stock and the
Series D Preferred Stock. HEOF was not organized for the purpose of acquiring
the Series C Preferred Stock or the Series D Preferred Stock.
5B.05 ACCREDITED INVESTOR. HEOF is an "accredited investor" within the meaning
of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as
presently in effect.
5B.06 RESTRICTED SECURITIES. HEOF understands that the HEOF Securities it is
purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, HEOF represents that it is familiar with SEC
Rule 144, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
5B.07 TITLE TO SHARES. HEOF has good and indefeasible title to the Exchange
Shares, free and clear of all pledges, liens, charges and other encumbrances
whatsoever.
5B.08 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the
representations set forth above, HEOF further agrees not to make any disposition
of all or any portion of the Securities unless and until the transferee has
agreed in writing for the benefit of the Company to be bound by this Section and
the Investor Rights Agreement provided and to the extent this Section and such
agreement are then applicable, and:
(a) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
(b) (i) HEOF shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, HEOF shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that such disposition will
not require registration of such shares under the Act. It is agreed that the
Company will not require opinions of counsel for transactions made pursuant to
Rule 144 except in unusual circumstances, as reasonably determined by the
Company.
(c) Notwithstanding the provisions of Paragraphs (a) and (b) above, no
such registration statement or opinion of counsel shall be necessary for a
transfer by a partner of HEOF who withdraws after the date hereof, if the
transferee agrees in writing to be subject to the terms hereof to the same
extent as if the transferee were an original investor hereunder.
5B.08 LEGENDS. It is understood that the certificates evidencing the HEOF
Securities will bear the following restrictive legend:
"The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of 1933, as
amended, or the securities laws of any state. Except upon such registration,
such shares may not be sold or transferred at any time whatsoever except upon
delivery to the Company of an opinion of counsel satisfactory to the Company
that registration is not required for such transfer and/or submission to the
Company of such other evidence as may be satisfactory to the Company to the
effect that any such transfer shall not be in violation of the Securities Act of
1933, as amended, and/or applicable state securities laws and/or any rule or
regulation promulgated thereunder."
ARTICLE SIX
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CONDITIONS PRECEDENT TO HEOF'S PERFORMANCE
The obligations of HEOF to purchase the HEOF Shares, make payment of its
Subscription and surrender the Exchange Shares and complete the Closing are
subject to the satisfaction or waiver, at or before the Closing Date, of all the
conditions set out below in this Article Six. HEOF may waive any or all of these
conditions in whole or in part without prior notice.
6.01 ACCURACY OF THE COMPANY'S REPRESENTATIONS.
All representations and warranties by the Company in this Agreement of a
material nature will be true, correct and complete in all respects on and as of
the Closing Date as though made on and as of the Closing Date.
6.02 PERFORMANCE BY THE COMPANY.
The Company will have performed, satisfied and complied with all covenants and
agreements required by this Agreement to be performed, satisfied or complied
with by the Company on or before the Closing Date.
6.03 ABSENCE OF LITIGATION.
No action, suit, or proceeding before any court or any governmental body or
authority, pertaining to the Company (except as disclosed in the Registration
Statement) or the transactions contemplated by this Agreement or to its Closing
will have been instituted or, to the Company's knowledge, threatened on or
before the Closing Date.
6.04 CONSENTS AND APPROVALS.
All certifications, consents or approvals necessary to permit consummation of
the Closing will have been received on or before the Closing Date.
6.06 LEGAL REPRESENTATION.
The Company acknowledges that it has the opportunity to seek and receive legal
advice from its own legal counsel on all the documents involved in this
transaction.
ARTICLE SEVEN
CONDITIONS PRECEDENT TO THE COMPANY'S PERFORMANCE
The obligations of the Company to issue the HEOF Shares for the Subscription and
surrender of the Exchange Shares and complete the Closing are subject to the
satisfaction, at or before the Closing Date, of all the conditions in this
Article Seven. The Company may waive any or all of these conditions in whole or
in part without prior notice.
7.01 ACCURACY OF REPRESENTATIONS.
All representations and warranties by HEOF in this Agreement of a material
nature will be true, correct and complete in all respects on and as of the
Closing Date as though made on and as of the Closing Date.
7.02 PERFORMANCE.
HEOF will have performed, satisfied and complied with all covenants and
agreements required by this Agreement to be performed, satisfied or complied
with by such person on or before the Closing Date.
7.03 PAYMENT OF PURCHASE PRICE. HEOF shall have delivered the subscription price
and the Exchange Shares specified in Article One.
7.04 LEGAL REPRESENTATION.
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HEOF acknowledges that it has sought and received legal advice from its own
legal counsel on all the documents involved in this transaction.
ARTICLE EIGHT
OTHER AGREEMENTS
8.01 CONVERSION OF PREFERRED STOCK
The Company agrees to exercise its mandatory conversion rights with respect to
the Series A Preferred Stock and Series B Preferred Stock on or before the
Closing Date, convert all of the outstanding shares of Series A Preferred Stock
and the Series B Preferred Stock into Class A Common Stock and Class B Common
Stock, respectively, within thirty (30) days after the date hereof and to retire
the Series A Preferred Stock and Series B Preferred Stock immediately after such
conversion.
ARTICLE NINE
FORM OF AGREEMENT
9.01 SURVIVAL OF WARRANTIES. The warranties and representations of the Company
and HEOF contained in or made pursuant to or in connection with this Agreement
shall survive the execution and delivery of this Agreement and the Closing and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the Company or HEOF.
9.02 MODIFICATION AND WAIVER.
No supplement, modification, or amendment of this Agreement is binding unless
executed in writing by all the parties. No waiver of any of the provisions of
this Agreement is deemed, or constitutes, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver. No
waiver is binding unless executed in writing by the party making the waiver.
9.03 COUNTERPARTS.
This Agreement may be executed simultaneously in one or more counterparts, each
of which is deemed an original, but all of which together constitute one and the
same instrument. The parties may deliver executed counterparts by telecopier
which counterparts have the same effect as the Agreement itself.
9.04 GOVERNING LAW.
This Agreement is construed according to, and governed by, the laws of the State
of Texas, conflict of laws provisions notwithstanding. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed according to their specific terms or were otherwise
breached. It is accordingly agreed that the parties are entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the Southern District of Texas or any Texas state
court, this being in addition to any other remedy to which they are entitled at
law or in equity. In addition, each of the parties (a) consents to submit itself
to the personal jurisdiction of any Federal court located in the Southern
District of Texas or any Texas state court if any dispute arises out of this
Agreement or any of the transactions contemplated by this Agreement, (b) agrees
that it will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court and (c) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a Federal court sitting
in the Southern District of Texas or any Texas state court.
9.05 DEFINITIONS.
For purposes of this Agreement:
(a) an "Affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
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(b) "Material Adverse Effect" on a party means a material adverse
effect upon the financial condition, results of operations, business,
properties, assets or operations of such party;
(c) "Person" means an individual, corporation, company, joint venture,
association, trust, unincorporated organization or other entity;
(d) a "Subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting Company interests of which
is sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first person.
9.06 INTERPRETATION.
When a reference is made in this Agreement to an Article, Section, or Exhibit,
such reference is to an Article or Section of, or an Exhibit to, this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and do not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. All terms defined in this Agreement have the defined meanings when
used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein. The definitions contained in this Agreement
are applicable to the singular as well as the plural forms of such terms and to
the masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument or statute defined or referred to herein or in any
agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
9.07 ENTIRE AGREEMENT: NO THIRD-PARTY BENEFICIARIES.
This Agreement (including the documents and instruments referred to herein) (a)
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and (b) are not intended to confer upon any
person other than the parties any rights or remedies.
9.08 EFFECTIVE DATE OF THIS AGREEMENT.
This Agreement is effective as of the date first written above upon the
execution hereof by HEOF and the Company.
9.09 FINDER'S FEES.
Each party represents that it neither is nor will be obligated for any finder's
fee or commission in connection with this transaction except as described
herein.
9.10 SEVERABILITY. In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
ARTICLE TEN
SUCCESSORS AND ASSIGNS
10.01 SUCCESSORS AND ASSIGNS; ASSIGNMENT.
This Agreement is binding on, and inures to the benefit of, the parties hereto
and their respective heirs, legal representatives, successors, and assigns.
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ARTICLE ELEVEN
REMEDIES
11.01 INDEMNITY.
(a) Each party shall defend, indemnify and save and hold harmless the
other party, and its partners, directors, officers, employees and agents against
all Liabilities that relate to the breach of any of the terms, covenants,
conditions or representations of this Agreement; or such party's
misrepresentations or breaches of warranty contained in this Agreement or any of
the documents entered into or delivered in connection herewith.
(b) The right to indemnification set forth in this Section 11.01
survives this Agreement.
(c) As used in this Section 11.01, the following terms mean:
"Liabilities" means all debts, liabilities, obligations,
losses, damages, costs and expenses (including, without limitation, prejudgment
interest and post-judgment interest), penalties, fines, taxes, liens, court
costs, judgments, awards, settlements, assessments, and attorneys' and
accountants' fees and expenses (including, without limitation, those incurred in
investigating and defending any items indemnified and those incurred in
enforcing any indemnity obligation).
11.02 OTHER REMEDIES.
If any party, without legal cause, fails or refuses to consummate the
transactions contemplated by this Agreement according to the terms and
conditions hereof, then the other parties have all rights and remedies available
at law or in equity, specifically including, but not limited to, the right of
specific performance.
11.03 MEDIATION AFTER CLOSING.
If, after the consummation of Closing, a dispute relating to this
Agreement arises between the parties hereto, the parties agree to use the
following procedure prior to any party pursuing other available remedies.
(a) A meeting shall be held promptly between the parties, attended by
individuals with decision-making authority regarding the dispute, to attempt in
good faith to negotiate a resolution of the dispute.
(b) If, within thirty (30) days after such meeting, the parties have
not succeeded in negotiating a resolution of the dispute, they agree to submit
the dispute to mediation according to the Commercial Mediation Rules of the
American Arbitration Association and to bear equally the costs of the mediation.
(c) The parties will jointly appoint a mutually acceptable mediator,
seeking assistance in such regard from the American Arbitration Association if
they have been unable to agree upon such appointment within twenty (20) days
from the conclusion of the negotiation period.
(d) The parties agree to participate in good faith in the mediation and
negotiations related thereto for a period of thirty (30) days.
11.04 MANDATORY ARBITRATION.
If the parties are not successful in resolving the dispute through
mediation as provided in Section 11.03 above, then the parties agree to submit
the matter to binding arbitration in accordance with the rules and regulations
of the American Arbitration Association located in or near Houston, Texas.
Notwithstanding the foregoing, nothing herein or in Section 11.03 above
is construed as limiting a party's right to seek at any time injunctive relief
from any court of appropriate jurisdiction.
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ARTICLE TWELVE
NOTICES
12.01 NOTICES
All notices, claims, requests, demands and other communications under this
Agreement must be in writing and are deemed duly given or made on the date of
service if served personally or on the third day after mailing if mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid, and properly addressed:
(a) if to Houston Economic Opportunity Fund, L.P., addressed to it at:
Houston Economic Opportunity Fund, L.P.
1400 Smith Street
Houston, Texas 77002
Attention: President
with copies to:
Houston Economic Opportunity Fund, L.P.
1400 Smith Street
Houston, Texas 77002
Attention: Donna Lowry
and
T. D. Warner & Associates, P.C.
4410 Montrose Boulevard
Houston, Texas 77006
Attention: T. Deon Warner
(b) if to the Company, addressed to:
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Attention: President
with copies to:
Samuel C. Beale
Vice President and General Counsel
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
and
James J. Spring, III
Chamberlin, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Any party may change its address for the purposes of this Section by giving the
other party written notice of the new address in the manner set forth above.
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IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on the
day and year first written above.
HOUSTON ECONOMIC OPPORTUNITY FUND, L.P.
BY: HEOF Management Corp.
Its corporate general partner
BY: /s/ Gene E. Humphrey
------------------------------------
Gene E. Humphrey
President
CYNET, INC.
By: /s/ Bernard B. Beale
-------------------------------------
Bernard B. Beale, Vice President
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AGREEMENT CONCLUDED BETWEEN ON FEBRUARY 17, 2000 BETWEEN
TELIRAN ELECTRONICS, LTD., CYNET HOLDINGS, LLC AND CYNET, INC.
On the 16th day of February, 2000, Teliran Electronics, Ltd. of Israel and its
Subsidiaries, including without limitation Globewave, Inc. of New Jersey, United
States of America (hereinafter referred to as the "Teliran Group"), Cynet
Holdings, LLC, (hereinafter referred to as "Cynet Holdings") a State of Texas,
United States of America, limited liability company and Cynet, Inc , a State of
Texas, United States of America, corporation (hereinafter Cynet Holdings, LLC
and Cynet, Inc. are collectively referred to as the "Cynet Group") enter into a
definitive agreement concerning Exclusive Marketing Rights, Technical Support,
Options to buy equity, and Partnership in Future Technology.
1. AGREEMENT SUPERSEDES ALL PREVIOUS AGREEMENTS BETWEEN THE PARTIES. This
Agreement supersedes all previous agreements between the parties to
this Agreement; except the Purchase Order Number 1101 dated February 3,
2000 which is incorporated by reference in this Agreement This
Agreement is effective upon Cynet Holdings' delivery of the pledged
Cynet, Inc. shares pursuant to Paragraph 3 below.
2. EXCLUSIVE MARKETING RIGHTS. The Teliran Group grants to Cynet Holdings
for three (3) years exclusive sales and marketing rights in all
territories (including without limitation North America, South America,
Asia, and Africa also includes specialty markets) for the Teliran
Group's Complete PCcard (hereinafter referred to as the "Cell
Phone/Modem") subject to Cynet Inc.'s performance in the sales of the
product. The parties agree that the year 2000 minimum sales performance
is 23,700 units. The Cynet Group has issued to the Teliran Group a
written purchase order for 23,700 Cell Phone Modem units at the
purchase price of $350 per unit for various delivery dates on or before
December 31, 2000. The deliveries by quarter shall be as follows: 1st
Quarter - 3,000 units, 2nd Quarter 5,000 units, 3rd Quarter - 7,800
units and 4th Quarter - 7,900 units. The years 2001 and 2002 minimum
performance commitments shall be jointly developed by the Teliran Group
and The Cynet Group; but, in no event shall the sales performance be
less than the year 2000 performance. The Cynet Group agrees to provide
the Teliran Group, as requested, sales and marketing information
concerning actual and prospective sales by targeted markets, which
markets are to be mutually determined and agreed upon at a later date.
In the event the Cynet Group fails to meet sales objectives in any
given market and after the Teliran Group has given the Cynet Group
written notice of its concerns and has allowed adequate time for the
Cynet Group to cure the deficiencies and the Cynet Group has failed to
cure the noticed deficiencies, then the Teliran Group may take back the
sales and marketing rights for the specified market without affecting
the Cynet Group's exclusive sales and marketing rights in all of the
remaining markets. Nonetheless, the Cynet Group shall have the option
to have its obligation to purchase units reduced pursuant to the
Teliran Group revoking exclusive sales and marketing rights in
proportion to the projected number of units to be sold in that market
revoked.
Init.:______ Init.:______ Init.:______
<PAGE>
AGREEMENT
BETWEEN THE TELIRAN GROUP AND THE CYNET GROUP
FEBRUARY17, 2000
PAGE 2
In the event the Cynet Group fails to meet sales objectives in all
given markets and the Teliran Group elects to revoke all sales and
marketing rights pursuant to the procedure set forth above, this
agreement is terminated.
3. LINE OF CREDIT. On or before March 1, 2000, Cynet Holdings shall
deliver to the Teliran Group a letter of credit or other financial
guarantee acceptable to the Teliran Group in the amount of
$1,050,000.00 for covering the projected sales for the First Quarter of
2000 which guarantee shall be for 180 days from the date of issuance.
On or before April 1, 2000, Cynet Holdings shall deliver to the Teliran
Group a letter of credit or other financial guarantee acceptable to the
Teliran Group in the amount of $1,750,000.00 for covering the projected
sales for the Second Quarter of 2000 which guarantee shall be for 180
days from the date of issuance. Until Cynet Holdings delivers to the
Teliran Group the Letters of Credit described above, Cynet Holdings
shall pledge as security to the Teliran Group 1,000,000 shares of
Cynet, Inc. stock, which shares shall be held and distributed pursuant
to a mutually agreed upon Escrow Agreement as follows:
(i) The Teliran Group shall return to Cynet Holdings
250,000 shares of the Cynet, Inc. stock upon delivery
of the letter of credit in the amount of
$1,050,000.00 as described above;
(ii) The Teliran Group shall return to Cynet Holdings
250,000 shares of the Cynet, Inc. stock upon delivery
of the letter of credit in the amount of
$1,750,000.00 as described above; and
(iii) The Teliran Group shall return to Cynet Holdings the
remaining 500,000 shares of the Cynet, Inc. stock at
its option at any time after the requirements of (i)
and (ii) have been met but, in any case, the shares
shall be returned no later than March 31, 2001.
The pledged shares of stock shall be delivered to Dr. Israel Leshem who
shall serve as the Escrow Agent and such delivery shall be on or before
February 24, 2000. CYNET shall bear all of the costs associated with
the sales, marketing, advertising and promotion of the Cell Phone Modem
during the term of its Exclusive Marketing Rights.
4. PURCHASE OPTION. Upon completion of one (1) year of the successful
fulfillment of this agreement, the Cynet Group shall have the option to
purchase up to five percent (5%) of Teliran Electronics, Ltd. at the
purchase price of $2.50 per share, which option shall be in effect
throughout the term of this agreement. Also, the Teliran Group shall
have the
Init.:______ Init.:______ Init.:______
<PAGE>
AGREEMENT
BETWEEN THE TELIRAN GROUP AND THE CYNET GROUP
FEBRUARY17, 2000
PAGE 3
the option to buy from Cynet, Inc. or Cynet Holdings shares in Cynet,
Inc. in an amount equal in value to $1,000,000 USD.
5. ONE YEAR ASSIGNMENT OF THE EXCLUSIVE MARKETING RIGHTS. Cynet Holdings,
with the approval of the Teliran Group, may assign to Cynet, Inc. the
exclusive sales and marketing rights in all territories (including
without limitation North America, South America, Asia, and Africa also
includes specialty markets) for the Teliran Group's Complete PCcard
(hereinafter referred to as the "Cell Phone/Modem") subject to Cynet
Inc.'s performance in the sales of the product for the first year of
the Agreement subject to Cynet, Inc. meeting the quarterly sales
commitments listed in Paragraph 2 above. Cynet, Inc.'s performance
requirements shall be reduced on a pro rata basis in the event that The
Teliran Group fails to deliver to Cynet Holdings the number of units on
a quarterly basis as described in Paragraph 2 above. At Cynet Holdings'
election, it may assign to Cynet, Inc. the Exclusive Marketing Rights,
as defined above, for any additional periods during the term of this
Agreement. Cynet Holdings may not assign the Exclusive Marketing Rights
under this Agreement to any third-party without the written approval of
The Teliran Group.
6. TECHNICAL SUPPORT. Beginning on February 1, 2000, the Teliran Group
shall pay to Cynet Holdings $10,000.00 per month to subsidize the Cynet
Group's employment of a minimum of two technical support persons to
support the sales and marketing of the Cell Phone Modem product. The
subsidy shall continue for the term of The Cynet Group's Exclusive
Marketing Agreement. At the Teliran Group's election, the subsidy may
be paid in cash or deducted from Cynet Holding's payment of Cell Phone
Modems previously ordered but for which the Teliran Group has not
received full payment.
7. PARTNERSHIP IN THE NEW TECHNOLOGY. The Cynet Group and the Teliran
Group agree to enter a joint venture regarding the research and
development of improvements and follow-ons to the Cell Phone Modem
product. The technology and products shall be own 50% by the Teliran
Group and 50% by the Cynet Group. This effort shall be directed through
the creation of a new and separate Israeli corporation or limited
liability company. Cynet Holdings and the Teliran Group agree to
execute a detailed written Joint Venture Agreement encompassing among
other things the provisions of the Paragraph. The Joint Venture
Agreement shall be completed and executed on or before April 1, 2000.
After the execution of the Joint Venture Agreement, the parties agree
to begin making investments in the Joint Venture entity. The
investments shall be in agreed installments to
Init.:______ Init.:______ Init.:______
<PAGE>
AGREEMENT
BETWEEN THE TELIRAN GROUP AND THE CYNET GROUP
FEBRUARY17, 2000
Page 4
equal a minimum of $5 million in cash or cash value on or before the
close of December 31, 2000. The Teliran Group's investment can include
transfer to the new company of some existing technology, knowledge and
persons associated with the Cell Phone Modem. Cynet Holdings shall
include some amount of cash as well as additional technology and
knowledge. The Teliran Group and Cynet Holdings shall agree as to the
cash value of any in-kind contributions to the new research and
development entity. The Teliran Group shall retain exclusive
manufacturing and production rights over the newly developed products.
Cynet Holdings shall retain exclusive marketing rights over the newly
developed products.
8. GOVERNING LAW. This Agreement shall be governed by the laws of Israel.
Venue and jurisdiction regarding this Agreement shall lie in the State
of Israel.
TELIRAN ELECTRONICS, LTD. CYNET HOLDINGS, LLC
"Teliran Group" "Cynet Holdings"
By: /s/ Shlomo Alon By: /s/ Vincent W. Beale, Sr.
------------------------------ -------------------------------
Shlomo Alon, Chairman Vincent W. Beale, Sr.
President
By: /s/ Menashe Shabi
------------------------------
Menashe Shabi, President
CYNET, INC.
By: /s/ Bernard B. Beale
------------------------------
Bernard B. Beale
Executive Vice President
<PAGE>
AGREEMENT BETWEEN CYNET HOLDINGS, LLC AND CYNET, INC.
This Agreement is made this 16 day of February, 2000 by and between Cynet
Holdings, LLC, a Texas limited liability company (hereinafter referred to as
"Holdings") and CYNET Inc., a Texas corporation (hereinafter referred to as
"CYNET"), in consideration of the mutual promises made herein.
1. PURPOSE. Holdings has entered into an agreement (the "Teliran Agreement")
with Teliran Group to acquire exclusive marketing rights to the Teliran Group's
Complete PCcard a/k/a the CYNET Cell/Modem (the "Cell Phone/Modem"). CYNET is
desirous of controlling the resales of the Cell Phone/Modem and assisting
Holdings in fulfilling its requirements pursuant to the Teliran Agreement.
2. ASSIGNMENT OF SALES AND MARKETING RIGHTS. Holdings hereby assigns to CYNET
the first year of its exclusive sales and marketing rights for the Cell
Phone/Modem in accordance with the terms herein.
3. LETTERS OF CREDIT. As additional consideration, Holdings agrees to obtain two
letters of credit pursuant to the Teliran Agreement sufficient to cover the
projected sales of the Cell/Phone Modem for the First and Second Quarters of
2000.
3. TERRITORY. The assignment of the sales and marketing rights for the Cell
Phone/Modem will operate on an exclusive basis and include all territories,
including without limitation North America, South America, Asia and Africa and
includes specialty markets.
4. MINIMUM SALES REQUIREMENTS. In consideration of the assignment of exclusive
sales and marketing rights, CYNET's performance in the sales of the product must
meet certain minimum requirements as follows:
- First Quarter 2000 - 3,000 units
- Second Quarter 2000 - 5,000 units
- Third Quarter 2000 - 7,800 units
- Fourth Quarter 2000 - 7,900 units
CYNET's performance requirements shall be reduced on a pro rata basis in the
event the Teliran Group fails to deliver to Holdings and/or CYNET the number of
units shown above for the respective quarters. CYNET may otherwise satisfy its
sales requirements by purchasing for its inventory the minimum number of units
required by this paragraph.
5. TERM AND OPTION TO RENEW. The initial term of this Agreement shall be one
year. This Agreement shall be renewable for additional one year periods subject
to CYNET's sales performance in meeting its minimum sales requirements pursuant
to Paragraph 4 above.
Initial _______ Initial _______
<PAGE>
6. FURTHER ASSURANCES. The parties will each perform such acts, execute and
deliver such instruments and documents, and do all such other things as may be
reasonably necessary to accomplish the transactions contemplated by this
Agreement.
7. NO WAIVER. No waiver of any term or condition of this Agreement will be valid
or binding on a party unless the same has been mutually assented to in writing
by all parties. The failure of a party to enforce at any time any of the
provisions of this Agreement, or the failure to require at any time performance
by one or both of the other parties of the provisions of this Agreement, will in
no way be constructed to be a present or future waiver of such provisions, nor
in any way affect the ability of a party to enforce each and every such
provision thereafter.
8. ENTIRE AGREEMENT. The terms and conditions contained in this Agreement
constitute the entire agreement between the parties with respect to the subject
matter thereof and supercede all previous agreements and understandings, whether
oral or written and all disputes and disagreements related thereto. No agreement
or understanding varying or extending the terms and conditions of this Agreement
will be binding upon any party unless in a written document signed by the party
to be bound thereby.
9. ASSIGNMENT. CYNET may not assign or delegate this Agreement or any of its
rights or duties under this Agreement without the prior written consent of
Holdings. Subject to the foregoing, this Agreement will inure to the benefit of,
and will be binding upon, the parties and their respective successors and
assigns.
10. GOVERNING LAW. This Agreement shall be governed by the laws of Texas. Venue
and jurisdiction regarding this Agreement shall lie in the State of Texas.
CYNET HOLDINGS, LLC
By: /s/ Vincent W. Beale, Sr.
-------------------------------------
Vincent W. Beale, Sr., President
CYNET, INC.
By: /s/ Samuel C. Beale
------------------------------------
Samuel C. Beale, Vice President
And General Counsel
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 182,881
<SECURITIES> 0
<RECEIVABLES> 529,524
<ALLOWANCES> (140,000)
<INVENTORY> 0
<CURRENT-ASSETS> 614,383
<PP&E> 3,981,477
<DEPRECIATION> (1,859,381)
<TOTAL-ASSETS> 2,920,027
<CURRENT-LIABILITIES> (3,959,774)
<BONDS> 0
(236,237)
0
<COMMON> (22,130,201)
<OTHER-SE> (2,196,476)
<TOTAL-LIABILITY-AND-EQUITY> (2,920,027)
<SALES> 0
<TOTAL-REVENUES> 8,626,675
<CGS> 0
<TOTAL-COSTS> 15,961,069
<OTHER-EXPENSES> 54,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 939,557
<INCOME-PRETAX> (8,597,541)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,597,541)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,597,541)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
