<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 2000
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INTELISPAN, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 7379 91-1738902
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2151 EAST BROADWAY ROAD, SUITE 211
TEMPE, ARIZONA 85282
(480) 446-3200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
---------------
JAMES D. SHOOK
VICE PRESIDENT, GENERAL COUNSEL, AND SECRETARY
2151 EAST BROADWAY ROAD, SUITE 211
TEMPE, ARIZONA 85282
(480) 446-3200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
ROBERT S. KANT, ESQ.
JEAN E. HARRIS, ESQ.
SCOTT K. WEISS, ESQ.
GREENBERG TRAURIG, L.L.P.
ONE EAST CAMELBACK
PHOENIX, ARIZONA 85012-1656
(602) 263-2300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. | |
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. | |
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. | |
CALCULATION OF REGISTRATION FEE
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<CAPTION>
==================================================================================================================================
Proposed
Title of Each Maximum Proposed
Class Of Offering Maximum
Securities Amount To Be Price Aggregate Offering Amount Of
To Be Registered Registered Per Unit Price(1) Registration Fee
- ------------------------------------------- ------------------ -------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 ........... 1,420,000 Shares $3.03 $4,304,375 $1,136.36
=========================================== ================== ============== ========================== =========================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION JANUARY 7, 2000
PROSPECTUS
1,420,000 SHARES OF COMMON STOCK
INTELISPAN, INC.
Certain shareholders of Intelispan, Inc. are offering for sale up to
1,420,000 shares of common stock under this prospectus relating to the
following:
- 1,280,000 shares of common stock that shareholders have the
right to acquire upon conversion of Series A of our preferred
stock,
- 108,000 shares of common stock that were issued in January
1999 in connection with an investor relations agreement, and
- 32,000 shares of common stock that may be sold upon exercise
of warrants that were issued in June 1998 in connection with
another investor relations agreement.
The selling shareholders will determine when they will sell their
shares, and in all cases they will sell their shares at the current market price
or at negotiated prices at the time of the sale. We will pay the expenses
incurred to register the shares for resale, but the selling shareholders will
pay any underwriting discounts, concessions, or brokerage commissions associated
with the sale of their shares of common stock. The selling shareholders and the
brokers and dealers that they utilize may be deemed to be "underwriters" within
the meaning of the securities laws, and any commissions received and any profits
realized by them on the sale of shares may be considered to be underwriting
compensation.
We will not receive any of the proceeds of sales by the selling
shareholders. Securities laws and Securities and Exchange Commission regulations
may require the selling shareholders to deliver this prospectus to purchasers
when they resell their shares of common stock.
Our common stock is traded on the NASD over-the-counter bulletin board,
or OTCBB, under the symbol "IVPNE." On January 6, 2000, the last sale price of
the common stock as reported on Nasdaq was $3.00 per share. BECAUSE WE ARE NOT
AND WILL NOT BE A REPORTING COMPANY UNDER THE FEDERAL SECURITIES LAWS ON JANUARY
12, 2000, WE BELIEVE OUR COMMON STOCK WILL NO LONGER BE ELIGIBLE FOR QUOTATION
ON THE OTCBB AFTER THAT DATE.
-------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _____________, 2000.
<PAGE> 3
SUMMARY
The following summary is qualified in its entirety by more detailed
information appearing elsewhere in this prospectus. This prospectus contains
certain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of the factors set forth herein and
elsewhere in this prospectus, including those set forth under "Risk Factors."
You should read the entire prospectus carefully before making an investment
decision.
OUR COMPANY
INTRODUCTION
We provide complete and seamless network solutions that enable secure
and efficient business-to-business communications through virtual private
networks, or VPNs, and the Internet. These solutions include providing secure
network connectivity on a metered basis together with public key infrastructure,
or PKI, -based authentication service and e-commerce transaction management
services. We believe we differentiate our services by integrating complex
technologies to create our own branded network services.
Our principal network services for secure business-to-business
communication currently include the following:
- exSPANd VPN, a VPN utilizing private IP addresses;
- exSPANd INT, a VPN utilizing public IP addresses;
- exSPANd-PKI, a premium network service that utilizes PKI user
authentication; and
- TradeSPAN, a premium network service that incorporates Java
software for electronic document exchange over IP networks,
including legacy Electronic Data Interchange, or EDI, and
other digital file formats.
OUR MARKET OPPORTUNITY AND STRATEGY
Infonetics Research reports that the VPN market was $205 million in
1997 and is estimated to grow to $12 billion by the end of 2001. The Gartner
Group predicts that by 2003, more than 137 million users worldwide, including
one-third of the U.S. work force, will be engaging in some form of remote
access. We believe the following are key driving forces behind our current
market opportunity:
- the growth of business-to-business e-commerce,
- the increasing demand for network security,
- the increase in remote access computing,
- the increasing demand for cost-efficient outsourced network
services, and
- the adoption of centrally managed and distributed software
application business models.
Our goal is to be a leading single-source provider of network solutions
that enable secure and efficient business-to-business communication through VPNs
and the Internet. Key elements of the strategy to achieve this goal include the
following:
- targeting small- and medium-sized businesses through
resellers, system integrators, and strategic relationships;
- building a direct sales force and developing a marketing
campaign to target specific industries with the greatest
perceived demand for our services, such as healthcare and
financial services;
- increasing brand awareness through an aggressive media
campaign;
- continuing to pursue strategic relationships in order to
acquire technologies and service offerings to complement and
expand existing service offerings;
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- providing high-quality service and responsiveness to
customers; and
- pursuing strategic acquisitions to enhance our technology
portfolio, expand product offerings, and build our
distribution channels.
RECENT DEVELOPMENTS
In November 1999, we announced the appointment of Travis Lee Provow, a
director of our company since August 1998, as our Chief Executive Officer,
effective January 1, 2000. Mr. Provow served as Chief Operating Officer of
Slingshot Networks, LLC and has more than 18 years of network experience. Mr.
Provow was a founder of GridNet International, Inc., the network backbone of our
VPN solution, which was sold to MCI WorldCom in 1997. Prior to founding GridNet,
Mr. Provow held several domestic and international technical, marketing, product
management, and strategic planning positions with NCR, now AT&T Global
Information Services, from 1981 to 1995.
During January 2000, Maurice J. Gallagher, Jr. will become the Chairman
of the Board of Directors of our company. Mr. Gallagher is the Chairman of the
Board of Directors of MGC Communications, Inc., which he was instrumental in
organizing. Mr. Gallagher is also a founder and Chairman of BankServ, Inc., a
private payments company specializing in ACII and wire transfers via FED payment
systems founded in 1996. Mr. Gallagher also served as a director of
PurchasePro.com Inc. during 1998 and 1999. Mr. Gallagher co-founded ValuJet
Airlines, Inc. in 1993 and served as director of that company from 1993 until
November 1997. Mr. Gallagher held prior positions with ValuJet from 1993 to
1994, including Chief Financial Officer, and served as Vice Chairman of its
board of directors from 1994 to 1997. Prior to co-founding ValuJet, Mr.
Gallagher was a founder and President of WestAir Holding, Inc., a commuter
airline headquartered in Fresno, California. WestAir was sold to Mesa Airlines
in June 1992, and Mr. Gallagher was a member of the Mesa board of directors from
June 1992 through March 1993.
During December 1999 and January 2000, we offered units in a private
placement to accredited investors. Each unit consists of 133,333 shares of
common stock and a warrant to purchase 66,667 shares of common stock at an
exercise price of $0.75 per share. The maximum offering consists of 250 units
and the units are being offered by a placement agent. We granted the placement
agent the right to sell an additional 50 units to cover any over-allotments. In
connection with the offering, the placement agent will receive, among other
things, seven-year warrants to purchase 33.33% of the shares of common stock
included in the units sold and issuable upon exercise of the warrants included
in the units sold. As of the date of this filing, we have sold approximately 140
units, and have received approximately $10.9 million in net proceeds from this
offering. We expect that additional units will be sold subsequent to the date of
this filing. If the maximum offering is sold in the private placement, we will
raise approximately $22.0 million. Prior to the offering, designees of the
placement agent made available to us approximately $595,000, evidenced by bridge
notes that were converted into units in the offering. In connection with the
bridge notes, we issued to designees of the placement agent bridge warrants to
purchase 10,000,000 shares of common stock at an exercise price of $0.01 per
share. The holders of the bridge warrants exercised the warrants prior to the
first closing of the private placement.
OUR OFFICES
Our principal offices are located at 2151 East Broadway Road, Suite
211, Tempe, Arizona 85282, telephone (480) 446-3200, facsimile (480) 446-3232.
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THE OFFERING
Securities offered by the selling
shareholders.......................... 1,420,000 shares of common stock
Common stock currently
outstanding........................... 47,471,832 shares
Use of Proceeds....................... We will not receive any of the proceeds
of sales by the selling shareholders.
Risk Factors.......................... Investors should carefully consider the
factors discussed under "Risk Factors."
OTCBB symbol.......................... IVPNE
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................. $ 11,303 $ 129,596 $ 69,766 $ 485,627
Gross profit (loss)..................................... (4,535) (4,047) (4,204) 94,162
Loss from operations.................................... (681,539) (5,928,716) (4,154,971) (3,617,602)
Net loss................................................ (572,608) (5,210,560) (3,687,706) (3,635,324)
Net loss per common share - basic and diluted........... $ (0.06) $ (0.32) $ (0.22) $ (0.19)
Weighted average number of common shares outstanding.... 10,337,094 16,334,670 17,135,181 18,964,816
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: AS OF
SEPTEMBER 30, 1999
------------------
(unaudited)
<S> <C>
Working capital deficit........................................................... $ (2,239,862)
Total assets...................................................................... 2,020,089
Total debt........................................................................ 1,616,987
Shareholders' deficit............................................................. (1,073,428)
</TABLE>
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RISK FACTORS
An investment in common stock involves a high degree of risk.
Prospective investors should consider carefully the following risk factors, in
addition to the other information contained in this prospectus, before
purchasing any of our common stock.
OUR COMMON STOCK WILL NO LONGER BE ELIGIBLE FOR QUOTATION ON THE NASD BULLETIN
BOARD IN JANUARY 2000.
Our common stock is currently quoted on the OTCBB operated by the NASD.
On December 10, 1999, the OTCBB changed our symbol from "IVPN" to "IVPNE" after
an initial evaluation by the OTCBB for compliance with the OTCBB eligibility
rule. The trading symbols of securities whose issuers were not deemed compliant
at that time with the OTCBB Eligibility Rule, including ours, were appended with
an "E."
The OTCBB eligibility rule provides that no issuer may be quoted on the
OTCBB unless it is required to make current filings pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. We will not meet this requirement
by our required compliance date of January 12, 2000 and will no longer be
eligible for quotation on the OTCBB after that date unless we are able to secure
a waiver. If our common stock is no longer quoted on the OTCBB, we believe our
common stock may be published in the "pink sheets," which does not provide real
time quotes. As a result, we believe investors will have significantly less
liquidity, limited availability of quotations, and more difficulty purchasing
and selling our common stock, all of which could have a material adverse effect
on the market price of our common stock. No assurance can be given when, if
ever, we will meet the OTCBB qualifications to permit our common stock to be
quoted on the OTCBB.
WE HAVE INCURRED SUBSTANTIAL LOSSES, AND OUR INDEPENDENT PUBLIC ACCOUNTANTS HAVE
ISSUED A QUALIFIED OPINION ON OUR FINANCIAL STATEMENTS.
We have generated limited revenue, have incurred substantial losses
since our inception, and currently are experiencing a substantial cash flow
deficiency from operations. We expect to incur substantial additional losses for
the foreseeable future. We incurred net losses of approximately $573,000 during
1997, approximately $5.2 million during 1998, and approximately $3.7 million
during the nine months ended September 30, 1999. As of September 30, 1999, we
had a working capital deficit of approximately $2.2 million, an accumulated
deficit of approximately $9.4 million, and a shareholders' deficit of
approximately $1.1 million. Our ability to generate significant revenue is
uncertain, and we may never achieve profitability. In addition, we intend to
continue to fund the working capital needs and operating losses of Contego LLC,
our early-stage 66.8% owned subsidiary that supplies the software on which we
base our exSPANd-PKI service. The report by our independent public accountants
on our financial statements for the year ended December 31, 1998 states that our
losses, cash flow deficits, and other factors raise substantial doubt about our
ability to continue as a going concern.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR POTENTIAL
FOR FUTURE SUCCESS.
We began to introduce our products and services during 1998. We have
generated extremely limited revenue and have a very limited operating history on
which you can evaluate our potential for future success. You should evaluate our
company in light of the expenses, delays, uncertainties, and complications
typically encountered by early-stage businesses, many of which will be beyond
our control. These risks include the following:
- lack of sufficient capital,
- unanticipated problems, delays, and expenses relating to
product development and implementation,
- lack of intellectual property,
- licensing and marketing difficulties,
- competition,
- technological changes, and
- uncertain market acceptance of our products and services.
As a result of our limited operating history, our plan for rapid
growth, and the increasingly competitive nature of the markets in which we
operate, our historical financial data is of limited value in anticipating
future
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revenue and operating expenses. Our planned expense levels will be based in part
on our expectations concerning future revenue, which is difficult to forecast
accurately based on our stage of development. We may be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in
revenue. Further, business development and marketing expenses may increase
significantly as we expand operations. To the extent that these expenses precede
or are not rapidly followed by a corresponding increase in revenue, our
business, operating results, and financial condition may be materially and
adversely affected.
UNLESS OUR SHAREHOLDERS APPROVE AN AMENDMENT TO OUR ARTICLES OF INCORPORATION TO
INCREASE THE COMMON STOCK AUTHORIZED FOR ISSUANCE, WE WILL NOT HAVE SUFFICIENT
AUTHORIZED COMMON STOCK TO ISSUE TO ALL HOLDERS OF WARRANTS.
Assuming the maximum offering is sold in our private placement during
December 1999 and January 2000, we will issue to investors in the private
placement warrants to purchase approximately 20,000,100 shares of common stock
at an exercise price of $0.75 per share. We will not have sufficient authorized
shares of common stock to permit full exercise of the warrants. As a result,
until such time as we have sufficient authorized shares of common stock to
permit exercise of all the warrants, the holders of these warrants will only be
entitled to exercise warrants to purchase approximately 16% of the shares of
common stock otherwise issuable pursuant to the warrants. Specifically, we will
have 3,145,562 shares of common stock available for exercise of the warrants
from the total 20,000,100 shares of common stock issuable upon exercise of the
warrants. The Board of Directors has approved an amendment to our articles of
incorporation to increase the number of shares of common stock to an amount
sufficient for the exercise of the warrants. Before the amendment becomes
effective, we must obtain approval from 66 2/3% our shareholders at a special
shareholders' meeting. We have scheduled a shareholders' meeting during January
2000 to approve the amendment. Peter Nelson, our Vice Chairman and a principal
shareholder of our company, has agreed to vote his approximately 4,400,000
shares of common stock in favor of the amendment. There can be no assurance,
however, that the shareholders will approve the amendment. The inability of the
warrant holders to exercise a portion of their warrants would deprive the
holders of the value of the warrants and could have a material adverse effect on
the market price of the common stock. Moreover, the inability to exercise the
warrants will reduce the funds available to us and could result in litigation
against us by warrant holders.
WE DEPEND ON OUR SENIOR MANAGEMENT TEAM AND KEY EMPLOYEES.
Our success depends to a large degree upon the skills of our senior
management team and current key employees and upon our ability to identify,
hire, and retain additional sales, marketing, technical and financial personnel.
We may be unable to retain our existing key personnel or attract and retain
additional key personnel. We depend particularly upon the following key
executives: Travis Lee Provow, Chief Executive Officer and President; Peter
Nelson, founder and Vice Chairman of the Board; Ronald Loback, Chief Operating
Officer; Scot Brands, Chief Financial Officer; and Kent Dallas, Vice President
of Network Technologies. Although we have an employment agreement with Mr.
Nelson and are currently negotiating an employment agreement with Mr. Provow, we
do not have any other employment contracts with our other employees. We do not
maintain key person life insurance for any of our officers or key employees. We
also do not require our executives or our employees to enter non-competition
agreements with us, and those executives or employees could leave our company to
form or join a competitor. The loss of any of our key executives, the use of
proprietary or trade secret data by former employees who compete with us, or the
failure to attract, integrate, motivate, and retain additional key employees
could have a material adverse effect on our business.
WE DEPEND ON KEY CONTRACTUAL RELATIONSHIPS.
We enter into licensing, strategic, and other similar contractual
relationships under which we utilize proprietary technology and incorporate key
products and services into our customer solutions. We currently depend to a
great extent upon six key agreements:
- a reseller agreement with GridNet via MCI WorldCom that
enables us to provide exSPAND VPN;
- a technology supply agreement between our majority-owned
Contego, LLC subsidiary and Baltimore Technologies, plc;
- a strategic alliance agreement between Contego and GridNet
permitting the integration of Contego's product in the GridNet
network;
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- a supply agreement with Contego that enables us to provide
exSPAND-PKI;
- a software license and distribution agreement with Cyclone
Software Corporation that enables us to offer TradeSPAN; and
- a distributor agreement with Altiga Networks that enables us
to offer exSPANd-INT.
If any of these relationships are terminated, expired, or breached, or
if any of the parties to these agreements ceases operations or stops offering
its product or service, our operations would likely be materially impacted.
Further, any changes to the offerings provided by these third parties under
these agreements may require us to change or re-engineer our own services, which
will likely cause a material disruption of our business. In any of such cases,
there is no assurance that we would be able to timely modify our services or to
replace any of the services on favorable terms or at all.
WE FACE RISKS ASSOCIATED WITH OUR SUPPLY AGREEMENT WITH GRIDNET.
The GridNet private IP network provides the network service backbone
for the majority of our products through an agreement with MCI WorldCom. Under
the agreement, we have a $100,000 monthly minimum usage commitment to MCI
WorldCom. As of the date of this prospectus, we owe approximately $500,000 under
this agreement. In November 1999, MCI WorldCom informed us, however, that it
would suspend the required payment of our monthly minimum usage commitment. We
continue to accrue the $100,000 monthly minimum usage commitment under this
agreement, and all amounts payable under this agreement will be due to MCI
WorldCom upon 30 days' notice to our company. We may not have cash available to
pay amounts owed to MCI WorldCom if MCI WorldCom requires the payment. Under the
agreement, MCI WorldCom can eliminate its service offerings, including the
IntraConnect service, upon 60 days' notice to our company. If MCI WorldCom
terminates the IntraConnect service, we would have to find an alternative
network to provide our products and services to customers. Even if we located an
alternate network, an agreement may not be reached on terms that are acceptable
to us and the terms and the time required to migrate our offerings to an
alternative network could materially and adversely affect our business. In
addition, MCI WorldCom has notified us that it is currently changing the network
configuration and technology infrastructure underlying its services. These
changes likely will require us to re-engineer our product offerings to adapt to
these changes and may require us to reposition our offerings in the market.
There can be no assurance that this re-engineering will be possible, successful,
or cost effective.
WE DEPEND UPON LICENSED TECHNOLOGY FROM THIRD PARTIES.
We deal in technically complex products, including advanced and
patented encryption technology. We do not have any patents or copyrights for the
technology we utilize. Instead, we license most of the technology integral to
our business from third parties. Our commercial success will depend in part on
this licensed technology not infringing the proprietary rights of others and our
not breaching technology licenses that cover technology we use in our business.
It is uncertain whether any third-party patents will require us to utilize or
develop alternative technology, alter our products or services, obtain
alternative licenses, or cease activities that infringe on third-parties'
intellectual property rights. We may not be able to obtain any additional
required licenses on commercially favorable terms, if at all. Our inability to
acquire any third-party product licenses, or to integrate the related
third-party products into our products and services, could result in delays in
product development unless and until equivalent products can be identified,
licensed, and integrated. We also expect to require new licenses in the future
as our business grows and technology evolves. Existing or future licenses may
not continue to be available to us on commercially reasonable terms. Litigation,
which could result in substantial cost to us, may also be necessary to enforce
any patents issued or licensed to us or to determine the scope and validity of
third-party proprietary rights.
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WE WILL REQUIRE ADDITIONAL CAPITAL TO SUPPORT OUR GROWTH, AND WE HAVE LIMITED
EXTERNAL SOURCES OF FINANCING.
We will not receive any proceeds from this offering. Assuming we sell
the maximum number of units in our private placement, we believe that the
capital will satisfy our operating capital needs for at least 12 months based
upon our currently anticipated business activities. We anticipate incurring
substantial losses in the future and will likely require significant additional
financing in the future in order to satisfy our cash requirements. Our need for
additional capital to finance our operations and growth will be greater should,
among other things, our revenue or expense estimates prove to be incorrect,
particularly if we do not find additional sources of capital. If we do not find
additional sources of capital, we may be required to reduce the scope of our
business activities until other financing can be obtained. We cannot predict the
timing or amount of our capital requirements at this time. We may not be able to
obtain additional financing in sufficient amounts or on acceptable terms when
needed, which could adversely affect our operating results and prospects.
OUR PRODUCTS AND SERVICES MAY NOT EXPERIENCE BROAD MARKET ACCEPTANCE.
We offer secure business-to-business communications solutions. The
market for providing integrated and secure network services is in the early
stage of development. It is difficult to predict the rate at which this market
will grow, if at all, because this market is relatively new and current and
future competitors are likely to introduce competing services or products. Our
products and services may not experience broad market acceptance. Any market
acceptance for our products and services may not develop in a timely manner or
may not be sustainable. New or increased competition may result in market
saturation, more competitive pricing, or lower margins. Certain critical issues
concerning commercial use of our products and services remain unresolved and may
impact the growth of these services. These issues include, among others, the
ultimate security and reliability of networks, the ease and cost of access, and
the quality of service. Our business, operating results, and financial condition
would be materially and adversely affected if the markets for our products and
services fail to grow, grow more slowly than anticipated, or become more
competitive, or if our products and services are not accepted by targeted
customers even if a substantial market develops.
WE MUST BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE.
The emerging market for our products and services is characterized by
rapid technological developments and evolving industry standards. These factors
will require us continually to improve the performance and features of our
products and services and to introduce new products and services, particularly
in response to offerings from our competitors, as quickly as possible. As a
result, we will be required to expend substantial funds for and commit
significant resources to the conduct of continuing product development. We may
not be successful in developing and marketing new products and services that
respond to competitive and technological developments and changing customer
needs. Any failure by us to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques or
any significant delays in product development or introduction could have a
material adverse effect on our operations.
MANAGEMENT AND OTHER PRINCIPAL SHAREHOLDERS ARE ABLE TO EXERCISE SIGNIFICANT
CONTROL OVER OUR COMPANY.
The current executive officers and directors of our company
beneficially own approximately 30.4% of the outstanding common stock, excluding
stock options to be granted to three director designees to purchase an aggregate
of approximately 450,000 shares. As a result, the executive officers and
directors of our company will be able to significantly influence the management
and affairs of our company and all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in control of our company, even when such change of
control is in the best interests of shareholders. Control by management might
adversely affect the market price of the common stock and the voting and other
rights of our company's other shareholders.
THE MARKETS FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE, SECURE REMOTE ACCESS,
AND STRONG AUTHENTICATION ARE HIGHLY COMPETITIVE.
Our products and services compete in the secure network access and
secure business-to-business communication markets with VPN providers, Value
Added Network, or VAN, providers, and Internet EDI providers. The competition in
these markets is extremely competitive.
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Competition for our products and services arise from several sources in
the VPN market. Most major networking device companies provide or have announced
intentions to provide encryption or other secure access through their hardware.
This group includes Lucent and Cisco; firewall vendors, such as AXENT (Raptor)
and Check Point Software; and modem-pool companies, such as Shiva. Competitors
providing a service-based virtual private network include Sprint, AT&T, GTE,
IBM, and MCI WorldCom, as well as smaller companies, such as Concentric
Networks. In addition, several companies, including Sun Microsystems and
Microsoft, provide or have announced their intention to provide software
product-based solutions, some of which will be integrated into their operating
systems.
Our products and services compete with different technologies that
provide EDI services, including electronic data interchange applications based
on value-added networks and other secure document exchange applications. Many
existing VANs have strong, long-standing relationships with customers and have
demonstrated their ability to deliver a complete solution. Competitors in the
VAN EDI marketplace include GE Information Services, Sterling Commerce, IBM,
Kleinschmidt, and Harbinger. Some of these companies, together with newer
entrants in the market, have introduced Internet-based EDI products and
services. We may also compete in this segment with enterprise resource software
providers that integrate EDI into their products, such as PeopleSoft, BAAN, SAP,
and Oracle.
Competition may develop from companies providing enhanced user
authentication technology that develop products that integrate their technology
into a network solution. These companies include Entrust, VeriSign, and
Baltimore, which utilize PKI-based technology, and Security Dynamics, ActivCard,
and Vasco, which provide non PKI-based network authentication products.
Although we believe that our products and services will compete
favorably in these market segments, we may not maintain a competitive position
against current and potential competitors and market acceptance for our products
and services has not yet been demonstrated. Many of our current and potential
competitors have longer operating histories, greater name recognition, larger
installed bases, and significantly greater financial, technical, marketing, and
sales resources than we possess. As a result, competitors may be able to react
more quickly to emerging technologies and changes in customer requirements or to
devote greater resources to the promotion and sale of their products. In
addition, certain of our current competitors in particular segments of the
security marketplace may broaden or enhance their offerings to provide a more
comprehensive solution competing more effectively with our products and
services.
OUR BUSINESS RELIES ON THE POPULARITY OF THE INTERNET AS A METHOD OF CONDUCTING
BUSINESS.
Our future revenue and any future profits will depend upon the
widespread acceptance and use of the Internet and related technologies as an
effective medium of business-to-business commerce. The failure of the Internet
and related technologies to continue to develop as a commercial or business
medium to conduct business-to-business commerce would adversely affect our
business, operating results, and financial condition. The market for
Internet-based, business-to-business electronic commerce products is relatively
new and is evolving rapidly. The acceptance and use of the Internet for
business-to-business commerce could be limited by a number of factors, such as
potential slowing growth and use of the Internet in general, the relative ease
of conducting business on the Internet, the efficiencies and improvements that
conducting commerce on the Internet provides, concerns about transaction
security, and taxation of transactions on the Internet.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF OUR PRODUCTS AND
SERVICES.
A fundamental requirement to conducting Internet-based,
business-to-business electronic commerce is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches of the trading communities, or well-publicized security breaches
affecting the Internet in general, could deter retailers and manufacturers from
conducting electronic transactions that transmit confidential information.
Advances in computer capabilities, new discoveries in the field of cryptography,
and other developments may result in a compromise or breach of the algorithms we
use to protect content and transactions on the trading communities. Anyone that
is able to circumvent our security measures could misappropriate proprietary
confidential user information or cause interruptions in operations. There may be
significant cost requirements to protect against security breaches or to
alleviate problems caused by breaches. Any such occurrences could materially and
adversely affect our business.
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<PAGE> 11
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS.
As part of our growth strategy, we may acquire complementary businesses
and assets. Although we are not currently in negotiations to make any
acquisitions, acquisitions that we may make in the future could result in the
diversion of time and personnel from our business. We also may issue shares of
common stock or other securities in connection with acquisitions, which could
result in the dilution of the voting power of existing shareholders and could
have a dilutive effect on earnings per share. Any acquisitions would be
accompanied by other risks commonly encountered in such transactions, including
the following:
- difficulties integrating the operations and personnel of
acquired companies,
- the additional financial resources required to fund the
operations of acquired companies,
- the potential disruption of our business,
- our ability to maximize our financial and strategic position
by the incorporation of acquired technology or businesses with
our product and service offerings,
- the difficulty of maintaining uniform standards, controls,
procedures, and policies,
- the potential loss of key employees of acquired companies,
- the impairment of employee and customer relationships as a
result of changes in management, and
- the incurrence of significant expenses in consummating
acquisitions.
WE MUST BE ABLE TO MANAGE OUR GROWTH.
We anticipate a period of significant growth in connection with our
entry into the market for business-to-business electronic commerce. The
resulting strain on our managerial, operational, financial, and other resources
could be significant. Success in managing this expansion and growth will depend,
in part, upon the ability of senior management to manage effectively the growth
of our company. Any failure to manage our proposed growth and expansion could
have a material adverse effect on our business.
RIGHTS TO ACQUIRE SHARES OF COMMON STOCK WILL RESULT IN DILUTION TO OTHER
HOLDERS OF COMMON STOCK.
Assuming completion of the maximum offering and upon conversion of the
Series A preferred stock, there will be outstanding 63,483,795 shares of common
stock. In addition, we have outstanding the following securities:
- options held by our officers and employees to purchase
5,485,813 shares of common stock with exercise prices ranging
from $1.00 to $2.50 per share;
- options to purchase an aggregate of approximately 450,000
shares of common stock at an exercise price of $0.75 per share
to three of the four director designees upon their appointment
to our board of directors; and
- warrants to purchase 34,551,597 shares of common stock with
exercise prices ranging from $0.75 to $9.00 per share.
Holders of these securities will have the opportunity to profit from an
increase in the market price of our common stock, with resulting dilution in the
interests of the holders of common stock. The existence of these stock options
and warrants could adversely affect the terms on which we can obtain additional
financing, and the holders can be expected to exercise these securities at a
time when, in all likelihood, we would be able to obtain additional capital by
offering shares of common stock on terms more favorable to us than those
provided by the exercise or conversion of these securities.
OUR COMMON STOCK IS A "PENNY STOCK."
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 under the Securities Exchange Act of 1934, or Exchange Act. Penny
stocks are stocks
- with a price of less than $5.00 per share;
9
<PAGE> 12
- that are not traded on a "recognized" national exchange;
- whose prices are not quoted on the Nasdaq automated quotation
system (Nasdaq listed stock must still have a price of not
less than $5.00 per share); or
- issued by companies with net tangible assets less than $2.0
million (if the issuer has been in continuous operation for at
least three years) or $5.0 million (if in continuous operation
for less than three years), or with average revenues of less
than $6.0 million for the last three years.
Section 15(g) of the Exchange Act and Rule 15g-2 under the Securities
Act require broker/dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain
manually signed and dated written receipt of the document before effecting a
transaction in a penny stock for the investor's account. Compliance with these
requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or otherwise, which could have a material
adverse affect on the liquidity and market price of our common stock.
SHARES OF COMMON STOCK ELIGIBLE FOR SALE IN THE PUBLIC MARKET MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of common stock by shareholders in the
public market, or even the potential for such sales, are likely to adversely
affect the market price of the common stock and could impair our ability to
raise capital by selling equity securities. As of the date of this prospectus,
approximately 5,000,000 of the 47,471,832 shares of common stock currently
outstanding were freely transferable without restriction or further registration
under the securities laws, unless held by "affiliates" of the company, as that
term is defined under the securities laws. We also have outstanding
approximately 33,751,741 restricted shares of common stock, as that term is
defined under Rule 144 under the securities laws, that are eligible for sale in
the public market, subject to compliance with the holding period, volume
limitations, and other requirements of Rule 144. Moreover, the exercise of
outstanding options and warrants will result in additional outstanding shares of
common stock and will create additional potential for sales of additional shares
of common stock in the public market.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE.
Our common stock is traded on the OTCBB under the symbol "IVPNE," but
we believe that our common stock will no longer be eligible for quotation on the
OTCBB after January 12, 2000. The trading volume of our common stock
historically has been limited and sporadic, and the stock prices have been
volatile. For example, during the last 12 months, our common stock has traded at
prices ranging from $0.41 to $4.50. As a result of the limited and sporadic
trading activity and lack of public information regarding our company in the
marketplace, the quoted price for our common stock on the OTCBB is not
necessarily a reliable indicator of its fair market value. The price at which
our common stock will trade may be highly volatile and may fluctuate as a result
of a number of factors, including the following:
- quarterly variations in our operating results,
- large purchases or sales of our common stock,
- actual or anticipated announcements of new products or
services by us, our business partners, or competitors,
- investor perception of our business prospects or the Internet
industry in general,
- general conditions in the markets in which we compete, and
- worldwide economic and financial conditions.
INVESTORS THAT CONVERT THEIR SHARES OF SERIES A PREFERRED STOCK FOR COMMON STOCK
WILL FORFEIT THEIR RIGHT TO RECEIVE PREFERENCE PAYMENTS OF DIVIDENDS AND ANY
PREFERENCE PAYMENTS IN THE EVENT OF LIQUIDATION, DISSOLUTION, OR WINDING UP OF
OUR COMPANY.
We have outstanding 25,600 shares of Series A preferred stock. The
holders of the Series A preferred stock have a preference in payment of
dividends over the holders of common stock. In the event of any liquidation,
10
<PAGE> 13
dissolution, or winding up of our company, the holders of the Series A preferred
stock will be entitled to receive $100 per share of the Series A preferred
stock, plus any cumulative accrued but unpaid dividends before the holders of
common stock receive any distribution. The Series A preferred stock is
convertible to common stock upon the occurrence of certain conditions. Investors
that convert their shares of Series A preferred stock for common stock will
forfeit their right to receive preference payments of dividends and any
preference payments in the event of liquidation, dissolution, or winding up of
our company.
In addition, our board of directors may authorize and issue, without
further action by our shareholders, additional series of preferred stock with
powers, preferences, voting rights, or conversion rights that could adversely
affect the powers, preferences, voting rights, or other rights of the holders of
shares of common stock. The issuance of preferred stock may have the effect of
delaying, deterring, or preventing a change in control of our company, even when
such change in control is in the best interests of our shareholders.
WE ARE REQUIRED TO PAY DIVIDENDS ON SHARES OF SERIES A PREFERRED STOCK, AND WE
HAVE NO INTENTION TO PAY DIVIDENDS ON OUR COMMON STOCK.
We are required to quarterly pay a 10% annual dividend on the Series A
preferred stock. The dividends may be paid in either stock or cash. For the
foreseeable future, we intend to retain any remaining future earnings, if any,
to finance our operations and do not anticipate paying any cash dividends with
respect to our common stock.
WE ARE UNABLE TO CONTROL OUR CONTEGO SUBSIDIARY.
Contego is a licensor of proprietary technology that currently is
essential to the success of our company, and Contego licenses this technology to
us. Although we own a 66.8% interest in Contego, we do not control all aspects
of Contego. Certain corporate governance issues and significant acquisitions or
dispositions may require a unanimous approval of the managers of Contego. The
managers of Contego are Peter Nelson, the Vice Chairman of our board of
directors; Mitchell Eggers, a former member of our board of directors; and an
independent third party.
CONTEGO DEPENDS ON OUR COMPANY FOR WORKING CAPITAL.
Contego has not generated revenue, and no assurances can be given when,
if ever, it will. Contego depends on us for its funding. We currently provide
employees and services to Contego under an oral management agreement. There can
be no assurance that we or Contego's other members, including Baltimore, will
continue to have sufficient cash resources to fund Contego or that we can
attract or provide appropriate personnel to Contego to continue development of
its products.
LEGAL UNCERTAINTIES SURROUND THE DEVELOPMENT OF THE INTERNET.
The laws governing Internet transactions remain largely unsettled. The
adoption or modification of laws or regulations relating to the Internet could
adversely effect our business, operating results, and financial condition by
increasing our costs and administrative expenses. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel, consumer protection, and taxation apply to the Internet. Laws
and regulations directly applicable to communications or commerce over the
Internet are becoming more prevalent. We must comply with new regulations in the
United States, as well as any other regulations adopted by other countries in
which we may do business. The growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, as well as new laws governing the taxation of
Internet commerce. Compliance with any newly adopted laws may prove difficult
for our company and may harm our business, operating results, and financial
condition.
OUR BUSINESS COULD BE SEVERELY DISRUPTED IF OUR COMPUTER SYSTEMS OR THE COMPUTER
SYSTEMS OF OTHER PARTIES ON WHICH WE RELY FAIL BECAUSE THEY ARE NOT YEAR 2000
COMPLIANT.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four-digit entries to distinguish between dates
before and after January 1, 2000. As a result, computer systems and software
used by many companies may need to be upgraded to comply with such year 2000
requirements. Significant uncertainty exists concerning the potential
11
<PAGE> 14
effects associated with compliance, although we have tested our products and
found them to be year 2000 compliant. However, current products may contain
undetected errors or defects associated with year 2000 date functions. Further,
the technology being licensed from third parties and incorporated into our
products may contain errors or defects. If any such errors or defects do exist,
our company may incur material costs to resolve them. The internal systems used
to deliver our services utilize third-party hardware and software. In addition,
our users' and technology partners' internal operating systems and other
software applications must operate effectively for them to use our products and
services effectively. If these systems or applications are not year 2000
compliant, the users may not use our products and services and the technology
partners may not be able to host our services. We cannot predict to what extent
users' and technology partners' systems and applications are year 2000
compliant.
FORWARD-LOOKING STATEMENTS
Some of the statements and information contained in this prospectus
concerning our future, proposed, and anticipated activities, certain trends with
respect to our revenue, operating results, capital resources, and liquidity or
with respect to the markets in which we compete or the secure
business-to-business communication markets in general, and other statements
contained in this prospectus regarding matters that are not historical facts are
forward-looking statements, as such term is defined in the securities laws.
Forward-looking statements, by their very nature, include risks and
uncertainties, many of which are beyond our control. Accordingly, actual results
may differ, perhaps materially, from those expressed in or implied by the
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed elsewhere in this section entitled "Risk
Factors."
USE OF PROCEEDS
We will not receive any of the proceeds of sales of common stock by the
selling shareholders.
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<PAGE> 15
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the OTCBB under the symbol "IVPN"
since August 1998 and "IVPNE" since December 10, 1999. See "Risk Factors - Our
common stock will no longer be eligible for quotation on the NASD Bulletin Board
in January 2000." The following table sets forth the high and low sales prices
of our common stock for the calendar quarters indicated as reported on the
OTCBB.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Third quarter..................................................... $ 17.19 $ 2.75
Fourth quarter.................................................... 5.50 2.25
YEAR ENDED DECEMBER 31, 1999:
First quarter..................................................... 3.81 1.25
Second quarter.................................................... 2.00 0.75
Third quarter..................................................... 1.22 0.44
Fourth quarter.................................................... 3.50 0.41
YEAR ENDED DECEMBER 31, 2000:
First quarter (through January 6, 2000)........................... 3.59 3.00
</TABLE>
As of January 6, 2000, there were approximately 174 holders of record
of the common stock. On January 6, 2000, the closing sales price of our common
stock as quoted on the OTCBB was $3.00 per share.
Our common stock currently is quoted on the OTCBB. The OTCBB is a
quotation service that displays real-time quotes, last-sale prices, and volume
information for qualifying securities. In January 1999, the NASD announced that
it would limit quotations on the OTCBB to the securities of companies that,
among other requirements, are "reporting" companies under the federal securities
laws. Because we are not and will not be a reporting company as of January 12,
2000, we do not believe that our common stock will be quoted on the OTCBB on or
shortly following such date. When our common stock is no longer quoted on the
OTCBB, we believe our common stock may be published in the "pink sheets," which
does not provide real-time quotes. As a result, we believe there will be
significantly less liquidity, limited availability of quotations, and increased
difficulty in making purchases and sales of our common stock, all of which could
have a material adverse effect on the market price of our common stock. No
assurance can be given when, if ever, we will meet the OTCBB qualifications to
permit our common stock to be quoted on the OTCBB after January 2000.
DIVIDEND POLICY
We are required to pay a 10% annual dividend on our Series A preferred
stock. The dividend is payable quarterly and may be paid in either stock or
cash. The holders of the Series A preferred stock will have preference in
payment of dividends over the holders of common stock. For the foreseeable
future, we intend to retain any remaining future earnings to finance our
operations and do not anticipate paying any cash dividends with respect to our
common stock. Subject to the preferences that may be applicable to any
then-outstanding preferred stock, the holders of common stock will be entitled
to receive such dividends, if any, as may be declared by our board of directors
from time to time out of legally available funds. Payments of any cash dividends
in the future will depend on our financial condition, results of operations, and
capital requirements as well as other factors deemed relevant by our board of
directors.
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<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Consolidated Statement of Operations Data" for the year ended December
31, 1998 and the period from September 15, 1997 (inception) through December 31,
1997 and "Consolidated Balance Sheet Data" as of December 31, 1998 and 1997 are
derived from the consolidated financial statements of Intelispan, Inc., which
have been audited by KPMG LLP, independent certified public accountants. The
consolidated financial statements as of December 31, 1998 and 1997 and for the
year ended December 31, 1998 and the period from September 15, 1997 (inception)
through December 31, 1997, and the report thereon are included elsewhere in this
registration statement. The selected consolidated financial data should be read
in conjunction with our consolidated financial statements for the respective
periods, the related notes, and the independent auditors' report. The selected
data should be read in conjunction with the consolidated financial statements
for the year ended December 31, 1998, the related notes and the independent
auditors' report, which contains an explanatory paragraph that states that the
Company's recurring losses from operations and net capital deficiency raise
substantial doubt about the entity's ability to continue as a going concern,
appearing elsewhere in this prospectus. The consolidated financial statements do
not include any adjustments that might result from the outcome of that
uncertainty. The selected consolidated financial data for the nine months ended
September 30, 1998 and 1999 are derived from the unaudited financial statements
of Intelispan, Inc. included elsewhere in this registration statement that, in
the opinion of management, include all adjustments, consisting of only normal
recurring adjustments, that management considers necessary for a fair
presentation of the information set forth below. The results of operations for
the nine months ended September 30, 1999 and 1998 are not necessarily indicative
of the results for the full year. The following data should be read in
conjunction with "Management's Discussion and Analysis" and our consolidated
financial statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................. $ 11,303 $ 129,596 $ 69,766 $ 485,627
Cost of revenue......................................... 15,838 133,643 73,970 391,465
----------- ------------ ----------- ------------
Gross profit (loss).................................. (4,535) (4,047) (4,204) 94,162
Selling expenses........................................ 9,796 1,382,062 845,382 244,508
General and administrative expenses..................... 667,208 4,317,057 3,079,835 3,467,256
Cost of abandoned acquisition (1)....................... -- 225,550 225,550 --
----------- ------------ ----------- ------------
Loss from operations................................. (681,539) (5,928,716) (4,154,971) (3,711,764)
Interest income (expense) and other, net ............... 454 21,276 29,980 (82,902)
Minority interest....................................... 108,477 696,880 437,285 65,180
----------- ------------ ----------- ------------
Net loss............................................. (572,608) (5,210,560) (3,687,706) (3,635,324)
=========== ============ =========== ============
Net loss per common share - basic and diluted........... $ (0.06) $ (0.32) (0.22) (0.19)
Weighted average number of common shares................ 10,337,094 16,334,670 17,135,181 18,964,816
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit) (2)........................... $ (76,580) $ (364,654) $ (109,857) $ (2,239,862)
Total assets (2)........................................ 1,635,657 2,042,261 2,619,798 2,020,089
Total debt.............................................. 700,000 188,957 180,236 1,616,987
Shareholders' equity (deficit) (2)...................... 27,392 997,983 1,022,837 (1,143,386)
</TABLE>
- -----------------------
(1) Relates to an acquisition that we abandoned on September 30, 1998. In
accordance with the merger and acquisition agreement, we were required
to pay a break-up fee and legal fees of the intended acquiree.
(2) Subsequent to September 30, 1999, we received net proceeds of
approximately $10.9 million from a private placement of units.
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<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
You should read the following discussion and analysis with the selected
consolidated financial data and our consolidated financial statements including
the notes, which appear elsewhere in this prospectus. The following discussion
contains forward-looking statements that reflect our plans, estimates, and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and elsewhere in this prospectus,
particularly in "Risk Factors."
OVERVIEW
We provide complete and seamless network solutions that enable secure
and efficient business-to-business communications through virtual private
networks and the Internet. These solutions include providing secure network
connectivity on a usage-billed basis together with public key
infrastructure-based authentication service and e-commerce transactions
management services. We attempt to differentiate our services by integrating
complex technologies to create our own branded network services.
We began operating our business in September 1997 as Intelispan
Ventures, Inc., offering secure computer network communications solutions as a
value-added reseller of products and services of our service providers. In July
1998, Intelispan Ventures merged into Equipment Leasing & Sales Corporation, a
Washington corporation formed in September 1996 to provide equipment leasing
services. We changed our name at the time of the merger to "Intelispan, Inc."
Intelispan Ventures is the successor corporation for accounting purposes while
Equipment Leasing & Sales Corporation is the surviving legal entity.
Our results of operations include the results of Contego, LLC, a
developer of a secure user-authentication product, of which we own 66.8% as of
November 1999. The remaining 33.2% ownership in Contego is held by Baltimore
Technologies, plc, a United Kingdom-based company. We consolidate our financial
reporting with the Contego subsidiary. It is unlikely that we could liquidate
our interest in Contego if we had short-term cash needs.
We generate revenue from three primary sources:
- Sales of our secure remote access services (the exSPANd VPN
and exSPAND-PKI services), which include monthly fees based on
actual hourly usage, non-recurring startup costs, and
recurring monthly charges for circuit installation and similar
charges;
- Sales of Internet access, both wholesale and retail sales.
Historically, these sales have provided the majority of our
revenue as we have built market presence and awareness for our
other products, but we do not expect revenue from Internet
access to represent a substantial portion of our revenue in
the future;
- Sales of our professional services, typically as part of
designing or modifying a network prior to providing our other
services. These represent only a small portion of our revenue.
In the future, we expect our planned e-commerce hub, known as E-munity,
and our TradeSPAN EDI service to provide an increasing portion of our revenue,
although we expect the amount to remain at less than 5% of total revenue until
early 2001.
We believe that our revenue will be subject to seasonal fluctuations.
We anticipate that most of our revenue will be based on actual usage by
customers, which we expect usage to decrease during holiday periods and when
business travel is lower, such as late November through early January of each
year. July and August may also be months when revenue may decrease due to
vacation schedules.
Our operations have been almost entirely funded through equity and
convertible debt financing. We have not had lines of credit or other credit
facilities available to us. In December 1999, we raised equity financing of
approximately $10.9 million, which we believe when combined with additional
equity financing in January 2000, will satisfy our operating capital needs for
at least 12 months based upon our current anticipated business activities.
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<PAGE> 18
Our company is changing substantially as a result of the equity funds
raised in December 1999 and funds that will be raised in January 2000, and we
believe that an analysis of our historical operating results is not necessarily
meaningful. You should not rely on this information as a basis for predicting
our future performance.
RESULTS OF OPERATIONS
The following table provides, for the periods shown, the percentage of
total revenue represented by certain line items included in our consolidated
statements of operations.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
December 31, September 30,
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenue....................................... 100.00% 100.00% 100.00% 100.00%
Cost of sales................................. 140.12 103.12 106.02 80.61
---------- ---------- ---------- ----------
Gross profit (loss)........................... (40.12) (3.12) (6.02) 19.39
Selling expenses.............................. 86.67 1066.44 1211.74 50.35
General and administrative expenses........... 5902.93 3331.17 4414.52 713.97
Cost of abandoned acquisition................. 0.00 174.04 323.30 0.00
---------- ---------- ---------- ----------
Operating loss................................ (6029.72) (4574.77) (5955.58) (744.93)
Interest income and expense and other, net.... 4.02 16.41 42.97 (17.07)
Minority interest............................. 959.72 537.73 626.79 13.42
---------- ---------- ---------- ----------
Net loss...................................... (5065.98)% (4020.62)% (5285.82)% (748.58)%
========== ========== ========== ==========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
Our total revenue increased 594% to approximately $486,000 for the nine
months ended September 30, 1999, up from approximately $70,000 for the
comparable period in 1998. The increase in revenue is primarily due to customers
that began use of exSPANd VPN service, which accounted for approximately
$368,000, or 76% of total revenue during such period, an increase of 1000% from
the same period in 1998. Usage and recurring monthly charges for the exSPANd VPN
accounted for approximately $273,000 or 74% of total exSPANd VPN revenue, with
the balance comprised of installation and other non-recurring charges. Wholesale
and retail sales of Internet access and other income comprised approximately
$117,000 or 24% of total revenue.
During the nine months ended September 1999, five major customers of
the exSPANd VPN service accounted for approximately $264,000 or 72% of our
exSPANd VPN revenue. One customer, which provided 14% of the total exSPANd VPN
revenue, cancelled its account during the fourth quarter.
Our cost of sales for the nine months ended September 30, 1999 was
approximately $391,000 compared to approximately $74,000 for the nine months
ended September 30, 1998. Primarily as a result of the increase in percentage of
revenue in the exSPANd VPN service, which has a higher gross margin, our gross
margin was 19% of total revenue during the nine-month period ended September 30,
1999 compared to (6%) of total revenue during the nine-month period ended
September 30, 1998. Our cost of goods sold consists primarily of payments to MCI
WorldCom for network usage. For the exSPANd-PKI service, we have an additional
payment that is made to our majority-owned Contego subsidiary for licensing fees
on certain PKI technology used in the product. For our TradeSPAN service, in
addition to the network usage fees, we pay certain licensing fees to Cyclone
Commerce, Inc., which provides the software technology underlying the product,
and a small fee to RSA, Inc. for licensing certain PKI technology used in
Cyclone's product.
Operating expenses decreased by approximately 12% from approximately
$4,151,000 for the nine-month period ended September 30, 1998 to approximately
$3,712,000 for the nine-month period ended September 30, 1999. This decrease is
largely attributable to a 71% reduction in advertising and marketing expenses as
well as maintaining a smaller staff. Our payroll expenses increased 10% from
approximately $1,354,000 for the nine months ended September 30, 1998 to
approximately $1,493,000 for the nine months ended September 30, 1999. We expect
payroll expenses to substantially increase in the near future as we build our
national sales force and increase our management team. We also expect
advertising and marketing expenses to substantially increase as we develop a
marketing campaign to target specific industries with the greatest perceived
demand for our services and increase brand awareness through an aggressive media
campaign.
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Capital expenditures for the period ended September 30, 1999 were
approximately $24,000. We expect this amount to increase substantially during
fiscal year 2000 as we build out our network infrastructure and servicing
capabilities. We expect to depreciate most capital equipment purchases, which
will consist primarily of routers, server class computers, software, and network
access servers on a straight-line basis over three years.
Our net loss increased from approximately $3,688,000 for the nine-month
period ended September 30, 1998 to approximately $3,635,000 for the nine-month
period ended September 30, 1999. In 1998, we recorded a one-time loss of
$225,550 for acquisition break-up fees and related legal expenses. During these
periods for 1998 and 1999, our net loss per share decreased from $0.22 in 1998
to $0.19 in 1999.
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
Our financial information for fiscal year 1997 is based almost entirely
on the operations of Equipment Sales and Leasing Corporation, the entity into
which Intelispan Ventures, Inc. merged in July 1998, as Intelispan Ventures
began operations in September 1997. Our total revenue for the year ended
December 31, 1998 was approximately $130,000 compared to approximately $11,000
for the year ended December 31, 1997. This 1082% increase in revenue is
attributable primarily to Intelispan Ventures beginning its operations and
initial sales in early 1998.
Our cost of revenue for the year ended December 31, 1998 was
approximately $134,000 compared with approximately $16,000 for the year ended
December 31, 1997. The increase is due to Intelispan Ventures commencing sales
of exSPANd VPN services, wholesale and retail Internet services during 1998.
Our gross loss for the year ended December 31, 1998 was approximately
$4,000 compared to approximately $4,500 for the year ended December 31, 1997.
General and administrative expenses increased to approximately $4,317,000 for
the fiscal year ended December 31, 1998, an increase of 547% over the
approximately $667,000 for the fiscal year ended December 31, 1997, based almost
entirely upon Intelispan Ventures commencement of operations.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1999, we had a cash balance of approximately $92,000
with a working capital deficit of $2,239,860. As a result of a private placement
in December 1999, our cash balance as of December 31, 1999 was approximately
$4,500,000. For the nine months ended September 30, 1999, our net cash used in
operating activities was approximately $2,014,444. Total cash flows from
financing activities were approximately $2,063,000 for the nine-month period
ended September 30, 1999. As set forth in the next paragraph, we received
additional cash proceeds after September 30, 1999 from the sale of equity to
private investors. Our working capital requirements depend upon numerous
factors, including the timing of expenditures related to our network
infrastructure, the rate at which we expand our staff, and our ability to meet
revenue projections, among other items.
We received approximately $595,000 in short-term debt from financing
activities from October through December 1999, and an additional $10.9 million
in net proceeds from private investors purchasing shares of our common stock and
common stock purchase warrants from a transaction completed during December
1999.
We cannot predict the timing and amount of our future capital
expenditures. However, we believe that the proceeds from the private placement
in December 1999, together with cash flows from our operations will be
sufficient to fund our current operations through the first quarter of 2001. We
intend to accelerate our development and infrastructure spending in the coming
calendar quarters if we have sufficient available capital resources. Beyond that
period, we may require additional financing which may come from future equity or
debt offerings that could result in further dilution to our shareholders.
Adequate capital may not be available at that time and the lack of such capital
could adversely affect our business.
YEAR 2000 COMPLIANCE
We rely heavily upon network services and software provided by third
parties. Many existing computer programs and systems use only two digits to
identify a year in the date field. These programs and systems were
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designed and developed without considering the impact of the change in the
century. If not corrected, many programs and systems could fail or create
erroneous results when working with dates after January 1, 2000.
State of Readiness
We conducted an internal audit of our own systems in mid-year 1999. We
believe that all of our own internal systems are Year 2000 compliant. We also
believe that if such systems prove to not be Year 2000 compliant, their
non-compliance will not materially affect our business operations.
We have not obtained any certification from our third-party vendors
regarding their Year 2000 readiness.
Risks
Any failure of our internal systems or those provided by our third
party vendors, especially the networking services provided through MCI WorldCom,
could prevent us from providing services to our customers and could disrupt our
billing. We believe that the most reasonably likely worst case scenario from a
Year 2000 problem that affects us would be a short-term inability to provide
services to our customers, which would result in reduced revenue during that
period and could result in customer dissatisfaction and even termination of
contracts.
Failures of our customers' systems due to a Year 2000 problem could
also affect us if these customers are unable to operate their networks or if
they divert funds and personnel to fix their problems rather than continue to
roll-out services to their employees.
We do not have any contingency plans for Year 2000 related
interruptions.
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BUSINESS
We provide complete and seamless network solutions that enable secure
and efficient business-to-business communications through virtual private
networks, or VPNs, and the Internet. These solutions include providing secure
network connectivity on a metered basis together with public key infrastructure,
or PKI, -based authentication service and e-commerce transaction management
services. We believe our company differentiates its services by integrating
complex technologies to create our own branded network services.
Our principal network services for secure business-to-business
communications currently includes the following:
- exSPANd VPN, a VPN utilizing private IP addresses;
- exSPANd INT, a VPN utilizing public IP addresses;
- exSPANd-PKI, a premium network service that utilizes PKI user
authentication; and
- TradeSPAN, a premium network service that incorporates Java
software for electronic document exchange over IP networks,
including legacy Electronic Data Interchange, or EDI, and
other digital file formats.
MARKET OPPORTUNITY
Infonetics Research reports that the VPN market was $205 million in
1997 and is estimated to grow to $12 billion by the end of 2001. The Gartner
Group predicts that by 2003, more than 137 million users worldwide, including
one-third of the U.S. work force, will be engaging in some form of remote
access. We believe the following are key driving forces behind our current
market opportunity:
- the growth of business-to-business e-commerce,
- the increasing demand for network security,
- the increase in remote access computing,
- the increasing demand for cost-efficient outsourced network
services, and
- the adoption of centrally managed and distributed software
application business models.
STRATEGY
Our goal is to be a leading single-source provider of network solutions
that enable secure and efficient business-to-business communication through VPNs
and the Internet. Key elements of the strategy to achieve this goal include the
following:
- targeting small- and medium-sized businesses through
resellers, system integrators, and strategic relationships,
- building a direct sales force and developing a marketing
campaign to target specific industries with the greatest
perceived demand for our services, such as healthcare and
financial services,
- increasing brand awareness through an aggressive media
campaign,
- continuing to pursue strategic relationships in order to
acquire technologies and service offerings to complement and
expand existing service offerings,
- providing high-quality service and responsiveness to
customers, and
- pursuing strategic acquisitions to enhance our technology
portfolio, expand our product offerings, and build our
distribution channels.
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THE NEED FOR INTEGRATED SECURE NETWORK ACCESS SERVICES
We believe that companies implementing secure network solutions,
including solutions for business-to-business communication and secure remote
access, typically face numerous implementation issues. Secure network solutions
require large investments in hardware, software, and personnel. The
implementation process is complex and demands a great deal of management time
and attention. Computer systems, hardware, and software become obsolete in a
relatively short period of time, requiring additional investments from time to
time. In order to support these systems, companies must hire, train, and retain
qualified support personnel. As a result, we believe there exists a need for
these companies to outsource integrated secure network access services.
VPNs are made secure through encryption or other means so that only
authorized users can access the network, preventing unauthorized users from
intercepting data, destroying files, or otherwise gaining access to confidential
material. Typical VPNs use a technique called "tunneling" to encapsulate and
protect the data transmitted over their networks. Tunneling, however, requires
significant network support, which degrades the performance and speed of the
network.
THE INTELISPAN SOLUTION
Our solutions enable customers to conduct business-to-business
communications with their trading partners without the typical up-front costs,
complexity, and other capital resources typically required by other VPNs. Our
solutions are designed to be user-friendly and enable customers to implement
them quickly, efficiently, and cost-effectively, thereby allowing customers to
focus on their core businesses. We provide our integrated network solutions to
customers on a fee for usage basis, eliminating technological obsolescence and
ongoing network maintenance. Our solution includes the following services:
- exSPANd VPN, a VPN utilizing private IP addresses;
- exSPANd INT, a VPN utilizing public IP addresses;
- exSPANd-PKI, a premium network service that utilizes PKI user
authentication; and
- TradeSPAN EDI, a premium network service that incorporates
Java software for electronic document exchange over IP
networks, including legacy EDI and other digital file formats.
exSPANd VPN
exSPANd is a VPN service, built on the backbone of MCI WorldCom's
GridNet Network, that enables users to dial into a central network to conduct
secure business-to-business communications. Users can access the exSPANd service
from over 500 points of presence domestically and 60 countries internationally.
Unlike other VPN services that utilize hardware and software programs,
or corporate firewalls, as their primary protection against unauthorized users,
exSPANd embeds authentication and routing intelligence security within the
network itself. As a result, exSPANd supplements the security provided by
corporate firewalls and grants users access only to authorized areas of the
network.
exSPANd INT
exSPANd INT is an Internet-based VPN service designed to allow our
network users to access its VPN through the public Internet. exSPANd INT
provides an encrypted tunnel between the customer's software and our managed
security gateway.
exSPANd PKI
exSPANd PKI is a VPN network service that offers enhanced security
through the utilization of PKI technology. PKI technology utilizes digital
certificates to identify users and control their access to the network. exSPANd
PKI empowers customers themselves to issue, revoke, and create policies and
rights for each certificate, rather than relying on the network or a third party
to perform those services.
tradeSPAN
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TradeSPAN is an IP-based, platform-independent, communication
application that allows customers to establish and manage secure electronic
business-to-business trading relationships, regardless of the compatibility of
their systems. TradeSPAN removes the interoperability and incompatibility
barriers between EDI and non-EDI trading partners. TradeSPAN allows customers to
automate business transactions with trading partners, such as issuing purchase
orders, shipping documents, and other mission-critical business documents that
companies would not otherwise transmit over the Internet. Customers can tailor
the TradeSPAN service to conform to their own systems and standards, thereby
removing the need for the customers to alter their existing business processes.
INTELICENTER
InteliCenter is a suite of specialized, browser-based network
management tools and database access applications that allow customers' network
administrators to monitor and manage their VPN users. InteliCenter provides
network administrators real-time network visibility, allowing them to add or
delete users and otherwise control user activity. InteliCenter is included with
the exSPANd VPN, exSPANd PKI, and TradeSPAN services, and customers may elect to
receive more advanced InteliCenter options for an additional charge. With
InteliCenter, network administrators can monitor and manage their networks more
efficiently by providing administrators the ability to
- troubleshoot and provide customer support,
- obtain data necessary for billing and network planning,
- monitor the state of dedicated IP network connections and
network access points, and
- access Intelispan's help desks and trouble ticket systems.
E-MUNITY SERVICES
We intend to further develop our E-Munity services, which are intended
to be a suite of services hosted by us and offered to customers on a
transactional basis. E-Munity services are intended to enable our customers to
communicate with their trading partners. These services include document
management, carbon copy, non-repudiation, encryption, and data warehouse query
sets. We are designing E-Munity to act as a "hub" with which customers and their
trading partners interface, thus avoiding the need for customers to install and
manage the applications on their own computer systems. We are developing its
E-Munity services and are implementing a pilot program for one customer and its
trading partners. To date, we have not generated revenue from E-Munity services,
have not successfully tested these services, and cannot provide assurance that
these services will be functional or will generate revenue in the future.
STRATEGIC RELATIONSHIPS
We have the following strategic relationships:
- MCI WorldCom. We depend on a non-exclusive, renewable
five-year reseller agreement with GridNet via MCI WorldCom,
which provides the backbone of all of our network services. We
have not made all required payments to MCI WorldCom under this
agreement. See "Risk Factors - We face risks associated with
our supply agreement with GridNet."
- Contego, LLC. Contego owns the technology underlying the
exSPANDd PKI authentication service and the right to integrate
that technology into the GridNet Network. We have a
distribution agreement with Contego, which enables us to offer
our exSPANd PKI service. Contego is owned 66.8% by us and
33.2% by Baltimore Technologies plc, which licenses to Contego
certain PKI software technology incorporated into Contego's
technology.
- Cyclone Software Corporation. We license certain software from
Cyclone Software Corporation and incorporate that software
with exSPANd VPN to form TradeSPAN. Our license agreement with
Cyclone expires in June 2003. We pay an annual maintenance fee
and may incur certain incremental fees depending on its
licensing arrangements with its customers. Cyclone has the
non-exclusive right to resell our services.
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- Altiga Networks, Inc. Our exSPANd INT product incorporates
technology from Altiga Networks, Inc., which we obtain
pursuant to a distributor agreement with Altiga.
We depend upon these strategic relationships and the loss or material
change in any of these relationships could have a material adverse effect on our
business.
SALES AND MARKETING
We currently distribute our products and services through our direct
sales efforts and third-party resellers. We intend to hire additional sales and
marketing personnel and target Fortune 500 companies, particularly in industries
where we believe there is a high demand for our services, such as health
services and finance.
We also intend to target smaller companies through third-party
resellers that typically also sell a bundle of value-added services from other
third parties. Because of the variety of products and services they carry, we
believe that the resellers are well positioned to access and penetrate customers
that we might not otherwise reach. In addition, we have entered into wholesale
arrangements that allow third parties to sell our services under their brand
names. From time to time, we intend to evaluate the possibility of acquiring
reseller and other distribution channels to expand the reach of our distribution
network.
In addition, we intend to enter into strategic marketing relationships
with other companies to provide opportunities to cross-market our products with
the products and services of the strategic partners. For example, we are working
with IBM to attempt to host third-party applications over our network services
integrated on IBM's systems.
We intend to create an awareness of the Intelispan brand name and to
focus on the features of our integrated network services that differentiate them
from our competitors. We plan to accomplish this goal through a media campaign
and participation in trade shows and industry seminars.
COMPETITION
Our products and services compete in the secure network access and
secure business-to-business communication markets with VPN providers, Value
Added Network providers, and EDI providers. The competition in these markets is
extremely and intensely competitive.
Competition for our products and services arise from several sources in
the VPN market. Most major networking device companies provide or have announced
intentions to provide encryption or other secure access through their hardware.
This group includes Lucent and Cisco; firewall vendors, such as AXENT (Raptor)
and Check Point Software; and modem-pool companies, such as Shiva. Competitors
providing a service-based VPN include Sprint, AT&T, GTE, IBM, and MCI WorldCom,
as well as smaller companies such as Concentric Networks. In addition, several
companies, including Sun Microsystems and Microsoft, provide or have announced
their intention to provide software product-based solutions, some of which will
be integrated into their operating systems.
Our products and services compete with different technologies that
provide EDI services including electronic data interchange applications based on
value-added networks and other secure document exchange applications. Many
existing VANs have strong, long-standing relationships with customers and have
demonstrated their ability to deliver a complete solution. Competitors in the
VAN EDI marketplace include GE Information Services, Sterling Commerce, IBM,
Kleinschmidt, and Harbinger. Some of these companies, together with newer
entrants in the market, have introduced Internet-based EDI products and
services. We may also compete in this segment with enterprise resource software
providers that integrate EDI into their products, such as PeopleSoft, BAAN, SAP,
and Oracle.
Competition may develop from companies providing enhanced user
authentication technology that develop programs to integrate their technology
into a network solution. These companies include Entrust, VeriSign, and
Baltimore, which utilize PKI-based technology, and Security Dynamics, ActivCard,
and Vasco, which provide non PKI-based network authentication products.
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Although we believe that our products and services will compete
favorably in these market segments, we may not maintain a competitive position
against current and potential competitors and market acceptance for our products
and services has not yet been demonstrated. Many of the current and potential
competitors have longer operating histories, greater name recognition, larger
installed bases, and significantly greater financial, technical, marketing, and
sales resources than we do. As a result, competitors may be able to react more
quickly to emerging technologies and changes in customer requirements or to
devote greater resources to the promotion and sale of their products. In
addition, certain of our current competitors in particular segments of the
security marketplace may broaden or enhance their offerings to provide a more
comprehensive solution competing more effectively with our products and
services.
THIRD-PARTY LICENSED TECHNOLOGY AND INTELLECTUAL PROPERTY
Our solutions include complex technology, including advanced and
patented encryption technology. Other than certain copyrights in software source
code owned by Contego, our 66.8% owned subsidiary, we do not have any patents or
copyrights for the technology we utilize. Instead, we license most of the
technology integral to our business from third parties. Our success will depend
in part on this licensed technology not infringing the proprietary rights of
others.
As of January 2000, we had obtained registrations for the service mark
"Intelispan" and have applications pending for the trademark "TradeSPAN" and the
service marks "exSPANd" and "TradeSPAN". Contego has an application pending for
the service mark "Trusted Domain". To our knowledge, there has not yet been any
opposition to the marks, although the process is in its early stages and the
registration of the marks may be challenged. We have never filed copyright
applications with the U.S. Patent and Trademark Office or filed for patents,
copyrights, or trademarks in any foreign countries.
We depend upon our licensed technology and only have limited
intellectual property. See "Risk Factors We depend upon licensed technology from
third parties."
EMPLOYEES
As of January 2000, we had 17 full-time employees, including our six
executive officers. Of our employees, five are involved in sales and marketing;
six in technical services, professional, or customer support services; and six
in administration, executive, and finance. No employees are covered by any
collective bargaining agreements with us, and we believe that the relationship
with our employees is good.
PROPERTIES
We lease our corporate headquarters located in a 5,500 square-foot
facility in Tempe, Arizona. The facility includes executive and administrative
offices and a network operations center. We believe the facility will be
adequate for our needs for the foreseeable future. We intend to move our
corporate headquarters to Atlanta during fiscal year 2000, but to date have not
made formal arrangements to lease a facility.
LEGAL PROCEEDINGS
We are, and may in the future be, party to litigation arising in the
ordinary course of our business. We do not consider any current claims to be
material to our business, financial condition, or operating results. Our
insurance coverage may not be adequate to cover all liabilities arising out of
any claims that may be instituted in the future. A lack of insurance coverage
may have an adverse effect on our business, financial condition, and operating
results.
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MANAGEMENT
The following table sets forth certain information regarding each of
our directors, director designees, and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Maurice J. Gallagher, Jr. (1). 50 Chairman of the Board of Directors
Peter A. Nelson............... 46 Vice Chairman of the Board of Directors
Travis Lee Provow............. 42 President, Chief Executive Officer, and Director
Ronald W. Loback.............. 51 Executive Vice President and Chief Operating Officer
Scot A. Brands................ 37 Chief Financial Officer
Kenton G. Dallas.............. 34 Vice President, Network Services and New Technologies
James D. Shook................ 34 Vice President, General Counsel, and Secretary
Michael S. Falk (1)........... 37 Director
Philip R. Ladouceur (1)....... 59 Director
</TABLE>
- -------------------
(1) Expected to join the Board of Directors following the completion of our
private placement in January 2000. Such persons are designees of
Commonwealth Associates, L.P. who has the right to appoint four of our
seven directors.
Maurice J. Gallagher, Jr. will serve as our Chairman of the Board of
Directors upon the completion of our private placement in January 2000. Mr.
Gallagher also serves as the Chairman of the Board of Directors of MGC
Communications, Inc., which Mr. Gallagher was instrumental in organizing. Mr.
Gallagher is also a founder and Chairman of BankServ, Inc., a private payments
company specializing in ACH and wire transfers via FED payment systems founded
in 1996. Mr. Gallagher also served as a director of PurchasePro.com, Inc. during
1998 and 1999. Mr. Gallagher co-founded ValuJet Airlines, Inc. in 1993 and
served as director of that company from 1993 until November 1997. Mr. Gallagher
also held prior positions with ValuJet from 1993 to 1994, including Chief
Financial Officer, and served as Vice Chairman of the Board of Directors from
1994 to 1997. Prior to co-founding ValuJet, Mr. Gallagher was a founder and
President of WestAir Holding, Inc., a commuter airline headquartered in Fresno,
California. WestAir was sold to Mesa Airlines in June 1992, and Mr. Gallagher
was a member of the Mesa board of directors from June 1992 through March 1993.
Peter A. Nelson has served as our Vice Chairman of the Board of
Directors since January 2000. Mr. Nelson served as our Chairman of the Board of
Directors, President, and Chief Executive Officer since forming our company in
September 1997 until January 2000. Mr. Nelson has been an entrepreneur for over
20 years, most recently serving as President and Chief Executive Officer of
UniDial Associates from 1993 to the present, President of Neptune Marketing
Technologies of Delaware, Inc. from 1995 to 1997, and President of Video
Electronics, Inc. from 1979 to 1994.
Travis Lee Provow has served as our President and Chief Executive
Officer since January 2000 and has served as a director of our company since
August 1998. From August to December 1999, Mr. Provow has served as the Chief
Operating Officer of Slingshot Networks LLC, a provider of digital media
storage. From 1995 to 1998, Mr. Provow served as the Executive Vice President
and Chief Operating Officer of GridNet International, a provider of enhanced
data communications services, which Mr. Provow founded and which was purchased
by MCI WorldCom in July 1997. Prior to GridNet, Mr. Provow spent 15 years with
NCR and its successor, AT&T Global Information Services, in various domestic and
international technical, marketing, product management, and strategic
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planning positions, leaving that company as the Vice President of Retail Product
and Systems Marketing and a company officer.
Ronald W. Loback has served as our Chief Operating Officer since March
1998. Prior to taking his current position with our company, Mr. Loback was the
founder and served as the Chief Executive Officer from March 1994 to October
1996 of Sage Communications, a technical consulting company. From 1981 to 1994,
he was Assistant Vice President of AT&T Global Information Services; District
Sales Manager for Teradata Corporation and Sales Manager - Amdahl Communications
Division. From 1968 to 1981, Mr. Loback served in various technology and
operations positions with Mountain Bell.
Scot A. Brands has served as our Chief Financial Officer since January
2000. Prior to taking his current position with our company, Mr. Brands served
as Vice President and General Counsel of Slingshot Networks LLC from May 1999 to
December 1999. Prior to that, Mr. Brands served as the Controller and General
Counsel for GridNet International from May 1995 to April 1999.
Kenton G. Dallas has served as our Vice President of Network Services
and New Technologies since January 1999. Mr. Dallas served as our Executive
Director of Marketing from August 1998 until January 1999. Mr. Dallas is
responsible for overall product development and integration, pricing, channel
strategy, and promotional activities. From January 1996 to June 1998, Mr. Dallas
held the positions of Pricing Manager and Director of Product Development at
GridNet International, where he was responsible for the product development of
IntraConnect, GridNet's virtual private network offering. From 1988 through
1995, Mr. Dallas worked in various capacities for Sprint Communications,
including Manager of Market and Business Analysis and Network Analyst.
James D. Shook has served as Vice President and General Counsel of our
company since August 1998. From July 1995 to July 1998, Mr. Shook served as Vice
President of Operations and General Counsel to Buzzeo, Inc., a developer of
enterprise software applications. From 1989 until 1995, Mr. Shook was an
attorney with the Phoenix-based law firm of Jennings, Strouss & Salmon, where he
specialized in intellectual property, securities, and commercial litigation.
Prior to Jennings, Strouss & Salmon, he worked in a variety of different
capacities in software development and quality assurance. Mr. Shook is a member
of the Arizona State Bar and earned a J.D. from the University of Arizona and a
B.S. in Computer Science from Arizona State University.
Michael S. Falk will serve as a director of our company upon the
completion of our private placement in January 2000. Mr. Falk is the co-founder,
Chairman, and Chief Executive Officer of Commonwealth Associates, L.P., a New
York-based merchant bank and investment bank established in 1988. Over the past
15 years, Mr. Falk has led the successful consummation of over 70 public and
private equity financings raising in excess of $1 billion for early-stage and
emerging-growth companies in the technology, telecommunications, leisure,
healthcare, and consumer services fields. More recently, Mr. Falk has led
Commonwealth's transition into the Internet and various related businesses. Mr.
Falk has served as a director of FutureLink Distribution Corp., an application
service provider, since 1999. Mr. Falk is a graduate of the Stanford University
Executive Program for Smaller Companies and holds a B.A. degree with honors in
Economics from Queens College.
Philip R. Ladouceur will serve as a director of our company upon the
completion of our private placement in January 2000. Mr. Ladouceur is the
Executive Chairman and Chief Executive Officer of FutureLink Distribution Corp.,
an application service provider. Mr. Ladouceur has served MetroNet
Communications Corp. and now AT&T Canada Corp. as a director since October 1996
and was President, Chairman, and Chief Executive Officer of MetroNet from
October 1996 to April 1998. From April 1998 to June 1999, Mr. Ladouceur was the
Executive Chairman of MetroNet until the company merged with AT&T Canada. He now
serves as a director of AT&T Canada Corp. When Mr. Ladouceur joined MetroNet,
the company was a private local Calgary, Alberta, Canada telecommunications
concern. He led the company through equity and debt financings of more than
CDN$2,000,000,000 as well as the company's initial public offering on the NASDAQ
and Toronto Stock Exchanges. Also, Mr. Ladouceur guided the company through its
recent acquisition of Rogers Communications' Telecom business, a transaction
valued at over CDN$1,000,000,000. AT&T Canada acquired MetroNet in a June 1999
transaction valued at approximately CDN$4,000,000,000. Prior to joining
MetroNet, Mr. Ladouceur was Executive Vice President, Operations at Bell Canada
International Inc. from February 1995 to October 1996, where he led key
restructuring efforts and the formation of a major joint venture with IBM
Canada. From October 1992 to February 1995, Mr. Ladouceur was the founding
President and Chief Executive Officer of ISM Information Systems Management
(Alberta) Ltd., a Canadian computer and network management outsourcing company.
Under Mr.
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Ladouceur's direction, ISM grew to CDN$75,000,000 in revenue on an annual basis,
and over 700 employees in a two-year period from start-up. Mr. Ladouceur
founded, and from June 1990 to October 1992 was the Managing Director of HDL
Capital Corporation, a Toronto-based merchant bank that specializes in business
turnarounds, management buyouts, and financing for medium and small businesses
in the telecommunications, technology, software, and retail sectors. From 1986
to 1989, Mr. Ladouceur was Senior Vice President, Finance, Chief Financial
Officer and a director of Rogers Communications Inc., one of the largest cable,
cellular and broadcasting companies in North America. While with Rogers, he
oversaw the completion of over CDN$3,000,000,000 in public and private
financings. Mr. Ladouceur currently serves on additional public and private
Boards of Directors including, Cell-Loc Inc.(Canadian Stock Exchange), and Plan
B Communications, a privately held company. Additionally, Mr. Ladouceur is the
past Chairman of the Competitive Telecommunications Association of Canada. Mr.
Ladouceur is also a member of the Advisory Board of Commonwealth Associates.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our bylaws authorize the board of directors to appoint from among its
members one or more committees consisting of one or more directors. Immediately
upon our company becoming a reporting company, our board of directors will
establish an audit committee and a compensation committee. The audit committee
and the compensation committee will each consist of at least two independent
directors. The audit committee will review the annual financial statements, any
significant accounting issues, and the scope of the audit with our independent
auditors and will discuss with the auditors any other audit-related matters that
may arise. The compensation committee will review and act on matters relating to
compensation levels and benefit plans for our key executives.
DIRECTOR COMPENSATION AND OTHER INFORMATION
Directors who are employees of our company do not receive any
additional compensation for serving as members of our board of directors. Each
non-employee director receives $15,000 cash compensation per year, $1,500 per
meeting attended in person, and reimbursement of expenses for their service as a
member of the board of directors. Under our Performance Equity Plan,
non-employee directors will receive options to purchase 30,000 shares of common
stock upon their appointment or election to the board of directors, and will
receive options to purchase 5,000 shares of common stock annually. These options
vest quarterly in equal amounts over three years. Upon the completion of the
private placement, and upon their appointment to our board of directors, we
expect to grant to three of the four director designees of Commonwealth options
to purchase 150,000 shares of common stock. See "Executive Compensation -
Performance Equity Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors has appointed one non-employee member of the
board of directors who, along with another former non-employee director,
historically made all compensation decisions relating to our executive officers.
After the four director designees join our board of directors, we expect to
appoint a compensation committee that will consist primarily of non-employee
members of our board of directors. Once formed, the compensation committee of
our board of directors will make all compensation decisions regarding our
executive officers.
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<PAGE> 29
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth certain information concerning the
compensation for the fiscal years ended December 31, 1997 and 1998 earned by our
Chief Executive Officer and by our other executive officers whose cash salary
and bonus exceeded $100,000 during fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------
AWARDS
-----------------
OTHER SECURITIES ALL OTHER
ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION (1) YEAR SALARY($) COMPENSATION ($) OPTIONS (#) ($)(2)
- ------------------------------- ---- ------------ ---------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Peter A. Nelson (3).................. 1998 186,923 18,600(4) -- 5,608
Chairman of the Board, President,
and Chief Executive Officer
Ronald W. Loback..................... 1998 104,936 --- (5) 580,000 2,798
Executive Vice President and Chief
Operating Officer
J. Dale Belt (6)..................... 1998 102,821 --- (5) 230,000 2,735
Chief Financial Officer
</TABLE>
- ----------------------------
(1) We consider Messrs. Provow, Nelson, Loback, Brands, Dallas, and Shook
to be our executive officers. Messrs. Provow and Brands became
employees of our company effective January 1, 2000. Messrs. Dallas and
Shook began their employment during 1998, and their cash compensation
during fiscal 1998 did not exceed $100,000.
(2) Amounts shown represent matching contributions made by us to our SIMPLE
plan.
(3) Mr. Nelson resigned as President and Chief Executive Officer effective
January 1, 2000, and is now the Vice Chairman of our board of
directors. Mr. Provow was named our Chief Executive Officer and
President effective January 1, 2000.
(4) Represents club dues and automobile allowances paid by us on behalf of
Mr. Nelson.
(5) Messrs. Loback and Belt also received certain perquisites, the value of
which did not exceed 10% of their salary during fiscal 1998.
(6) Mr. Belt resigned as Chief Financial Officer in May 1999. Mr. Brands
was named our Chief Financial Officer effective January 1, 2000.
OPTION GRANTS
The following table provides information on stock options granted to
the officers listed during the fiscal year ended December 31, 1998.
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<PAGE> 30
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED (#) (1) FISCAL YEAR PRICE ($/SH) DATE(1)
- ---------------------------------- --------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Peter A. Nelson................... --- --- --- ---
Ronald W. Loback.................. 400,000(2) 24.0% $2.50 9/18/08
180,000(3) 10.8% 2.50 9/18/08
J. Dale Belt...................... 130,000(2) 7.8% $2.50 5/28/01(4)
100,000(3) 6.0% 2.50 5/28/01(4)
</TABLE>
- -----------------------------
(1) All options were granted at the fair value of the shares on the date of
grant and expire upon the earlier of September 18, 2008 or two years
after the termination of employment.
(2) The options vest and become exercisable at the rate of 15% on the six
month anniversary of employment, 7.5% upon each calendar quarter
thereafter through the second year of employment, and 10% upon each
calendar quarter during the third year of employment.
(3) The options vest and become exercisable upon the six month anniversary
of employment.
(4) As a result of Mr. Belt's resignation as our Chief Financial Officer in
May 1999, these options will expire during May 2001.
RECENT GRANTS OF STOCK OPTIONS
In connection with his employment with our company, we granted to Mr.
Provow stock options to purchase 3,000,000 shares of common stock at an exercise
price of $1.00 per share. These options will vest monthly over a four-year
period beginning in January 2000. In connection with their appointment to our
board of directors, we expect to grant to each of the director designees from
Commonwealth, except Mr. Falk, options to purchase 150,000 shares of common
stock (an aggregate of 450,000 shares) at an exercise price of $0.75 per share.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides information respecting the options held by
the listed officers as of December 31, 1998. None of the listed officers
exercised options during fiscal 1998.
AGGREGATED OPTION VALUES AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($) (1)
---------------------------------------- -------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter A. Nelson............. --- --- --- ---
Ronald W. Loback............ 270,000 310,000 $151,875 $174,375
J. Dale Belt................ 139,000 91,000 $78,188 $51,188
</TABLE>
- ----------------------
(1) Calculated based upon the closing price of our common stock as quoted
on the OTCBB on December 31, 1998 of $3.06 per share.
EMPLOYMENT ARRANGEMENTS
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<PAGE> 31
Prior to the appointment of Mr. Provow as our Chief Executive Officer
and President, Mr. Nelson served as our Chairman of the Board of Directors,
President, and Chief Executive Officer. Our employment agreement with Mr. Nelson
provides for Mr. Nelson to serve as our Vice Chairman of the Board of Directors
for a five-year term ending September 2004. Pursuant to the agreement, the term
is extended automatically for an additional one-year period every September. The
Board of Directors may terminate the agreement (i) in September 2002, the end of
the original term of the agreement, or (ii) at the end of each extension period.
Mr. Nelson receives a base salary of $180,000 plus certain expense allowances.
Should we terminate Mr. Nelson without cause, or should Mr. Nelson terminate his
employment for good reason, Mr. Nelson will receive his base salary and benefits
for the remaining term of the agreement.
We are currently negotiating an employment agreement with Mr. Provow,
and have previously issued to Mr. Provow options to purchase 3,000,000 shares of
common stock at an exercise price of $1.00 per share. These options vest monthly
over a four-year period commencing January 1, 2000.
SEVERANCE PLAN
We have a severance plan that enables certain executives of our company
to receive one month of salary in the event that executive is terminated for any
reason other than for cause, death, or voluntary decision by the executive. As
of January 6, 2000, the only executives covered by the severance plan are
Messrs. Loback and Shook. Executives covered by the severance plan are deemed to
have been involuntarily terminated in the event of a change of control (as
defined in the severance plan), or if the executive experiences certain
conditions including the following:
- a reduction in the executive's cash compensation;
- a reduction of compensation or benefits that are not made to
all employees; or
- the assignment of any duties inconsistent with the executive's
current position, or any diminishment in such position,
authority, duties, functions, or responsibilities.
In the event of any of the foregoing conditions, the executive will be
provided with COBRA continuation coverage for a one-year period, and we will
accelerate the vesting of any previously granted stock options or awards that
would otherwise be vested one calendar quarter after termination.
PERFORMANCE EQUITY PLAN
We have adopted the Performance Equity Plan to enable our company to
offer to our key employees, officers, directors, and consultants who provide
valuable services to us an opportunity to acquire a proprietary interest in our
company and to link their interest and efforts to the long-term interests of our
shareholders. The plan provides for the granting of awards to employees,
directors, and consultants eligible to receive awards under the plan. Such
awards may include stock options, restricted stock, stock reload options, and
other stock-based awards. A total of 2,704,670 shares of common stock may be
issued under the plan. As of January 6, 2000, no shares of our common stock had
been issued upon exercise of options granted pursuant to the plan, and there
were outstanding options to acquire 2,371,900 shares of the our common stock. We
had granted 218,857 shares of restricted stock under the plan, and had 113,913
shares available for grant under the plan. The plan will remain in effect until
no further grants can be made and no awards remain outstanding.
Options and awards may be granted only to persons who at the time of
grant are key employees, officers, directors, and consultants who are deemed to
have rendered or to be able to render significant services to our company and
who are deemed to have or have the potential to contribute to the success of our
company. Options that are incentive stock options may only be granted to
employees of our company. To the extent that granted options are incentive stock
options, the terms and conditions of those options must be consistent with the
qualification requirements set forth in the Internal Revenue Code.
The plan is administered by the Board of Directors, except that the
Board of Directors may delegate its power to administer the plan to a committee
appointed by the Board of Directors. The committee has the authority to
administer all matters governing the plan, including the persons eligible to
receive awards, the terms and
29
<PAGE> 32
conditions of grants of awards, the specified performance goals or other
criteria that need to be attained for the vesting of awards, and the
substitution of any awards.
The exercise prices, expiration dates, maximum number of shares
purchasable, and the other provisions of the options will be established at the
time of grant. The exercise prices of options may not be less than 100% (110% if
the option is granted to a shareholder who, at the time of grant, owns common
stock possessing more than 10% of the combined voting power of all classes of
stock of our company) of the fair market value of the common stock on the date
of grant. Options may be granted for terms of up to ten years and become
exercisable in whole or in one or more installments at such time as may be
determined upon a grant of the options. To exercise an option, the optionholder
will be required to deliver to us full payment of the exercise price of the
shares as to which the option is being exercised.
The performance equity plan includes a directors' awards program that
provides for the automatic grant of stock options to non-employee directors.
Under this program, each newly elected non-employee member of the Board of
Directors receives options to purchase 30,000 shares of common stock with an
exercise price equal to the fair market value of the common stock on the date of
grant. In addition, on the annual anniversary date of their appointment to the
Board of Directors, we will automatically grant to each non-employee director
options to purchase 5,000 shares of common stock with an exercise price equal to
the fair market value of the common stock on the date of grant. All options
under the directors' awards program will vest quarterly in equal amounts over
three years, and will have a term of ten years.
Under the plan, the committee also may award shares of restricted stock
or other stock-based awards either alone or in addition to other awards granted
under the plan. The committee will determine the eligible persons, the number of
shares to be awarded, the price (if any) to be paid by the holder, and all other
terms and conditions of such awards.
Under the plan, all options and other awards will immediately vest and
become exercisable if any person or entity (other than our company, or any
officer, director, or principal stockholder of our company) acquires securities
of our company in one or more transactions having at least 25% of the total
voting power of all of our company's securities then outstanding, and such
acquisition is not authorized or otherwise approved by our Board of Directors.
LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Articles of Incorporation provide that a
director of our company will not be personally liable to our company or our
shareholders for monetary damages for conduct as a director, except for
- acts or omissions involving intentional misconduct by the
director or a knowing violation of law by the director,
- assenting to an unlawful distribution where it is established
that the director did not perform the director's duty of
loyalty to our company, or
- any transaction from which the director will personally
receive a benefit in money, property, or services to which the
director is not legally entitled.
Our articles of incorporation also provide that if the Washington
Business Corporation Act is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of our company will be eliminated or limited to the fullest extent
permitted by the Washington Business Corporation Act, as so amended.
Our articles of incorporation also provide that we will indemnify and
advance expenses, to the fullest extent permitted by the Washington Business
Corporation Act, to each person who is a director or officer of our company.
This indemnity will not apply if
- acts or omissions of the director or officer are found to be
intentional misconduct or a knowing violation of law,
- a director assents to an unlawful distribution and it is
established that such director did not perform the director's
duty of loyalty to our company; or
30
<PAGE> 33
- any transaction with respect to which it was found that such
director or officer personally received a benefit in money,
property, or services to which the director or officer was not
legally entitled.
In addition, we have adopted provisions in our bylaws that require us
to indemnify our directors, officers, and certain other representatives of our
company against expenses and certain other liabilities arising out of their
conduct on behalf of our company.
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<PAGE> 34
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the shares
of our common stock beneficially owned as of December 31, 1999 by each of our
directors and executive officers, all of our directors and executive officers as
a group, and each person known by us to be the beneficial owner of more than 5%
of our common stock. The table also sets forth the number of shares of common
stock that each selling shareholder may offer and sell under this prospectus.
The shares to be offered may be sold from time to time subject to the conversion
of preferred stock or the exercise of warrants.
<TABLE>
<CAPTION>
SHARES OF COMMON
SHARES STOCK WHICH MAY BE
BENEFICIALLY OFFERED PURSUANT
NAME OF BENEFICIAL OWNER (1) OWNED (1) PERCENT (2) HERETO
- ---------------------------- --------- ----------- ------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Maurice J. Gallagher, Jr.**........................ 6,500,000(3) 9.9% --
Peter A. Nelson.................................... 4,532,973(4) 7.1% --
Travis Lee Provow.................................. 1,205,833(5) 1.9% --
Ronald W. Loback................................... 551,344(6) * --
Scot A. Brands..................................... 200,000(7) * --
Kenton G. Dallas................................... 305,000(8) * --
James D. Shook..................................... 288,052(9) * --
Michael S. Falk**.................................. 18,062,667(10) 22.4% --
Philip R. Ladouceur**.............................. 200,000(11) * --
Directors and executive officers as a group (9 persons) 24,945,869 30.4% --
--
5% SHAREHOLDERS: --
Commonwealth Associates, L.P....................... 18,062,667(10) 22.4% --
SELLING SHAREHOLDERS (12):
Abdullah M. Basodan................................ 750,000(13) 1.2% 750,000
Maher Mohamed Al-Nowaiser.......................... 250,000(13) * 250,000
Continental Capital & Equity Corporation (14)...... 108,000 * 108,000
Peter F. Duerr..................................... 101,250(13) * 101,250
Lars Ewaldsen...................................... 52,500(13) * 52,500
Stan A. Moore...................................... 50,000(13) * 50,000
Tomasovich Family Trust............................ 37,500(13) * 37,500
IC Holdings II, LLC (15)........................... 32,000 * 32,000
Dr. Claus D. Martin................................ 26,250(13) * 26,250
Bill R. Poland..................................... 12,500(13) * 12,500
</TABLE>
- ----------------------
* Less than one percent.
** Such persons are designees of Commonwealth Associates, L.P. which has
the right to appoint four of seven of our directors. Such persons are
expected to join our board of directors upon the completion of our
private placement in January 2000. Except as indicated, amounts exclude
agent warrants that Commonwealth may allocate to these directors.
Amounts exclude options to purchase approximately 150,000 shares of
common stock at an exercise price of $0.75 per share that we expect to
grant to each of the director designees, except Michael Falk (an
aggregate of approximately 450,000 shares) upon their appointment to
our board of directors.
(1) Beneficial ownership information is based on information provided to us,
and the beneficial owner has no obligation to inform us of or otherwise
report any such changes in beneficial ownership. Except as indicated, and
subject to community property laws when applicable, the persons named in
the table above have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. Except as
otherwise indicated, each director or officer may be reached through our
offices at 2151 East Broadway Road, Suite 211, Tempe, Arizona 85282.
(2) The percentages shown are calculated based upon 63,483,795 shares of
common stock outstanding on December 31, 1999, (which assumes 1,280,000
shares of common stock issuable upon conversion of the
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<PAGE> 35
Series A preferred stock). The numbers and percentages shown include the
shares of common stock actually owned as of December 31, 1999 and the
shares of common stock that the person or group had the right to acquire
within 60 days of December 31, 1999. In calculating the percentage of
ownership, all shares of common stock that the identified person or group
had the right to acquire within 60 days of December 31, 1999 upon the
exercise of options and warrants are deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned
by such person or group, but are not deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned
by any other person.
(3) Includes warrants to purchase 2,000,010 shares of common stock at an
exercise price of $0.75 per share and 500,000 warrants that Commonwealth
intends to allocate to Mr. Gallagher. Excludes options to purchase
approximately 150,000 shares of common stock that we expect to grant to
Mr. Gallagher.
(4) Excludes 250,000 shares of common stock held by Mr. Nelson's spouse,
Wendy Rusing Nelson, as her sole and separate property, and 574,323
shares of common stock owned in the Peter A. Nelson and Wendy Rusing
Nelson Children's Trust, Kurt Kittleson trustee, dated May 22, 1998, an
irrevocable trust for the benefit of their children. Mr. Kittleson has
the full power to vote and exercise investment power with respect to the
shares of the trust. Includes 28,278 shares of common stock issuable upon
exercise of warrants at an exercise price of $0.75 per share.
(5) Includes 165,833 shares of common stock issuable upon the exercise of
stock options and warrants to purchase 346,668 shares of common stock at
an exercise price of $0.75 per share. Assumes the purchase of 666,665
shares of common stock and warrants to purchase 333,335 shares of common
stock in connection with our private placement of units during January
2000. As part of his employment with our company, we granted to Mr.
Provow stock options to purchase 3,000,000 shares of common stock. These
options will vest monthly over a two-year period beginning in January
2000.
(6) Includes 390,000 shares of common stock issuable upon exercise of stock
options and 31,692 shares of common stock issuable upon exercise of
warrants at an exercise price of $0.75 per share.
(7) Includes 66,667 shares of common stock issuable upon the exercise of
warrants at an exercise price of $0.75 per share. Assumes the purchase of
133,333 shares of common stock and warrants to purchase 66,667 shares of
common stock in connection with our private placement of units during
January 2000.
(8) Includes 105,000 shares of common stock issuable upon the exercise of
stock options and 66,667 shares of common stock issuable upon exercise of
warrants at an exercise price of $0.75 per share. Assumes the purchase of
133,333 shares of common stock and warrants to purchase 66,667 shares of
common stock in connection with our private placement of units during
January 2000.
(9) Includes 275,000 shares of common stock issuable upon the exercise of
stock options and 4,351 shares of common stock issuable upon exercise of
warrants at an exercise price of $0.75 per share.
(10) Mr. Falk is a control person of Commonwealth. Includes (a) 16,666,667
shares of common stock issuable upon exercise of agent warrants, and (b)
890,664 shares of common stock and warrants to purchase 445,336 shares of
common stock at an exercise price of $0.75 per share. Commonwealth and
Mr. Falk have shared voting and dispositive power with respect to the
shares and warrants held by Commonwealth. Amounts are not adjusted to
reflect the transfer by Commonwealth of warrants to, among others, (a)
account executives employed by Commonwealth as compensation for their
services in placing units in the private placement, (b) the director
designees, and (c) a finder. Any allocation of warrants will reduce
Commonwealth's and Mr. Falk's beneficial ownership of our company. The
address of Commonwealth is 830 Third Avenue, New York, New York 10022.
(11) Includes 66,667 shares of common stock issuable upon the exercise of
warrants at an exercise price of $0.75 per share. Assumes the purchase of
133,333 shares of common stock and warrants to purchase 66,667 shares of
common stock in connection with our private placement of units during
January 2000.
(12) Except as indicated, none of the selling shareholders have ever held any
position, office, or other material relationship with our company.
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<PAGE> 36
(13) Represents shares of common stock that the shareholder may acquire upon
conversion of shares of preferred stock.
(14) Continental Capital & Equity Corporation served as our public relations
firm from January 1999 until May 1999.
(15) IC Holdings II, LLC provided investor relations services to our company
from June 1998 until November 1998. Amount represents warrants to
purchase 32,000 shares of common stock at an exercise price of $4.00 per
share.
CERTAIN TRANSACTIONS
Mr. Nelson, the Vice Chairman of our board of directors and a principal
shareholder of our company, is also the principal shareholder of another company
who subleases office space from us. That company pays us $5,000 per month for
rent, office supplies, support staff, and management. These payments totaled
approximately $60,000 during fiscal year 1998 and approximately $45,000 during
the nine months ended September 30, 1999.
In connection with a bridge financing in November 1999, ComVest Capital
Partners LLC, an affiliate of Commonwealth, and its designees received bridge
warrants to purchase 10,000,000 shares of common stock at an exercise price of
$0.01 per share. In connection with our private placement of units in December
1999 and January 2000, ComVest and its designees converted $595,000 evidenced by
bridge notes into 5.95 units and received 793,331 shares of common stock and
unit warrants to purchase 396,669 shares of common stock at an exercise price of
$0.75 per share. ComVest sold the bridge warrants to affiliates of Commonwealth.
Commonwealth previously received 60,000 shares of common stock as a
non-refundable retainer to act as the placement agent in the private placement
and received agent warrants to purchase 16,666,667 shares of common stock at an
exercise price of $0.50 per share. Upon the closing of the private placement, we
granted Commonwealth the right to appoint four of seven directors to our Board
of Directors. In addition, upon the closing of the private placement, we entered
into an 18-month financial advisory agreement with Commonwealth for financial
and investment banking services under which we will pay Commonwealth a monthly
fee of $5,000, the first three months of which were paid in advance upon the
closing of the private placement. We also entered into an agreement with
Commonwealth under which we will pay Commonwealth a fee if it enters into
certain transactions. Mr. Falk, ComVest, and Commonwealth are affiliates, and
Mr. Falk is a control person of ComVest and Commonwealth. The relationships and
agreements between us, ComVest, and Commonwealth create certain conflicts of
interest for Commonwealth in acting in the best interests of itself as opposed
to other shareholders of our company and provide Commonwealth with substantial
influence and control over our company. See "Risk Factors," "Principal and
Selling Shareholders," and "Management."
Commonwealth may allocate agent warrants to (a) certain of its director
designees (including approximately 500,000 agent warrants to Mr. Gallagher), (b)
account executives of Commonwealth, and (c) a finder.
We expect to grant to each of Commonwealth's director designees, except
Michael Falk, options to purchase approximately 150,000 shares of common stock
at an exercise price of $0.75 per share (a total of 450,000 shares).
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<PAGE> 37
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of our company consists of 100,000,000
shares of common stock, par value $.0001 per share, and 10,000,000 shares of
preferred stock, par value $.0001 per share. As of January 5, 2000, there were
issued and outstanding 47,431,832 shares of common stock and 25,600 shares of
Series A preferred stock. In addition, we have reserved the following:
- 5,485,813 shares of common stock for issuance upon exercise of
outstanding stock options,
- 10,518,893 shares of common stock for issuance upon exercise
of outstanding warrants,
- 1,280,000 shares of common stock for issuance upon conversion
of the Series A preferred stock, and
- 16,666,667 shares of common stock for issuance upon exercise
of the agent warrants issued to Commonwealth.
We will not have sufficient authorized common stock to permit full
exercise of the warrants issued to investors in connection with our private
placement in December 1999 and January 2000. We have scheduled a shareholders'
meeting in January 2000 to approve the amendment to increase the number of
shares of common stock authorized for issuance. We cannot provide assurance
when, if ever, the amendment will be approved. The failure to obtain approval
for the amendment could result in the inability to exercise a portion of the
warrants and could subject our company to litigation. See "Risk Factors."
COMMON STOCK
The holders of common stock are entitled to one vote for each share on
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, the holders of a majority of the common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to the preferences that may be applicable to any
then-outstanding preferred stock, the holders of common stock will be 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 the liquidation,
dissolution, or winding up of our company, the holders of common stock will be
entitled to share ratably in all the assets that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of holders of any preferred stock then outstanding. The holders
of common stock have no preemptive, subscription, redemption, or conversion
rights.
PREFERRED STOCK
Our Board of Directors is authorized, subject to any limitations
prescribed by Washington law, but without further action by the shareholders, to
provide for the issuance of serial preferred stock in one or more series; to
establish from time to time the number of shares to be included in these series;
to fix the designations, powers, preferences, and rights of the shares of each
such series and any qualifications, limitations, or restrictions thereof; and to
increase or decrease the number of shares of any such series, but not below the
number of shares of such series then outstanding, without any further vote or
action by the shareholders. The Board of Directors may authorize and issue
serial preferred stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of common stock. In
addition, the issuance of serial preferred stock may have the effect of
delaying, deterring, or preventing a change in control of our company.
Series A Preferred Stock
We have outstanding 25,600 shares of Series A preferred stock. Holders
of the Series A preferred stock are entitled to votes equal to 80% of the number
of shares of common stock into which the Series A preferred stock are
convertible. Unless otherwise specified or required by law, holders of the
Series A preferred stock will vote with the holders of common stock as a single
class on all matters submitted to a vote of shareholders. The holders are
entitled to a cumulative annual dividend of 10%, which is payable quarterly
either in cash or in common stock at our option. The holders of the Series A
preferred stock will have preference in payment of dividends over the holders of
common stock. In the event of any liquidation, dissolution, or winding up of our
company, the holders of Series A preferred stock will be entitled to receive
$100 per share of Series A preferred stock, plus any accrued but unpaid
35
<PAGE> 38
dividends, before the holders of common stock receive any distribution.
Beginning in February 2000, each share of Series A preferred stock will be
convertible at any time by the holders into 50 shares of common stock, an
aggregate of 1,280,000 shares. In the event that the closing price of the shares
of common stock on the OTCBB for 20 days out of a 30 consecutive trading day
period is at least $6.00 per share, we will have the right to redeem the Series
A preferred stock at a redemption rate of $100 per share plus accrued and unpaid
dividends. The Series A preferred stock will convert automatically into common
stock if
- the closing price of the shares of common stock on the OTCBB
for 20 days out of a 30 consecutive trading day period is at
least $8.00,
- we raise at least $6.0 million from the sale of our common
stock at a price per share greater than or equal to $5.00, or
- we complete a merger which our company is not the surviving
legal entity.
BRIDGE FINANCING
In October 1999, ComVest, an affiliate of Commonwealth, made available
to us up to $1.0 million in a bridge financing. As of the December 13, 1999, we
had borrowed an aggregate of $668,000 from ComVest and its designees, evidenced
by bridge notes, and agreed to convert the bridge notes into units at the
closing of the private placement. As a result of the conversion, ComVest and its
designees received 6.68 units in the private placement, consisting of 890,664
shares of common stock and unit warrants to purchase 445,336 shares of common
stock at an exercise price of $0.75 per share. In connection with the bridge
financing, we issued to ComVest and its designees bridge warrants to purchase
10,000,000 shares of common stock at an exercise price of $.01 per share, which
ComVest and its designees exercised prior to the closing of the private
placement. ComVest sold a portion of the bridge warrants to affiliates of
Commonwealth.
WARRANTS
Unit Warrants
In connection with our private placement of units in December 1999 and
January 2000, we issued warrants to purchase 9,300,713 shares of common stock.
Each unit warrant entitles the holder to purchase at any time for a period of
five years, a specified number of shares of common stock at an exercise price of
$0.75 per share. After the expiration of the exercise period, unit warrant
holders will have no further rights to exercise such unit warrants.
The unit warrants may be exercised only for full shares of common
stock. We will not issue fractional shares of common stock or cash in lieu of
fractional shares of common stock. Unit warrant holders do not have any voting
or other rights as a shareholder of our company.
The exercise price and the number of shares of common stock purchasable
upon the exercise of each unit warrant are subject to adjustment upon the
happening of certain events, such as stock dividends, distributions, and splits.
No adjustment in the exercise price will be required unless cumulative
adjustments require an adjustment of at least $0.01. Notwithstanding the
foregoing, in case of any consolidation, merger, or sale of all or substantially
all of the assets of our company, the holder of each of the unit warrants will
have only the right, upon the subsequent exercise thereof, to receive the kind
and amount of shares and other securities and property, including cash, that the
holder would have been entitled to receive by virtue of such transaction had the
unit warrants been exercised immediately prior to such transaction.
Commencing on the date 60 days following each closing of the private
placement of units, the unit warrants will be callable by us at $0.01 per unit
warrant if the average closing price of the common stock is greater than or
equal to $3.00 per share on the OTCBB or NASDAQ for a period of 20 consecutive
trading days and if the common stock issuable upon exercise of the unit warrants
is then covered by an effective registration statement.
We will not have sufficient authorized shares of common stock to permit
full exercise of the unit warrants. In the event that we sell 250 units in the
private placement, until such time as we have sufficient authorized shares of
common stock to permit exercise of all the unit warrants, each holder of unit
warrants will only be entitled to exercise the unit warrants to purchase
approximately 79% (16% if we sell 300 units) of the shares of common stock
36
<PAGE> 39
otherwise issuable pursuant to the unit warrant. Specifically, there will be
3,145,562 shares of common stock available for exercise of the unit warrants
from the total 20,000,100 shares of common stock issuable upon exercise of the
unit warrants. Each holder of a unit warrant to purchase 100,000 shares will be
permitted to purchase approximately 10,500 shares of common stock until
additional authorized shares of common stock are available. Our board of
directors has approved an amendment to our articles of incorporation to increase
the number of shares of common stock to an amount sufficient for the exercise of
the unit warrants. Before the amendment becomes effective, we must obtain
approval from our shareholders at a special shareholders' meeting. We have
scheduled a shareholders' meeting during January 2000 to approve the amendment.
Peter Nelson, the Chairman and a controlling shareholder of our company, has
agreed to vote his approximately 4.5 million shares of common stock. There can
be no assurance that our shareholders will approve the amendment. The inability
of the unit warrant holders to exercise a portion of their unit warrants would
deprive the holders of the value of the unit warrants and could have a material
adverse effect on the market price of our common stock. Moreover, such event
could result in litigation against our company.
Bridge Warrants
In connection with the bridge financing in October 1999, we issued to
ComVest and its designees bridge warrants to purchase 10,000,000 shares of
common stock. Each bridge warrant entitles the holder to purchase one share of
common stock at an exercise price of $0.01 per share at any time prior to
November 2, 2006. ComVest and its designees exercised the bridge warrants prior
to the closing of the private placement of units in December 1999. ComVest sold
a portion of the bridge warrants to affiliates of Commonwealth.
Agent Warrants
In connection with our private placement of units in December 1999, we
issued to the placement agent, 20,000,000 common stock purchase warrants. As of
January 5, 2000, all of the agent warrants remained outstanding. The agent
warrants entitle Commonwealth to purchase at any time prior to December 2006, a
specified number of shares of common stock at an exercise price of $0.50 per
share, subject to adjustment in accordance with the anti-dilution and other
provisions referred to below. The agent warrants may be exercised in whole or in
part. The shares of common stock underlying the agent warrants, when issued upon
the exercise thereof and payment of the purchase price, will be fully paid and
nonassessable. Unless the agent warrants are exercised, the holders of the agent
warrants do not have the rights or privileges of holders of common stock.
The agent warrants contain certain anti-dilution provisions, which
makes the exercise price of the agent warrants and the number of underlying
agent warrant shares subject to adjustment upon the happening of certain events.
No adjustments will be made unless such adjustment, or aggregation of
adjustments, would require an increase or decrease of at least $0.01 in the
exercise price of the agent warrants.
Selling Shareholders' Warrants
In June 1998, in connection with an investor relations agreement, we
issued to IC Holdings II, LLC, an investor relations firm, five-year warrants to
purchase 32,000 shares of common stock. The warrants entitle the holder to
purchase at any time prior to June 26, 2003, one share of common stock at an
exercise price of $8.50 per share. In July 1999, in satisfaction of amounts
payable to IC Holdings II, LLC, we amended the terms of the warrants to (a)
reduce the exercise price to $4.00 per share, and (b) grant certain "demand" and
"piggy-back" registration rights with respect to the shares of common stock
purchasable pursuant to the warrants, as described below.
REGISTRATION RIGHTS
In connection with the issuance of the shares of Series A preferred
stock, we agreed to use our "best efforts" to register the common stock issuable
upon conversion of the Series A preferred stock no later than November 1999. As
of January 5, 2000, 25,600 of the shares of Series A preferred stock are
outstanding, which are convertible into an aggregate of 1,280,000 shares of
common stock.
In connection with an investor relations agreement, we granted to an
investor relations firm warrants to purchase approximately 91,500 shares of
common stock at exercise prices ranging from $2.00 to $9.00 per share.
37
<PAGE> 40
We agreed to use our "best efforts" to register the shares underlying the
warrants at our sole cost and expense. None of these warrants have been
exercised, and we have not yet filed such registration statement.
In connection with an investor relations agreement, we granted to IC
Holdings II, LLC, an investor relations firm, warrants to purchase approximately
32,000 shares of common stock at an exercise price of $4.00 per share. We
granted certain "piggy-back" registration rights with respect to the shares of
common stock purchasable pursuant to the warrants. Under these registration
rights, the holder of common stock acquired on exercise of the warrants may
request us to register such stock if we propose to register any securities under
the securities laws using the same registration form that would be used to
register the warrants. We have also granted certain "demand" registration rights
with respect to the shares of common stock purchasable pursuant to the warrants.
Under these registration rights, the holder may request us to register such
stock. If the registration statement to be filed pursuant to the "demand" or
"piggy-back" registration rights is pursuant to an underwritten offering, the
managing underwriter may reduce the shares to be included in the registration
if, in the judgment of the underwriter, the shares to be included would
interfere with the successful marketing of the offering. We have agreed to pay
all expenses associated with any registration of the common stock acquired
pursuant to the exercise of the warrants.
We have granted certain "demand" registration rights commencing six
months from the final closing of the private placement in January 2000 with
respect to the shares of common stock included in the units, issuable upon
exercise of the unit warrants, the agent warrants, and the bridge warrant
shares. Under such registration rights, the following parties may request us to
register the resale of such securities:
- the holders of the bridge warrant shares,
- the holders of at least 50% of the shares of common stock
included in the units, or
- the holders of at least 50% of the shares of common stock
issuable upon exercise of the agent warrants.
We will not be obligated to file more than
- one "demand" registration with respect to the bridge warrant
shares,
- one "demand" registration with respect to the shares of common
stock included in the units and issuable upon exercise of the
unit warrants, and
- one "demand" registration with respect to the agent warrants.
We also have granted certain "piggy-back" registration rights with respect to
the these securities. In the event a demand is made pursuant to the demand
registration rights pursuant to the unit warrants and we do not file a
registration statement with the Securities and Exchange Commission within the
required period, the exercise price of the unit warrants will be reduced by 10%
and will be reduced by an additional 10% for each 90 days thereafter until a
registration statement is so filed.
We have agreed to pay all expenses associated with any registration of
such securities, except that any underwriter's fees, discounts, or commissions
relating to the securities registered by such holders will be the responsibility
of the holder.
LOCK-UP AGREEMENTS
Each investor in the private placement of units during December 1999
and January 2000 agreed with Commonwealth, the placement agent in that offering,
not to sell, transfer, or otherwise dispose of any securities included in the
units for one year following the final closing of the private placement, and
thereafter, and not to sell, transfer, or otherwise dispose of more than 25% of
such securities on a cumulative basis during each subsequent 90-day period
thereafter (such 24-month period will be referred to as the "Lock-Up Period").
If we undertake certain private or public offerings during the Lock-Up Period,
investors agreed not to sell, transfer, or otherwise dispose of their securities
for such period of time following such qualified offering, not to exceed 12
months, as the managing underwriter or placement agent of the qualified offering
may request, provided Commonwealth agrees. Certain officers and directors of our
company, Commonwealth, ComVest, and certain other persons are subject to similar
lock-up agreements.
38
<PAGE> 41
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
PLAN OF DISTRIBUTION
This prospectus relates to a total of 1,420,000 shares of common stock
currently outstanding or issuable to the selling shareholders upon exercise of
outstanding warrants or conversion of Series A preferred stock. These shares may
be sold from time to time by the selling shareholders. As used in this
prospectus, "selling shareholders" include transferees, donees, pledgees,
legatees, heirs, or legal representatives that sell shares received from a named
selling shareholder after the date of this prospectus.
The selling shareholders have advised us that they have not entered
into any agreements, understandings, or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling shareholders. At the time a particular offering of
common stock is made and to the extent required, the aggregate number of shares
being offered, the name or names of the selling shareholders, and the terms of
the offering, including the name of names of any underwriters, broker-dealers or
agents, any discounts, concessions or commissions and other terms constituting
compensation from the selling shareholders, and any discounts, concessions or
commissions allowed or reallowed or paid to broker-dealers, will be set forth in
an accompanying prospectus supplement.
Sales of the common stock offered hereby may be effected by or for the
account of the selling shareholders from time to time in transactions, which may
include block transactions, in the over-the-counter market, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to the prevailing market price, or at negotiated prices.
The selling shareholders may effect these transactions by selling the common
stock offered hereby directly to purchasers, through broker-dealers acting as
agents for the selling shareholders, or to broker-dealers that may purchase such
shares as principals and thereafter sell the shares from time to time in
transactions, which may include block transactions, in the over-the-counter
market, in negotiated transactions, through a combination of such methods of
sales or otherwise. In effecting sales, broker-dealers engaged by selling
shareholders may arrange for other broker-dealers to participate. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions, or commissions from the selling shareholders and/or the purchasers
of the common stock offered hereby for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both. As to a particular
broker-dealer, such compensation might be in excess of customary commissions.
The selling shareholders may resell the shares of common stock being
registered for resale hereby
- in transactions that are exempt from registration under the
Securities Act or
- as long as the registration statement there is a qualification
in effect under, or an available exemption from, any
applicable state securities law with respect to the resale of
such shares.
There is no assurance that any selling shareholder will sell any common
stock offered hereby, and any selling shareholder may transfer, devise or gift
the common stock by other means not described in this prospectus. For example,
in addition to selling pursuant to the registration statements of which this
prospectus is a part or to which it relates, the selling shareholders also may
sell under Rule 144.
The selling shareholders and any broker-dealers, agents, or
underwriters that participate with the selling shareholders in the distribution
of common stock offered hereby may be deemed to be "underwriters" within the
meaning of the Securities Act. Accordingly, the selling shareholders will be
subject to the prospectus delivery requirements of the Securities Act. Any
commissions paid or any discounts or concessions allowed to any such persons,
and any profits received on the resale of the common stock offered hereby and
purchased by them, may be deemed to be underwriting commissions or discounts
under the Securities Act. We will not pay any compensation to any NASD member in
connection with this offering. Brokerage commissions, if any, attributable to
the sale of the shares of common stock offered hereby will be borne by the
selling shareholders.
39
<PAGE> 42
We will not receive any proceeds from the sale of any shares of common
stock by the selling shareholders. We have agreed to bear all expenses, other
than selling commissions, in connection with the registration and sale of the
common stock being offered by the selling shareholders. We have agreed to
indemnify certain of the selling shareholders against certain liabilities under
the Securities Act. Each selling shareholder may indemnify any broker-dealer
that participates in transactions involving sales of the shares against certain
liabilities, including liabilities arising under the Securities Act.
To comply with the securities laws of certain jurisdictions, if
applicable, the shares of common stock offered hereby will be offered or sold in
such jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the common stock offered hereby may not be sold
unless they have been registered or qualified for sale in the applicable state
or an exemption from the registration or qualifications requirement is available
and is complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the common stock offered pursuant to this
prospectus may be limited in its ability to engage in market activities with
respect to the common stock. Without limiting the foregoing, each selling
shareholder will be subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including Regulation M. Those rules and
regulations may limit the timing of purchases and sales of any of the common
stock offered by the selling shareholders pursuant to this prospectus, which may
affect the marketability of the common stock offered hereby.
The selling shareholders also may pledge the shares of common stock
being registered for resale hereby to NASD broker/dealers pursuant to the margin
provisions of each selling shareholder's customer agreements with such pledgees.
Upon default by a selling shareholder, the pledgee may offer and sell shares of
common stock from time to time as described above.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon by Greenberg Traurig, L.L.P., Phoenix, Arizona.
EXPERTS
The consolidated financial statements of Intelispan, Inc. as of
December 31, 1998 and 1997, and for the year ended December 31, 1998 and the
period from September 15, 1997 (date of inception) through December 31, 1997,
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm in accounting and
auditing.
The report of KPMG LLP covering the December 31, 1998 financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations and net capital deficiency raise substantial
doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed a registration statement on Form SB-2 with the Securities and
Exchange Commission relating to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance we refer
you to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. For further information with respect to Intelispan, Inc. and the
common stock offered by this prospectus, we refer you to the registration
statement, exhibits, and schedules.
Anyone may inspect a copy of the registration statement without charge
at the public reference facilities maintained by the Securities Exchange and
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; the
Chicago Regional Office, Suite 1400, 500 West Madison Street, Citicorp Center,
Chicago, Illinois 60661; and the New York Regional Office, Suite 1300, 7 World
Trade Center, New York, New York 10048.
40
<PAGE> 43
Copies of all or any part of the registration statement may be obtained from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees. The
public may obtain information on the operation of the Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The
registration statement is also available through the Securities and Exchange
Commission's Web site at the following address: http://www.sec.gov.
This prospectus includes statistical data regarding the VPN market and
growth of the remote access that were obtained from industry publications,
including reports generated by Infonetics Research and the Gartner Group. These
industry publications generally obtain information from sources believed to be
reliable. We have not sought the consent of any of these organizations to refer
to their reports in this prospectus.
41
<PAGE> 44
INTELISPAN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report ........................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 ........ F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1998 and 1997 ................................. F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998 and 1997 ................................. F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 ................................. F-6
Notes to Consolidated Financial Statements .......................... F-7
Consolidated Balance Sheet as of September 30, 1999 (unaudited) ..... F-15
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1999 and 1998 (unaudited) .................... F-16
Consolidated Statement of Shareholders' Equity for the Nine Months
Ended September 30, 1999 (unaudited) ............................. F-17
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited) .................... F-18
Notes to Unaudited Consolidated Financial Statements ................ F-19
F-1
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Intelispan, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelispan, Inc. (a development stage enterprise) as of December 31, 1998 and
1997 and the related consolidated statements of operations, shareholders' equity
and cash flows for the year ended December 31, 1998 and the period from
September 15, 1997 (date of inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial position of Intelispan,
Inc. as of December 31, 1998 and 1997 and the results of its operations and its
cash flows for the year ended December 31, 1998 and the period from September
15, 1997 (date of inception) through December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Intelispan, Inc. will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, Intelispan, Inc. has suffered recurring
losses from operations, working capital deficiency and has a deficit accumulated
during the development stage that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
February 12, 1999
F-2
<PAGE> 46
INTELISPAN, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 27,459 753,034
Accounts receivable ............................................................... 82,040 5,853
Prepaid expenses .................................................................. 235,775 8,690
Other current assets .............................................................. 53,163 44,957
----------- -----------
Total current assets ............................................... 398,437 812,534
Property and equipment, net .......................................................... 376,671 9,907
Intangibles, net ..................................................................... 1,029,322 799,381
Other long-term assets ............................................................... 237,831 13,835
----------- -----------
$ 2,042,261 1,635,657
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ..................................................................... $ 561,846 158,861
Accrued liabilities .................................................................. 201,245 30,253
Notes payable to stockholders ........................................................ -- 700,000
----------- -----------
Total current liabilities .......................................... 763,091 889,114
Note payable ......................................................................... 188,957 --
Minority interest .................................................................... 92,230 719,151
Commitments, contingency and subsequent event (notes 4, 5, 7, 10, 11 and
12)
Shareholders' equity:
Common Stock, $.0001 par value; 100,000,000 shares authorized, issued
and outstanding 18,377,471 shares in 1998 and 10,371,429 shares in
1997 ............................................................................ 1,837 768
Paid-in capital ................................................................... 6,779,314 599,232
Deficit accumulated during the development stage .................................. (5,783,168) (572,608)
----------- -----------
Total shareholders' equity ......................................... 997,983 27,392
----------- -----------
$ 2,042,261 1,635,657
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 47
INTELISPAN, INC.
(A Development State Enterprise)
Consolidated Statements of Operations
For the period September 15, 1997 (date of
inception) through December 31, 1997 and for the
year ended December 31, 1998
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
1998 1997 INCEPTION
------------ ------------ ------------
<S> <C> <C> <C>
Revenue .................................................... $ 129,596 11,303 140,899
Costs of sales ............................................. 133,643 15,838 149,481
------------ ------------ ------------
Gross loss ............................... (4,047) (4,535) (8,582)
------------ ------------ ------------
Operating expenses:
Selling ................................................. 1,382,062 9,796 1,391,858
General and administrative .............................. 4,317,057 667,208 4,984,265
Cost of abandoned acquisition ........................... 225,550 -- 225,550
------------ ------------ ------------
Total operating expenses ................. 5,924,669 677,004 6,601,673
------------ ------------ ------------
Operating loss ........................... (5,928,716) (681,539) (6,610,255)
Interest expense ........................................... (18,980) (569) (19,549)
Interest income ............................................ 40,256 1,023 41,279
Minority interest .......................................... 696,880 108,477 805,357
------------ ------------ ------------
Net loss ................................. $ (5,210,560) (572,608) (5,783,168)
============ ============ ============
Net loss per common share - basic and diluted .............. $ (0.32) (0.06) (0.39)
============ ============ ============
Weighted average common shares outstanding ................. 16,334,670 10,337,094 14,975,050
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
INTELISPAN, INC.
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity
For the period September 15, 1997 (date of
inception) through December 31, 1997 and for the
year ended December 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON SHARE PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common shares issued in connection with the
merger with ELSC ....................... 2,693,625 $ 269 (269) -- --
Common shares issued to founders
at inception ........................... 6,759,330 676 (676) -- --
Common shares issued to investors,
net of $60,000 costs ................... 918,474 92 599,908 -- 600,000
Net loss from inception to
December 31, 1997 ...................... -- -- -- (572,608) (572,608)
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 ............... 10,371,429 1,037 598,963 (572,608) 27,392
Common shares issued to investors
under revised Stock Purchase Agreement .
303,630 30 (30) -- --
Common shares issued in January 1998
private offering ....................... 1,468,939 147 3,324,853 -- 3,325,000
Common shares issued for efforts in raising
funds in January 1998 private offering .
5,784,639 578 (578) -- --
Purchase of net assets from the merger of
ELSC ................................... -- -- 268,646 -- 268,646
Common shares issued in July 1998 private
offering, net of ....................... $ 195,000
costs .................................. 341,334 34 2,364,971 -- 2,365,005
Common shares issued as compensation for
services ............................... 107,500 11 222,489 -- 222,500
Net loss .................................. -- -- -- (5,210,560) (5,210,560)
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 ............... 18,377,471 $ 1,837 6,779,314 (5,783,168) 997,983
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 49
INTELISPAN, INC.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
For the period September 15, 1997 (date of
inception) through December 31, 1997 and for the
year ended December 31, 1998
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
1998 1997 INCEPTION
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $(5,210,560) (572,608) (5,783,168)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .............................. 261,130 42,726 303,856
Minority interest .......................................... (696,880) (108,477) (805,357)
Non-cash compensation....................................... 69,958 -- 69,958
Common stock issued as compensation for services ........... 222,500 -- 222,500
Increase in assets:
Accounts receivable ...................................... (76,187) (5,853) (82,040)
Prepaid expenses ......................................... (227,085) (8,690) (235,775)
Other current assets ..................................... (8,206) (44,957) (53,163)
Other long-term assets and intangibles ................... (665,243) (27,337) (692,580)
Increase in liabilities:
Accounts payable ......................................... 402,985 158,861 561,846
Accrued expenses ......................................... 170,992 30,253 201,245
----------- ----------- -----------
Net cash used in operating activities ............... (5,756,596) (536,082) (6,292,678)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ........................... (416,587) (10,884) (427,471)
----------- ----------- -----------
Net cash used in investing activities ............... (416,587) (10,884) (427,471)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ...................................... 5,690,005 600,000 6,290,005
Proceeds from note payable .................................... 188,957 -- 188,957
Proceeds from notes payable, shareholders ..................... -- 700,000 700,000
Principal payments on notes payable, shareholders ............. (700,000) -- (700,000)
Common stock issued in merger for net assets .................. 268,646 -- 268,646
----------- ----------- -----------
Net cash provided by financing activities ........... 5,447,608 1,300,000 6,747,608
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............. (725,575) 753,034 27,459
Beginning cash and cash equivalents .............................. 753,034 -- --
----------- ----------- -----------
Ending cash and cash equivalents ................................. $ 27,459 753,034 27,459
=========== =========== ===========
</TABLE>
Supplemental non-cash disclosures:
The Company's initial contribution in the investment in Contego, LLC was a
note payable in the amount of $868,000. The Company subsequently paid
this note along with accrued interest of $17,411.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 50
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF ORGANIZATION
Intelispan Ventures, Inc. dba Intelispan, Inc. (the Company) was
incorporated on September 15, 1997 and is currently in the development
stage. The Company was formed with the intention of providing a
comprehensive package of data communication services designed to meet
the developing global communications and electronic commerce needs of
businesses and other organizations. Management anticipates incurring
additional losses as they pursue their development efforts.
(b) MERGER
The Company (accounting acquirer) entered into a Plan of Merger and
Reorganization (the merger) as of July 27, 1998 whereby the legal
acquirer, Equipment Leasing and Sales Corporation (ELSC), was merged
with the Company using the purchase method of accounting. Under the
terms of the merger, shareholders of the Company received one share of
ELSC stock for every 1.131769 shares and/or warrants owned as of the
merger effective date. Immediately upon closing, the officers and
directors of ELSC resigned and were replaced by the Company's officers
and directors. Additionally, ELSC changed its name to Intelispan, Inc.
(c) PRINCIPLES OF CONSOLIDATION
The Company held a 43% interest in Contego, LLC as of December 31,
1997. On September 28, 1998, the CEO of Intelispan, Peter Nelson,
transferred his 8% interest in Contego to the Company in accordance
with a previous shareholder investment agreement. Additionally, on
November 30, 1998, the Company acquired an additional 9.36% as a
result of contributing $400,000 in a capital call that was not met by
the other members of Contego.
(d) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
(f) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation of equipment
is determined using straight-line method over the estimated useful
lives of the related assets, which is seven years for furniture and
fixtures and three to five years for equipment and software.
Depreciation expense charged to operations during the period from
inception (September 15, 1997) to December 31, 1998 was $49,801.
F-7
<PAGE> 51
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(g) INTANGIBLES
Intangibles are recorded at cost and are amortized over their
estimated useful lives using the straight-line method. Intangibles at
December 31, 1998 and 1997 respective amortization periods are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C> <C>
Software code $ 827,628 827,628 5 years
Product license fee 400,000 -- 5 years
Product license fee 25,000 -- 2 years
Trademarks 8,222 8,002 15 years
Other 22,527 5,500 5 years
------------------ -----------------
1,283,377 841,130
Accumulated amortization (254,055) (41,749)
------------------ -----------------
$ 1,029,322 799,381
================== =================
</TABLE>
(h) ADVERTISING COSTS
Advertising costs are expensed at the time the advertisement takes
place. Advertising expense charged to operations during the period
from inception (September 15, 1997) to December 31, 1998 was $362,927.
There were no advertising costs recorded as prepaid expenses as of
December 31, 1998.
(i) COST OF ABANDONED ACQUISITION
The Company abandoned a planned acquisition on September 30, 1998. In
accordance with the merger and acquisition agreement, the Company was
required to pay a break-up fee and legal fees of the intended
acquiree. The negotiated fee included in 1998 expenses was $165,909
and the corresponding legal fees totaled $59,641.
(j) STOCK BASED COMPENSATION
In accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, the Company
measures stock-based compensation expense as the excess of the market
price on date of grant over the amount the employee must pay for the
stock. The Company's policy is to generally grant stock options at
fair market value at the date of grant, therefore no compensation
expense is recognized. As permitted, the Company has elected to adopt
only the disclosure provisions of SFAS No. 123, Accounting for
Stock-based Compensation (see note 9).
(k) LOSS PER SHARE OF COMMON STOCK
The Company has adopted SFAS No. 128, Earnings per Share. Basic
earnings (loss) per share is computed by dividing income (loss)
attributable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings (loss) of the Company. In
F-8
<PAGE> 52
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
calculating net loss per common share, common stock equivalent shares
of 2,060,947 consisting of stock options and warrants have been
excluded because their inclusion would have been anti-dilutive.
(1) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets under the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(2) LIQUIDITY
The Company has incurred net losses of $5,140,602 and $572,608 in 1998 and
1997, respectively. The Company is in the development stage and has
recorded a minimal amount of revenue in 1998 and 1997. Despite its negative
cash flow, the Company has been able to secure investor financing to
support its operations to date, based on sales of common stock. Going
forward, significant amounts of additional cash will be needed to implement
the proposed business plan and to fund losses until the Company has began
to record revenue. While there is no assurance that funding will be
available to execute the plan, the Company is continuing to seek financing
to support its operations.
The Company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1998 and
1997 consolidated financial statements. The paragraph states that the
Company's recurring losses, working capital deficiency and the deficit
accumulated during the development stage raise substantial doubt about the
Company's ability to continue as a going concern and cautions that the
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
(3) EQUIPMENT
Equipment at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
----------------------------------------
1998 1997 USEFUL LIFE
------------------- ------------------ ------------------
<S> <C> <C> <C>
Furniture and fixtures $ 202,540 4,500 7 years
Computer equipment and software 219,743 6,384 3 years
Office equipment 5,188 -- 5 years
------------------- ------------------
427,471 10,884
Less accumulated depreciation (50,800) (977)
------------------- ------------------
$ 376,671 9,907
=================== ==================
</TABLE>
F-9
<PAGE> 53
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(4) NOTE PAYABLE
In September 1998, the Company entered into a financial advisory services
agreement with a third party. The term of the agreement is three years,
unless terminated by either party before the end of the term. In exchange
for the agreed upon financial advisory services, the Company is obligated
to pay the third party an initial payment of $30,000 (expensed during
1998), a fee of $4,000 per month over term of the agreement, and $250,000
non-interest bearing note payable, due October 11, 2001. The Company has
imputed interest at 11% per annum and charged interest expense,
accordingly. The non-interest portion of the note, $180,000, is being
amortized over the term of the agreement on a straight-line basis. The
indebtedness evidenced by the note shall be subordinate and junior to any
present or future debts and obligations, whether secured or unsecured,
arising from the borrowing of money from a bank, trust company, insurance
company, pension trust fund, or other financial institution.
(5) LEASE OBLIGATIONS
The Company has entered into lease agreements for office space and office
equipment. These leases have been accounted for as operating leases by the
Company. The Company expects to renew or replace the leases in the ordinary
course of business. The leases expire from 1999 to 2000 and total payments
are currently approximately $17,719 per month. Expense charged to
operations related to the leases during the period from inception
(September 15, 1997) to December 31, 1998 was approximately $164,546.
Future minimum payments required for years after 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 213,457
2000 10,282
---------------
$ 223,739
===============
</TABLE>
(6) INCOME TAXES
For the years ended December 31, 1998 and 1997, the Company generated a net
loss for both financial reporting and income tax purposes, therefore no
income tax provision has been recorded.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company's primary deferred taxes result from net operating loss
carryforwards and tax depreciation and amortization in excess of book
depreciation and amortization. The Company recorded a valuation allowance
offsetting its entire net deferred tax asset due to its limited earnings
history and the fact that management believes it is more likely than not
that the deferred tax assets will not be realized.
The Company has available approximately $4,500,000 in net operating losses
which may be carried forward to offset future federal taxable income for
fifteen years and state taxable income for five years.
F-10
<PAGE> 54
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(7) STOCKHOLDERS' EQUITY
(a) STOCK PURCHASE AGREEMENT
In September 1997, the Company completed an equity financing with a
small group of investors. The Stock Purchase Agreement ("SPA")
originally called for an initial investment of $660,000, issuance of
918,474 shares, and continued investment at periodic intervals
culminating in a cumulative investment of $3,500,000 and ownership of
49% of the total common stock outstanding. In January 1998, the
original SPA was nullified and replaced with a revised SPA resulting
in a refund of the initial investment. The revised SPA called for an
initial investment of $600,000, issuance of 303,630 shares in addition
to the 918,474 previously issued, provided for 5,784,639 incentive
shares to be issued to the investors covered under the revised SPA for
their efforts in raising additional capital in the January 1998
private placement offering.
(b) PRIVATE PLACEMENT OFFERINGS
The Company completed two equity financings during 1998. A private
placement offering at $2.00 per share was begun in January 1998
resulting in additional funds of $3.325 million invested in the
Company. A second equity offering was begun in July 1998 that raised
additional capital of $2,365,005 net of $195,000 in costs. The July
offering was priced at $7.50 per unit which consisted of one share of
common stock and one-half of a warrant. The warrant granted the holder
the option to purchase additional shares at $8.00 if exercised within
one year of purchase or $8.50 if exercised in the second year. A total
of 170,667 options are outstanding as of December 31, 1998. The
Company has made verbal commitments to the July investors that they
will be offered the option to convert their investment to the same
terms and conditions of the Company's next private offering. The next
equity financing to be undertaken by the Company is expected to be at
$2.00 per share and will not include any warrants. Should the July
investors elect to convert to the new offering, it is estimated that
additional shares of 938,669, will be issued at no additional cost to
the investors.
(c) SHARES ISSUED TO CONSULTANT
The Company entered into an agreement with a consultant to assist with
the merger completed in July 1998. The agreement called for a cash
payment of $75,000 and issuance of 102,500 post-merger shares upon
successful completion of the merger. The Company recorded total
expense of $275,000 in 1998 related to the agreement.
(8) PENSION PLAN
The Company has a SIMPLE Plan (the Plan) which covers all employees who
have earned or are expected to earn at least $5,000 during the year or who
have been employed by the Company for six months. Eligible employees may
elect to defer up to $6,000 each year. The Company matches employee
deferrals up to 3% of an employee's salary. During the period from
inception (September 15, 1997) to December 31, 1997 and the year ended
December 31, 1998, the Company contributed $0 and $19,297, respectively, to
the plan.
F-11
<PAGE> 55
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(9) STOCK OPTION PLAN
The Company adopted The Intelispan, Inc. Performance Equity Plan (the
"Option Plan") in September 1998. The Option Plan provides for the issuance
of stock options (incentive and non-qualified), restricted stock grants and
other stock-based awards granting the right to purchase up to 2,704,670
shares of common stock to employees, directors and consultants. Under the
stock option provisions of the Option Plan, options may be granted to
purchase shares of the Company's common stock at not less than fair market
value at the date of grant, and are exercisable for a period not exceeding
ten years from that date.
Effective with the adoption of the Option Plan, the Company has adopted the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted under SFAS No. 123, the Company will measure
stock-based compensation expense as the excess of the market price at the
grant date over the amount the employee must pay for the stock. SFAS No.
123 requires disclosure of pro forma net earnings and pro forma net
earnings per share as if the fair value based method had been applied in
measuring compensation expense for awards granted.
At December 31, 1998, there were 966,570 shares available for grant under
the Option Plan. The per share weighted-average fair value of stock options
granted under the Option Plan for the year ended December 31, 1998 was
$0.79 based on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions: expected dividend
yield of 0%, expected volatility of 47%, risk-free interest rate of 6% and
an expected life of 1.5 to 3 years.
The following table summarizes the activity under this plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE EXERCISE
OF OPTIONS PRICE PRICE EXERCISABLE
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Granted 1,746,600 $0.01 - $9.00 $4.21
Exercised (5,000) $0.01 $0.01
Forfeitures (8,500) $4.00 $4.00
------------------ ------------------- ------------------
Outstanding 12/31/98 1,733,100 $4.00 - $9.00 $4.23 716,880
================== =================== ================== ==================
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------- ----------------- ------------------ ------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00 1,651,100 9.72 $4.00 634,880 $4.00
$7.50 - $9.00 82,000 1.59 $8.80 82,000 $8.80
----------------- ------------------ ------------------- ---------------- ----------------
$4.00 - $9.00 1,733,100 7.33 $4.23 716,880 $4.55
================= ================== =================== ================ ================
</TABLE>
F-12
<PAGE> 56
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Three employees have entered into an agreement with the Company that
grants them a put right covering 50,000 of their options. The put grants
them the right to have the Company purchase half of their shares at
market value during the week of January 18, 1999 and the remaining half
at market value during the week of June 14, 1999. Market value is capped
at $5.00 for 20,000 of the options and $6.00 for the remaining 30,000. At
the Company's discretion, if the employee elects to invoke their right,
the Company can delay payment for thirty days depending upon cash
availability.
The Company initiated a private placement offering on July 31, 1998 to
raise additional capital (see note 7). In conjunction with this offering,
a total of 51,465 options were awarded to a finder granting the holder
the right to purchase additional shares at $7.50 per share that expire
July 31, 2000. A total of 105,715 options, of which 78,215 are fully
vested, have been issued to financial advisory consultants with exercise
prices ranging from $3.25 to $7.50. These options are not part of the
Option Plan and are not included in the summary table information above.
On January 15, 1999, the Board of Directors of the Company approved a
repricing of incentive stock options and non-qualified options granted to
employees and non-employee directors on September 18, 1998. The previous
exercise price of $4.00 per share was repriced to $2.50 per share.
Options for 1,651,100 shares were repriced.
Common stock received through the exercise of non-qualified options
results in a tax deduction for the Company equivalent to the taxable
income recognized by the optionee at time of exercise. For financial
reporting purposes, the tax effect of this deduction is accounted for as
a credit to additional-paid-in-capital rather than as a reduction of
income tax expense. There were no exercises of such options during the
period ended December 31, 1998. A stock grant for 5,000 shares
exercisable at no cost to the holder was awarded to a consultant in 1998
under the Option Plan. Accordingly, $22,500 of expense was recorded for
fiscal 1998.
The Company applies APB Opinion No. 25 in accounting for its various
stock plans and, accordingly, no compensation costs for the Option Plan
are reflected in the consolidated financial statements. Had the Company
determined compensation cost in accordance with SFAS No. 123, the
Company's net loss per share would have increased the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
SEPTEMBER 15,
1997 TO
DECEMBER 31,
1998
--------------
<S> <C>
Net loss:
As reported $ (5,783,168)
=============
Pro forma (unaudited) $ (7,286,863)
=============
Net loss per common share:
As reported $ (0.39)
=============
Pro forma (unaudited) $ (0.49)
=============
</TABLE>
F-13
<PAGE> 57
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(10) SIGNIFICANT SUPPLIER
The Company currently contracts its private IP network backbone services
from an independent third party. This network serves as the platform for
most of the Company's services and is a key enabling component of the
Company's product offering. The current contract for supply of the network
expires in September 2003 and contains automatic one year renewal options
unless canceled by either party. Additionally, the supplier can elect to
discontinue offering the service as part of its business operations upon
sixty days notice. The contract also contains provisions for guaranteed
minimum monthly billing commitments that the Company must meet. Shortfalls
in billed revenue for each of the first twelve months ending April 1999 are
added to the guaranteed commitment levels in the corresponding months of
year three of the contract. Beginning with the first month of year two, May
1999, a minimum monthly payment of $100,000 will be due each month
thereafter.
(11) LEGAL PROCEEDING
In December 1998, the Company received a copy of a lawsuit from an
individual that alleges a broad variety of claims that the defendants
misrepresented facts to him and/or improperly operated Contego, LLC (a
majority-owned subsidiary of Intelispan) for their own benefit, to his
detriment. The individual claims that these actions reduced the value of
Contego, in which he claims to own an 8% interest, from $15 to $20 million
to virtually no value. He requests damages in excess of $1.6 million plus
unspecified exemplary damages and the rights to the Contego name and
trademarks. The Company has not yet filed a response to the lawsuit.
(12) SUBSEQUENT EVENTS
The Company has verbally reached an agreement in principal to acquire the
remaining 39.64% ownership interest in Contego that it does not presently
control. The anticipated purchase price of $1,585,600 is expected to be
paid entirely in common voting stock of the Company based on a price of
$2.75 per share or 576,582 shares. A letter of intent is currently being
negotiated between the parties to the proposed transaction.
F-14
<PAGE> 58
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Balance Sheet
September 30, 1999
Unaudited
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1999
--------------
<S> <C>
Current assets:
Cash and cash equivalents............................................................. $ 91,940
Accounts receivable................................................................... 442,914
Prepaid expenses...................................................................... 113,620
Other current assets.................................................................. 47,258
--------------
Total current assets................................................... 695,732
Property and equipment, net.............................................................. 262,420
Intangibles, net......................................................................... 833,625
Other long-term assets................................................................... 228,312
--------------
$ 2,020,089
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Accounts payable......................................................................... $ 389,129
Accrued liabilities...................................................................... 1,130,307
Notes payable ........................................................................... 1,416,156
--------------
Total current liabilities.............................................. 2,935,594
Note payable............................................................................. 200,831
Minority interest........................................................................ 27,050
Commitments, contingency and subsequent event (notes 4, 5, 6 and 7)......................
Shareholders' equity (deficiency):
Preferred Stock, $.0001 par value; 25,600 shares issued and outstanding............... 3
Common Stock, $.0001 par value; 100,000,000 shares authorized, issued and outstanding
18,810,546 shares................................................................... 1,881
Paid-in capital....................................................................... 8,273,222
Deficit accumulated during the development stage...................................... (9,418,492)
--------------
Total shareholders' equity (deficiency)................................ (1,143,386)
--------------
$ 2,020,089
==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-15
<PAGE> 59
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statements of Operations
For the nine months ended September 30, 1999 and 1998
Unaudited
<TABLE>
<CAPTION>
CUMULATIVE
SEPTEMBER 30, AMOUNTS FROM
1999 1998 INCEPTION
------------- ------------- ------------
<S> <C> <C> <C>
Revenue.................................................................... $ 485,627 69,766 626,526
Costs of sales............................................................. 391,465 73,970 540,946
------------- ------------- -----------
Gross profit (loss)...................................... 94,162 (4,204) 85,580
------------- ------------- -----------
Operating expenses:
Selling................................................................. 244,508 845,382 1,636,366
General and administrative.............................................. 3,467,256 3,079,835 8,451,521
Cost of abandoned acquisition........................................... -- 225,550 225,550
------------- ------------- -----------
Total operating expenses................................. 3,711,764 4,150,767 10,313,437
------------- ------------- -----------
Operating loss........................................... (3,617,602) (4,154,971) (10,227,857)
Interest expense........................................................... (84,553) (9,036) (104,102)
Interest income............................................................ 159 36,210 41,438
Other income............................................................... 1,492 2,806 1,492
Minority interest.......................................................... 65,180 437,285 870,537
------------- ------------- -----------
Net loss................................................. $ (3,635,324) (3,687,706) (9,418,492)
============= ============= ===========
Net loss per common share - basic and diluted.............................. $ (0.19) (0.22)
============= =============
Weighted average common shares outstanding................................. 18,964,816 17,135,181
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-16
<PAGE> 60
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statement of Shareholders' Equity
For the nine months ended September 30, 1999
Unaudited
<TABLE>
<CAPTION>
PREFERRED COMMON
PREFERRED SHARE COMMON SHARE
SHARES AMOUNTS SHARES AMOUNTS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances, December 31,
1998................................. -- $ -- 18,377,471 $ 1,837
Common shares issued in
January 1999 private
offering, net of $64,800 costs....... -- -- 500,001 50
Common shares converted
to Preferred shares.................. 25,600 3 (341,334) (34)
Issuance of warrants to third
parties for services and
in connection with debt
financing............................ -- -- -- --
Common shares issued as
compensation for services............ -- -- 274,408 28
Net loss................................ -- -- -- --
----------- ----------- ----------- -----------
Balances, September 30, 1999............ 25,600 $ 3 18,810,546 $ 1,881
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHAREHOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
----------- ----------- -----------
<S> <C> <C> <C>
Balances, December 31,
1998................................. 6,779,314 (5,783,168) 997,983
Common shares issued in
January 1999 private
offering, net of $64,800 costs....... 635,150 -- 635,200
Common shares converted
to Preferred shares.................. 31 -- 0
Issuance of warrants to third
parties for services and
in connection with debt
financing............................ 446,250 -- 446,250
Common shares issued as
compensation for services............ 412,477 -- 412,505
Net loss................................ -- (3,635,324) (3,635,324)
----------- ----------- -----------
Balances, September 30, 1999............ 8,273,222 (9,418,492) (1,143,386)
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-17
<PAGE> 61
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
Unaudited
<TABLE>
<CAPTION> Cumulative
SEPTEMBER 30, Amounts from
1999 1998 Inceptions
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $ (3,635,324) (3,687,706) (9,418,492)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................................... 288,658 183,154 592,514
Bad debt expense........................................................ 17,451 -- 17,451
Loss on sale of property and equipment.................................. 5,597 -- 5,597
Minority interest....................................................... (65,180) (437,285) (870,537)
Net-Cash Compensation................................................... -- 69,958 69,958
Common stock issued as compensation for services........................ 858,753 222,500 1,081,253
Increase in assets:
Accounts receivable................................................... (378,325) (54,511) (460,365)
Prepaid expenses...................................................... 122,155 (567,840) (113,620)
Other current assets.................................................. 5,905 14,477 (47,258)
Other long-term assets and intangibles................................ 9,519 (666,807) (683,061)
Increase in liabilities:
Accounts payable...................................................... (172,717) 707,152 389,129
Accrued expenses...................................................... 929,064 168,631 1,130,309
-------------- ------------ ------------
Net cash used in operating activities............................ (2,014,444) (4,048,277) (8,307,122)
-------------- ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment............................... 40,000 -- 40,000
Purchases of property and equipment........................................ (24,307) (355,506) (451,778)
-------------- ------------ ------------
Net cash provided/ (used) in investing activities................ 15,693 (355,506) (411,778)
Cash flows from financing activities:
Issuance of common stock................................................... 635,200 5,690,005 6,925,205
Subscription receivable.................................................... -- (1,500,000) --
Proceeds from note payable................................................. 1,428,032 180,001 2,316,989
Principal payments on notes payable, shareholders........................ -- (700,000) (700,000)
Common stock issued in merger for net assets............................... -- 268,646 268,646
-------------- ------------ ------------
Net cash provided by financing activities........................ 2,063,232 3,938,652 8,810,840
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.......................... 64,481 (465,131) 91,940
Beginning cash and cash equivalents........................................... 27,459 753,034 --
-------------- ------------ ------------
Ending cash and cash equivalents.............................................. $ 91,940 287,903 91,940
============== ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-18
<PAGE> 62
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(1) GENERAL
The unaudited consolidated financial statements for the nine months ended
September 30, 1999 and 1998, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, that
management considers necessary for a fair presentation of the information
set forth below. The results of operations for the nine months ended
September 30, 1999 and 1998 are not necessarily indicative of the results
for the full year.
(a) NATURE OF ORGANIZATION
Intelispan Ventures, Inc. dba Intelispan, Inc. (the Company) was
incorporated on September 15, 1997 and is currently in the development
stage. The Company was formed with the intention of providing a
comprehensive package of data communication services designed to meet
the developing global communications and electronic commerce needs of
businesses and other organizations. Management anticipates incurring
additional losses as they pursue their development efforts.
(b) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(2) LIQUIDITY
For the nine month period ended September 30, 1999, the Company incurred
net losses of $3,635,324. The Company has incurred net losses of $5,140,602
and $572,608 in 1998 and 1997, respectively. The Company is in the
development stage and has recorded a minimal amount of revenue in 1998 and
1997. Despite its negative cash flow, the Company has been able to secure
investor financing to support its operations to date, based on sales of
common stock. Going forward, significant amounts of additional cash will be
needed to implement the proposed business plan and to fund losses until the
Company has began to record revenue. While there is no assurance that
funding will be available to execute the plan, the Company is continuing to
seek financing to support its operations. In December 1999, the Company
raised approximately $10.9 million of net proceeds in a private placement
(see note 7).
(3) SHAREHOLDERS' EQUITY
In January 1999, the Company completed a private placement offering in
which 500,001 shares of common stock were issued at $1.40 per share
resulting in net additional funds of approximately $635,200 invested in the
Company.
In December 1999, the Company issued a private placement memorandum
offering up to 250 units ("Units") at a price of $100,000 per Unit. Each
Unit consists of (a) 133,333 shares of common stock of the Company, and (b)
a warrant to purchase 66,667 shares of common stack at an exercise price of
$0.75 per share ("Warrant). The Warrants are callable by the Company under
certain circumstances. In December 1999, the Company sold 139.5 Units
resulting in gross additional funds of approximately $14 million invested
in the Company.
SHARES ISSUED TO THIRD PARTIES
During 1999, the Company entered into agreements with a consultant to
provide market consulting services. The agreements called for the issuance
of 102,857 common stock shares in exchange for the consulting services. The
Company recorded total expense of $127,714 in 1999 related to the
agreements.
F-19
<PAGE> 63
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
In January 1999, the Company entered into an agreement with a public
relations and direct marketing advertising firm to provide various
consulting and marketing services to the Company. In exchange for the
services, the Company issued 108,000 shares of the Company's restricted
common stock to the firm. The Company recorded total expense of $202,500 in
1999 related to the agreement. As part of the agreement, the firm also
purchased 42,000 shares of the Company's common stock as part of the
Company's 504 private placement offering. In addition, the firm was granted
an option to purchase 200,000 shares of the Company's common stock,
exercisable as follows: (1) 100,000 shares exercisable at $7.00 per share,
and (2) 100,000 shares exercisable at $9.00 per share. The term of the
option shall expire twelve (12) months from the day the shares underlying
the option are registered. The Company used the Black-Scholes option
pricing model to value the option and recorded total expense of $242,250 in
1999 related to the option.
In July 1999, the Company entered into an agreement with a consultant to
resolve outstanding payment issues due the consultant for services provided
by the consultant in 1998. As part of the agreement, the Company issued
21,551 shares of restricted common stock to the consultant for full payment
of the amount due for prior services. Also, the exercise price for the
warrant to purchase up to 32,000 shares of the Company's common stock was
reduced to $4.00 per share.
(4) STOCK OPTION PLAN
The Company adopted The Intelispan, Inc. Performance Equity Plan (the
"Option Plan") in September 1998. The Option Plan provides for the issuance
of stock options (incentive and non-qualified), restricted stock grants and
other stock-based awards granting the right to purchase up to 2,704,670
shares of common stock to employees, directors and consultants. Under the
stock option provisions of the Option Plan, options may be granted to
purchase shares of the Company's common stock at not less than fair market
value at the date of grant, and are exercisable for a period not exceeding
ten years from that date.
Effective with the adoption of the Option Plan, the Company has adopted the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted under SFAS No. 123, the Company will measure
stock-based compensation expense as the excess of the market price at the
grant date over the amount the employee must pay for the stock. SFAS No.
123 requires disclosure of pro forma net earnings and pro forma net
earnings per share as if the fair value based method had been applied in
measuring compensation expense for awards granted.
At September 30, 1999, there were 43,362 shares available for grant under
the Option Plan. The per share weighted-average fair value of stock options
granted under the Option Plan for the period ended September 30, 1999 was
$1.33 based on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions: expected dividend
yield of 0%, expected volatility of 204%, risk-free interest rate of 6% and
an expected life of 1.5 years.
F-20
<PAGE> 64
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
The following table summarizes the activity under this plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE EXERCISE
OF OPTIONS PRICE PRICE EXERCISABLE
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Outstanding 12/31/98 1,733,100 $4.00 - $9.00 $4.23 716,880
Granted 1/1/99 through 9/30/99
944,708 $0.01 - $2.75 $1.78
Exercised (262,408) $0.00 - $2.00 $0.23
Forfeitures (21,500) $2.50 - $3.00 $2.50
------------------ ------------------- ------------------
Outstanding 9/30/99 2,393,900 $0.00 - $3.00 $2.65 1,340,295
================== =================== ================== ==================
</TABLE>
The following table summarizes information about the stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------------- ----------------- ------------------ ------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.00 - $3.00 2,311,900 9.19 $2.46 1,258,295 $2.49
$7.50 - $9.00 82,000 0.84 $8.80 82,000 $8.80
----------------- ------------------ ------------------- ---------------- ----------------
$0.00 - $9.00 2,393,900 8.90 $2.65 1,340,295 $2.81
================= ================== =================== ================ ================
</TABLE>
Three employees have entered into an agreement with the Company that grants
them a put right covering 50,000 of their options. The put grants them the
right to have the Company purchase half of their shares at market value
during the week of January 18, 1999 and the remaining half at market value
during the week of June 14, 1999. Market value is capped at $5.00 for
20,000 of the options and $6.00 for the remaining 30,000. At the Company's
discretion, if the employee elects to invoke their right, the Company can
delay payment for thirty days depending upon cash availability. Two of the
employees exercised their rights to exercise a total of 15,000 options
each, 30,000 in the aggregate, during 1999.
On January 15, 1999, the Board of Directors of the Company approved a
repricing of incentive stock options and non-qualified options granted to
employees and non-employee directors on September 18, 1998. The previous
exercise price of $4.00 per share was repriced to $2.50 per share. Options
for 1,651,100 shares were repriced.
Common stock received through the exercise of non-qualified options results
in a tax deduction for the Company equivalent to the taxable income
recognized by the optionee at time of exercise. For financial reporting
purposes, the tax effect of this deduction is accounted for as a credit to
additional-paid-in-capital rather than as a reduction of income tax
expense. There were no
F-21
<PAGE> 65
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
exercises of such options during the period ended December 31, 1998. Stock
grants for 232,408 shares exercisable at no cost to the holders were
awarded to consultants in 1999 under the Option Plan. Accordingly, $329,714
of expense was recorded for fiscal 1999.
The Company applies APB Opinion No. 25 in accounting for its various stock
plans and, accordingly, no compensation costs for the Option Plan are
reflected in the consolidated financial statements. Had the Company
determined compensation cost in accordance with SFAS No. 123, the Company's
net loss per share would have increased the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
------------------ ---------------
<S> <C> <C>
Net loss:
As reported............................................ $ (3,635,324) $ (3,687,706)
================== ================
Pro forma (unaudited).................................. $ (4,170,328) $ (5,849,156)
================== ================
Net loss per common share:
As reported............................................ $ (0.19) $ (0.22)
================== ================
Pro forma (unaudited).................................. $ (0.21) $ (0.31)
================== ================
</TABLE>
(5) NOTES PAYABLE
During the period July 1, 1999 through September 30, 1999, the Company
received convertible debt financing in the amount of $600,000 from a third
party. Subsequent to September 30, 1999, the Company received an additional
$150,000 from that party in additional convertible debt financing. The
notes payable are due on June 30, 2000 and bear interest at the rate of 15%
per annum and also have a premium of 10% of the principal amount. In
conjunction with the notes, the Company also issued warrants to purchase
520,000 shares of the Company's common stock at a price of $1.05 per share.
In December 1999, the third party converted the notes payable and accrued
interest into shares of common stock as part of the Company's private
placement memorandum dated December 13, 1999.
In March 1999 and April 1999, the Company received convertible debt
financing in the amount of $206,250 from a third party. On June 22, 1999,
the Company issued a $1,000 promissory note to the third party in exchange
for extending the due dates of each note to October 31, 1999. The notes
payable bear interest at the rate of 10% per annum. In December 1999, the
third party converted $150,000 of the notes payable into shares of common
stock as part of the Company's private placement memorandum dated December
13, 1999. The remaining principal balance and accrued interest will be
repaid to the third party from net proceeds of the December 1999 private
placement.
In April 1999, the Company entered into a Standstill Agreement with another
corporation in connection with a proposed merger. Under that agreement, the
corporation advanced the sum of $800,000 to the Company over the period of
April 1999 through June 1999. In November 1999, the Company and the
corporation terminated the negotiations of the proposed merger. As a
result, the Company and the corporation entered into a Settlement Agreement
in December 1999. As part of the Settlement Agreement, the Company agreed
to repay a negotiated amount of $846,000 to the corporation in connection
with the funds advanced to the Company under the Standstill Agreement.
F-22
<PAGE> 66
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
The Company repaid $846,000 to the corporation in December 1999 from the
net proceeds of the December 1999 private placement.
(6) SIGNIFICANT SUPPLIER
The Company currently contracts its private IP network backbone services
from an independent third party. This network serves as the platform for
most of the Company's services and is a key enabling component of the
Company's product offering. The current contract for supply of the network
expires in September 2003 and contains automatic one year renewal options
unless canceled by either party. Additionally, the supplier can elect to
discontinue offering the service as part of its business operations upon
sixty days notice. The contract also contains provisions for guaranteed
minimum monthly billing commitments that the Company must meet. Shortfalls
in billed revenue for each of the first twelve months ending April 1999 are
added to the guaranteed commitment levels in the corresponding months of
year three of the contract. Beginning with the first month of year two, May
1999, a minimum monthly payment of $100,000 will be due each month
thereafter.
In November 1999, the third party informed the Company that it would
suspend the payment of the Company's monthly minimum usage commitment. The
Company continues to accrue the $100,000 monthly minimum usage commitment
under this agreement, and all amounts payable under this agreement will be
due to the third party upon 30 days' notice to the Company. At September
30, 1999 the Company has accrued $500,000 for this supplier.
(7) SUBSEQUENT EVENT
Subsequent to September 30, 1999 the Company assumed an additional 6.4%
interest in Contego, LLC pursuant to the terms of a lawsuit settlement.
Consequently, the Company will hold an approximate 66.8% interest in
Contego, LLC.
LEGAL PROCEEDING
In December 1998, the Company received a copy of a lawsuit from an
individual that alleges a broad variety of claims that the defendants
misrepresented facts to him and/or improperly operated Contego, LLC (a
majority-owned subsidiary of Intelispan) for their own benefit, to his
detriment. The individual claims that these actions reduced the value of
Contego, in which he claims to own an 8% interest, from $15 to $20 million
to virtually no value. He requests damages in excess of $1.6 million plus
unspecified exemplary damages and the rights to the Contego name and
trademarks. The Company has not yet filed a response to the lawsuit.
In November 1999, the Company settled this lawsuit. The Company paid the
individual $75,000 cash and, in exchange, the individual's ownership
interest in Contego, LLC was assigned to the Company.
In October 1999, a lender made available to the Company up to $1.0 million
in Bridge Financing. During the period October 1999 through December 1999,
the Company borrowed an aggregate of $595,000 from the lender and its
designees, evidence by Bridge Notes. The lender and its designees converted
the Bridge Notes into shares of common stock as part of the Company's
private placement memorandum dated December 13, 1999. In connection with
the Bridge Financing, the Company issued to the lender and its designees
Bridge Warrants to purchase 10,000,000 shares of
F-23
<PAGE> 67
INTELISPAN, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
common stock at an exercise price of $.01 per share, which the lender and
its designees exercised in December 1999. The Company recognized a non-cash
charge of approximately $14.9 million during the year ended December 31,
1999 related to the write-off of unamortized financing costs incurred as a
result of the bridge warrants' exercise price substantially below the fair
market value on the date of issuance.
F-24
<PAGE> 68
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN
THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO
SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON
STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
--------------------
Page
Summary......................................... 1
Risk Factors.................................... 4
Forward Looking Statements...................... 12
Use of Proceeds................................. 12
Price Range of Common Stock..................... 13
Dividend Policy................................. 13
Selected Consolidated Financial Data............ 14
Management's Discussion and Analysis............ 15
Business........................................ 19
Management...................................... 24
Executive Compensation.......................... 27
Principal and Selling Shareholders.............. 32
Certain Transactions............................ 34
Description of Securities....................... 35
Plan of Distribution............................ 39
Legal Matters................................... 40
Experts......................................... 40
Where You Can Find
Additional Information..................... 41
Index to Consolidated Financial
Statements.................................F-1
- -------------------------------------------------------
- -------------------------------------------------------
1,420,000 SHARES OF
COMMON STOCK
INTELISPAN, INC.
----------------
P R O S P E C T U S
----------------
, 2000
---------------
- ----------------------------------------------------
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Amended and Restated Articles of Incorporation provide that a director
of our company will not be personally liable to our company or our shareholders
for monetary damages for conduct as a director, except for
- acts or omissions involving intentional misconduct by the director or
a knowing violation of law by the director,
- assenting to an unlawful distribution where it is established that the
director did not perform the director's duty of loyalty to our
company, or
- any transaction from which the director will personally receive a
benefit in money, property, or services to which the director is not
legally entitled.
Our articles of incorporation also provide that if the Washington Business
Corporation Act is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of our company will be eliminated or limited to the fullest extent permitted by
the Washington Business Corporation Act, as so amended.
Our articles of incorporation also provide that we will indemnify and
advance expenses, to the fullest extent permitted by the Washington Business
Corporation Act, to each person who is a director or officer of our company.
This indemnity will not apply if
- acts or omissions of the director or officer are found to be
intentional misconduct or a knowing violation of law,
- a director assents to an unlawful distribution and it is established
that such director did not perform the director's duty of loyalty to
our company; or
- any transaction with respect to which it was found that such director
or officer personally received a benefit in money, property, or
services to which the director or officer was not legally entitled.
In addition, we have adopted provisions in our bylaws that require us to
indemnify our directors, officers, and certain other representatives of our
company against expenses and certain other liabilities arising out of their
conduct on behalf of our company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in the Registration Statement.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee................................................... $ 1,136.36
Blue Sky fees and expenses............................................. *
Accountants' fees and expenses......................................... *
Legal fees and expenses................................................ *
Printing and engraving expenses........................................ *
Miscellaneous fees..................................................... *
-----------
Total............................................................. $ *
===========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1996 through September 1997, we as Equipment Leasing & Sales
Corporation, or ELSC, issued 3,500,000 shares of common stock to our founders
for a total purchase price of $15,250. We issued these
II-1
<PAGE> 70
shares in reliance on an exemption under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
In February 1997, we, as ELSC, completed an offering in which we issued
to approximately 15 accredited investors 266,000 shares of common stock for a
total of $53,200. We issued these shares in reliance on an exemption under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering and Rule 504 of Regulation D of the General Rules and
Regulations under the Securities Act.
In January 1998, we, as Intelispan Ventures, Inc., or IVI, completed an
offering in which we issued to five international investors 1,383,139 shares of
Class A common stock for a total purchase price of $600,000. These shareholders
received rights to acquire additional Class A and B Shares and incentive
warrants to acquire additional Class B shares depending upon the amount of funds
raised in our next offering. This offering was completed, in part, to nullify a
stock purchase agreement begun in September 1997. We issued these shares in
reliance on an exemption under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering and Rule 506 of
Regulation D of the General Rules and Regulations under the Securities Act.
In March 1998, we, as IVI, completed an offering in which we issued to
21 accredited investors 1,662,500 shares of Class A common stock for a total
purchase price of $3.325 million. We issued these shares in reliance on an
exemption under Section 4(2) of the Securities Act as a transaction by an issuer
not involving a public offering and Rule 506 of Regulation D of the General
Rules and Regulations under the Securities Act.
In June 1998, we, as ELSC, completed an offering in which we issued to
fourteen accredited investors 2,390,000 shares of common stock for a total
purchase price of $239,000. We issued these shares in reliance on an exemption
under Rule 504 of Regulation D of the General Rules and Regulations Under the
Securities Act.
In July 1998, we, as ELSC, issued 15,235,000 shares of common stock to
the shareholders of IVI in connection with the merger of the companies. For each
1,000 shares of common stock held, each IVI shareholder received 884 shares of
ELSC. We issued these shares in reliance on an exemption under Section 4(2) of
the Securities Act as transactions by an issuer not involving any public
offering and Rule 506 of Regulation D of the General Rules and Regulations Under
the Securities Act.
In September 1998, we completed an offering in which we issued units at
a price of $7.50 per unit. Each unit consisted of one share of common stock and
a warrant to purchase one-half of a share of common stock. We sold units to
eight accredited investors, and as a result issued 341,334 shares of common
stock for a total purchase price of $2.56 million. We issued these shares in
reliance on an exemption under Section 4(2) of the Securities Act and Rule 506
of Regulation D of the General Rules and Regulations Under the Securities Act.
In August 1999, these eight investors converted their units into Series A 10%
Convertible Preferred Stock at $100 per share. Holders of Series A Preferred
Stock are entitled to voting rights, and preferences in dividend and liquidation
payments over the holders of common stock. See "Description of Securities -
Preferred Stock - Series A Preferred Stock." Each share of Series A Preferred
Stock is convertible into 50 shares of common stock. In connection with this
conversion, we granted the holders of Series A Preferred Stock certain
registration rights with respect to the underlying common stock. We issued the
Series A Preferred Stock in reliance upon Section 4(2) of the Securities Act and
Rule 504 of Regulation D of the General Rules and Regulations under the
Securities Act.
In March 1999, we completed an offering in which we issued to seven
accredited investors, one of which was an international investor, 542,001 shares
of common stock for a total purchase price of $760,000. We issued these shares
in reliance on an exemption under Section 4(2) of the Securities Act and Rule
504 of Regulation D of the General Rules and Regulations under the Securities
Act.
In March 1999 and April 1999, we sold notes totaling $206,250 to one
international corporate accredited investor. In June, we issued an additional
$1,000 promissory note to this investor to extend the maturity date of these
notes to October 31, 1999. The investor converted $150,000 of the amounts
outstanding into units in our December 1999 offering.
In July 1999 through October 1999, we sold to two accredited investors
an aggregate of $750,000 principal amount of notes. In connection with the
issuance of the notes, we issued to the holders warrants to purchase 600,000
shares of common stock at an exercise price of $1.05 per share. At that time, we
were anticipating merging with another corporation. If we completed the merger,
the notes automatically converted into common stock. The notes were due May
2000, and the principal amount of the notes and accrued interest were converted
into units in our private placement during December 1999.
II-2
<PAGE> 71
In October 1999, ComVest, an affiliate of Commonwealth, made available
to us up to $1.0 million in a bridge financing. As of December 13, 1999, we had
borrowed an aggregate of $595,000 from ComVest and its designees, evidenced by
bridge notes, and agreed to convert the bridge notes into units at the closing
of the private placement. As a result of the conversion, ComVest and its
designees received 5.95 units in the private placement, consisting of 793,331
shares of common stock and unit warrants to purchase 396,669 shares of common
stock at an exercise price of $0.75 per share. In connection with the bridge
financing, we issued to ComVest and its designees bridge warrants to purchase
10,000,000 shares of common stock at an exercise price of $.01 per share, which
ComVest and its designees exercised prior to the closing of the private
placement. ComVest sold a portion of the bridge warrants to affiliates of
Commonwealth. We issued the bridge notes and bridge warrants in reliance on an
exemption under Section 4(2) of the Securities Act as a transaction by an issuer
not involving a public offering.
In December 1999, we offered and sold units at a price of $100,000 per
unit in a private placement. We offered the units only to persons that were
"accredited investors," as defined under the Securities Act and Regulation D
promulgated thereunder. Each unit consisted of 133,333 shares of common stock
and a warrant to purchase 66,667 shares of common stock at an exercise price of
$0.75 per share. As of the date of this filing, we have sold 139.51 units,
resulting in the issuance of 18,601,287 shares of common stock and 9,300,713
unit warrants for a total purchase price of $13,951,000. Commonwealth
Associates, L.P. is offering the units on behalf of us as the placement agent in
the offering on a "best efforts" basis. In connection with this offering,
Commonwealth received (i) a commission equal to 7% of the aggregate purchase
price of the units sold, and (ii) a structuring fee equal to 3% of the aggregate
purchase price of the units sold. We also issued to Commonwealth seven-year
agent warrants to purchase, at an exercise price of $0.75 per share, 33.33% of
the shares of common stock (a) included in the units sold, and (b) issuable upon
exercise of the unit warrants included in the units sold. Pursuant to the sale
of 139.51 units, we paid Commonwealth approximately $977,000 in commissions,
$419,000 in structuring fees, and issued it 9,300,667 agent warrants. As of the
date of the private placement, ComVest, an affiliate of Commonwealth, had lent
us approximately $595,000 evidenced by bridge notes. ComVest and its designees
converted the bridge notes into 5.95 units in the offering and received 793,331
shares of common stock and unit warrants to purchase 396,669 shares of common
stock. We also agreed to convert approximately $1.0 million of other short-term
indebtedness and approximately $116,500 of compensation payable to certain
directors and officers into units in the offering. We issued the units and agent
warrants in reliance on an exemption under Section 4(2) of the Securities Act
and Rule 506 of Regulation D of the Securities Act.
II-3
<PAGE> 72
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Registrant
3.2 Bylaws of the Registrant*
4.1 Specimen of Common Stock Certificate*
4.3 Form of Unit Warrant*
4.4 Form of Agent Warrant issued to Commonwealth Associates,
L.P.*
10.1 Data Communication Products or Services Agreement dated
April 9, 1998 (and the Terms and Conditions attached thereto
dated February 1998) by and between GridNet International,
Inc. and the Registrant*
10.2 Information Technology Supply Agreement dated September 10,
1997 between Contego, LLC and Security Domain Pty Limited*
10.3 Strategic Alliance Agreement dated December 11, 1997 by and
between Contego, LLC and GridNet International, Inc.*
10.4 Distributor Agreement dated January 15, 1999 between
Contego, LLC and the Registrant*
10.5 Software License and Distribution Agreement dated June 18,
1998 by and between the Registrant and Cyclone Software
Corporation
10.6 Altiga Networks, Inc. Authorized Distributor Agreement dated
June 23, 1999 between Altiga Networks, Inc. and the
Registrant*
10.7 Performance Equity Plan
10.8 The Registrant's Severance Plan and Summary Plan Description
23.1 Consent of Greenberg Traurig, a partnership of limited
liability entities (included in Exhibit 5)*
23.2 Consent of KPMG LLP
23.3 Consents of Proposed Directors
24 Power of Attorney of Directors and Executive Officers
(included on Signature Page of the Registration Statement)
27.1 Financial Data Schedule for Fiscal Year Ended December 31,
1997
27.2 Financial Data Schedule for Nine Months Ended September 30,
1998
27.3 Financial Data Schedule for Fiscal Year Ended December 31,
1998
27.4 Financial Data Schedule for Nine Months Ended September 30,
1999
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For determining any liability under the Securities Act, the Registrant will
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
II-4
<PAGE> 73
form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
For determining any liability under the Securities Act, the Registrant will
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
<PAGE> 74
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Tempe,
state of Arizona, on January 7, 2000
INTELISPAN, INC.
By: /s/ Travis Lee Provow
---------------------------------------
Travis Lee Provow
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints jointly and severally, Travis Lee Provow and
Peter A. Nelson, and each one of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to sign any registration statement and amendments
thereto for the same offering pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all which said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do, or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Travis Lee Provow
- ------------------------ President, Chief Executive Officer, and January 7, 2000
Travis Lee Provow Director (Principal Executive Officer)
/s/Peter A. Nelson
- ------------------------
Peter A. Nelson Vice Chairman of the Board of Directors January 7, 2000
/s/Brenda S. Plagge
- ------------------------
Brenda S. Plagge Controller (Principal Accounting Officer) January 7, 2000
</TABLE>
II-6
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT INDEX
- ----------- ----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Registrant
3.2 Bylaws of the Registrant*
4.1 Specimen of Common Stock Certificate*
4.3 Form of Unit Warrant*
4.4 Form of Agent Warrant issued to Commonwealth Associates,
L.P.*
5 Opinion of Greenberg Traurig, a partnership of limited
liability entities*
10.1 Data Communication Products or Services Agreement dated
April 9, 1998 (and the Terms and Conditions attached thereto
dated February 1998) by and between GridNet International,
Inc. and the Registrant*
10.2 Information Technology Supply Agreement dated September 10,
1997 between Contego, LLC and Security Domain Pty Limited*
10.3 Strategic Alliance Agreement dated December 11, 1997 by and
between Contego, LLC and GridNet International, Inc.*
10.4 Distributor Agreement dated January 15, 1999 between
Contego, LLC and the Registrant*
10.5 Software License and Distribution Agreement dated June 18,
1998 by and between the Registrant and Cyclone Software
Corporation
10.6 Altiga Networks, Inc. Authorized Distributor Agreement dated
June 23, 1999 between Altiga Networks, Inc. and the
Registrant*
10.7 Performance Equity Plan
10.8 The Registrant's Severance Plan and Summary Plan Description
23.1 Consent of Greenberg Traurig, a partnership of limited
liability entities (included in Exhibit 5)*
23.2 Consent of KPMG LLP
23.3 Consents of Proposed Directors
24 Power of Attorney of Directors and Executive Officers
(included on Signature Page of the Registration Statement)
27.1 Financial Data Schedule for Fiscal Year Ended December 31,
1997
27.2 Financial Data Schedule for Nine Months Ended September 30,
1998
27.3 Financial Data Schedule for Fiscal Year Ended December 31,
1998
27.4 Financial Data Schedule for Nine Months Ended September 30,
1999
</TABLE>
- ---------------
* To be filed by amendment.
II-7
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
INTELISPAN, INC.
Intelispan, Inc. (the "Corporation"), a corporation organized and
existing under the Laws of the State of Washington, originally incorporated on
September 24, 1996, and having previously adopted certain amendments to its
Articles of Incorporation duly approved by the Shareholders and/or Board of the
Corporation, sets forth the following amended and restated Articles of
Incorporation pursuant to RCW 23B.10.070.
ARTICLE I
NAME OF CORPORATION
The name of the Corporation shall be: INTELISPAN, INC.
ARTICLE II
DURATION OF CORPORATION
The period of duration of the Corporation shall be perpetual.
ARTICLE III
CORPORATION PURPOSES
The purpose or purposes for which the Corporation is organized are:
Section 1.
To lend and sell equipment and supplies to third parties.
Section 2.
In general, to carry on any lawful business whatsoever in
connection with the foregoing which is calculated, directly or indirectly, to
promote the interests of the Corporation or to enhance the value of its
properties.
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<PAGE> 2
Section 3.
To engage in and carry on any lawful business or trade,
regardless of whether or not said business or trade is directly or indirectly
related to the business referred to in Section 1 of Article III and to exercise
all powers granted to a corporation formed under the Washington Business
Corporation Act, including any amendments thereto or successor statutes that may
hereinafter be enacted.
ARTICLE IV
CAPITALIZATION
The aggregate number of shares which the Corporation shall have the
authority to issue is 100,000,000 shares of Common Stock having a par value of
$0.0001 per share and 10,000,000 shares of Preferred Stock with a par value of
$0.0001 per share. There shall be no other class or shares of stock in the
Corporation. The Corporation shall have the right to purchase, take, receive or
to otherwise acquire, hold, own, pledge, transfer and dispose of its own shares,
to the extent of both its unrestricted and unreserved capital surplus.
The Preferred Stock may be issued, from time to time, in one or more
series, each of such series to have such designation and such dividend,
liquidation, conversion and other preferences, limitations, voting powers and
relative rights as are fixed by the Board of Directors from time to time.
Authority is hereby expressly vested in and granted to the Board of Directors of
the Corporation, subject to the provisions of this Paragraph and state law, to
adopt a resolution or resolutions dividing the shares of Preferred Stock into
one or more series.
ARTICLE V
NO PREEMPTIVE RIGHTS
Shareholders shall have no preemptive rights to acquire additional
shares offered for sale by the corporation.
ARTICLE VI
NO CUMULATIVE VOTING
Each shareholder entitled to vote at any election for Director shall
have the right to vote, in person or by proxy, the number of shares owned by him
for as many persons as there are Directors to be elected and for whose election
he has a right to vote, and no shareholder shall be entitled to cumulate his
votes.
2
<PAGE> 3
ARTICLE VII
GENERAL PROVISIONS
Section 1.
The Board of Directors shall have full power to adopt, alter, amend, or
repeal the Bylaws or adopt new Bylaws. Nothing herein shall deny the concurrent
power of the shareholders to adopt, alter, amend, or repeal the Bylaws.
Section 2.
The Corporation reserves the right to amend, alter, change, or repeal
any provisions contained in its Articles of Incorporation in any manner now or
hereafter prescribed or permitted by statue. All rights of shareholders of the
Corporation are granted subject to this reservation.
Section 3.
The Corporation may enter into contracts and otherwise transact
business as a vendor, purchaser, or otherwise, with its Directors, Officers, and
shareholders and with corporations, associations, firms and entities in which
they are or may be or become interested as Directors, Officers, shareholders,
members, or otherwise, as freely as though such adverse interests did not exist,
even though the vote, action or presence of such Director, Officer or
shareholder may be necessary to obligate the corporation upon such contracts or
transactions; and in the absence of fraud, no such Director, Officer of
shareholder shall be held liable to account to the Corporation, by reason of
such adverse interest or by reason of any fiduciary relationship to the
corporation arising out of such office or stock ownership, for any profit or
benefit realized by him through any such contract or transaction; provided that
in the case of Directors and Officers of the Corporation (but not in the case of
shareholders who are not Directors or Officers), the nature of the interest of
such Director of Officer, though not necessarily the details or extent thereof,
be disclosed or known to the Board of Directors of the Corporation, at the
meeting thereof at which such contract or transaction is authorized or
confirmed. A general notice that a Director or Officer of the Corporation is
interested in any corporation, association, firm, or entity shall be sufficient
disclosure as to such Director or Officer with respect to all contracts and
transactions with that corporation, association, firm, or entity.
ARTICLE VIII
REGISTERED OFFICE AND ADDRESS
The address of the registered office of the Corporation is CT
Corporation System, 520 Pike Street, Seattle, WA 98101.
3
<PAGE> 4
ARTICLE IX
BOARD OF DIRECTORS
Section 1.
The number, qualifications, terms of office, manner of election, time
and place of meetings, and powers and duties of the Directors shall be
prescribed in the Bylaws.
Section 2.
A Director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a Director,
except for:
(a) Acts or omissions involving intentional misconduct by the
Director or a knowing violation of law by the Director;
(b) Conduct violating RCW 23B.08.310 (which involves certain
distributions by the Corporation); or
(c) Any transaction from which the Director will personally
receive a benefit in money, property, or services to which the Director is not
legally entitled.
If the Washington Business Corporation Act is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Washington Business
Corporation Act, as so amended. Any repeal or modification of the foregoing
paragraph by the shareholders of the Corporation shall not adversely affect any
right or protection of a Director of the Corporation with respect to any acts or
omissions of such Director occurring prior to such repeal or modification.
ARTICLE X
IDEMNIFICATION
Section 1.
The Corporation shall indemnify its Directors and Officers to the
fullest extent permitted by the Washington Business Corporation Act now or
hereafter in force. However, such indemnity shall not apply on account of:
(a) Acts or omissions of the Director or Officer finally
adjudged to be intentional misconduct or a knowing violation of law;
(b) Conduct of the Director or Officer finally adjudged to be
in violation of RCW 23B.08.310; or,
4
<PAGE> 5
(c) Any transaction with respect to which it was finally
adjudged that such Director or Officer personally received a benefit in money,
property, or services to which the Director was not legally entitled.
The Corporation shall advance expenses for such persons pursuant to the
terms set forth in the Bylaws, or in a separate Directors' resolution or
contract.
Section 2.
The Board of Directors may take such action as is necessary to carry
out these indemnification and expense advancement provisions. The Corporation is
expressly empowered to adopt, approve and amend from time to time such Bylaws,
resolutions, contracts, or further indemnification and expense advancement
arrangements as may be permitted by law, implementing these provisions. Such
Bylaws, resolutions, contracts, or further arrangements shall include but not be
limited to implementing the manner in which determinations as to any indemnity
or advancement of expenses shall be made.
Section 3.
No amendment or repeal of this Articles shall apply to or have any
effect on any right to indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, the Corporation has adopted these Amended
and Restated Articles of Incorporation this February 10, 1999.
/s/ James D. Shook
---------------------
James D. Shook
Secretary
5
<PAGE> 1
EXHIBIT 10.5
SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT
THIS SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT ("Agreement") is
entered, effective as of June 18, 1998, by and between INTELISPAN VENTURES,
INC., an Arizona corporation ("IVI"), and CYCLONE SOFTWARE CORPORATION, an
Arizona corporation ("CSC"). IVI and CSC are at times individually referred to
as "Party" or collectively as "Parties." All capitalized words constitute
defined terms listed in Section I of this Agreement.
RECITALS
A. CSC is the owner of certain software providing among other features,
interconnectivity and data exchange capabilities, and as further defined as
"Software" below.
B. IVI is maintaining a computer communications network as further
defined as "Network" below and is or may be providing certain Services (as
defined below).
C. The Parties wish to enter into an agreement whereby IVI would
receive the following non-exclusive licenses regarding the Software:
1. SERVICE LICENSE. To use the Software resident on the
Network and third party networks in connection with "Services" as defined below.
2. INTERNAL DISTRIBUTION LICENSE. To sublicense and distribute
the Software to IVI's "Customers" as defined below for Customers' use on the
Network.
3. EXTERNAL DISTRIBUTION LICENSE. To sublicense and distribute
the Software to Customers for use on TCP/IP networks other than the Network.
COVENANTS
In consideration of the foregoing Recitals and the mutual promises,
terms, and conditions contained in this Agreement, and for other good and
valuable consideration, receipt of which is hereby acknowledged, the Parties
hereby agree as follows:
1. DEFINITIONS.
1.1 AFFILIATE. "Affiliate" shall mean any corporation or business
entity controlled by, controlling, or under common control with a named person
or entity.
1.2 CYCLONE INTERCHANGE. "Cyclone Interchange" shall mean CSC's
commercial computer software product known as Cyclone Interchange, licensed to
operate with Cyclone Interchange Solo or other compatible third party software
products.
1.3 CUSTOMERS. "Customers" means end-users of Cyclone Interchange
sublicensed under this Agreement.
<PAGE> 2
1.4 CYCLONE INTERCHANGE SOL. "Cyclone Interchange Solo" shall mean
Cyclone Interchange configured and licensed to provide connectivity and data
exchange with one Cyclone Interchange customer.
1.5 DOCUMENTATION. "Documentation" means the manuals, guides, online
help, readme files, training materials, tutorials, job aids, quick references,
and other technical documentation, provided in any media, which CSC generally
makes available for use with a particular Software product
1.6 EFFECTIVE DATE. The "Effective Date" is June 18, 1998.
1.7 EXECUTABLE CODE. "Executable Code" means a form of computer program
or portion thereof which can be executed by a computer without further
modification. Examples include binary code and code which can be directly
executed by an interpreter.
1.8 EXTERNAL DISTRIBUTION LICENSE. "External Distribution License" has
the meaning defined in Section 3.3.
1.9 FIRST LEVEL SUPPORT. "First Level Support" means the following
steps: Call acceptance and contact with the customer until resolution. Gather
problem information and determine the level of the problem. Search knowledge
base and deliver known solutions to customer. Dispatch IVI support personnel as
appropriate. Escalate to Second Level Support as required.
1.10 INTERNAL DISTRIBUTION LICENSE. "Internal Distribution License" has
the meaning defined in Section 3.2.
1.11 IMPROVEMENTS. "Improvements" means all corrections, updates,
upgrades and all new releases of the Software which CSC may generally make
available to end-users of the Software at any time after the date of delivery as
specified in Section 5.1 who have executed maintenance agreements with CSC.
1.12 MAINTENANCE. "Maintenance" shall have the meaning set forth in
Section 6.6.
1.13 LICENSE. "License" means the license of the Software set forth in
Section 3 below.
1.14 NETWORK. The "Network" shall be IVI's permitted use of the
Worldcom Advanced Network's Virtual Private Network.
1.15 PERMITTED TRADING PARTNERS. "Permitted Trading Partners" shall
mean the maximum number of Solo Customer Profiles, as defined in the
Documentation, permitted for use under this Agreement.
1.16 SECOND LEVEL SUPPORT. "Second Level Support" means the following
steps:
Respond to First Level Support escalations with a higher level of expertise in a
specific technology area. Develop and gain customer agreement for problem
isolation, solution creation and solution implementation plan. Provide an
existing fix, work-around solution, or if not available, escalate to CSC for
assistance.
2
<PAGE> 3
1.17 SERVICE LICENSE. "Service License" has the meaning defined in
Section 3. 1.
1.18 SERVICES. The "Services" are the following services of IVI: (a)
Validate, which is individual background information or investigation reports;
(b) Medical Data Mining; (c) Computer Code Correction, which is the provision of
- -fixes for problems such as those related to the year 2000, Dow 10,000 and
Eurocurrency. The Services may include additional services as mutually agreed by
the Parties.
1.19 SOFTWARE. "Software" means Cyclone Interchange and Cyclone
Interchange Solo and any accompanying Documentation, including any corrections,
updates, upgrades and enhancements ("Updates") thereto made available by CSC to
IVI pursuant to the terms of this Agreement.
1.20 SOLO CUSTOMER. "Solo Customer" shall mean a Customer licensed to
use Cyclone Interchange Solo in accordance with the terms of this Agreement.
1.21 SOURCE CODE. "Source Code" means a form of computer program or
portion thereof written in a programming language employed by computer
programmers which must be translated into the language of a machine before it
can be executed.
1.22 SUBDISTRIBUTOR. "Subdistributor" means any person or organization
authorized by Licensee to sublicense any Software licensed in this Agreement.
1.23 TERM. "Term" shall have the meaning defined in Section 2.
1.24 THIRD LEVEL SUPPORT. "Third Level Support" means help, support,
and assistance pertaining to the technical aspects of the Software necessary to
the extent that IVI has exhausted First Level Support and Second Level Support
to resolve a problem.
2. TERM. The Term of this Agreement shall be five (5) years from the
Effective Date and shall automatically renew for consecutive one (1) year terms
unless either party provides written notice of non-renewal at least one hundred
eighty (180) days before the end of the original five-year term or any one-year
extension term.
3. SOFTWARE LICENSES. CSC hereby grants to IVI the following nonexclusive,
nontransferable, and worldwide licenses as follows:
3.1 SERVICE LICENSE. IVI shall have a Service License to (a) use one
(1) copy (or more, if reasonably approved by CSC) of Cyclone Interchange located
at 8220 East Gelding Drive, Scottsdale Arizona 85260 (or such other location as
notified in advance to CSC) (the "IVI Operations Center") for the sole purpose
of marketing and promoting the Services on the Network, and (b) copy and
distribute any number of Cyclone Interchange Solo to Solo Customers for use on
or off the Network, in connection with IVI's offering of the Services.
3.2 INTERNAL DISTRIBUTION LICENSE. IVI shall have an Internal Distribution
License to market, promote, sublicense and distribute Software to Customers only
for Customers' use on the Network.
3
<PAGE> 4
3.3 EXTERNAL DISTRIBUTION LICENSE. IVI shall have an External
Distribution License to market, promote, sublicense and distribute the Software
to other customers for general use within or without the Network.
4. CONDITIONS COMMON TO ALL LICENSES.
4.1 IVI TRADEMARK USE. The Parties agree that IVI may market, promote,
use, sublicense, and distribute the Software under its own trademarks and/or
trade names, and with its own appropriate proprietary notices.
4.2 DISPLAY OF CSC TRADEMARKS. IVI shall not delete or remove any of
CSC's trademarks or proprietary notices from the Software, but shall have the
right to reasonably move or adjust marks for product packaging or co-branding
purposes. Further, IVI shall prominently display "Cyclone Powered" or an
equivalent thereof on all product sheets, splash screens and other locations
that include other IVI marks related to the Software.
4.3 RSA LICENSES. IVI agrees to license any RSA Data Security, Inc.
("RSA") software modules required for the Software directly from RSA, and IVI
shall be responsible for an fees or royalties requested by RSA in connection
with any Software licensed to or by IVI.
4.4 SUBLICENSES. IVI and its Subdistributors shall license the Software
licensed pursuant to Section 3 pursuant to sublicense agreements substantially
in the form attached as Exhibit B, which protect CSC's rights, and limit CSC's
liability consistently with the terms of this Agreement, as well as other terms
and conditions as may be agreed to by CSC and IVI from time to time.
4.5 CODE DISTRIBUTION. IVI may distribute the Software in Executable
Code only.
4.6 LIMITATION ON IVI'S USE. As between IVI and CSC, CSC holds all
right, title, and interest in and to all copyrights, trade secrets, and other
proprietary rights in the Software, including any modifications or derivations
of the Software, including those developed by or for IVI. Notwithstanding the
foregoing, IVI shall have the right to develop separate software modules using
APIs provided by CSC which IVI shall own to the extent such modules do not
contain proprietary intellectual property of CSC. IVI shall not sell or
otherwise transfer the Software except as provided in Section 3.
4.7 SUBDISTRIBUTORS. IVI may appoint Subdistributors at its sole
discretion. In all cases, however, IVI shall require, by written contract, that
each of its Subdistributors comply with IVI's obligations hereunder as if such
Subdistributor stood in the position of IVI hereunder, except that IVI shall be
solely responsible for making all payments to CSC hereunder. IVI shall promptly
notify CSC of the appointment of all Subdistributors, and shall be responsible
for all acts of such Subdistributors.
Each agreement with a Subdistributor shall provide that CSC is an
intended third party beneficiary with the right to enforce such agreement
against the Subdistributor. CSC shall have the right to cause IVI to audit
Subdistributors and provide relevant information from such audits with CSC.
4
<PAGE> 5
4.8 COPIES OF SOFTWARE. IVI may create duplicate and backup copies of
the Software for IVI's and Customers' use within the parameters of the Internal
and External Service License. All versions of Software to be distributed under
the Internal and External Distribution Licenses shall. be provided by CSC to IVI
for copying and redistribution by IVI. The Software and all related materials,
including any original or complete or partial copies thereof, are and remain the
property of CSC, whether or not the copies are made by IVI, and irrespective of
the ownership of the -media on which the software or related materials. are
contained.
4.9 DEMONSTRATION COPIES OF CYCLONE INTERCHANGE. IVI shall have the
right to license up to five (5) customers at any time, demonstration copies of
Cyclone Interchange for use on the Network for a ninety (90) day trial period.
If a customer does not return a demonstration copy within such ninety (90) day
period, the appropriate fee under Section 7.2 below shall be immediately due to
CSC.
4.10 PAPAGO PRODUCT. CSC may, at its discretion complete development of
its Papago Product. In the event that CSC completes its Papago Product, such
product shall be included as "Software" under this Agreement, provided that the
only additional payment due for the Papago Product shall be the payments due for
individual Papago Product licenses for use in accordance with Section 7.2 and
7.3 below.
5. DELIVERY. IVI hereby acknowledges that CSC has made delivery of one (1)
copy of the Software on or before June __, 1998, and IVI has accepted the
Software.
6. SUPPORT.
6.1 CSC END-USER SUPPORT OBLIGATIONS. CSC will. provide Maintenance to
IVI and, as requested by IVI, Third Level Support, throughout the term of this
Agreement and the additional term of any Customer license hereunder, provided
CSC is receiving payment pursuant to Section 6.5 below.
6.2 CSC TRAINING AND SUPPORT. Upon request by IVI and as mutually
agreed by the parties, including any financial compensation, if any, CSC will
provide the training and support services to IVI and to its Customers throughout
the term of this Agreement.
6.3 IVI CUSTOMER SUPPORT OBLIGATIONS. Throughout the term of this
Agreement and the additional term of any Customer license hereunder, IVI will
provide First and Second Level Support to its Customers.
6.4 ADDITIONAL CSC SUPPORT. CSC consulting and support services for
IVI, or Customers in addition to those described in Sections 6.1 and 6.2 above
("Additional Support") may be requested by IVI at any time, whereupon CSC may
provide a cost estimate and proposed timetable. Any such Additional Support
shall only be provided pursuant to a written amendment to this Agreement, and/or
a written agreement between IVI and CSC.
6.5 REIMBURSEMENT OF EXPENSES. CSC shall furnish Maintenance and Third
Level Support for the Software to IVI for a period of one (1) year from the
Effective Date without any charge or fee. Thereafter, IVI shall pay CSC as
follows:
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<PAGE> 6
(a) $40,000.00 per year within thirty (30) days after the start of
each year for Maintenance of IVI's copy of Cyclone Interchange used to provide
Services.
(b) An amount equal to ten percent (10%) of all fees payable to CSC
during the first year of this Agreement pursuant to Sections 7.2 and 7.3 for
Maintenance of Customer licenses granted during the first year of this
Agreement. This amount would be paid during the first month of the second year
of this Agreement. This payment is for the second year of support of such
licenses.
(c) An amount equal to ten percent (10%) of all fees payable to CSC
during each month of this Agreement pursuant to Sections 7.2 and 7.3. These
amounts would be payable monthly. This is for the first year of support of
licenses granted.
(d) An amount equal to ten percent (10%) of all fees paid for a
license pursuant to Sections 7.2 and 7.3, upon each anniversary of each such
license These amounts would be payable monthly. This payment shall not be made
for the second year of support for licenses granted in the first year of this
Agreement.
For all other expenses incurred by CSC in providing the training and support
services described in this Article 6, CSC shall be reimbursed as specifically
agreed by CSC and IVI in writing.
6.6 MAINTENANCE. CSC will maintain the Software in an operable
condition in accordance with the specifications contained in the Documentation
supplied with the Software during the term of this Agreement. CSC shall also
provide IVI without charge such corrections and improvements as CSC may make
generally available to its Software licensees as part of standard maintenance
service. All such services shall be referred to as "Maintenance" and shall be
provided according to CSC's then-current Maintenance Policy.
7. LICENSE PAYMENTS. In consideration for the rights and Licenses granted
in this Agreement, and subject to the conditions set forth in this Agreement,
IVI shall pay the following license fees:
7.1 SERVICE LICENSE. For the Service License the Software will be
priced at a one-time payment of $400,000 payable upon invoice by CSC. The
license fees stated in this Section 7.1 include all fees for an unlimited number
of Cyclone Interchange Solo licenses for Customers on the Network.
7.2 INTERNAL DISTRIBUTION LICENSE. For purposes of the Internal
Distribution License, the license fee for the Software payable to CSC will be
$25,000.00 for each Customer sublicense of Cyclone Interchange to be installed
at a Customer facility, and $10,000 for each Customer sublicense to be installed
at the IVI Operations Center. These sublicenses shall be reassignable by IVI
from time to time pursuant to contracts with Customers. The license fees stated
in this Section 7.2 include all fees for an unlimited number of Cyclone
Interchange Solo licenses for Customers on the Network. Payment to CSC shall be
made within ninety (90) days of the delivery of the Software to the Customer or
receipt of the Customer's payment therefor, whichever is sooner.
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7.3 EXTERNAL DISTRIBUTION LICENSE. For purposes of the External
Distribution License, the license fee payable by IVI to CSC shall be at a
discount of fifty percent (50%) off CSC's regular retail price list for sales
inside of the territory and possessions of Canada, the U.S.A, and Mexico, and at
a discount of sixty percent (60%) off CSC's regular retail price list for sales
outside of the territory and possessions of Canada, the U.S.A, and Mexico.
Payment to CSC shall be made within ninety (90) days of the delivery of the
Software or receipt of the Customer's payment therefor, whichever is sooner. CSC
shall provide IVI with any modifications of its retail Price list at least
thirty (30) days before such modifications become effective.
7.4 CUSTOMER IDENTIFICATION. Each payment shall be accompanied by a
report setting, forth the amount of fees paid, how such fees have been
calculated and the identities of customers upon which reported fees are based,
date of delivery and date of payment, if received. Further, IVI and its
Subdistributors agree to make and to maintain until the expiration of two (2)
years after the last payment under this Agreement is due, complete books,
records and accounts to verify IVI's copies of the Software and the payments due
CSC hereunder. CSC shall have the right to examine such books, records and
accounts during IVI's normal business hours to verify IVI's reports on the
amount of payments made to CSC under this Agreement. If any such examination
discloses a shortfall in payment to CSC of more than five percent (5%) for any
month, IVI agrees to pay or reimburse CSC for that auditing expense upon written
request by CSC.
8. OWNERSHIP; CONFIDENTIALITY.
8.1 CSC OWNERSHIP RIGHTS. Except for the licenses granted hereunder,
all rights, title and interests, including, without limitation, intellectual
property rights, in and to the Software are retained by CSC. IVI shall execute
all such documents that may be required to vest in CSC, or otherwise confirm,
such ownership rights.
8.2 NO DECOMPILATION. IVI shall not attempt to obtain or permit others
to obtain the Source Code of any Software supplied to IVI in compiled form
through decompilation, disassembly or other means.
8.3 IVI OWNERSHIP RIGHTS. Except as other-wise set forth herein, all
rights, title and interests, including, without limitation, all intellectual
property rights in and to the IVI Services and Network, are retained by IVI. CSC
shall execute all such documents that may be required to vest in IVI, or
otherwise confirm, such ownership rights.
8.4 CONFIDENTIALITY.
(a) SECRECY DUTIES. Any non-public information or documentation
provided by the Parties or their representatives, agents, and employees to each
other in the context of this Agreement ("Information") shall be kept strictly
confidential. The Parties each agree that the amount of license or other fees
payable hereunder, and the payment terms, shall be deemed Information of the
other for purposes of this Section 8.4. Access to such Information shall be
restricted to the Parties' representatives and agents as is reasonably required
for purposes of effecting the purposes of this Agreement ("Authorized
Representatives"). IVI and CSC shall inform such Authorized Representatives of
their limitations, duties and obligations hereunder. Each of the Parties shall
be liable for any breach of this Agreement by, their respective employ-
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ees or agents. The Parties and their Authorized Representatives shall safeguard
the Information against unauthorized disclosure, use, appropriation, or access
by others, shall not disclose or permit access to Information to others without
the express written permission of the Party to which the Information pertains,
and shall not use, not allow the use of, or disclose or allow Information for
any purpose unrelated to the consummation of the transactions contemplated by
this Agreement. If this Agreement is terminated or expires, all Information
except as required for the maintenance of continuing Customer obligations, shall
be immediately returned to the respective Party. Notwithstanding the foregoing,
each Party shall have the right to disclose the existence and nature of this
Agreement to third parties. Further, within ten (10) days after the Effective
Date, the Parties will issue as mutually agreed press release regarding this
Agreement.
(b) EXCEPTION TO SECRECY DUTIES. A Party shall not be bound to its
above-stated secrecy duties as to such Information or part thereof, (a) which
such Party can demonstrate was known to it before disclosure by the other Party
or its Agents; (b) which is now, or becomes in the future, public knowledge
other than through acts or omissions of such Party or its representatives or
agents gents; or (c) which is lawfully obtained by a Party from sources
independent of the other Party.
(c) REMEDIES. The Parties understand that dissemination of the
Information would be detrimental to the other, and that the Information is the
exclusive property of the other. The confidentiality clauses contained in this
Section 8.4 are reasonable and necessary to protect the legitimate interests of
the Parties and any violation thereof will result in an irreparable injury to
the other Party. The Parties agree that in the event of any violation of this
Section by one Party, the other shall be entitled to injunctive relief and
damages, which remedies shall be cumulative and in addition to any other rights
or remedies to which such other shall be entitled. The Parties declare that it
is impossible to measure in money the damages that will accrue if a Party should
fail to perform any of the obligations contained in this Section. Therefore, the
terms and provisions of this Section may be specifically enforced in equity. The
Parties waive the claim or defense that the remedy at law is adequate for a
breach of the terms and provisions of this Section.
9. IVI SERVICES. IVI shall provide CSC with favorable wholesale pricing
for CSC's use of IVI Services and Network and CSC may private brand the IVI
Services, all as to be further negotiated and determined by the Parties.
10. TERMINATION; EXPIRATION.
10.1 BREACH OF CONTRACT. The license granted in this Agreement may be
terminated by the nondefaulting Party if either Party fails to substantially
comply with the terms and conditions of this Agreement for more than thirty (30)
days after receipt of notice to it from the nondefaulting Party specifically
setting forth the nature of such failure or default, unless such failure or
default could not be reasonably cured within thirty (30) days and the defaulting
Party has made a reasonable attempt within such 30 days to commence to cure the
noticed default. If any payment is not made within thirty (30) days of the due
date thereof, such payment shall bear interest at the rate of one and one-half
percent (1.5%) per month, or the highest legal rate, whichever is less,
commencing as of the due date, until fully paid. Failure to make any payment
within thirty (30) days of the due date thereof shall constitute a material
breach of this Agreement. Notwithstand-
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ing the foregoing, either Party may terminate this Agreement immediately in the
event of a breach by the other party of its obligations under Section 8 or 11,
and IVI may immediately terminate this Agreement upon CSC's breach of a warranty
in Section 12 or upon any interruption of IVI's License rights under this
Agreement due to an infringement claim.
10.2 CONTINUING CONTRACTUAL OBLIGATIONS. If the license granted by this
Agreement is terminated by IVI for CSC's breach, or expires, CSC will permit IVI
to complete performance of any existing contracts IVI has with its Customers
involving the Software or any part thereof for a period not to exceed one (1)
year following the effective date of the termination or expiration of this
Agreement provided no new business will be solicited under any such existing
contract, provided this shall not preclude the issuance of Cyclone Solo licenses
as provided under this Agreement. In such event, the right of IVI to so complete
performance of any existing contracts IVI has with its customers will be
expressly conditioned upon the continued compliance by IVI with all terms and
conditions of this Agreement.
10.3 IVI OBLIGATIONS ON TERMINATION. Except as necessary for continuing
the obligations referenced in Section 10.2, upon termination or expiration of
this Agreement, IVI shall destroy all Documentation and all copies of any
Software, or portions thereof, in its possession or control. Termination shall
not affect the rights of any Customers of the Software sublicensed under the
External Distribution License to continue to use such programs; however, IVI
shall not furnish further copies of the Software to any person after termination
under such License. Upon termination or expiration, IVI shall immediately pay to
CSC all license fees then outstanding.
11. NONCIRCUMVENTION; NONHIRE.
11.1 NONCIRCUMVENTION. CSC warrants and agrees that neither CSC nor any
of its directors, officers, and employees shall attempt or undertake to
circumvent IVI and shall not directly engage in any business negotiations,
dealings, or transactions with Worldcom and/or Zergo, for one (1) year after the
Effective Date or Worldcom Advanced Network for two (2) years' after the
Effective Date without the express prior written consent of IVI (provided that
if IVI and Worldcom Advanced Network enter into a written agreement, a copy of
which is promptly provided to CSC, which agreement appoints Worldcom. Advanced
Network as a Subdistributor of Services and Software, then the period of time
with respect to WorldCom Advanced Network shall be five (5) years). IVI shall be
under no duty or reasonability standard whatsoever with regard to giving such
consent and may withhold consent in its sole discretion.
11.2 NONHIRE. Except as otherwise agreed to in writing, for the Term of
this Agreement and for a period of two (2) years thereafter, the Parties shall
not make or accept any offer regarding the employment or independent services of
each other's employees (including employees terminated within ninety (90) days),
unless the other Party becomes insolvent.
12. REPRESENTATIONS AND WARRANTIES
CSC warrants that it is the owner of the Software and/or has the right
to grant IVI the rights set forth herein; provided that IVI's sole remedy, and
CSC's sole obligation, with respect to such warranty shall be CSC's
indemnification obligation set forth in Section 13 below. EXCEPT FOR THIS
EXPRESS LIMITED WARRANTY, NEITHER CSC NOR ITS LICENSORS
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MAKE ANY WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND SPECIFICALLY
DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
13. INFRINGEMENT. CSC shall indemnify, defend, and hold IVI harmless from
any against claims threatened or actual that the Software infringes a patent,
copyright , trade secret, or other property right of a third party and shall pay
the resultant court costs, expenses, and legal fees and any damages finally
awarded or paid in the settlement of any claim. CSC shall be released from the
foregoing obligation unless IVI provides CSC with (1) written notice within
fifteen (15) days of the date IVI first becomes aware of such claim or action,
or possibility thereof, (ii) sole control and authority over the defense or
settlement thereof and (iii) proper and full information and assistance to
settle and/or defend any such claim or action. Without limiting the foregoing,
if any injunction is, or CSC believes, in its sole discretion, is likely to be,
entered prohibiting the use of the Software by IVI as contemplated herein, CSC
will, at its sole option and expense, either: (a) procure for IVI the right to
use the infringing Software as provided herein, or (b) replace the infringing
Software with non-infringing, functionally equivalent products, or (c) suitably
modify the infringing Software so that it is not infringing; or, (d) in the
event (a), (b) and (c) are not commercially reasonable, accept return of the
infringing Software and refund fees paid hereunder. Except as specified above,
CSC will not be liable for any costs or expenses incurred without its prior
written authorization. Notwithstanding the foregoing, CSC assumes no liability
for infringement claims arising from (i) combination of the Software with other
products not provided by CSC, but not covering the Software, or (ii) any
modifications to the Software unless such modification was made by CSC. THE
FOREGOING PROVISIONS OF THIS SECTION 8 STATE THE ENTIRE LIABILITY AND
OBLIGATIONS OF CSC OR ITS LICENSORS, AND THE EXCLUSIVE REMEDY OF IVI WITH
RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT OF ANY PATENT, COPYRIGHT, TRADE
SECRET, TRADEMARK OR OTHER INTELLECTUAL PROPERTY RIGHT BY THE SOFTWARE. IN NO
EVENT WILL CSC'S LIABILITY UNDER THIS SECTION 13 EXCEED THE SOFTWARE LICENSE
FEES PAID TO CSC UNDER THIS AGREEMENT. EXCEPT AS PROVIDED IN THIS SECTION 13, IN
NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL
OR INDIRECT DAMAGES ARISING IN ANY WAY OUT OF THIS AGREEMENT, HOWEVER CAUSED AND
ON ANY THEORY OF LIABILITY.
14. SOURCE CODE ESCROW AGREEMENT. Upon request of IVI, the Parties shall
enter into an Escrow Agreement regarding the Software in substantially the form
attached hereto as Exhibit A. IVI shall pay all of CSC's costs in connection
with the Escrow Agreement including legal review and the escrow fees under the
Escrow Agreement.
15. GENERAL PROVISIONS.
15.1 NOTICES. All notices, requests, demands and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given to a Party only if the notice is faxed
to such Party's telefax number set forth below and delivered by second day
delivery, addressed as set forth below. Notwithstanding the above, the notice
shall be effective at the time the fax transmission is received:
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To IVI: Intelispan, Inc. To: Cyclone Software Corporation
8220 East Gelding Drive 11000 North Scottsdale Road,
Scottsdale, AZ 85260 Suite 260
Fax: (602) 443-4702 Scottsdale, AZ 8525
Fax: (602) 991-1295
Copy: Jones, Skelton and Hochuli Wilson Sonsini Goodrich & Rosati
2901 North Central Avenue, 650 Page Mill Road
Suite 800 Palo Alto, California 94304
Phoenix AZ, 85012 Attn: Doug Collom
Attn: Martin Janello Fax: (650) 493-6811
Fax: (602) 263-1784
Any Party may change its address or fax number by giving notice of such changes
in conformity with the provisions of this Subsection for the giving of notice.
15.2 WAIVER. No waiver of any provision of this Agreement shall be
valid unless it is in writing and signed by the Party against whom or which it
is sought to be enforced. No waiver of any provision of this Agreement at any
time shall be deemed a waiver of any other provisions of this Agreement at such
time or of the same provision at any other time.
15.3 FORCE MAJEURE. Neither Party will be liable for any failure or
delay in performing an obligation under this Agreement that is due to causes
beyond its reasonable control, including but not limited to governmental acts or
omissions laws or regulations, failure to obtain or maintain government licenses
or licensing agreements with third parties for any reason, defaults or breaches
of contract by third parties, natural catastrophes, acts of war, labor strikes
or difficulties. If any of these causes continue or are reasonably to be
expected to continue to prevent or delay performance for more than five (5)
days, a Party shall have the right to terminate this Agreement.
15.4 SURVIVAL. After termination, Sections 6, 8, 10 through 16 shall
survive the termination of this Agreement.
15.5 GOVERNING LAW. This Agreement shall be construed pursuant to the
laws of the United States and the State of Arizona.
15.6 AMENDMENT, MODIFICATION, REVOCATION. This Agreement or any part
thereof may be amended, modified, or revoked in whole or in part only by an
instrument in writing signed by both Parties to this Agreement.
15.7 ASSIGNMENT OF AGREEMENT. Except as stated herein, this Agreement
or any part thereof shall not be assignable without the other Party's written
approval. Any attempt to do so without the other Party's approval shall be void.
Notwithstanding the above, the Parties shall have the right to assign this
Agreement without any prior approval to any successor pursuant to a merger or
consolidation of a Party or the sale of all or substantially all of a Party's
business assets, provided that such successor undertakes to fulfill all
obligations of the assigning Party under this Agreement. Additionally, a Party
shall have the right to assign this Agreement or delegate its obligations
hereunder to any Affiliate, provided that the assigning Party guarantees the
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obligations to be hereunder to any Affiliate, provided that the assigning Party
guarantees the obligations to be performed by such Affiliate. This Agreement
shall be binding upon and inure to the benefit of the Parties' performed by such
Affiliate. This Agreement shall be binding upon and inure to the benefit of the
Parties' successors and assigns to the extent assignment is permitted under this
Subsection.
15.8 ENTIRE AGREEMENT OF PARTIES. This Agreement contains the entire
agreement and understanding among the Parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
15.9 ARBITRATION.
i) General. Any dispute arising out of or in connection with the
present Agreement shall be finally settled by compulsory arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), as modified or supplemented under this Section; provided,
however, that in the event of any such controversy or claim, (i) neither Party
will initiate arbitration within the first thirty (30) days after the aggrieved
Party first notifies the other Party of the controversy or claim and (ii) during
such 30-day period, the chief executive officers or designated representatives
of both Parties shall convene in Phoenix, Arizona to endeavor in good faith to
amicably resolve the controversy or claim.
ii) Proceeding. To initiate arbitration, either Party shall file
the appropriate notice at the Regional Office of the AAA in Phoenix, Arizona,
U.S.A. The arbitration proceeding will take place during a period not exceeding
two (2) days by telephonic conference call, and will consist of one (1)
arbitrator appointed by the AAA- Any communication between a Party and the
arbitrator will be directed to the AAA for transmittal to the arbitrator. The
Parties expressly agree that the arbitrator will be empowered to (i) issue an
interim order or award and (ii) grant injunctive relief.
iii) Award. The arbitration award shall be the exclusive remedy of
the Par-ties for all claims, counterclaims, issues or accountings presented or
plead to the arbitrator. The award will (i) be granted and paid in U.S. Dollars
exclusive of any tax, deduction or offset and (ii) include interest from the
date of breach or other violation of the Agreement until the award is fully
paid, computed at four percent (4%) over the then current prime rate provided by
Bank of America. Judgment upon the arbitration award may be entered in any court
that has jurisdiction thereof. Any additional costs, fees or expenses incurred
in enforcing the arbitration award will be charged against the Party that 9
resists its enforcement.
iv) Injunction. Notwithstanding the foregoing, nothing in this
Agreement shall prevent a Party from seeking injunctive or equitable relief with
respect to a Party's intellectual property rights.
15.10 REMEDIES. The rights and remedies provided for in this Agreement
shall not be mutually exclusive, nor shall they be exclusive of any other
remedies.
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15.11 ATTORNEY FEES. In the event of any adversarial proceeding between
the Parties with respect to this Agreement or the transaction contemplated by
this Agreement, the prevailing Party shall be entitled to reasonable attorney's
fees, expenses, and costs incurred therein from the other Party.
15.12 SEVERABILITY. If any provision of this Agreement is declared void
or unenforceable or contrary to mandatory law, such provision shall be deemed
severed from this Agreement to the extent affected and this Agreement shall
otherwise remain in full force and effect and shall be construed to effect the
objectives stated in this Agreement to the largest extent permissible by law.
However, if a Party reasonably deems a provision severed essential to this
Agreement, that Party shall have the right to terminate this Agreement.
15.13 AUTHORITY TO BIND. Each person executing this Agreement hereby
warrants that the person has full and legal authority to execute this Agreement
for and on behalf of the respective Parties and to bind such Parties.
15.14 JOINT RESPONSIBILITY. Each Party is willing to and does assume
joint responsibility for the form and composition of each and all the contents
of this Agreement, and further agrees that this Agreement shall be interpreted
as though each of the Parties participated equally in the composition of this
Agreement, and each and every part thereof.
15.15 TAXES. IVI shall be responsible for the payment of all taxes or
assessments, however designated, in connection with this Agreement, except any
tax based on CSC's income.
15.16 GOOD FAITH AND FAIR DEALING. The provisions of this Agreement, as
well as any statements made by the Parties in connection with the relationship
it addresses, shall be interpreted in good faith. The Parties will exercise
their rights and duties under this Agreement in accordance with good faith and
fair dealing with each other and each reposes trust and confidence in the other
to do so.
15.17 CAPTION. The captions of Sections and Subsections contained in
this Agreement are for convenience of reference only, and they neither form a
part of this Agreement nor are they to be used in the construction or
interpretation hereof
15.18 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and if executed in counterpart by all] required Parties, each
executed copy shall be deemed an original, but all counterparts together shall
constitute one and the same agreement.
15.19 TIME IS OF THE ESSENCE. In the performance of any and all of the
terms, covenants, provisions, warranties, and conditions of this Agreement, time
is of the essence.
15.20 INDEPENDENT CONTRACTORS. It is expressly understood and agreed
that IVI and CSC are acting hereunder as independent contractors and are not
employees, partners, or joint venturers of each other. Under no circumstances
shall any of the employees of one Party be deemed the employees of the other for
any purpose. This Agreement shall not be construed as authority for either Party
to act for the other Party in any agency or other capacity or to make
commitments of any kind for the account of, or on behalf of, the other Party,
except to the extent, and for the purposes, expressly provided for and set forth
herein.
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15.21 GENDER AND NUMBER. Whenever it appears appropriate from the
context, each term stated in the singular shall include the plural and vice
versa, and the masculine, feminine, or neuter form shall include the masculine,
feminine, and neuter.
15.22 ADVERBS. Whenever the terms "herein," "hereunder," "hereof" or
similar terms are used, they shall refer to this entire Agreement as a whole and
shall not solely refer to any particular section.
15.23 GENERAL RIGHTS AND EXPORT. Any use of the Software and
Documentation by the U.S. Government is conditioned upon the Government agreeing
that the Software is subjected to Restricted Rights as provided under the
provisions set forth in subdivision (c)(1)(ii) of Clause 252.227-7013 of the
Defense Federal Acquisition Regulations Supplement, or the similar acquisition
regulations of other applicable U.S. Government organizations. IVI shall comply
with all applicable export control laws and regulations, including the Export
Administration Regulations maintained by the United States Department of
Commerce. IVI acknowledges that certain CSC products utilize encryption
technology, which is specifically regulated by the U.S. Government.
IN WITNESS WHEREOF, the Parties have executed this Agreement the day,
month and year set forth beneath their signatures below.
INTELISPAN VENTURES, INC. CYCLONE SOFTWARE CORPORATION
Date: 6/18/98 Date: June 18, 1998
by: /s/ Peter A. Nelson (CEO) by: /s/ Peter Hurtubise
--------------------------------- --------------------------------
as its authorized representative (Vice President Sales)
as its authorized representative
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Exhibit A
Escrow Agreement
<PAGE> 16
PREFERRED ESCROW AGREEMENT
Account Number _____________
This Agreement is effective _________, 19 ________ among Data
Securities International, Inc. ("DSI"), __________ ("Depositor") and
____________________ ("Preferred Beneficiary"), who collectively may be referred
to in this Agreement as "the parties."
A. Depositor and Preferred Beneficiary have entered or will enter into
a license agreement, development agreement and/or other agreement regarding
certain proprietary technology of Depositor (referred to in this Agreement as
"the license agreement").
B. Depositor desires to avoid disclosure of its proprietary technology
except under certain limited circumstances.
C. The availability of the proprietary technology of Depositor is
critical to Preferred Beneficiary in the conduct of its business and, therefore,
Preferred Beneficiary needs access to the proprietary technology under certain
limited circumstances.
D. Depositor and Preferred Beneficiary desire to establish an escrow
with DSI to provide for the retention, administration and controlled access of
the proprietary technology materials of Depositor.
E. The parties desire this Agreement to be supplementary to the license
agreement pursuant to 11 United States [Bankruptcy] Code, Section 365(n).
ARTICLE I -- DEPOSITS
1.1 Obligation to Make Deposit. Upon the signing of this Agreement by
the parties, Depositor shall deliver to DSI the proprietary information and
other materials ("deposit materials") required to be deposited by the license
agreement or, if the license agreement does not identify the materials to be
deposited with DSI, then such materials will be identified on an Exhibit A. If
Exhibit A is applicable, it is to be prepared and signed by Depositor and
Preferred Beneficiary. DSI shall have no obligation with respect to the
preparation, signing or delivery of Exhibit A.
1.2 Identification of Tangible Media. Prior to the delivery of the
deposit materials to DSI, Depositor shall conspicuously label for identification
each document, magnetic tape, disk, or other tangible media upon which the
deposit materials are written or stored. Additionally, Depositor shall complete
Exhibit B to this Agreement by listing each such tangible media by the item
label description, the type of media and the quantity. The Exhibit B must be
signed by Depositor and delivered to DSI with the deposit materials. Unless and
until Depositor makes the initial deposit with DSI, DSI shall have no obligation
with respect to this Agreement, except the obligation to notify the parties
regarding the status of the deposit account as required in Section 2.2 below.
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1.3 Deposit Inspection. When DSI receives the deposit materials and the
Exhibit B, DSI will conduct a deposit inspection by visually matching the
labeling of the tangible media containing the deposit materials to the item
descriptions and quantity listed on the Exhibit B. In addition to the deposit
inspection, Preferred Beneficiary may elect to cause a verification of the
deposit materials in accordance with Section 1.6 below.
1.4 Acceptance of Deposit. At completion of the deposit inspection, if
DSI determines that the labeling of the tangible media matches the item
descriptions and quantity on Exhibit B. DSI will date and sign the Exhibit B and
mail a copy thereof to Depositor and Preferred Beneficiary. If DSI determines
that the labeling does not match the item descriptions or quantity on the
Exhibit B, DSI will (a) note the discrepancies in writing on the Exhibit B; (b)
date and sign the Exhibit B with the exceptions noted; and (c) provide a copy of
the Exhibit B to Depositor and Preferred Beneficiary. DSI's acceptance of the
deposit occurs upon the signing of the Exhibit B by DSI. Delivery of the signed
Exhibit B to Preferred Beneficiary is Preferred Beneficiary's notice that the
deposit materials have been received and accepted by DSI.
1.5 Depositor's Representations. Depositor represents as follows:
a. Depositor lawfully possesses all of the deposit
materials deposited with DSI;
b. With respect to all of the deposit materials,
Depositor has the right and authority
c. The deposit materials are not subject to any lien or
other encumbrance; and
d. The deposit materials consist of the proprietary
information and other materials
1.6 Verification. Preferred Beneficiary shall have the right, at
Preferred Beneficiary's expense, to cause a verification of any deposit
materials. A verification determines, in different levels of detail, the
accuracy, completeness, sufficiency and quality of the deposit materials. If a
verification is elected after the deposit materials have been delivered to DSI,
then only DSI, or at DSI's election an independent person or company selected
and supervised by DSI, may perform the verification.
1.7 Deposit Updates. Unless otherwise provided by the license
agreement, Depositor shall update the deposit materials within 60 days of each
release of a new version of the product which is subject to the license
agreement. Such updates will be added to the existing deposit. All deposit
updates shall be listed on a new Exhibit B and the new Exhibit B shall be signed
by Depositor. Each Exhibit B will be held and maintained separately within the
escrow account. An independent record will be created which will document the
activity for each Exhibit B. The processing of all deposit updates shall be in
accordance with Sections 1.2 through 1.6 above. All references in this Agreement
to the deposit materials shall include the initial deposit materials and any
updates.
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1.8 Removal of Deposit Materials. The deposit materials may be removed
and/or exchanged only on written instructions signed by Depositor and Preferred
Beneficiary, or as otherwise provided in this Agreement.
ARTICLE 2 -- CONFIDENTIALITY AND RECORD KEEPING
2.1 Confidentiality. DSI shall maintain the deposit materials in a
secure, environmentally safe, locked receptacle which is accessible only to
authorized employees of DSI. DSI shall have the obligation to reasonably protect
the confidentiality of the deposit materials. Except as provided in this
Agreement, DSI shall not disclose, transfer, make available, or use the deposit
materials. DSI shall not disclose the content of this Agreement to any third
party. If DSI receives a subpoena or other order of a court or other Judicial
tribunal pertaining to the disclosure or release of the deposit materials, DSI
will immediately notify the parties to this Agreement. It shall be the
responsibility of Depositor and/or Preferred Beneficiary to challenge any such
order; provided, however, that DSI does not waive its rights to present its
position with respect to any such order. DSI will not be required to disobey any
court or other judicial tribunal order. (See Section 7.5 below for notices of
requested orders.)
2.2 Status Reports. DSI will issue to Depositor and Preferred
Beneficiary a report profiling the account history at least semi-annually. DSI
may provide copies of the account history pertaining to this Agreement upon the
request of any party to this Agreement.
2.3 Audit Rights. During the term of this Agreement, Depositor and
Preferred Beneficiary shall each have the right to inspect the written records
of DSI pertaining to this Agreement. Any inspection shall be held during normal
business hours and following reasonable prior notice.
ARTICLE 3 - - GRANT OF RIGHTS TO DSI
3.1 Title to Media. Depositor hereby transfers to DSI the title to the
media upon which the proprietary information and materials are written or
stored. However, this transfer does not include the ownership of the proprietary
information and materials contained on the media such as any copyright, trade
secret, patent or other intellectual property rights.
3.2 Right to Make Copies. DSI shall have the right to make copies of
the deposit materials as reasonably necessary to perform this Agreement. DSI
shall copy all copyright, nondisclosure, and other proprietary notices and
titles contained on the deposit materials onto any copies made by DSI. With all
deposit materials submitted to DSI, Depositor shall provide any and all
instructions as may be necessary to duplicate the deposit materials including
but not limited to the hardware and/or software needed.
3.3 Right to Sublicense Upon Release. As of the effective date of this
Agreement, Depositor hereby grants to DSI a non-exclusive, irrevocable,
perpetual, and royalty-free license to sublicense the deposit materials to
Preferred Beneficiary upon the release, if any, of the deposit materials in
accordance with Section 4.5 below. Except upon such a release, DSI shall not
sublicense or otherwise transfer the deposit materials.
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<PAGE> 19
ARTICLE 4 -- RELEASE OF DEPOSIT
4.1 Release Conditions. As used in this Agreement, "Release Conditions"
shall mean the following:
a. Depositor's failure to carry out obligations imposed on it
pursuant to the license agreement
b. Depositor's failure to continue to do business in the ordinary
course.
4.2 Filing For Release. If Preferred Beneficiary believes in good faith
that a Release Condition has occurred, Preferred Beneficiary may provide to DSI
written notice of the occurrence of the Release Condition and a request for the
release of the deposit materials. Upon receipt of such notice, DSI shall provide
a copy of the notice to Depositor, by certified mail, return receipt requested,
or by commercial express mail.
4.3 Contrary Instructions. From the date DSI mails the notice
requesting release of the deposit materials, Depositor shall have ten business
days to deliver to DSI Contrary Instructions. "Contrary Instructions" shall mean
the written representation by Depositor that a Release Condition has not
occurred or has been cured. Upon receipt of Contrary Instructions, DSI shall
send a copy to Preferred Beneficiary by certified mail, return receipt
requested, or by commercial express mail. Additionally, DSI shall notify both
Depositor and Preferred Beneficiary that there is a dispute to be resolved
pursuant to the Dispute Resolution section (Section 7.3) of this Agreement.
Subject to Section 5.2, DSI will continue to store the deposit materials without
release pending (a) joint instructions from Depositor and Preferred Beneficiary,
(b) resolution pursuant to the Dispute Resolution provisions, or (c) order of a
court.
4.4 Release of Deposit. If DSI does not receive Contrary Instructions
from the Depositor, DSI is authorized to release the deposit materials to the
Preferred Beneficiary or, if more than one beneficiary is registered to the
deposit, to release a copy of the deposit materials to the Preferred
Beneficiary. However, DSI is entitled to receive any fees due DSI before making,
the release. This Agreement will terminate upon the release of the deposit
materials held by DSI.
4.5 Use License Following Release. Unless otherwise provided in the
license agreement, upon release of the deposit materials in accordance with this
Article 4, Preferred Beneficiary shall have a non-exclusive, non-transferable,
irrevocable right to use the deposit materials for the sole purpose of
continuing the benefits afforded to Preferred Beneficiary by the license
agreement. Preferred Beneficiary shall be obligated to maintain the
confidentiality of the released deposit materials.
ARTICLE 5 -- TERM AND TERMINATION
5.1 Term of Agreement. The initial term of this Agreement is for a
period of *one year. Thereafter, this Agreement shall automatically renew from
year-to-year unless (a) Depositor and Preferred Beneficiary jointly instruct DSI
in writing that the Agreement is terminated; or (b) the Agreement is terminated
by DSI for nonpayment in accordance with Section 5.2. If the deposit materials
are subject to another escrow agreement with DSI, DSI reserves the right, after
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<PAGE> 20
the initial one year term, to adjust the anniversary date of this Agreement to
match the then prevailing anniversary date of such other escrow arrangements.
5.2 Termination for Nonpayment. In the event of the nonpayment of fees
owed to DSI, DSI shall provide written notice of delinquency to all parties to
this Agreement. Any party to this Agreement shall have the right to make the
payment to DSI to cure the default. If the past due payment is not received in
full by DSI within one month of the date of such notice, then DSI shall have the
right to terminate this Agreement at any time thereafter by sending written
notice of termination to all parties. DSI shall have no obligation to take any
action under this Agreement so long as any payment due to DSI remains unpaid.
5.3 Disposition of Deposit Materials Upon Termination. Upon termination
of this Agreement by joint instruction of Depositor and Preferred Beneficiary,
DSI shall destroy, return, or otherwise deliver the deposit materials in
accordance with Depositor's instructions. Upon termination for nonpayment, DSI
may, at its sole discretion, destroy the deposit materials or return them to
Depositor. DSI shall have no obligation to return or destroy the deposit
materials if the deposit materials are subject to another escrow agreement with
DSI.
5.4 Survival of Terms Following Termination. Upon termination of this
Agreement, the following provisions of this Agreement shall survive:
a. Depositor's Representations (Section 1.5).
b. The obligations of confidentiality with respect to the
deposit materials.
c. The licenses granted in the sections entitled Right to
Sublicense Upon Release
d. The obligation to pay DSI any fees and expenses due.
e. The provisions of Article 7.
f. Any provisions in this Agreement which specifically state
they survive the
ARTICLE 6 -- DSPS FEES
6.1 Fee Schedule. DSI is entitled to be paid its standard fees and
expenses applicable to the services provided. DSI shall notify the party
responsible for payment of DSI's fees at least 90 days prior to any increase in
fees. For any service not listed on DSI's standard fee schedule, DSI will
provide a quote prior to rendering the service, if requested.
6.2 Payment Terms. DSI shall not be required to perform any service
unless the payment for such service and any outstanding balances owed to DSI are
paid in full. All other fees are due upon receipt of invoice. If invoiced fees
are not paid, DSI may terminate this Agreement in accordance with Section 5.2.
Late fees on past due amounts shall accrue at the rate of one and one-half
percent per month (18% per annum) from the date of the invoice.
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<PAGE> 21
ARTICLE 7 -- LIABILITY AND DISPUTES
7.1 Right to Rely on Instructions. DSI may act in reliance upon any
instruction, instrument, or signature reasonably believed by DSI to be genuine.
DSI may assume that any employee of a party to this Agreement who gives any
written notice, request, or instruction has the authority to do so. DSI shall
not be responsible for failure to act as a result of causes beyond the
reasonable control of DSI.
7.2 Indemnification. DSI shall be responsible to perform its
obligations under this Agreement and to act in a reasonable and prudent manner
with regard to this escrow arrangement. Provided DSI has acted in the manner
stated in the preceding sentence, Depositor and Preferred Beneficiary each agree
to indemnify, defend and hold harmless DSI from any and all claims, actions,
damages, arbitration fees and expenses, costs, attorney's fees and other
liabilities incurred by DSI relating in any way to this escrow arrangement.
7.3 Dispute Resolution. Any dispute relating to or arising from this
Agreement shall be resolved by arbitration under the Commercial Rules of the
American Arbitration Association. Unless otherwise agreed by Depositor and
Preferred Beneficiary, arbitration will take place in San Diego, California,
U.S.A. Any court having jurisdiction over the matter may enter judgment on the
award of the arbitrator(s). Service of a petition to confirm the arbitration
award may be made by First Class mail or by commercial express mail, to the
attorney for the party or, if unrepresented, to the party at the last known
business address.
7.4 Controlling Law. This Agreement is to be governed and construed in
accordance with the laws of the State of California, without regard to its
conflict of law provisions.
7.5 Notice of Requested Order. If any party intends to obtain an order
from the arbitrator or any court of competent jurisdiction which may direct DSI
to take, or refrain from taking any action, that party shall:
a. Give DSI at least two business days' prior notice of the
hearing;
b. Include in any such order that, as a precondition to DSI's
obligation, DSI be paid
c. Ensure that DSI not be required to deliver the original
(as opposed to a copy)
ARTICLE 8 -- GENERAL PROVISIONS
8.1 Entire Agreement. This Agreement, which includes the Exhibits
described herein, embodies the entire understanding among the parties with
respect to its subject matter and supersedes all previous communications,
representations or understandings, either oral or written. No amendment or
modification of this Agreement shall be valid or binding unless signed by all
the parties hereto, except that Exhibit A need not be signed by DSL Exhibit B
need not be signed by preferred Beneficiary and Exhibit C need not be signed.
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<PAGE> 22
8.2 Notices. All notices, invoices, payments, deposits and other
documents and communications shall be given to the parties at the addresses
specified in the attached Exhibit C. It shall be the responsibility of the
parties to notify each other as provided in this Section in the event of a
change of address. The parties shall have the right to rely on the last known
address of the other parties. Unless otherwise provided in this Agreement, all
documents and communications may be delivered by First Class mail.
8.3 Severability. In the event any provision of this Agreement is found
to be invalid, voidable or unenforceable, the parties agree that unless it
materially affects the entire intent and purpose of this Agreement, such
invalidity, voidability or unenforceability shall affect neither the validity of
this Agreement nor the remaining provisions herein, and the provision in
question shall be deemed to be replaced with a valid and enforceable provision
most closely reflecting the intent and purpose of the original provision.
8.4 Successors. This Agreement shall be binding upon and shall inure to
the benefit of the successors and assigns of the parties. However, DSI shall
have no obligation in performing this Agreement to recognize any successor or
assign of Depositor or Preferred Beneficiary unless DSI receives clear,
authoritative and conclusive written evidence of the change of parties.
__________________________________ Data Securities International, Inc.
Depositor
By:________________________________
By:_______________________________
Name:_____________________________ Name:______________________________
Title:____________________________
Date:_____________________________ Title:_____________________________
Date:______________________________
By:_______________________________
Name:_____________________________
Title:____________________________
Date:_____________________________
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<PAGE> 23
EXHIBIT A
MATERIALS TO BE DEPOSITED
Account Number______________________
Depositor represents to Preferred Beneficiary that deposit materials delivered
to DSI shall consist of the following:
____________________________________ ____________________________________
Depositor Preferred Beneficiary
By:_________________________________ By:_________________________________
Name:_______________________________ Name:_______________________________
Title:______________________________ Title:______________________________
Date:_______________________________ Date:_______________________________
A-1
<PAGE> 24
EXHIBIT B
DESCRIPTION OF DEPOSIT MATERIALS
Account Number _________________________________________________________________
Depositor Company Name__________________________________________________________
DEPOSIT TYPE: ______Initial ______ Supplemental
ENVIRONMENT:
Host System CPU/OS ______Version ______ Backup__________________________________
Source System CPU/OS_______Version ______Compiler ______________________________
Special Instructions:___________________________________________________________
DEPOSIT COPYING REQUIREMENT:
Hardware needed: _______________________________________________________________
Software needed/Instructions: __________________________________________________
DEPOSIT MATERIALS:
Exhibit B Name _____________________________Version ____________________________
Item label description Media Quantity
For Depositor, I certify that the above de-
scribed deposit materials have been trans-
mitted to DSI:
By:__________________________________________
Print Name __________________________________
Date_________________________________________
For DSI, I certify that the deposit inspection
has been completed (any exceptions are
noted above):
By:__________________________________________
Print Name___________________________________
Date of Acceptance___________________________
ISE ______________ EX. B# ___________________
Send materials to: DSI, 9555 Chesapeake Dr. 4200, San Diego, CA 92123
B-1
<PAGE> 25
EXHIBIT C
DESIGNATED CONTACT
Account Number_________________
Notices, deposit material returns and
communications to Depositor Invoices to Depositor should be
should be addressed to: addressed to:
Company Name:___________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Designated Contact: __________________________ Contact: ________________________
Telephone:______________________________________________________________________
Facsimile:______________________________________________________________________
Notices and communications to Invoices to Preferred Beneficiary
Preferred Beneficiary should be addressed to: should be addressed to:
Company Name:___________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Designated Contact: __________________________ Contact:_________________________
Telephone:______________________________________________________________________
Facsimile:______________________________________________________________________
Requests from Depositor or Preferred Beneficiary to change the designated
contact should be given in writing by the designated contact or an authorized
employee of Depositor or Preferred Beneficiary.
Contracts, deposit materials and notices to Invoice inquiries and fee
remittances
DSI should be addressed to: to DSI should be addressed to:
DSI DSI
Contract Administration Accounts Receivable
Suite 200 Suite 1450
9555 Chesapeake Drive 425 California Street
San Diego, CA 92123 San Francisco, CA 94104
Telephone: (619) 694-1900 (415) 398-7900
Facsimile: (619) 694-1919 (415) 398-7914
Date: ______________________________
C-1
<PAGE> 26
Exhibit B
End User License Agreement
<PAGE> 27
S O F T W A R E L I C E N S E A G R E E M E N T
between
CYCLONE SOFTWARE CORPORATION
11000 North Scottsdale Road Suite 260
Scottsdale, Arizona 85254
and
________________________________________________________________________________
("Licensee")
________________________________________________________________________________
Address
________________________________________________________________________________
City State Zip Code Telephone Number
INITIAL ORDER:
Number of Permitted Trading Partners:___________________________________________
Initial License Fee:____________________________________________________________
Effective Date:_________________________________________________________________
1. DEFINITIONS
1.1 "Cyclone Interchange" shall mean Cyclone Software Corporation's
(Cyclone's) commercial computer software product known as Cyclone Interchange,
licensed to operate with a specific number of Permitted Trading Partners.
1.2 "Software" shall mean Cyclone Interchange. With respect to the
Software product, the definition shall include any accompanying Documentation,
including any corrections, updates, upgrades and enhancements ("Updates")
thereto made available by Cyclone to Licensee pursuant to the terms of this
Agreement.
1.3 "Documentation" shall mean the manuals, guides, online help, readme
files, training materials, tutorials, job aids, quick references, and other
technical documentation, provided in any media, which Cyclone generally makes
available for use with a particular Software product.
1.4 "Designated Server" shall mean any single computer at the location
identified above, as amended pursuant to Section 4.2.
1.5 "Permitted Trading Partners" shall mean the maximum number of
Partner Profiles, as defined in the Documentation, permitted for use under this
Agreement. The maximum number of Permitted Trading Partners is identified above,
and may be amended pursuant to Section 4.3. Licensee may determine the identity
of specific Permitted Trading Partners.
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<PAGE> 28
1.6 "Cyclone Interchange Solo" shall mean a Cyclone Interchange
configured and licensed to be used with one (1) Permitted Trading Partner.
2. GRANT OF RIGHTS
2.1 Licenses. Cyclone hereby grants to Licensee the following Software
license: a nonexclusive, nontransferable license, without right of sublicense,
to install and use, solely in object- or byte-code format, and solely for
Licensee's internal business purposes, solely on a Designated Server, and within
the maximum number of Permitted Trading Partners.
2.2 Copies.
(a) Software. Licensee may make copies of the Software as
reasonably required for internal testing, training,
and for archival purposes pursuant to Licensee's
standard archival procedures.
(b) Documentation. Licensee may make copies of the
Documentation as reasonably required to allow
Licensee's employees to use the Software in
accordance with the licenses granted in this Section
2.
2.3 Limitations. Licensee shall have the rights only with respect to
the Software and Documentation expressly set forth herein. In particular, (i)
Licensee shall have no right to use, copy, modify, display, rent, lease, loan or
otherwise distribute the Software or Documentation except as expressly provided
herein, and (ii) Licensee shall not decompile, reverse engineer or otherwise
attempt to obtain, derive or modify the source code or architecture of the
Software.
2.4 Use by Trading Partners. During the term of this Agreement, Cyclone
agrees to provide, according to Cyclone's standard Software License Agreement, a
no-cost, nontransferable Cyclone Interchange Solo license to each of Licensee's
Permitted Trading Partners. This Cyclone Interchange Solo license is to be used
by the Permitted Trading Partners to trade only with Licensee.
3. PROPRIETARY RIGHTS
3.1 Ownership. The Software and Documentation are proprietary to
Cyclone or its licensors and, except for the licenses explicitly granted
hereunder or otherwise granted by Cyclone, Cyclone or its licensors own all
right, title and interest, including without limitation all intellectual
property rights, in and to the Software and Documentation, and in and to any
copies, translations, compilations, partial copies, modifications, improvements,
enhancements, and updates of the Software and Documentation. Licensee shall not
remove any proprietary notices from any part of the Software or Documentation,
and shall reproduce such notices on any copies of such materials made by
Licensee in the same manner as such notices appear on the originals.
3.2 Confidentiality. Licensee acknowledges that the Software (including
materials, processes or techniques utilized in the Software) are proprietary to
and valuable trade secrets of Cyclone and/or its licensors, and Licensee agrees
to maintain their confidential nature. Licensee shall exercise at least the same
degree of care to protect the confidentiality of the Software as it would
exercise in protecting its own similar confidential information. Licensee will
take all steps
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<PAGE> 29
necessary to ensure that the Software shall not be disclosed to, or used by, any
person, association or entity except Licensee's own employees and consultants
and then only to the extent necessary for Licensee's permitted use of the
Software and consistent with the protection required by this Section.
Additionally, each party agrees that while either may disclose the existence of
this Agreement, the exact terms shall be deemed confidential information.
4. SOFTWARE USE
4.1 Back-Up Hardware. Licensee may use a single back-up or replacement
CPU as a temporary substitute for a Designated Server while it is inoperative
because it is malfunctioning or undergoing repair, maintenance or other
modification; provided that the Software shall be removed from such back-up or
replacement hardware when the original Designated Server is returned to use.
4.2 Replacement Hardware. Licensee may permanently substitute new
hardware for a Designated Server without additional charge.
4.3 Ordering New Software.
(a) Licensee may license additional Permitted Trading Partners by
submitting a purchase order or other notice to Cyclone specifying the number of
Permitted Trading Partners which Licensee wishes to add to this Agreement;
provided, however, that Licensee may only increase the number of Permitted
Trading Partners in increments according to Cyclone's then-current pricing
policies. Upon receipt of such order, Cyclone shall invoice Licensee for the
agreed upon license fees due and shall provide Licensee with the information
necessary to be input in a manner specified by Cyclone to provide access to the
Software by up to the appropriate number of new Permitted Trading Partners.
(b) Notwithstanding anything herein to the contrary, the ordering
and use of the Software shall be governed by the terms of this Agreement, and
nothing contained in any purchase order submitted by Licensee other than order
dates, identity, location, quantity and price shall in any way serve to modify
or add to the terms of this Agreement.
(c) Notwithstanding anything herein to the contrary, where
Licensee has purchased Maintenance (as defined in Section 7 below) for the
Software, continued Maintenance shall be subject to Licensee's payment of a pro
rata share of the Maintenance fee due for the additional Software ordered by
Licensee, as provided in Cyclone's then-current Maintenance policy.
5. LICENSE FEE AND PAYMENT
5.1 Fees. The license fee for the software initially licensed by
Licensee hereunder is set forth on the face of this Agreement. All amounts
payable under this Agreement shall be paid net thirty (30) days from the date of
invoice. Any amounts due Cyclone under this Agreement not received by Cyclone by
the date due shall be subject to a service charge of one and one-half percent
(1 1/2%) per month, or the maximum charge permitted by law, whichever is less.
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<PAGE> 30
5.2 Taxes. Unless separately stated, all charges under this Agreement
do not include any taxes, duties or charges of any kind (including withholding
or value-added taxes) imposed by any federal, state or local governmental entity
for products or services provided under this Agreement. When Cyclone has the
legal obligation to collect such taxes, the appropriate amount shall be due upon
invoice to Licensee unless Licensee provides Cyclone with a valid tax exemption
certificate authorized by the appropriate taxing authority.
6. LIMITED WARRANTY
Cyclone warrants that it is the owner of the Software and/or has the
right to grant Licensee the rights set forth herein; provided that Licensee's
sole remedy, and Cyclone's sole obligation, with respect to such warranty shall
be Cyclone's indemnification obligation set forth in Section 8 below. EXCEPT FOR
THIS EXPRESS LIMITED WARRANTY, NEITHER CYCLONE NOR ITS LICENSORS MAKE ANY
WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND SPECIFICALLY DISCLAIMS
ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7. MAINTENANCE SERVICES
Cyclone will maintain the Software in an operable condition in
accordance with the specifications contained in the Documentation supplied with
the Software for a period of 90 days after the Effective Date. Also during this
period, Cyclone shall provide Licensee without charge such corrections and
improvements as Cyclone may make generally available to its Software licensees
as part of standard maintenance service. All such services shall be referred to
as "Maintenance" and shall be provided according to Cyclone's then-current
Maintenance Policy. Upon expiration of this initial period of Maintenance,
Licensee shall have the option to continue to receive Maintenance in accordance
with Cyclone's then-current Maintenance Policy upon payment in advance to
Cyclone, on an annual basis, of the Maintenance charges then in effect for the
Software licensed to Licensee.
8. INTELLECTUAL PROPERTY RIGHTS INDEMNITY
Cyclone agrees, at its own expense, to defend or, at its option, to
settle, any claim or action brought against Licensee on the issue of
infringement of any United States copyright or trade secret of any third party
by the Software as used within the scope of this Agreement, and to pay all
damages and costs, including reasonable legal fees, which may be assessed
against Licensee under any such claim or action. Cyclone shall be released from
the foregoing obligation unless Licensee provides Cyclone with (i) written
notice within fifteen (15) days of the date Licensee first becomes aware of such
claim or action, or possibility thereof, (ii) sole control and authority over
the defense or settlement thereof and (iii) proper and full information and
assistance to settle and/or defend any such claim or action. Without limiting
the foregoing, if a final injunction is, or Cyclone believes, in its sole
discretion, is likely to be, entered prohibiting the use of the Software by
Licensee as contemplated herein, Cyclone will, at its sole option and expense,
either: (a) procure for Licensee the right to use the infringing Software as
provided herein, or (b) replace the infringing Software with noninfringing,
functionally equivalent products, or (c) suitably modify the infringing Software
so that it is not infringing; or, (d) in the event (a), (b) and
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<PAGE> 31
(c) are not commercially reasonable, accept return of the infringing Software.
Except as specified above, Cyclone will not be liable for any costs or expenses
incurred without its prior written authorization. Notwithstanding the foregoing,
Cyclone assumes no liability for infringement claims arising from (i)
combination of the Software with other products not provided by Cyclone, but not
covering the Software, or (ii) any modifications to the Software unless such
modification was made by Cyclone. THE FOREGOING PROVISIONS OF THIS SECTION 8
STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF CYCLONE OR ITS LICENSORS, AND THE
EXCLUSIVE REMEDY OF LICENSEE, WITH RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT
OF ANY PATENT, COPYRIGHT, TRADE SECRET, TRADEMARK OR OTHER INTELLECTUAL PROPERTY
RIGHT BY THE SOFTWARE.
9. LIMITATION OF LIABILITY
EXCEPT AS PROVIDED IN SECTION 8, CYCLONE'S LIABILITY UNDER THIS
AGREEMENT SHALL NOT EXCEED THE AMOUNT OF LICENSE FEES RECEIVED BY CYCLONE FROM
LICENSEE UNDER THIS AGREEMENT. IN NO EVENT SHALL CYCLONE OR ITS LICENSORS HAVE
ANY LIABILITY FOR LOST PROFITS, LOSS OF DATA OR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, OR FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL
DAMAGES INCLUDING, WITHOUT LIMITATION, DAMAGES ARISING IN ANY WAY OUT OF THIS
AGREEMENT UNDER ANY CAUSE OF ACTION, WHETHER OR NOT CYCLONE HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES. LICENSEE UNDERSTANDS THAT NOTHING CONTAINED
HEREIN SHALL RELEASE LICENSEE FROM PAYING ANY AMOUNTS THEN DUE AND OWING TO
CYCLONE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
10. TERM AND TERMINATION
10.1 Termination. This Agreement is effective until terminated. Upon
prior written notice, either party may terminate this Agreement if the other
party becomes insolvent, ceases doing business in the regular course, files a
petition in bankruptcy or is subject to the filing of an involuntary petition
for bankruptcy which is not rescinded within a period of forty-five (45) days,
or fails to cure a material breach of any term or condition of this Agreement
within thirty (30) days of receipt of written notice specifying such breach.
10.2 Return of Materials. Upon termination of this Agreement for any
reason, Licensee shall immediately discontinue use of the Software and
Documentation and within ten (10) days after termination certify. in writing to
Cyclone that all copies of the Software and Documentation, in whole or in part,
in any form, have either been returned to Cyclone or destroyed in accordance
with Cyclone's instructions. All payments made by Licensee to Cyclone hereunder
are non-refundable.
10.3 Effect of Termination. The following provisions shall survive any
termination of this Agreement: Sections 3, 5, 6, 8, 9, 10.2 and 11. Termination
shall not release Licensee from
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<PAGE> 32
paying any amounts owed to Cyclone under this Agreement. All other rights and
licenses granted hereunder will cease upon termination.
11. GENERAL
11.1 Assignment. Licensee may not assign its rights, duties and
obligations under this Agreement, except with the advance written consent of
Cyclone. Any attempted assignment contrary to the terms of this clause shall
terminate this Agreement. Notwithstanding, the rights and obligations of this
Agreement shall be binding on each party's permitted successors and assigns.
11.2 Governing Law and Jurisdiction. This Agreement shall be governed,
construed and enforced in accordance with the laws of the State of Arizona,
without reference to conflict of law principles. The federal and state courts
within Maricopa County, Arizona, shall have exclusive jurisdiction to adjudicate
any dispute arising out of this Agreement. Each party hereto expressly consents
to the personal jurisdiction of, and venue in, such courts.
11.3 No Waiver. The failure of either party to enforce at any time any
of the provisions of this Agreement shall not be deemed to be a waiver of the
right of such party thereafter to enforce any such provisions.
11.4 Government Customers. Any use of the Software and Documentation by
the U.S. Government is conditioned upon the Government agreeing that the
Software is subjected to Restricted Rights as provided under the provisions set
forth in subdivision (c)(1)(ii) of Clause 252.227-7013 of the Defense Federal
Acquisition Regulations Supplement, or the similar acquisition regulations of
other applicable U.S. Government organizations.
11.5 Export Laws. Licensee shall comply with all applicable export
control laws and regulations, including the Export Administration Regulations
maintained by the United States Department of Commerce. Licensee acknowledges
that certain Cyclone products utilize encryption technology, which is
specifically regulated by the U.S. Government.
11.6 Entire Agreement. This Agreement and Exhibits attached hereto and
incorporated herein constitute the entire agreement between the parties and
supersedes all previous agreements or representations, oral or written, relating
to this Agreement. This Agreement may not be modified or amended except in
writing and signed by a duly authorized representative of each party.
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<PAGE> 33
IN WITNESS WHEREOF, the parties by their duly authorized representatives have
executed this Agreement as of the Effective Date.
CYCLONE SOFTWARE CORPORATION ____________________________________
("LICENSEE")
By:____________________________ By:_________________________________
Name:__________________________ Name:_______________________________
Title:_________________________ Title:______________________________
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<PAGE> 34
PREFERRED ESCROW AGREEMENT INTRODUCTION
DSI's Preferred arrangement offers the flexibility of a modifiable contract
combined with premium protection for both the depositor and the beneficiary.
This advanced escrow can be precisely tailored to accommodate various
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Because we recognize that various situations require different levels of service
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8
<PAGE> 1
Exhibit 10.7
INTELISPAN, INC.
PERFORMANCE EQUITY PLAN
SECTION 1. PURPOSE; DEFINITIONS.
1.1 Purpose. The purpose of the Intelispan, Inc. (the "Company")
Performance Equity Plan (the "Plan") is to enable the Company to offer to its
key employees, officers, directors and consultants whose past, present and/or
potential contributions to the Company and its Subsidiaries have been, are or
will be important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The various types of long-term incentive
awards which may be provided under the Plan will enable the Company to respond
to changes in compensation practices, tax laws, accounting regulations and the
size and diversity of its businesses.
1.2 Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Agreement" means the agreement between the Company and the
Holder setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto and the regulation promulgated
thereunder.
(d) "Committee" means the Stock Option Committee of the Board or any
other committee of the Board, which the Board may designate to administer the
Plan or any portion thereof. If no Committee is so designated, then all
references in this Plan to "Committee" shall mean the Board.
(e) "Common Stock" means the Common Stock of the Company, par value
$0.0001 per share.
(f) "Company" means Intelispan, Inc., a corporation organized under
the laws of the State of Washington.
(g) "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan.
(h) "Effective Date" means the date set forth in Section 13.1,
below.
(i) "Fair Market Value", unless otherwise required by any applicable
provision of the Code or any regulations issued thereunder, means, as of any
given date: (i) if the Common Stock is listed on a national securities exchange
or quoted on the Nasdaq National Market or Nasdaq
<PAGE> 2
SmallCap Market, the last sale price of the Common Stock in the principal
trading market for the Common Stock on the last trading day preceding the date
of grant of an award hereunder, as reported by the exchange or Nasdaq, as the
case may be; (ii) if the Common Stock is not listed on a national securities
exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, but
is traded in the over-the-counter market, the closing bid price for the Common
Stock on the last trading day preceding the date of grant of an award hereunder
for which such quotations are reported by the OTC Bulletin Board or the National
Quotation Bureau, Incorporated or similar publisher of such quotations; and
(iii) if the fair market value of the Common Stock cannot be determined pursuant
to clause (i) or (ii) above, such price as the Committee shall determine, in
good faith.
(j) "Holder" means a person who has received an award under the
Plan.
(k) "Incentive Stock Option" means any Stock Option intended to be
and designated as an "incentive stock option" within the meaning of Section 422
of the Code.
(l) "Nonqualified Stock Option" means any Stock Option that is not
an Incentive Stock Option.
(m) "Normal Retirement" means retirement from active employment with
the Company or any Subsidiary on or after age 65.
(n) "Other Stock-Based Award" means an award under Section 8, below,
that is valued in whole or in part by reference to, or is otherwise based upon,
Stock.
(o) "Parent" means any present or future parent corporation of the
Company, as such term is defined in Section 424(e) of the Code.
(p) "Plan" means the Intelispan, Inc. Performance Equity Plan, as
hereinafter amended from time to time.
(q) "Restricted Stock" means Stock, received under an award made
pursuant to Section 7, below, that is subject to restrictions under said Section
7.
(r) "Stock" means the Common Stock.
(s) "Stock Option" or "Option" means any option to purchase shares
of Stock which is granted pursuant to the Plan.
(t) "Stock Related Option" means any option granted under Section
6.3, below, as a result of the payment of the exercise price of a Stock Option
and/or the withholding tax related thereto in the form of Stock owned by the
Holder or the withholding of Stock by the Company.
(u) "Subsidiary" means any present or future subsidiary corporation
of the Company, as such term is defined in Section 424(f) of the Code.
Page 2 of 12
<PAGE> 3
SECTION 2. ADMINISTRATION.
2.1 Committee Membership. The Plan shall be administered by the Board or a
Committee. Committee members shall serve for such term as the Board may in each
case determine, and shall be subject to removal at any time by the Board.
2.2 Powers of Committee. The Committee shall have full authority, subject
to Section 4.2, below, to award, pursuant to the terms of the Plan: (i) Stock
Options,(ii) Restricted Stock, (iii) Stock Reload Options and/or (iv) Other
Stock-Based Awards. For purposes of illustration and not of limitation, the
Committee shall have the authority (subject to the express provisions of this
Plan):
(a) to select the officers, key employees, directors and consultants
of the Company or any Subsidiary to whom Stock Options, Restricted Stock, Reload
Stock Options and/or Other Stock-Based Awards may from time to time be awarded
hereunder.
(b) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not limited
to, number of shares, share price, any restrictions or limitations, and any
vesting, exchange, surrender, cancellation, acceleration, termination, exercise
or forfeiture provisions, as the Committee shall determine);
(c) to determine any specified performance goals or such other
factors or criteria which need to be attained for the vesting of an award
granted hereunder;
(d) to determine the terms and conditions under which awards granted
hereunder are to operate on a tandem basis and/or in conjunction with or apart
from other equity awarded under this Plan and cash awards made by the Company or
any Subsidiary outside of this Plan;
(e) to permit a Holder to elect to defer a payment under the Plan
under such rules and procedures as the Committee may establish, including the
crediting of interest on any deferred amounts denominated in cash and of
dividend equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which Stock and
other amounts payable with respect to an award hereunder may be deferred which
may be either automatic or at the election of the Holder; and
(g) to substitute (i) new Stock Options for previously granted Stock
Options, which previously granted Stock Options have higher option exercise
prices and/or contain other less favorable terms, and (ii) new awards of any
other type for previously granted awards of the same type, which previously
granted awards are upon less favorable terms.
Page 3 of 12
<PAGE> 4
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Sections 4.2(iv) and 10, below,
the Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any award issued under the Plan (and to determine the form and
substance of all Agreements relating thereto), and to otherwise supervise the
administration of the Plan. Subject to Section 10, below, all decisions made by
the Committee pursuant to the provisions of the Plan shall be made in the
Committee's sole discretion and shall be final and binding upon all persons,
including the Company, its Subsidiaries and Holders.
(b) Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term or provision of the Plan relating to Incentive Stock
Options (including but not limited to Stock Reload Options granted in
conjunction with an Incentive Stock Option) or any Agreement providing for
Incentive Stock Options shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as to
disqualify the Plan under Section 422 of the Code, without the consent of the
Holder(s) affected, to disqualify any Incentive Stock Option under such Section
422.
SECTION 3. STOCK SUBJECT TO PLAN.
3.1 Number of Shares. The total number of shares of Common Stock reserved
and available for distribution under the Plan shall be 2,704,670 shares. Shares
of Stock under the Plan may consist, in whole or in part, of authorized and
unissued shares or treasury shares. If any shares of Stock that have been
granted pursuant to a Stock Option cease to be subject to a Stock Option, or if
any shares of Stock that are subject to any Restricted Stock, Reload Stock
Option or Other Stock-Based Award granted hereunder are forfeited or any such
award otherwise terminates without a payment being made to the Holder in the
form or Stock, such shares shall again be available for distribution in
connection with future grants and awards under the Plan. Only net shares issued
upon a stock-for-stock exercise (including stock used for withholding taxes)
shall be counted against the number of shares available under the Plan.
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of any
merger, reorganization, consolidation, recapitalization, dividend (other than a
cash dividend), stock split, reverse stock split, or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and exercise price of shares subject to outstanding Options, and in the
number of shares subject to, and in the related terms of, other outstanding
awards (including but not limited to awards of Restricted Stock, Stock Reload
Options and Other Stock-Based Awards) granted under the Plan as may be
determined to be appropriate by the Committee in order to prevent dilution or
enlargement of rights, provided that the number of shares subject to any award
shall always be a whole number.
Page 4 of 12
<PAGE> 5
SECTION 4. ELIGIBILITY.
4.1 General. Awards may be made or granted to key employees, officers,
directors and consultants who are deemed to have rendered or to be able to
render significant services to the Company or its Subsidiaries and who are
deemed to have contributed or to have the potential to contribute to the success
of the Company. No Incentive Stock Option shall be granted to any person who is
not an employee of the Company or a Subsidiary at the time of grant.
4.2 Directors' Awards. Notwithstanding anything contained herein to
the contrary:
(i) The only awards to be granted to a director of the Company
hereunder (even if such person also acts in other capacities for the Company in
addition to being a director) shall be Stock Options with the terms set forth
below and in Section 6, below. If there is an inconsistency between the
provisions of Sections 4 and 6, the provisions of Section 4 shall control;
(ii) Any person who shall become a non-employee director of
the Company shall be awarded, on the date of becoming a director (or the
Effective Date if later), a stock option to purchase 30,000 shares of Common
Stock at the Fair Market Value thereof on the date of grant, which option shall
vest quarterly in equal amounts over three years, and shall have a term of ten
years; and
(iii) On the annual anniversary date of the appointment to
the Board of each non-employee director of the Company (or the next business day
thereafter if such day is a Saturday, Sunday or legal holiday) during the term
of the Plan, assuming there are enough shares then available for grant
hereunder, each such director shall be awarded an Incentive Stock Option to
purchase 5,000 shares of the Company's Common Stock (to be adjusted in
accordance with Section 3.2, above) at the Fair Market Value thereof, which
option shall vest quarterly in equal amounts over three years, and shall have a
term of ten years; and
(iv) This Section 4.2 shall not be amended more than once
every six months, other than to comport with any changes in the Code or the
Employment Retirement Income Security Act, or the rules and regulations
promulgated under either of those statutes.
SECTION 5. REQUIRED SIX-MONTH HOLDING PERIOD.
5.1 Any equity security issued under this Plan must be held for at least
six months from the date of the grant of the related award.
SECTION 6. STOCK OPTIONS.
6.1 Grant and Exercise. Stock Options granted under the Plan may be of two
types: (i) Incentive Stock Options and (ii) Stock Options. Any Stock Option
granted under the Plan shall contain such terms, not inconsistent with this
Plan, or with respect to Incentive Stock Options, not inconsistent with the
Code, as the Committee may from time to time approve. The Committee shall
Page 5 of 12
<PAGE> 6
have the authority to grant Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options and which may be granted alone or in
addition to other awards granted under the Plan. To the extent that any Stock
Option intended to qualify as an Incentive Stock Option does not so qualify, it
shall constitute a separate Nonqualified Stock Option. An Incentive Stock Option
may be granted only within the ten-year period commencing from the Effective
Date and may only be exercised within ten years of the date of grant (or five
years in the case of an Incentive Stock Option granted to an optionee ("10%
Stockholder") who, at the time of grant, owns Stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company.
6.2 Terms and Conditions. Stock Options granted under the Plan shall be
subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant and may not be less than 100% of the Fair Market Value of the
Stock as defined above; provided, however, that the exercise price of an
Incentive Stock Option granted to a 10% Stockholder shall not be less than 110%
of the Fair Market Value of the Stock.
(b) Option Term. Subject to the limitations in Section 6.1, above,
the term of each Stock Option shall be fixed by the Committee.
(c) Exercisability. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by the
Committee and as set forth in Section 9, below. If the Committee provides, in
its discretion, that any Stock Option is exercisable only in installments, i.e.,
that it vests over time, the Committee may waive such installment exercise
provisions at any time at or after the time of grant in whole or in part, based
upon such factors as the Committee shall determine.
(d) Method of Exercise. Subject to whatever installment, exercise
and waiting period provisions are applicable in a particular case, Stock Options
may be exercised in whole or in part at any time during the term of the Option,
by giving written notice of exercise to the Company specifying the number of
shares of Stock to be purchased. Such notice shall be accompanied by payment in
full of the purchase price, which shall be in cash or, unless otherwise provided
in the Agreement, in shares of Stock (including Restricted Stock and other
contingent awards under this Plan) or, partly in cash and partly in such Stock,
or such other means which the Committee determines are consistent with the
Plan's purpose and applicable law. Cash payments shall be made by wire transfer,
certified or bank check or personal check, in each case payable to the order of
the Company; provided, however, that the Company shall not be required to
deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of Stock
shall be valued at the Fair Market Value of a share of Stock on the date prior
to the date of exercise. Such payments shall be made by delivery of stock
certificates in negotiable form which are effective to transfer good and valid
title thereto to the Company, free of any liens or encumbrances. A Holder shall
have none of the rights of a stockholder with respect to the shares
Page 6 of 12
<PAGE> 7
subject to the Option until such shares shall be transferred to the Holder upon
the exercise of the Option.
(e) Transferability. Except as may be set forth in the Agreement, no
Stock Option shall be transferable by the Holder other than by will or by the
laws of descent and distribution, and all Stock Options shall be exercisable,
during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holder's employment by the
Company or a Subsidiary terminates by reason of death, any Stock Option held by
such Holder, unless otherwise determined by the Committee at the time of grant
and set forth in the Agreement, shall be fully vested and may thereafter be
exercised by the legal representative of the estate or by the legatee of the
Holder under the will of the Holder, for a period of one year (or such other
greater or lesser period as the Committee may specify at grant) from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's employment by
the Company or any Subsidiary terminates by reason of Disability, any Stock
Option held by such Holder, unless otherwise determined by the Committee at the
time of grant and set forth in the Agreement, shall be fully vested and may
thereafter be exercised by the Holder for a period of one year (or such other
greater or lesser period as the Committee may specify at the time of the grant)
from the date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
(h) Other Termination. Subject to the provisions of Section 12.3,
below, and unless otherwise determined by the Committee at the time of grant and
set forth in the Agreement, if a Holder is an employee of the Company or a
Subsidiary at the time of grant and if such Holder's employment by the Company
or any Subsidiary terminates for any reason other than death or Disability, the
Stock Option shall thereupon automatically terminate, except that if the
Holder's employment is terminated by the Company or a Subsidiary without cause
or due to Normal Retirement, then the portion of such Stock Option which has
vested on the date of termination of employment may be exercised for the lesser
of three months after termination of employment or the balance of such Stock
Option's term.
(i) Additional Incentive Stock Option Limitation. In the case of an
Incentive Stock Option, the aggregate Fair Market Value of Stock (determined at
the time of grant of the Option) with respect to which Incentive Stock Options
become exercisable by a Holder during any calendar year (under all such plans of
the Company and its Parent Subsidiary) shall not exceed $100,000. Any Incentive
Stock Options granted in excess of this limitation shall not be void but shall
be treated as Nonqualified Stock Options.
(j) Buyout and Settlement Provisions. The Committee may at any time,
in its sole discretion, offer to buy out a Stock Option previously granted,
based upon such terms and conditions as the Committee shall establish and
communicate to the Holder at the time that such
Page 7 of 12
<PAGE> 8
offer is made.
(k) Stock Option Agreement. Each grant of a Stock Option shall be
confirmed by, and shall be subject to the terms of, the Agreement executed by
the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after the
time of grant in the case of a Nonqualified Stock Option) a Stock Reload Option
up to the amount of shares of Stock held by the Holder for at least six months
and used to pay all or part of the exercise price of an Option and, if any,
withheld by the Company as payment for withholding taxes. Such Stock Reload
Option shall have an exercise price equal to the Fair Market Value as of the
date of the Stock Reload Option grant. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and shall expire on the date of expiration of the Option to which the
Reload Option is related.
SECTION 7. RESTRICTED STOCK.
7.1 Grant. Shares of Restricted Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be awarded, the number of shares to be awarded, the price
(if any) to be paid by the Holder, the time or times within which such awards
may be subject to forfeiture (the "Restricted Period"), the vesting schedule and
rights to acceleration thereof, and all other terms and conditions of the
awards.
7.2 Terms and Conditions. Each Restricted Stock award shall be subject to
the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be represented
by a stock certificate or certificates registered in the name of the Holder to
whom such Restricted Stock shall have been awarded. During the Restriction
Period, certificates representing the Restricted Stock and any securities
constituting Retained Distributions (as defined below) shall bear a legend to
the effect that ownership of the Restricted Stock (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are subject
to the restrictions, terms and conditions provided in the Plan and the
Agreement. Such certificates shall be deposited by the Holder with the Company,
together with stock powers or other instruments of assignment, each endorsed in
blank, which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued and
outstanding shares of Common Stock for all corporate purposes. The Holder will
have the right to vote such Restricted Stock, to receive and retain all regular
cash dividends and other cash equivalent distributions as the Board may in its
sole discretion designate, pay or distribute on such Restricted Stock and to
exercise all other rights, powers and privileges of a holder of Common Stock
with
Page 8 of 12
<PAGE> 9
respect to such Restricted Stock, with the exceptions that (i) the Holder will
not be entitled to delivery of the stock certificate or certificates
representing such Restricted Stock until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing the Restricted Stock during the
Restriction Period; (iii) other than regular cash dividends and other cash
equivalent distributions as the Board may in its sole discretion designate, pay
or distribute, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Stock (and such
Retained Distributions will be subject to the same restrictions, terms and
conditions as are applicable to the Restricted Stock) until such time, if ever,
as the Restricted Stock with respect to which such Retained Distributions shall
have been made, paid or declared shall have become vested and with respect to
which the Restriction Period shall have expired; (iv) a breach of any of the
restrictions, terms or conditions contained in this Plan or the Agreement or
otherwise established by the Committee with respect to any Restricted Stock or
Retained Distributions will cause a forfeiture of such Restricted Stock and any
Retained Distributions with respect thereto.
(c) Vesting; Forfeiture. Upon the expiration of the Restriction
Period with respect to each award of Restricted Stock and the satisfaction of
any other applicable restrictions, terms and conditions (i) all or part of such
Restricted Stock shall become vested in accordance with the terms of the
Agreement, subject to Section 9, below, and (ii) any Retained Distributions with
respect to such Restricted Stock shall become vested to the extent that the
Restricted Stock related thereto shall have become vested, subject to Section 9,
below. Any such Restricted Stock and Retained Distributions that do not vest
shall be forfeited to the Company and the Holder shall not thereafter have any
rights with respect to such Restricted Stock and Retained Distributions that
shall have been so forfeited.
SECTION 8. OTHER STOCK-BASED AWARDS.
8.1 Grant and Exercise. Other Stock-Based Awards may be awarded, subject
to limitations under applicable law, that are denominated or payable in, valued
in whole or in part by reference to, or otherwise based on, or related to,
shares of Common Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, purchase rights, shares of
Common Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, or other rights convertible into shares
of Common Stock and awards valued by reference to the value of securities of or
the performance of specified Subsidiaries. Other Stock-Based Awards may be
awarded either alone or in addition to or in tandem with any other awards under
this Plan or any other plan of the Company.
8.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such other stock-based awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such awards, and all other terms and conditions
of the awards.
Page 9 of 12
<PAGE> 10
8.3 Terms and Conditions. Each Other Stock-Based Award shall be subject to
such terms and conditions as may be determined by the Committee and to Section
9, below.
SECTION 9. ACCELERATED VESTING AND EXERCISABILITY.
If (i) any person or entity other than the Company and/or any officer,
director or principal stockholder (i.e., a holder (beneficially or of record) of
more than ten percent of the Company's voting stock) of the Company as of the
Effective Date acquire securities of the Company (in one or more transactions)
having 25% or more of the total voting power of all the Company's securities
then outstanding and (ii) the Board of Directors of the Company does not
authorize or otherwise approve such acquisition, then, the vesting periods of
any and all Options and other awards granted and outstanding under the Plan
shall be accelerated and all such Options and awards will immediately and
entirely vest, and the respective holders thereof will have the immediate right
to purchase and/or receive any and all Stock subject to such Options and awards
on the terms set forth in this Plan and the respective agreements respecting
such Options and awards.
SECTION 10. AMENDMENT AND TERMINATION.
Subject to Section 4.2 (iv) hereof, the Board may at any time, and from
time to time, amend alter, suspend or discontinue any of the provisions of the
Plan, but no amendment, alteration, suspension or discontinuance shall be made
which would impair the rights of a Holder under any Agreement theretofore
entered into hereunder, without the Holder's consent.
SECTION 11. TERM OF PLAN.
11.1 Effective Date. The Plan shall be effective as of September 18, 1998
("Effective Date"). Any awards granted under the Plan prior to such approval
shall be effective when made (unless otherwise specified by the Committee at the
time of grant), but shall be conditioned upon, and subject to, such approval of
the Plan and no awards shall vest or otherwise become free of restrictions prior
to such approval.
11.2 Termination Date. Unless terminated by the Board, this Plan shall
continue to remain effective until such time no further awards may be granted
and all awards granted under the Plan are no longer outstanding. Notwithstanding
the foregoing, grants of Incentive Stock Options may only be made during the ten
year period following the Effective Date.
SECTION 12. GENERAL PROVISIONS.
12.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed by the
Company and the Holder. The Committee may terminate any award made under the
Plan if the Agreement relating thereto is not executed and returned to the
Company within 10 days after the Agreement has been delivered to the Holder for
his or her execution.
Page 10 of 12
<PAGE> 11
12.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Holder by the Company, nothing contained herein shall
give any such Holder any rights that are greater than those of a general
creditor of the Company.
12.3 Employees.
(a) Violations of the "Employment, Confidential Information and
Invention Assignment Agreement" With the Company. In the event a Holder's
employment with the Company or a Subsidiary is terminated for any reason
whatsoever, and such Holder violates the terms of any Employment,
Confidentiality and/or Invention Assignment Agreement with the Company in the
applicable time periods referenced in such agreements, the Committee, in its
sole discretion, may require such Holder to return to the Company the economic
value of any award which was realized or obtained by such Holder at any time
during the period beginning on that date which is six months prior to the date
of such Holder's termination of employment with the Company.
(b) No Right of Employment. Nothing contained in the Plan or in any
award hereunder shall be deemed to confer upon any Holder who is an employee of
the Company or any Subsidiary any right to continued employment with the Company
or any Subsidiary, nor shall it interfere in any way with the right of the
Company or any Subsidiary to terminate the employment of any Holder who is an
employee at any time.
12.4 Investment Representations. The Committee may require each person
acquiring shares of Stock pursuant to a Stock Option or other award under the
Plan to represent to and agree with the Company in writing that the Holder is
acquiring the shares for investment without a view to distribution thereof.
12.5 Additional Incentive Arrangements. Nothing contained in the Plan
shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.
12.6 Withholding, Taxes. Not later than the date as of which an amount
must first be included in the gross income of the Holder for Federal income tax
purposes with respect to any option or other award under the Plan, the Holder
shall pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state and local taxes of any kind
required by law to be withheld or paid with respect to such amount. If permitted
by the Committee, tax withholding or payment obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditioned upon such payment or arrangements and the Company or the
Holder's employer (if not the Company) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Holder from the Company or any Subsidiary.
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<PAGE> 12
12.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Arizona (without regard to choice of law provisions).
12.8 Other Benefit Plans. Any award granted under the Plan shall not be
deemed compensation for purposes of computing benefits under any retirement plan
of the Company or any Subsidiary and shall not affect any benefits under any
other benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation (unless required by
specific reference in any such other plan to awards under this Plan).
12.9 Non-Transferability. Except as otherwise expressly provided in the
Plan or the Agreement, no right or benefit under the Plan may be alienated,
sold, assigned, hypothecated, pledged, exchanged, transferred, encumbranced or
charged, and any attempt to alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void.
12.10 Applicable Laws. The obligations of the Company with respect to all
Stock Options and awards under the Plan shall be subject to (i) all applicable
laws, rules and regulations and such approvals by any governmental agencies as
may be required, including, without limitation, the Securities Act of 1933, as
amended, and (ii) the rules and regulations of any securities exchange on which
the Stock may be listed.
12.11 Conflicts. If any of the terms or provisions of the Plan or an
Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of said
Section 422 of the Code. Additionally, if this Plan or any Agreement does not
contain any provision required to be included herein under Section 422 of the
Code, such provision shall be deemed to be incorporated herein and therein with
the same force and effect as if such provision had been set out at length herein
and therein. If any of the terms or provisions of any Agreement conflict with
any terms or provision of the Plan, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of the
Plan. Additionally, if any Agreement does not contain any provision required to
be included therein under the Plan, such provision shall be deemed to be
incorporated therein with the same force and effect as if such provision had
been set out at length therein.
12.12 Non-Registered Stock. The shares of Stock to be distributed under
this Plan have not been, as of the Effective Date, registered under the
Securities Act of 1933, as amended, or any applicable state or foreign
securities laws and the Company has no obligation to any Holder to register the
Stock or to assist the Holder in obtaining an exemption from the various
registration requirements, or to list the Stock on a national securities
exchange.
Page 12 of 12
<PAGE> 1
EXHIBIT 10.8
THE INTELISPAN, INC.
SEVERANCE PLAN
AND
SUMMARY PLAN DESCRIPTION
THIS AGREEMENT is made and entered into by Intelispan, Inc., a
Washington corporation (hereinafter the "Employer").
R E C I T A L S:
WHEREAS, the Employer currently has no severance plan for its executive
employees;
WHEREAS, it is important to Employer that the Executive Employees
listed in the attached Exhibit A be given financial incentives to continue to
work for Employer; and
WHEREAS, Employer desires that this plan document also serve as the
summary plan description for this severance plan.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants contained herein, the following constitutes the severance plan (the
"Plan") and summary plan description thereof. The Plan shall be effective on the
Closing Date.
I. DEFINITIONS
BASE SALARY: The term "Base Salary" means the regular rate of base cash
compensation, paid to a Participant/Employee by Employer in the twelve (12)
calendar month period ending in the calendar month before the calendar month
containing the Participant's Termination Date, excluding (a) overtime pay, (b)
bonuses, (c) living or other allowances, (d) contributions to (other than
Employee salary reduction contributions to an Internal Revenue Code Section
401(k) or 125 plan maintained by Employer) and distributions from any ERISA
employee pension or welfare benefit plans maintained by Employer, (e) sick
leave, vacation leave, termination allowance, or paid time off converted to
cash, and (f) benefits payable or paid under this Plan.
CALENDAR YEAR: The term "Calendar Year" means a period of twelve (12)
consecutive calendar months beginning January 1st and ending the following
December 31st.
CHANGE OF CONTROL: The term "Change of Control" shall occur when any of
the following conditions have been met: (a) any person or entity other than a
current director or officer of Intelispan becomes the "beneficial owner", as
such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934,
directly or indirectly of securities of Intelispan representing 15% or more of
the combined voting power of Employer's then-outstanding securities, except that
this provision shall not apply to any public or private offering of Intelispan
common stock; (b) for each individual Participant, the individuals constituting
the Board of Directors of Intelispan ("Original
<PAGE> 2
Directors") cease for any reason to constitute a majority thereof, unless the
election or nomination for election of each new director was approved (an
"Approved Director") by the unanimous vote of a Board of Directors constituted
entirely of Original Directors and Approved Directors; (c) a tender offer or
exchange offer is completed for the ownership of securities of Intelispan
representing 20% or more of the combined voting power of Intelispan's
then-outstanding voting securities; (d) Intelispan is merged, consolidated or
enters into a reorganization transaction with another person or entity and the
result of such transaction is that less than 75% of the outstanding equity
securities of the surviving entity are then owned in the aggregate by the prior
stockholders of Intelispan; or (e) Intelispan transfers substantially all of its
assets to another person or entity that is not a wholly owned subsidiary of
Intelispan. Sales of Intelispan common stock beneficially owned or controlled by
Intelispan shall not be considered in determining whether a Change of Control
has occurred.
CLOSING DATE: The date that this Agreement is approved by Employer's
Board of Directors.
EMPLOYEE: The term "Employee" means an individual employed by Employer.
EMPLOYMENT TERM: The period of time during which the Employee has been
continuously employed with Employer, through the date of Termination;
ERISA: The Employee Retirement Income Security Act of 1974 as amended.
FISCAL YEAR: Each twelve (12) month period beginning January 1st and
ending the following December 31st, or such other fiscal year as may be set by
Intelispan.
FOR CAUSE: The term "For Cause" means a termination of an Employee's
employment with Employer due to unexcused, chronic absenteeism (excluding
absenteeism for legitimate health-related reasons), intentional or gross
malpractice resulting in severe damage to Employer, or gross avoidance of job
duties.
FULL-TIME: The term "Full-Time" means performing services at a rate
equal to or exceeding forty (40) hours per week.
INVOLUNTARY TERMINATION OF EMPLOYMENT: The term "Involuntary
Termination of Employment" means a termination of Participant's employment with
Employer for any reason other than (a) For Cause, (b) the Participant's death,
or (c) the Participant's voluntary decision to stop working for Employer. A
Participant's employment with Employer shall be deemed to have been
involuntarily terminated if Participant stops working for Employer on a
substantially Full-Time basis within ninety (90) days following the occurrence
of any one of the following events:
- a reduction in the Participant's regular rate of cash
compensation excluding items (a-f) contained in the definition
of Base Salary.
- the assignment to Participant of any duties inconsistent in
any respect with Participant's position, authority, duties,
functions or other responsibilities as in effect immediately
prior to the Closing Date or any diminishment in such
position, authority, duties, functions or responsibilities;
<PAGE> 3
- Employer requiring Participant to be based at a location more
than 30 miles from Participant's principal office immediately
prior to the Closing Date;
- the failure to provide Participant with compensation and
benefit programs substantially similar to those in effect
immediately prior to the Closing Date, unless similar
reductions in such programs are made to all employees;
- A Change Of Control;
- the failure of any successor of Employer to agree to assume
and perform under the Plan.
PARTICIPANT: The term "Participant" means a highly compensated and
managerial Employee of Employer who satisfies the requirements of Section 2.01.
PLAN ADMINISTRATOR OR ADMINISTRATOR: The term "Plan Administrator" or
"Administrator" means the entity or individual identified in Section IV of this
Plan.
TERMINATION DATE: The date an Employee/Participant ceases to be
employed by Employer.
II. TERMINATION ALLOWANCE PLAN BENEFITS
2.01 An "Employee" shall be a Participant if the Employee is listed in
Exhibit A hereto, as such Exhibit may be modified from time to time by Employer;
2.02 A Participant shall receive severance pay equal to: one (1) month
of the Base Salary if, and only if:
(a) the Participant executes the release agreement
attached hereto as Exhibit B;
(b) Participant experiences an Involuntary Termination of
Employment; and
(c) the Participant complies with the terms of the
then-applicable (if any) Confidentiality Agreement
signed by Employee.
2.03 A Participant eligible for the severance benefit described in
Section 2.02 above shall also:
(a) be provided with COBRA continuation coverage for himself/herself
and his/her dependents under each medical, dental, and/or vision plan maintained
by Employer that the Participant participated in on the day before his/her
Termination Date; the entire cost of this coverage shall be paid by Employer
during the one (1) year period beginning on Participant's Termination Date;
thereafter, the Participant shall be responsible for paying all
<PAGE> 4
COBRA continuation coverage premiums; and
(b) accelerate the vesting of any previously granted stock
options or other stock-related rights (including ISO, NQSOs, SARs, Deferred
Stock and Restricted Stock) (collectively the "Option Compensation") that would
otherwise be vested one (1) calendar quarter after the Termination Date.
(c) Other terms as may be established for each individual
Participant by the Administrator.
III. PAYMENT OF PLAN BENEFITS
3.01 The Section 2.02 severance pay benefit payable to a Participant
under this Plan shall be paid by Employer in one payment, the first payment to
occur within ten (10) working days of the Participant's Termination Date.
Notwithstanding the foregoing provisions of this Section 3.01, payment of a
Participant's Section 2.02 benefit shall not be made if at the time of the
payment is due the Participant is in breach of the covenant described in Section
2.02(c) above.
3.02 The Section 2.03 benefit payable to a Participant under this Plan
shall be paid by Employer in two (2) approximately equal payments, the first
payment to occur within thirty (30) working days of the Participant's
Termination Date. The second payment shall occur within five (5) working days
after the second payment made under Section 3.01, above; Notwithstanding the
foregoing provisions of this Section 3.02, payment of a Participant's Section
2.02 benefit shall not be made if at the time of the payment is due the
Participant is in breach of the covenant described in Section 2.02. Nothing
herein shall limit Employer's remedies or rights for Participant's breach of
such covenant.
IV. PLAN ADMINISTRATION
4.01 The Plan Administrator shall be the person serving as the
President of Employer. The Employer's Board of Directors may remove and replace
the individual serving as the Plan Administrator. The primary responsibility of
the Plan Administrator is to administer the Plan for the exclusive benefit of
Participants subject to the specific terms of the Plan. The Plan Administrator
shall administer the Plan, shall construe the Plan, and shall determine all
factual and nonfactual questions of interpretation or policy in a manner not
inconsistent with the Plan. The Plan Administrator's construction or
determination shall be final and conclusive on all parties. The Plan
Administrator may delegate to any other person or organizations any of its
powers or duties with respect to the operation of the Plan.
The Plan Administrator may correct any defect, supply any omission, or
reconcile any inconsistency in the manner and to the extent necessary or
advisable to carry out the purpose of the Plan. The Plan Administrator may
change or waive any requirements of the Plan to conform with the law. The Plan
Administrator shall have all powers necessary or appropriate to accomplish the
Administrator's duties under the Plan.
<PAGE> 5
The Plan Administrator's duties shall include, but not be limited to,
the following:
(a) Determining all factual and nonfactual questions relating
to the eligibility of an Eligible Employee employed by Employer to (1)
be and remain a Participant in the Plan, and (2) receive Plan benefits;
(b) Computing the amount of benefits, if any, to which any
Participant is entitled under the Plan; and
(c) Informing and assisting any Participant regarding any
rights, benefits, or elections available under the Plan.
V. PLAN YEAR
The Plan Year of the Plan shall be the Fiscal Year. The Plan shall be
in existence until all Plan benefits are paid to the Participants.
VI. AMENDMENT OR TERMINATION OF PLAN
6.01 AMENDMENT OF PLAN. Employer's Board of Directors, or its designee
who shall be Employer's President, has the power at any time or times, to adopt
one or more written amendments to this Plan provided such amendment does not,
without each affected Participant's written consent, limit, reduce, or remove
the level of benefits payable or the individuals eligible for benefits
hereunder.
6.02 TERMINATION OF PLAN. The Plan has been established with the
intention and expectation that it will continue until all Plan benefits are paid
to Plan Participants.
VII. BENEFIT CLAIMS PROCEDURE
7.01 CLAIMS FOR BENEFITS. Any claim for benefits under the Plan shall
be made in writing to the Plan Administrator. If such claim for benefits is
wholly or partially denied, the Plan Administrator shall, within ninety (90)
days after receipt of the claim, notify the claimant of the denial of the claim.
Such notice of denial (a) shall be in writing, (b) shall be written in a manner
calculated to be understood by the claimant, and (c) shall contain (1) the
specific reason or reasons for denial of the claim, (2) a specific reference to
the pertinent Plan provisions upon which the denial is based, (3) a description
of any additional material or information necessary to perfect the claim, along
with an explanation of why such material or information is necessary, and (4) an
explanation of the claim review procedure. The ninety (90) day period may, under
special circumstances, be extended up to an additional ninety (90) days upon
written notice of such extension to the claimant which notice shall specify the
extraordinary circumstances and the extended date of the decision. Notice of
extension must be given prior to expiration of the initial ninety day period. If
no notice of decision is given within the applicable ninety (90) or one hundred
eighty (180) day
<PAGE> 6
review period, the claim shall, on the last day of the applicable period, be
deemed to have been denied and the claimant may file a request for review as
provided in the next paragraph.
7.02 REQUEST FOR REVIEW OF DENIAL. Within sixty (60) days after the
receipt of the decision denying a claim (or the occurrence of the date that a
claim is deemed denied) by the claimant, the claimant may file a written request
with the Plan Administrator that it conduct a full and fair review of the denial
of the claim for benefits. The claimant or his duly authorized representative
may review pertinent documents and submit issues and comments in writing to the
Administrator in connection with the review.
7.03 DECISION ON REVIEW OF DENIAL. The Plan Administrator shall deliver
to the claimant a written decision on the review of the denial within sixty (60)
days after the receipt of the aforesaid request for review, except that if there
are special circumstances (such as the need to hold a hearing, if necessary)
which require an extension of time for processing, the aforesaid sixty (60) day
period shall, upon written notice to the claimant be extended an additional
sixty (60) days. Such decision shall (a) be written in a manner calculated to be
understood by the claimant, (b) include the specific reason or reasons for the
decision, and (c) contain a specific reference to the pertinent Plan provisions
upon which the decision is based. If the decision on review is not delivered to
the claimant within the applicable sixty (60) or one hundred twenty (120) day
review period, the claim shall be considered denied on the last day of the
applicable review period.
7.04 NOTICE OF TIME LIMITS. Upon a claimant filing a claim the Plan
Administrator shall notify the claimant of the claim and review procedure
including the time periods involved.
VIII. ERISA INFORMATION
8.01 The name of the Plan is:
The Intelispan, Inc. Severance Plan.
8.02 The name, address, and telephone number of the Plan sponsor are:
(a) Name: Intelispan, Inc.
(b) Address: 8220 E. Gelding Drive
Scottsdale, AZ 85260
(c) Telephone Number: (602) 443-3999
8.03 The Employer Identification Number assigned by the Internal
Revenue Service to the Plan sponsor and the identification number assigned to
the Plan are:
(a) The Employer I.D. number for Employer is -
___________.
(b) The Plan identification number is 50 - _______.
<PAGE> 7
8.04 The Plan is a welfare benefit plan administered by the Plan
Administrator whose business address and phone number is the same as that of
Employer. The individual initially serving as the Plan Administrator is the
individual employed as President of Employer.
8.05 The agent for service of legal process is Employer and the Plan
Administrator.
8.06 Plan benefits will be paid out of Employer's general assets.
IX. PARTICIPANTS' ERISA RIGHTS
9.01 A Participant is entitled to certain rights and protections under
the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that
Participants shall be entitled to:
(a) Examine, without charge, at the Plan Administrator's office,
all Plan documents, and copies of all documents filed by the Plan with U.S.
Dept. of Labor, such as detailed annual reports and Plan descriptions; and
(b) Obtain copies of all documents and other information directly
relating to the Plan upon written request to the Plan Administrator which may
charge a reasonable amount for the copies.
9.02 In addition to creating rights for participants in the Plan, ERISA
also imposes responsibilities upon the people who are responsible for the
operation of the Plan.
(a) The people who operate the Plan, called "fiduciaries" of the
Plan, have a duty to do so prudently and in the interest of a
Participant.
(b) No one, including Employer, or any person, may discharge a
Participant or otherwise discriminate against a Participant in any way
to prevent him or her from obtaining a benefit or exercising his or her
rights under ERISA.
(c) If a Participant's claim for a benefit is denied in whole or
in part, he or she must receive a written explanation of the reason for
the denial.
(d) A Participant has the right to have the Plan Administrator
review and reconsider his or her claim.
9.03 Under ERISA, there are steps a Participant can take to enforce the
above rights.
(a) For instance, if a Participant requests materials from the
Plan and if he or she does not receive them within 30 days, a
Participant may file suit in federal court. In such a case, the court
may require the Plan Administrator to provide the materials and pay the
Participant up to $100 a day until he or she receives the materials,
unless the materials were not sent to the Participant for reasons
beyond the control of the Plan Administrator.
<PAGE> 8
(b) If a Participant has a claim for benefits which is denied or
ignored, in whole or in part, he or she may file suit in a state or
federal court.
(c) If it should happen that the Plan's fiduciaries misuse the
Plan's money, or if a Participant is discriminated against for
asserting his or her rights, he or she may seek assistance from the
U.S. Dept. of Labor, or he or she may file a suit in Federal court. The
court will decide who should pay court costs and fees. If the
Participant loses, the court may order him or her to pay these costs
and fees, for example, if it finds the Participant's claim is
frivolous.
9.04 If a Participant has any questions about the Plan, he or she
should contact Employer's Human Resources Department. If a Participant has any
questions about this Article IX or his or her rights under ERISA, he or she
should contact the nearest Area Office of the Pension and Welfare Benefits
Administration, U.S. Department of Labor, listed in the telephone directory as
the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits
Administration, U.S. Department of Labor, 200 Constitution Avenue N.W.,
Washington, D.C. 20210.
X. STATUS OF EMPLOYMENT RELATIONS
The adoption and maintenance of the Plan shall not be deemed (a) to
give to any Eligible Employee the right to be retained in the employ of
Employer; (b) to affect the right of Employer to discipline or discharge any
Eligible Employee at any time; (c) to give Employer the right to require any
Eligible Employee to remain in its employ; or (d) to affect any Eligible
Employee's right to terminate his or her employment at any time.
XI. NO PLAN ASSETS
All benefits under this Plan shall remain for all purposes solely a
general, unpledged, unrestricted asset and right of Employer (without being
restricted to the provision of Plan benefits) and no person other than Employer
shall, by virtue of the Plan's provisions, have any interest in such asset.
Title to and beneficial ownership of any Plan assets shall at all times remain
in Employer and Eligible Employees and Participants shall not have any property
interest whatsoever in any assets of Employer.
XII. RESPONSIBILITY AND INDEMNIFICATION OF FIDUCIARIES
12.01 The Plan Administrator and the Employer's Board of Directors
shall be free from all liability for their acts and conduct in the
administration of the Plan except for acts of willful misconduct; provided,
however, that the foregoing shall not relieve any of them from any
responsibility or liability for any responsibility, obligation, or duty that
they may have pursuant to ERISA.
12.02 To the extent the Plan Administrator or Employer's Board of
Directors is not insured by any insurance company pursuant to provisions of any
applicable insurance policy, Employer
<PAGE> 9
shall indemnify and hold harmless the Plan Administrator and the Employer's
Board of Directors from any and all claims, losses, damages, expenses and
liabilities (including court costs and attorneys' fees) arising from any act of
commission or omission that may be brought by Employer's employees, Participants
or their beneficiaries or legal representatives, or by any other person,
corporation, entity, government or agency thereof, provided, however, that such
indemnification shall not apply to any such person for such person's acts of
gross negligence or willful misconduct in connection with the Plan. For purposes
of this provision the Plan Administrator and Employer's Board of Directors shall
not be deemed covered by insurance if an insurance company asserts any right
against them by virtue of the insurance company's subrogation rights.
XIII. APPLICABLE LAW
The Plan shall be construed, regulated, interpreted, and administered
under and in accordance with the laws of the State of Arizona, except to the
extent such laws are preempted by ERISA.
XIV. ANTI-ALIENATION
A Participant's rights to benefits under the Plan are not subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by creditors of a Participant or a
Participant's beneficiary.
XV. HEADINGS
The section and subsection headings are contained herein for
convenience only and shall not affect the construction hereof.
XVI. UNFUNDED BENEFITS
A Participant's rights to Plan benefits represent rights of only a
general unsecured creditor of Employer. The Plan constitutes a mere promise by
Employer to make benefit payments in the future if, and only if, an Eligible
Employee becomes a Participant. It is the intention of Employer that the Plan
and Trust be unfunded for tax purposes and for purposes of Title I of the
Employee Retirement Income Security Act of 1974.
XVII. PRONOUNS
When necessary to the meaning hereof, either the masculine or the
neuter pronoun shall be deemed to include the masculine, the feminine, and the
neuter, and the singular shall be deemed to include the plural.
<PAGE> 10
XVIII. INVALIDITY PROVISION
The invalidity or unenforceability of any provision, or any part
thereof, of this Plan shall not affect the validity of the remaining portions of
this Plan and this Plan shall be continued in all respects as if such invalid or
unenforceable provision were omitted.
IN WITNESS WHEREOF, Employer has caused this Plan to be executed this
28th day of September, 1998.
EMPLOYER:
INTELISPAN, INC.
/s/ James D. Shook
----------------------------------
By James D. Shook
Its Secretary
Pursuant to Board Resolution Dated September 18, 1998
<PAGE> 11
EXHIBIT A
ELIGIBLE EMPLOYEES
1. Ronald Loback
2. J. Dale Belt
3. James D. Shook
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Intelispan, Inc.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial Data" in the
registration statement on Form SB-2.
Our report dated February 12, 1999, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations and has a
net capital deficiency, which raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP
Phoenix, Arizona
January 7, 2000
<PAGE> 1
EXHIBIT 23.3
I hereby consent to the use of my name as a director of Intelispan, Inc., to be
designated by Commonwealth Associates, L.P. upon completion of the Company's
private placement in January 2000.
/s/ Maurice J. Gallagher, Jr.
-----------------------------
Maurice J. Gallagher, Jr.
<PAGE> 2
EXHIBIT 23.3
I hereby consent to the use of my name as a director of Intelispan, Inc., to be
designated by Commonwealth Associates, L.P. upon completion of the Company's
private placement in January 2000.
/s/ Philip R. Ladouceur
-----------------------------
Philip R. Ladouceur
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