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SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1998
PROSPECTUS
[LOGO]
CONSUMER NET MARKETPLACE, INC.
4,000,000 SHARES OF COMMON STOCK
Consumer Net Marketplace, Inc.
1900 Los Angeles Avenue, Second Floor
Simi Valley, California 93065
THE OFFERING
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PER OUTSTANDING
PER SHARE SHARE TOTAL
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<S> <C> <C> <C>
Price to Public...... $ 14.00 $ 14.00 --
Underwriting
Discounts and
Commission(1)...... $ 0 $ 0 $ 0
Proceeds to
Company............ $ 50,352,078 $ 0 $ 50,352,078
</TABLE>
Consumer Net Marketplace, Inc., a California corporation, is a full service
Internet Service Provider and Internet Presence Provider. As an Internet Service
Provider, we offer dial-up access to the Internet as well as ISDN, frame relay,
IDSL, and many other DSL products and services. As an Internet Presence
Provider, we provide Web hosting and creation, virtual domain hosting,
co-location services, technical support, and training. Additionally, we are
currently implementing the equipment and software necessary to provide Voice
over Internet Protocol. See "BUSINESS."
The shares covered by this Prospectus are comprised of (i) 3,596,577 shares
of the Common Stock of CNM and (ii) an aggregate of 403,423 outstanding shares
of Common Stock which were issued to several investors in a private placement
and to an officer and director of CNM. See "SELLING SECURITY HOLDERS."
This is our initial public offering. No public market currently exists for
our shares. The offering price may not reflect the market price of our shares
after the offering. We will not receive any proceeds from the sale of the
outstanding shares of Common Stock.
PROPOSED TRADING SYMBOL:
NASDAQ SMALL CAP MARKET -- CNM
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THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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(1) No Underwriters are involved in the offer or sale of the Common Stock or
the outstanding shares of Common Stock at this time. The Common Stock and
outstanding shares of Common Stock may be offered and sold on a best
efforts basis by registered broker-dealers selected by us who are members
of the National Association of Securities Dealers, Inc. We may pay selling
commissions to firms that are members of the National Association of
Securities Dealers, Inc. for Common Stock or outstanding shares of Common
Stock sold by them. As of the date of this Prospectus, no selling
agreements have been entered into by us with broker-dealer firms. See "PLAN
OF DISTRIBUTION."
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PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. CNM's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" on page 6 and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and financial statements and notes to the financial
statements appearing elsewhere in this Prospectus.
CNM
Consumer Net Marketplace, Inc., a California corporation ("CNM"), commenced
operations in January 1996 and was incorporated in May 1996. CNM is currently in
the process of implementing a major expansion of its technical capability and
infrastructure. Since March 1998, CNM has recruited several high level computer
engineers and systems analysts who have established CNM as a full service
Internet Service Provider ("ISP") and Internet Presence Provider ("IPP"). See
"MANAGEMENT." In June 1998, CNM relocated to over 7,200 square feet of space
enabling CNM to install and operate a highly secure data and telecommunications
facility and to accommodate the new CNM headquarters. See
"BUSINESS--Facilities." As an Internet Service Provider, CNM offers reliable,
fast, and inexpensive dial-up access to the Internet for businesses and
individuals as well as ISDN, frame relay, Digital Subscriber Lines ("DSL") and
many other DSL products and services. CNM also provides Web hosting and
creation, virtual domain hosting, co-location services, technical support, and
training.
CNM operates a high capacity OC12x3 ATM SONET that is linked directly to the
Internet backbone. CNM is currently implementing the equipment and software
necessary to provide Voice over Internet Protocol ("VoIP"). This equipment,
along with Ascend GRF 1600 routers, Ascend Max TNTs, Ascend Max 6000s, Ascend
GRF 400 routers, and CBX 500 ATM switches enables us to provide data
communications and quality of service ("QOS") voice telecommunications. Through
access arrangements with competitive local exchange carriers ("CLECs"), we are
installing our switching equipment in several "Points of Presence" ("POPs") to
expand our telecommunications network, initially in California and subsequently
on a national basis. CNM plans to implement additional POPs in other countries
that would enable us to provide Internet services and VoIP to customers on a
global basis.
CNM provides two levels of service. These services are classified as
"Personal" and "Business." Personal Services are defined as services designed
and implemented for the individual user. Business Services are defined as
services designed and implemented for business owners, executives, and
employees. Through relationships established by CNM with Ascend Communications,
ICG Telecom Group, Inc., Pacific Bell Internet, PacNet, Covad, and other
telecommunications companies, we will implement both levels of service in
Southern California up through Northern California, including San Francisco and
Sacramento. Our short term plan is to expand coverage of both levels of service
on a national basis. Our long term plan is to implement these same services on a
global basis. Although we provide high quality service at low prices for
individuals, CNM's primary focus is providing complete business solutions
worldwide.
CNM also developed, owns, and operates the Consumer Net Marketplace shopping
mall on the Internet, which has been on-line since September 1996. Consumer Net
Marketplace provides information and sources for the purchase of consumer
products and services over the Internet in a convenient shopping mall
presentation. Since the introduction of CNM's shopping mall, CNM maintains over
1,200 businesses averaging 1,000,000 hits per month by Internet users.
CNM has developed proprietary software to enable secure commercial
transactions (i.e., purchases and sales) to be conducted within the CNM
Network-TM- and on other Web sites. CNM has also recently developed a
proprietary provisioning system allowing users complete and simplified
automation of all our services.
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CNM has recently entered into extensive advertising agreements with Eller
Media Company, Advo, Visa Card, Cable Networks and several major Southern
California radio stations as well as multiple reseller agreements to conduct
CNM's retail marketing program for prospective dial-up and business solution
customers. See "BUSINESS--Commerce on the Internet," "BUSINESS--Internet
Presence Provider--Web Services" and "BUSINESS--Marketing and Revenues."
Our executive offices are located at 1900 Los Angeles Avenue, Second Floor,
Simi Valley, California 93065, (805) 520-7170. Our Internet addresses are:
WWW.CNMNETWORK.COM, WWW.CONSUMERMARKET.COM, and WWW.CNMINC.COM. Our email
address is: [email protected]. Information contained on our World Wide Web
site shall not be deemed to be a part of this Prospectus.
THE OFFERING
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<S> <C>
Type of Security Registered.......................... Common Stock, no par value.
Number of Outstanding Shares of Series 1 Class A
Common Stock....................................... 6,534,250(2)
Number of Outstanding Shares of Series 1 Class B
Common Stock....................................... 75,000
Common Stock Offered................................. 3,596,577 shares
Outstanding Common Stock Offered(1).................. 403,423 shares
Common Stock Outstanding after this Offering......... 10,130,827 Shares(2)
Use of Proceeds...................................... To finance enhancements to our
network infrastructure, to fund new
service and product introductions,
to finance protential acquistions,
and for working capital and other
general corporate purposes.
Proposed Nasdaq Symbol............................... CNMN
Risk Factors......................................... The Common Stock offered hereby
involves a high degree of risk. See
"RISK FACTORS" on page 6.
</TABLE>
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(1) The investors in a prior private placement are offering 10%, and the
Chairman and President of CNM is offering 5%, of the shares of CNM's Common
Stock owned by them for sale in this offering, which equals a total of
403,423 outstanding shares of Common Stock. See "SELLING SECURITY HOLDERS."
(2) Based on shares of Common Stock outstanding as of October 5, 1998. This
amount excludes (i) 250,000 shares of Series 1 Class B Common Stock reserved
for issuance upon the exercise of options outstanding at an exercise price
of $0.50 per share, (ii) 1,970,000 shares of Common Stock reserved for
issuance upon the exercise of stock options outstanding under CNM's 1997
Stock Option Plan at an exercise price of $2.00 per share, (iii) 127,500
shares of Common Stock reserved for issuance upon the exercise of stock
options outstanding which were granted outside of CNM's 1997 Stock Option
Plan, and (iv) 30,000 shares of Common Stock and 100,000 shares of Series 1
Class B Common Stock reserved for issuance upon the exercise of stock
options which may be granted in the future under CNM's 1997 Stock Option
Plan. See "CAPITALIZATION," "MANAGEMENT--Stock Option Plan" and "DESCRIPTION
OF CAPITAL STOCK." The number of shares of Common Stock outstanding also do
not include any shares which may be
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acquired by Eller Media Company pursuant to its proposed subscription
agreement with us. See "BUSINESS--Proposed Agreement with Eller Media
Company."
SUMMARY FINANCIAL DATA
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
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PERIOD FROM
SIX MONTHS ENDED SIX MONTHS ENDED INCEPTION ON
JUNE 30, 1998 JUNE 30, 1997 YEAR ENDED 5/9/96 TO
(UNAUDITED) (UNAUDITED) DECEMBER 31, 1997 12/31/96
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.............................. $ 11,713 $ 6,916 $ 30,697 $ 20,828
Loss before income taxes.............. (602,436) (9,374) (1,101,605) (101,699)
Net Loss.............................. (603,236) (10,174) (1,102,405) (102,499)
PER COMMON SHARE DATA:
Net Loss.............................. (.11) (.00) (.22) (.02)
Cash Dividends........................ 0 0 0 0
Book Value............................ (.07) (.02) (.11) (.02)
Number of Shares, weighted
average(1).......................... 5,273,290 5,003,619 5,037,857 5,000,000
BALANCE SHEET DATA:
Total Assets.......................... 856,970 45,550 81,973 25,795
Long-Term Debt(2)..................... 0 0 0 0
Shareholders' Equity.................. (385,040) (112,173) (542,404) (101,999)
</TABLE>
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(1) Includes 75,000 shares of Series 1 Class B Common Stock. See "DESCRIPTION OF
CAPITAL STOCK."
(2) Does not include a noninterest-bearing promissory note in the principal
amount of $500,000 payable on demand by CNM to Consumer Net Partners, an
affiliated California general partnership. See "BUSINESS--Previous Financing
and Development Arrangement."
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RISK FACTORS
Investing in CNM's Shares is risky. You should be able to bear a complete
loss of your investment. You should carefully consider the following factors,
among others.
CAUTIONARY STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth in the risk factors below and elsewhere in this Prospectus.
Important factors that may cause actual results to differ from projections
include, for example:
- adverse economic conditions
- intense competition, including entry of new competitors and products
- adverse federal, state and local government regulation
- inadequate capital to operate our business
- unexpected costs and operating deficits
- lower sales and revenues than forecast
- inability to develop marketable products and services
- technological obsolescence and other problems relating to CNM's products
and services
- loss of customers or inability to attract new business or individual
customers
- inability to establish consumer confidence in conducting transactions on
the Internet
- price competition forcing CNM's prices down
- inability to upgrade and develop our systems and attract or retain
qualified personnel
- lack of traffic on CNM's Web site
- systems downtime or Internet brownouts
- the risk associated with the Year 2000 in connection with computer
programs with which CNM may interact that read only the last two digits of
an annual date
- the risk of credit card fraud and other types of fraud and theft which may
be perpetrated by computer hackers and on-line thieves
- increased costs for supplies, components and personnel, or loss of
suppliers and contracts
- the risk of litigation and administrative proceedings involving CNM and
our employees
- the possible acquisition of new businesses that result in operating losses
or that do not perform as anticipated, resulting in unanticipated losses
- the possible fluctuation and volatility of CNM's operating results and
financial condition
- adverse publicity and news coverage
- loss of key executives
- changes in interest rates
- inflationary factors
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- and other specific risks that may be alluded to in this Prospectus or in
other reports issued by CNM. CNM does not promise to update
forward-looking information to reflect actual results or changes in
assumptions or other factors that could affect those statements.
LIMITED OPERATING HISTORY--NEW BUSINESS
CNM commenced operations in January 1996, incorporated on May 9, 1996, and
initiated our Web site in September 1996. Accordingly, CNM has a limited
operating history on which to base an evaluation of its business and prospects.
Our prospects must be considered in light of the risks, expenses, and
difficulties frequently encountered by companies in their development stage,
particularly companies in new and rapidly evolving markets. Such risks for CNM
include, but are not limited to, an evolving and unpredictable business model
and the management of growth. To address these risks, we must, among other
things, obtain a customer base, implement and successfully execute our business
and marketing strategy, continue to develop and upgrade our technology, improve
our Web sites, provide superior customer service, respond to competitive
developments, and attract, retain, and motivate qualified personnel. We cannot
assure that we will be successful in addressing such risks, and the failure to
do so could have a material adverse effect on our business, prospects, financial
condition, and results of operations.
Since inception, CNM has incurred operating losses. As of June 30, 1998, CNM
had an accumulated deficit of $1,808,140. For the year ended December 31, 1997,
CNM had a net loss of $1,102,405, and for the six months ended June 30, 1998,
the Company had a net loss of $603,236. As a development stage company, we have
only recently begun to earn revenues. We believe that our success will depend in
large part on our ability to (i) obtain brand name recognition, (ii) provide our
customers with outstanding service, (iii) achieve sufficient sales volume to
realize economies of scale, and (iv) successfully establish our technological
infrastructures. Accordingly, CNM intends to invest heavily in marketing and
promotion, site development, technology and operating infrastructure. As a
result, CNM expects to incur operating losses in the foreseeable future. CNM may
be unable to adjust spending in a timely manner to compensate for any unexpected
shortfall of revenues. Any significant shortfall of demand for CNM's products
and services in relation to CNM's expectations would have an immediate adverse
impact on CNM's business, operating results, and financial condition.
SPECULATIVE NATURE OF BUSINESS
The market for our Internet services has only recently begun to develop, is
rapidly evolving, and is characterized by an increasing number of market
entrants who have introduced or developed products and services for
communication and commerce over the Internet and private networks. As is typical
in the case of a new and rapidly evolving industry, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. The industry is young and has few proven products or services.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access, and quality of
service) remain unresolved and may impact the growth of Internet use. While we
believe that our on-line services will offer significant advantages for commerce
and communication over the Internet and private networks, there can be no
assurance that such activities will become widespread, or that our services will
become widely adopted for these purposes.
The adoption of the Internet for commerce and communications, particularly
by those individuals and enterprises which have historically relied upon
alternative means of commerce and communication, generally requires the
acceptance of a new way of conducting business and exchanging information. In
particular, enterprises that have already invested substantial resources in
other means of conducting commerce and exchanging information may be
particularly reluctant to adopt a new strategy that may make their existing
personnel and infrastructure obsolete. In addition, we cannot assure that
individual personal computer users in business or at home will adopt the
Internet for on-line commerce or
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communication. Because the market for CNM's Internet services is new and
evolving, it is difficult to predict the future growth rate, if any, and size of
this market. We cannot assure that the market for our products and services will
develop, that our product or services will be adopted, or that individual
personal computer users in business or at home will use the Internet or private
networks for commerce and communication. If the market fails to develop,
develops more slowly than expected, or becomes saturated with competitors, or if
our services do not achieve market acceptance, CNM's business, operating
results, and financial condition will be materially adversely affected.
DEVELOPMENT RISKS
Key elements of our strategy are to provide reliable co-location, virtual
domain hosting, dial-up access, voice and data communication, and e-commerce
service on the Internet, to provide QOS VoIP over our own network, and to
generate a high volume of traffic on and use of our Web sites. Accordingly, the
satisfactory performance, reliability and availability of CNM's
transaction-processing systems, network infrastructure, and Web sites are
critical to our reputation and our ability to attract and retain customers, as
well as maintain adequate customer service. CNM's revenues are expected to
depend in part on the volume of business we will receive as an Internet Service
Provider (I.S.P.), Internet Presence Provider (I.P.P.), planned provider of VoIP
service, and the number of visitors who access our Web sites.
Any system interruptions that result in the unavailability of CNM's Web site
or Internet services would reduce the volume of our business, and the
attractiveness of our product and service offerings. CNM may experience periodic
system interruptions from time to time. We cannot assure that we will be able to
accurately project the rate or timing of increases, if any, in the use of our
services, or timely expand and upgrade our systems and infrastructure to
accommodate such increase. Any substantial disruptions or delays in any of our
systems would have a material adverse effect on our business, prospects,
financial condition and results of operations. We cannot assure that CNM will be
able to successfully complete the development, implementation, sale, and service
of its Internet Service Provider services, co-location and virtual domain
hosting services, proprietary provisioning system, shopping cart, e-commerce
software, and VoIP services. See "BUSINESS."
RISK OF SYSTEM FAILURE
The operations of CNM are dependent upon, among other things, our ability to
deliver high quality uninterrupted access to the Internet and other services
provided or intended to be provided by CNM. Any system failure that causes
excessive interruptions in our operations could have a material adverse effect
on us. As we expand our network, there will be increased stress placed upon
network hardware and traffic management systems. Any of a number of potential
hardware failures at CNM operations center or at any of our POPs, as well as
failure caused by power losses, telecommunications failures, or natural causes
such as fire, floods or other natural causes, could result in significant
interruptions of CNM's services. Although we are currently in the process of
constructing our own high-speed fault-tolerant backbone to prevent service
interruptions even in the face of massive failures of sections of the network,
we cannot assure that our backbone will eliminate all interruptions of our
services in the event of a massive system failure. See "BUSINESS." Although CNM
maintains in effect casualty insurance that would fund most of the cost of
replacing equipment loss due to fires, floods, or similar natural causes, such
insurance would not protect CNM from loss of customers and business reputation
that could result from such an event. In addition, some potential losses may not
be adequately covered by such policies. The occurrence of any of the foregoing
risks could have a material adverse effect on our business, financial condition,
results of operations, and cash flow.
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COMPETITION IN TELEPHONE SERVICE INDUSTRY
CNM's VoIP long distance telephone service will place us in direct
competition with interexchange carriers ("IXCs") which provide long-distance
access, and other long-distance resellers and providers. Our prospective
competitors include large carriers such as AT&T, MCI, Sprint, and WorldCom, and
new entrants to the long distance market such as the Regional Bell Operating
Carriers ("RBOCs") who have entered or have announced plans to enter the United
States intrastate and interstate long-distance market pursuant to recent
legislation authorizing such entry. Most of our competitors are significantly
larger and have substantially greater market presence as well as financial,
technical, operational, marketing, and other resources and experience than CNM.
DEPENDENCE ON TELECOMMUNICATION CARRIERS AND OTHER SUPPLIERS
CNM relies on local telephone companies and other companies to provide data
communications capacity via local telecommunication lines and leased long
distance lines. CNM is subject to potential disruptions in these
telecommunication services and may have no means of replacing these services on
a timely basis or at all in the event of disruptions. In addition, we are
dependent on certain third-party suppliers of hardware components. Certain
components used by CNM in providing our network services are currently acquired
from limited sources. We also depend on third-party software vendors to provide
us with much of our Internet software, including the Netscape Navigator software
("Netscape Navigator"), which is the World Wide Web client software that we
license from Netscape Communications Corporation ("Netscape"). The ongoing
development of our provisioning systems software by an independent software
development company currently under contract is important to our Web hosting
business. See "BUSINESS--CNM Network Services" and "BUSINESS--Company Research
and Development." Failure of our suppliers to provide components and products in
the quantities, at the quality levels or at the times required by us, or an
inability by CNM to develop alternative sources of supply, if required, could
result in delays and increased costs of expansion of our network infrastructure.
Our suppliers and telecommunication carriers also sell or lease services and
products to our competitors and may be, or in the future may become, competitors
of CNM. There can be no assurance that our suppliers and telecommunication
carriers will not enter into exclusive arrangements with our competitors, or
cease selling or leasing their services or products to CNM. See
"BUSINESS--Competition," and "BUSINESS--Marketing and Revenues."
DEPENDENCE ON TELECOMMUNICATIONS ACCESS
All Internet and most telecommunications service providers, including CNM,
depend on other companies to provide communications capacity via leased
facilities. If one or more of these companies is unable or unwilling to provide
or expand its current levels of service to CNM in the future, our operations
could be materially and adversely affected. Although leased facilities are
available from several alternative suppliers, including AT&T, MCI, Sprint, and
WorldCom, there can be no assurance that we could obtain substitute services
from other providers at reasonable or comparable prices or in a timely fashion.
In addition, CNM is dependent on local telephone companies to provide local
dial-up and leased, high speed dedicated access telephone lines for access to
each of our POPs. CNM is presently dependent on Pacific Bell, ICG Telecom Group,
Inc., and Covad to install and maintain communication lines. Although we have
not yet experienced delays in the installation of communication lines, such
delays could adversely affect our rate of growth.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
A number of new laws and regulations may be adopted with respect to the
Internet covering issues such as the provision of telephone service, user
privacy, pricing, and the quality of products and services. The adoption of any
such laws or regulations may decrease the growth of the Internet, which could in
turn decrease the demand for CNM's services and increase our cost of doing
business, or
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otherwise have an adverse affect on our business, operating results and
financial condition. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain. CNM's products may become subject to United States export controls in
the future. We cannot assure that such export controls, either in their current
form or as may be subsequently enacted, will not limit CNM's ability to
distribute products outside of the United States or electronically. In addition,
federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Any such export restrictions, new
legislation or regulation, or unlawful exportation could have a material adverse
impact on our business, operating results and financial condition. See "RISK
FACTORS--Government Regulatory Policy Risks" on page 10.
GOVERNMENT REGULATORY POLICY RISKS
The long distance telephone service that we intend to provide is subject to
federal and state regulation. The provision of long distance telephone service
is subject to the provisions of the Communications Act of 1934, as amended,
including amendments effected by the Telecommunications Act of 1996 (the "1996
Telecommunications Act"), and the regulations of the Federal Communications
Commission (the "FCC"). At the state level, the long distance telephone industry
is subject to the applicable laws and regulations of the various state Public
Utility Commissions ("PUCs") and other state agencies. Federal laws and FCC
regulations apply to interstate telecommunications (including international
telecommunications that originate or terminate in the United States), while
state regulatory authorities have jurisdiction over telecommunications both
originating and terminating within a state. Regulation of the telecommunications
industry is changing rapidly, and the regulatory environment varies
substantially from state to state. Moreover, as deregulation at the federal
level occurs, some states are reassessing the level and scope of regulation that
may be applicable to CNM. We cannot assure that future regulatory, judicial, or
legislative activities will not have a material adverse effect on CNM, or that
domestic or international regulators or third parties will not raise material
issues with regard to our compliance or noncompliance with applicable
regulations.
The FCC has considered the issue of whether ISPs should be subject to access
charges, Universal Service Fund support fees, and regulation, and has determined
that it would not adopt such regulations. The FCC has announced that it will be
issuing a Notice of Proposed Rule Making ("NPRM") to explore proposals to create
incentives for companies to make the most efficient use of the telephone network
for Internet and other information services. While the FCC has announced that it
does not intend for this NPRM to consider the imposition of access charges or
regulations on ISPs, it could result in the creation of more competition for
CNM. In addition, the FCC could reopen and reconsider these issues at any time.
A recent federal legislative change, the 1996 Telecommunications Act, may
have potentially significant effects on our operations. The 1996
Telecommunications Act, among other things, allows the RBOCs and other companies
to enter the long distance business and enables other entities, including
entities affiliated with power utilities, CLECs, and cable television companies,
to provide an expanded range of telecommunications services. Entry of such
companies into the long distance business would result in substantial additional
competition in one of the markets into which CNM intends to expand, and may have
a material adverse effect on CNM and its efforts to expand in this market. On
April 10, 1998, the FCC submitted a report to Congress regarding the Universal
Service Fund support payments. One of the principal issues considered in this
report is whether Internet VoIP should still be classified as
non-telecommunications services, so as to be exempt from regulation, access
charges, and Universal Service Fund support payments. While the FCC determined
that it would continue the exemption, primarily as part of a continuing policy
to permit continued expansion of the Internet, it also indicated that Congress
directed the universal service support mechanism to be competitively neutral.
The FCC also noted the novel status of Internet telephony, and noted that it may
continue investigation of the regulatory status of Internet telephony. While
Internet services, including Internet telephony, remain
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unregulated and exempt from access charges and Universal Service Fund support
payments, the FCC could change its policy at any time. In fact, the FCC has
indicated that it will take a case-by-case evaluation approach to determine
whether individual Internet telephony service offerings more closely resemble
enhanced services, which should remain exempt from regulation, or
telecommunications services which are subject to regulation.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of ISPs and online service companies for
information carried on or disseminated through their networks has not yet been
definitively established. Internet access and content providers face potential
liability of uncertain scope for the actions of subscribers and others using
their systems, including liability for infringement of intellectual property
rights, rights of publicity, defamation, libel, and criminal activity under the
laws of the U.S. and foreign jurisdictions. CNM does not maintain errors and
omissions insurance. Any imposition of liability on CNM for alleged negligence,
intentional torts, or other liability could have a material adverse effect on
CNM. In addition, recent legislative enactments and pending legislative
proposals aimed at limiting the use of the Internet to transmit indecent or
pornographic materials could, depending upon their interpretation and
application, result in significant potential liability to Internet access and
service providers including CNM, as well as additional costs and technological
challenges in complying with any statutory or regulatory requirements imposed by
such legislation. For example, the Communications Decency Act of 1996 (amending
47 U.S.C. Section 223), which is part of the 1996 Telecommunications Act, became
effective on February 8, 1996. The 1996 Telecommunications Act would impose
criminal liability on persons sending or displaying in a manner available to
minors indecent material on an interactive computer service such as the
Internet, and on an entity knowingly permitting facilities under its control to
be used for such activities. While the constitutionality of these provisions has
been successfully challenged in federal appellate court, the U.S. Department of
Justice has appealed to the U.S. Supreme Court. We cannot assure the final
result regarding the constitutionality of the 1996 Telecommunications Act, or as
to the scope and content of any substitute legislation or other legislation in
the U.S. or foreign jurisdictions restricting the type of content being provided
over the Internet. If these provisions or related legislation are upheld, the
effect on the Internet industry could have a material adverse effect on our
business, financial condition, results of operation, and cash flow. In addition,
CompuServe faced action by German authorities in response to which CompuServe
temporarily restricted the scope of the Internet access it provides to all
subscribers, both in the U.S. and internationally. A number of countries are
considering content restrictions based on such factors as political or religious
views expressed, and pornography or indecency.
DEPENDENCE ON THE INTERNET
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including, among others, inconsistent quality of service,
lack of availability of cost-effective, high-speed options, a limited number of
local access points for corporate users, inability to integrate business
applications on the Internet, the need to deal with multiple and frequently
incompatible vendors, inadequate protection of the confidentiality of stored
data and information moving across the Internet, and a lack of tools to simplify
Internet access and use. Published reports have indicated that a perceived lack
of security of commercial data, such as credit card numbers, has significantly
impeded commercial exploitation of the Internet to date, and there can be no
assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Published reports have also
indicated that capacity constraints caused by growth in the use of the Internet
may, unless resolved, impede further development of the Internet to the extent
that users experience delays, transmission errors and other difficulties.
Further, the adoption of the Internet for commerce and communications,
particularly by those individuals and enterprises that have historically relied
upon alternative means of commerce and
11
<PAGE>
communication, generally requires the understanding and acceptance of a new way
of conducting business and exchanging information. In particular, enterprises
that have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new strategy that may make their existing personnel and infrastructure
obsolete.
CNM is also at risk as a result of fundamental technological changes in the
way Internet solutions may be marketed and delivered. Integrating technological
advances may require substantial time and expense, and we cannot assure that we
will succeed in adapting our network infrastructure. While we believe that our
plan of combining the scale and scope of a national operation with the local
presence of its ISP operations offers significant advantages for commerce and
communication over the Internet, we cannot assure that commerce and
communication over the Internet will become widespread, or that our offered
Internet access and communications services will become widely adopted for these
purposes. The failure of the market for business-related Internet solutions to
continue to develop would adversely impact our business, financial condition,
results of operations, and cash flow. In addition, new technologies or industry
standards have the potential to replace or provide lower cost alternatives to
our existing products and services. The adoption of such new technologies or
industry standards could render our existing products and services obsolete and
unmarketable.
NO ASSURANCE OF PROFITABILITY
CNM's business is speculative and dependent upon the acceptance of our
services and the effectiveness of our marketing program. We have reported net
losses since inception. We cannot assure that we will earn significant revenues,
that we will not continue to incur losses, or that investors will not lose their
entire investment.
IMMEDIATE DILUTION
Assuming an initial public offering price of $14.00 per share, investors
purchasing shares of Common Stock in this offering will incur immediate and
substantial dilution in net tangible book value of the Common Stock of $9.67 per
share. To the extent that currently outstanding options to purchase shares of
Common Stock are exercised, there will be further dilution. See "DILUTION."
RAPID TECHNOLOGICAL CHANGE
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality, and features of our Internet services and related
Internet hardware and software. The on-line commerce industry is characterized
by rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies, and the emergence of new industry standards and practices that
could render our existing Web site and proprietary technology obsolete. Our
future success will depend, in part, on our ability to license leading
technologies, enhance our existing services, develop new services and
technologies that address the increasingly sophisticated and varied needs of its
prospective customers, and respond to technological advances and emerging
industry standards on a cost-effective and timely basis. In particular,
successful ISPs must provide customers with the appropriate products, services,
and guidance to best take advantage of the rapidly evolving Internet. The
development of Web sites and other proprietary technology entails significant
technical and business risks. We cannot assure that we will successfully use new
technologies effectively or adapt our Web site and proprietary technology to
customer requirements or emerging industry standards. If we are unable to meet
such requirements, our business prospects, financial condition and results of
operations would be materially adversely affected.
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<PAGE>
YEAR 2000
CNM may utilize certain third-party supplied computer programs, interact
with computer programs utilized by financial institutions in connection with
credit card transactions, and interact with computer programs used by our
vendors and suppliers. These programs may refer to annual dates only by the last
two digits, e.g., "98" for "1998." Problems are anticipated to arise for many of
these programs in the year 2000. While we have taken this problem into account
with respect to our own internal programs, other programs with which we may
interact may not have corrected this problem. CNM is currently assessing the
Year 2000 problem readiness of our third-party supplied software, computer
technology, and other services. Based upon the results of this assessment, CNM
will develop and implement, if necessary, a remediation plan with respect to
third-party software, computer technology, and services that are not Year 2000
ready. At this time, the expenses associated with this assessment and potential
remediation plan cannot presently be determined. Year 2000 problems and
associated costs could have a material adverse effect on our business, financial
condition, and results of operation.
COMPETITION
The market for our Internet related services and products is intensely
competitive and is characterized by rapid changes in technology and user needs
as well as the frequent introduction of new services and Web sites. CNM's
principal competitors include other Internet Service Providers, Internet
Presence Providers, providers of VoIP, computer software and technology
companies, cable operators, and on-line information, advertising, and shopping
services on the Internet. These competitors have longer operating histories,
greater name recognition, larger installed customer bases, and substantially
greater financial, technical, and marketing resources than CNM. We believe that
the principal factors affecting competition in our proposed market include
service performance and reliability, product functionality, ability to respond
to changing customer needs, ease of use, quality of technical service, training,
quality of support, and price. Other than technical expertise and the limited
time available to enter the market, there are no significant proprietary or
other barriers of entry that could keep potential competitors from developing or
acquiring similar tools and providing competing services in our proposed market.
Our ability to compete successfully in the sale of services and software will
depend in large part upon our ability to attract new customers, sell products
and services, deliver and support product enhancements, and respond effectively
to continuing technological changes by developing new products and services. We
cannot assure that CNM will be able to compete successfully in the future, or
that future competition for VoIP services and on-line e-commerce, services, and
information will not have a material adverse effect on the business, operating
results, and financial condition of CNM.
NO ASSURANCE THAT MARKETING PROGRAMS WILL BE SUCCESSFUL
CNM is implementing a variety of retail marketing programs, both outside and
on the Internet, to attract potential retail customers from the general public.
We cannot assure that any of these marketing strategies, including but not
limited to direct mailings, outdoor billboards, radio advertisements, and credit
card advertising inserts, will be successful or that we will acquire a
significant number of new customers from our marketing program. Many of the
strategies involve testing which is expensive. The strategies are unproven as
they apply to selling Internet services. If our marketing programs are not
successful, it would be expected to have a material adverse impact on our
financial condition, operating results and business.
UNCERTAINTY OF CUSTOMER RETENTION
The sales, marketing, and other costs to CNM of acquiring new customers are
substantial relative to the monthly fee derived from such customers.
Accordingly, we believe that our long-term success largely depends on our
ability to retain customers, while continuing to attract new customers. We
13
<PAGE>
continue to invest significant resources in our infrastructure and customer and
technical support capabilities. We cannot assure that such investment will
maintain or improve member retention. We believe that intense competition from
competitors, some of which offer free hours of services to new customers, may
cause some of our customers to switch to competitors' services. In addition, a
certain number of new Internet users experience the Internet only as a novelty
and do not become consistent users of Internet services. These factors may
adversely affect our customer retention rates. Unless offset by other factors,
significant customer loss could have a material adverse impact on CNM.
ON-LINE COMMERCE SECURITY RISKS
A significant barrier to on-line commerce and communications is the need for
secure transmission of confidential information over public networks. Concerns
over the security of transactions conducted on the Internet and other on-line
services, as well as user's desires for privacy may also inhibit the growth of
the Internet and other on-line services especially as a means of conducting
commercial transactions. The activities of CNM and third-party contractors are
expected to involve the storage and transmission of proprietary information,
such as credit card numbers and other confidential information. Any such
security breaches could damage our reputation and expose us to a risk of loss,
litigation and possible liability. We cannot assure that our security measures
will prevent security breaches or that failure to prevent such security breaches
will not have a material adverse effect on our business, prospects, financial
condition and results of operations. Merchants on the Internet are subject to
the risk of credit card fraud and other types of theft and fraud perpetrated by
hackers and on-line thieves. Credit card companies may hold merchants fully
responsible for any fraudulent purchases made when the signature cannot be
verified. Although credit card companies and others are in the process of
developing anti-theft and anti-fraud protections, and while we are continually
monitoring this problem, at the present time the risk from such activities could
have a material adverse effect on CNM. We cannot assure that advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments will not result in a compromise or breach of the
algorithms used by CNM to protect customer transaction data. A party who is able
to circumvent our security measures could misappropriate confidential
information or cause interruptions in the Company's operations. We may be
required to expend significant capital and other resources to protect against
such security breaches or to alleviate problems caused by such breaches. If any
such compromise of our security were to occur, it could have a material adverse
effect to our business, prospects, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
CNM's success is substantially dependent on the performance of our executive
officers and key employees. Given CNM's stage of development in the CNM
Network-TM- business, we are dependent on our ability to retain and motivate
high quality personnel. Although we believe we will be able to continue hiring
qualified personnel for such purposes, an inability to do so could materially
adversely affect our ability to market, sell, and enhance our services. The
market for qualified personnel has historically been, and will continue to be,
intensely competitive. The demand for experienced consultants, marketers and
programmers is expected to continue to increase significantly over the next
several years, particularly as Internet utilization grows. The loss of key
employees or our inability to hire and retain other qualified employees could
have a material adverse effect on our business.
INABILITY TO PROTECT PROPRIETARY RIGHTS
We regard our CNM Network-TM- concept as proprietary and will attempt to
protect it under a combination of copyright, trade secret, and trademark laws as
well as by contractual restrictions on employees and third parties. Despite
these precautions, it may be possible for unauthorized parties to copy our
services or otherwise obtain and use information that we regard as proprietary.
Existing trade
14
<PAGE>
secrets and copyright laws provide only limited protection. Certain provisions
of other license and distribution agreements CNM intends to use, including
provisions protecting against unauthorized use, copying, transfer, and
disclosure, may be unenforceable under the laws of certain jurisdictions.
Furthermore, CNM may be required to negotiate limits on these provisions from
time to time. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States. We
cannot assure that the steps taken by CNM will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights. Significant and protracted litigation may be necessary to protect our
intellectual property rights, to determine the scope of the proprietary rights
of others, or to defend against claims for infringement. We cannot assure that
third-party claims, with or without merit, alleging infringement will not be
asserted against us. Such assertions can be time consuming and expensive to
defend. They could require us to cease the manufacture, use, and sale of
infringing products and services, to incur significant litigation costs and
expenses, to develop or acquire non-infringing technology, and to obtain
licenses to the alleged infringing technology. We cannot assure that we would be
able to develop or acquire alternative technologies or to obtain such licenses
on commercially acceptable terms.
TRADEMARKS AND TRADENAMES
We believe that our trademarks and tradenames will have significant value
and will be important to the marketing of our services and products. We cannot
assure, however, that our registered trademarks and tradenames with the United
States Office of Patents and Trademarks will not violate the proprietary rights
of others, that our marks and names would be upheld if challenged, or that we
will not be prevented from using our marks and names, any of which could have an
adverse effect on us. In addition, we cannot assure that we will have the
financial resources necessary to enforce or defend our trademarks and service
marks.
POTENTIAL FOR PRODUCT AND SERVICE LIABILITY
CNM's products and services will be designed to satisfy our customer's
needs. A failure to satisfy a customer's need or an adverse impact on a customer
from our products or services could result in a claim for damages against us,
regardless of our responsibility for such failure. In connection with the sale
of our products and services, we will attempt to limit contractually our
liability for damages arising from negligent acts, errors, mistakes, or
omissions. Despite this precaution, we cannot assure that the limitations of
liability set forth in customer contracts would be enforceable or would
otherwise protect CNM from liability for damages. The successful assertion of
one or more large claims against CNM that exceed available insurance coverages,
or changes in our insurance policies, such as premium increases or the
imposition of large deductible or co-insurance requirements, could materially
and adversely affect our business, operating results, and financial condition.
CONTROL BY PRINCIPAL STOCKHOLDER
CNM's Chairman of the Board of Directors and President will beneficially own
approximately 46.9% of CNM's outstanding shares of Common Stock following this
offering, assuming that 3,596,577 shares of Common Stock are sold and Mr. Rice's
250,000 outstanding shares of Common Stock are sold. This stockholder would be
able to significantly influence all matters requiring approval by the
stockholders of CNM, including the election of directors and the approval of
mergers or other business combination transactions. See "PRINCIPAL
STOCKHOLDERS."
NO DIVIDENDS ON COMMON STOCK
CNM does not anticipate the payment of any cash dividends on our Common
Stock in the foreseeable future. See "DIVIDEND POLICY."
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<PAGE>
UNINSURED LOSSES
We cannot assure that CNM will not incur uninsured liabilities and losses as
a result of the conduct of our business. We plan to maintain comprehensive
liability and property insurance at customary levels. We will also evaluate the
availability and cost of business interruption insurance. However, should
uninsured losses occur, the shareholders could lose their invested capital.
LIABILITIES
CNM may have liabilities to affiliated or unaffiliated lenders. These
liabilities would represent fixed costs that would be required to be paid
regardless of the level of business or profitability experienced by CNM. We
cannot assure that we will be able to pay all of our liabilities. Furthermore,
we are always subject to the risk of litigation from licensees, suppliers,
employees, and others because of the nature of our business. Litigation can
cause us to incur substantial expenses and, if cases are lost, judgments and
awards can add to our costs.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS
CNM's capital requirements depend on numerous factors, including the rate of
market acceptance of our services, our ability to maintain and expand our
customer base, the level of resources devoted to expanding our marketing and
sales organization and our research and development activities, the availability
of hardware and software provided by third-party vendors, the rate of expansion
of our network infrastructure, and other factors. The timing and amount of such
capital requirements cannot accurately be predicted. If capital requirements
vary materially from those currently planned, we may require additional
financing. We have no commitments for any additional financing, and we cannot
assure that any such commitments can be obtained on favorable terms, if at all.
Any additional equity financing may be dilutive to CNM's stockholders, and debt
financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and operational matters.
If we are unable to obtain additional financing as needed, we may be required to
reduce the scope of our operations or our anticipated expansion, which could
have a material adverse effect on our business, financial condition, and results
of operations. See "RISK FACTORS--No Minimum Capital Requirement--Additional
Capital May Be Necessary" on page 16 and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources."
NO MINIMUM CAPITAL REQUIREMENT--ADDITIONAL CAPITAL MAY BE NECESSARY
No minimum capital requirement is imposed in connection with this offering,
and subscription funds may be utilized by CNM as soon as they are accepted,
beginning with the commencement of the offering. This offering is made on a best
efforts basis with no underwriter, and we cannot assure that we will raise any
capital pursuant to this offering. If we raise only minimal capital from this
offering, or significantly less than the maximum capital, then we will likely be
required to raise additional capital in the future in order to have sufficient
funds to implement our business and marketing plans. If additional capital or
financing is not available, shareholders could lose their entire investment in
CNM. We cannot assure that we will raise sufficient additional capital to
finance our operations. If we do not raise sufficient additional capital, then
we would not be able to implement our business and marketing expansion plans,
hindering our ability to be in business. Furthermore, we may modify this
offering due to market conditions or other factors.
FUTURE ISSUANCE OF STOCK BY THE COMPANY
Following this offering, we expect to have outstanding 10,130,827 shares of
Common Stock out of a total of 51,000,000 shares of Common Stock authorized
(i.e. 50,000,000 shares of Series 1 Class A
16
<PAGE>
Common Stock and 1,000,000 shares of Series 1 Class B Common Stock). The
remaining shares of Common Stock not issued or reserved for specific purposes
may be issued without any action or approval of the Company's stockholders.
Furthermore, our Articles of Incorporation also authorize the issuance of up to
1,000,000 shares of Preferred Stock, no par value, on terms that may be fixed by
our Board of Directors without further stockholder action. No shares of
Preferred Stock are presently issued or outstanding. The terms of any future
series of Common Stock or Preferred Stock, which may include priority claims to
assets and dividends, and special voting rights, could adversely affect the
rights of holders of the Common Stock. We cannot assure that we will not
undertake to issue additional shares of Commons Stock or Preferred Stock if we
deem the issuance appropriate. See "DILUTION."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of our Common Stock in the public
market following this offering could adversely affect the market price of our
stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"). The outstanding shares of our Common Stock owned by
affiliates and by unaffiliated investors are not, however, subject to lock-up
agreements and may be sold in accordance with the terms and conditions of Rule
144 of the Securities Act or another exemption from registration, if available.
See "SHARES ELIGIBLE FOR FUTURE SALE."
EFFECT OF CERTAIN CHARTER PROVISIONS
Certain provisions in our Articles of Incorporation allow us to issue
different classes of Common Stock, the rights and preferences of which may be
specified by the Board of Directors at any time prior to issuance, without
further stockholder approval, which could have the effect of delaying, deferring
or preventing a change in control of CNM, or creating equity securities senior
to the common stock and outstanding shares of Common Stock.
NO PUBLIC MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Common
Stock, and we cannot assure that a regular trading market will develop and
continue after this offering or that the market price of the Common Stock will
not decline below the initial public offering price.
POTENTIAL VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations that have
particularly affected the stocks of technology companies, resulting in changes
in the market prices of the stocks of many companies that may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock
following this offering. In addition, the market price of the Common Stock
following this offering may be highly volatile. Factors such as variations in
our financial results, comments by securities analysts, announcements of
technological innovations or new products by us or our competitors, changing
government regulations, developments concerning our proprietary rights or
litigation may have a material adverse effect on the market price of the Common
Stock.
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<PAGE>
DETERMINATION OF OFFERING PRICE ARBITRARY--NO UNDERWRITER
We have determined the initial public offering price of the Common Stock and
the outstanding shares of Common Stock in our sole discretion and not pursuant
to arms-length negotiations with an underwriter or other third party. The
initial public offering price bears no relationship to the book value of our
assets, our current earnings or revenues, or any other objective standard. We
cannot assure that the initial public offering price for the Common Stock or the
outstanding shares of Common Stock will be accepted by the market, or that our
stock will not trade for a lower price, if it eventually trades on a public
exchange. The initial public offering price may be deemed to have been
determined arbitrarily by CNM. In the absence of an underwriter for the
offering, purchasers of Common Stock or outstanding shares of Common Stock will
not have the benefit of additional due diligence and arms-length negotiation,
nor a firm commitment for the purchase of Common Stock or outstanding shares of
Common Stock. See "PLAN OF DISTRIBUTION."
USE OF PROCEEDS
The net proceeds from the sale of 3,596,577 shares of Common Stock offered
hereby are estimated to be approximately $42,799,266 assuming an initial public
offering price of $14.00 per share, after deducting the offering expenses
payable by CNM, estimated to be 15% of the gross proceeds of the offering. CNM
expects to use the net proceeds of this offering to finance enhancements to our
network infrastructure, including leasehold improvements and investments in
network equipment, to fund our marketing programs, to develop new products and
services, and for working capital and other general corporate purposes. While we
have from time to time engaged in preliminary discussions concerning possible
acquisitions or joint ventures, we have no present understandings, commitments,
agreements or active negotiations with respect to any such transaction. Pending
such uses, we will invest the net proceeds of this offering in short-term,
investment grade interest bearing securities. See "RISK FACTORS--No Minimum
Capital Requirement--Additional Capital May Be Necessary" on page 16.
DIVIDEND POLICY
We do not intend to pay cash dividends in the foreseeable future on the
shares of Common Stock. Cash dividends, if any, that we may pay in the future to
holders of Common Stock will be payable when, as, and if declared by the Board
of Directors of CNM, based upon the Board's assessment of the financial
condition of CNM, our earnings, our need for funds, and other factors including
any applicable laws. We are not currently a party to any agreement restricting
the payment of dividends. See "DESCRIPTION OF CAPITAL STOCK."
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<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the capitalization of
CNM and (ii) the capitalization of CNM as adjusted to reflect the sale of the
3,596,577 Shares of Common Stock being offered hereby at an assumed initial
public offering price of $14.00 per share and the application of the estimated
net proceeds from the sale of those shares.
<TABLE>
<CAPTION>
AS OF JUNE 30,
1998 AS ADJUSTED
(UNAUDITED) (UNAUDITED)
------------------ --------------
<S> <C> <C>
Indebtedness:
Long-term indebtedness(1)................................................... $ 0 $ 0
Stockholders' Equity:
Preferred Stock, no par value per share,
1,000,000 shares authorized,
none issued and outstanding............................................... $ 0 $ 0
Common Stock, Series 1 Class A, no par value per share,
50,000,000 shares authorized,
5,448,800 issued and outstanding(2)
10,130,827 as adjusted(3)................................................. $ 898,100 $ 43,697,366
Common Stock, Series 1 Class B, $.001 par value per share,
1,000,000 shares authorized,
75,000 issued and outstanding and
as adjusted(4)............................................................ $ 525,000 $ 525,000
Additional Paid-in Capital.................................................. $ 0 $ 0
Accumulated Deficit During Development Stage................................ $ (1,808,140) $ (1,808,140)
Total Shareholders' Equity (Deficit)........................................ $ (385,040) $ 42,414,226
------------------ --------------
Total Capitalization........................................................ $ (385,040) $ 42,414,226
------------------ --------------
------------------ --------------
</TABLE>
- ------------------------
(1) Does not include a noninterest-bearing demand promissory note payable by CNM
to an affiliated general partnership. See "BUSINESS--Previous Financing and
Development Arrangement."
(2) Includes 448,800 shares of CNM's Common Stock (as of June 30, 1998)
previously sold to outside investors for $2.00 per share as part of a
private placement pursuant to Section 4(2) of the Securities Act of 1933, as
amended, which commenced in October 1997 and terminated on October 8, 1998.
Includes 5,000,000 shares of Common Stock owned by Fredrick Rice, the
President and Chairman of the Board of Directors of the Company. See
"DESCRIPTION OF CAPITAL STOCK" and "PRINCIPAL STOCKHOLDERS." Does not
include an additional 1,085,450 shares of Common Stock issued in the private
placement between June 30, 1998 and October 8, 1998. See "BUSINESS--Prior
Private Placement of Stock." Does not include any shares which may be
subscribed for by Eller Media Company. See "BUSINESS--Agreement with Eller
Media Company."
(3) The capital to be raised from the placement of Common Stock is expected to
be a potential maximum of $50,352,078. The Common Stock capital, as
adjusted, reflects the issuance of 3,596,577 Shares, after deducting
offering costs estimated to be 15% of the gross proceeds of the offering. To
the extent that more or less than $50,352,078 is raised from the placement
of Common Stock, the figures would be adjusted proportionately. See "PLAN OF
DISTRIBUTION."
(4) Includes 75,000 shares issued to a prior unaffiliated consultant. Does not
reflect an option to purchase 250,000 shares of Series 1 Class B Common
Stock held by Consumer Net Partners, an affiliated general partnership,
which were issued to it as part of the consideration for all of the
partnership's rights in the Company's business. See "BUSINESS--Previous
Financing and Development Arrangement." The Series 1 Class B Common Stock
does not have voting or dividend rights, but is convertible into Series 1
Class A Common Stock on a share-for-share basis. See "DESCRIPTION OF CAPITAL
STOCK--Common Stock."
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<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the as adjusted pro forma net tangible book value per share of Common Stock
after this offering constitutes the dilution to investors in this offering. Net
tangible book value per share is determined by dividing the net tangible book
value (total assets less intangible assets and total liabilities) by the number
of outstanding shares of Common Stock.
As of June 30, 1998, the PRO FORMA net tangible book value of CNM was
$1,438,516 or approximately $.22 per share of Common Stock, including the
additional 1,085,450 shares issued in the previous private placement as if they
had been issued on June 30, 1998. The calculation assumes that the offering
costs incurred on the previous private placement are 16% of the gross proceeds
of that private placement. PRO FORMA net tangible book value per share consists
of total assets less intangible assets and liabilities, divided by the total
number of shares of Common Stock outstanding. Without giving effect to any
changes in such PRO FORMA net tangible book value after June 30, 1998, other
than to give effect to the sale of the 3,596,577 shares of Common Stock offered
hereby at an assumed initial public offering price of $14.00 per share and after
deducting estimated offering expenses payable by CNM (and accounting for the
issuance of an additional 1,085,450 shares of CNM's Common Stock for $2.00 per
share between June 30, 1998 and October 8, 1998), the PRO FORMA net tangible
book value at June 30, 1998, would have been $44,237,782 or approximately $4.33
per share. As of June 30, 1998, the net tangible book value per share of Common
Stock owned by CNM's current stockholders would have increased by approximately
$4.11 without any additional investment on their part and the purchasers of
Common Stock and outstanding shares of Common Stock will incur an immediate
dilution of approximately $9.67 per share from the offering price. "Dilution"
means the difference between the offering price and the PRO FORMA net tangible
book value per share after giving effect to the offering. Holders of Common
Stock may be subjected to additional dilution if any additional securities are
issued as compensation or to raise additional financing. The following graph and
table illustrates the dilution which investors participating in this offering
will incur and the benefit to current stockholders as a result of this offering:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
<S> <C>
Assumed public offering price $14.00
Pro forma net tangible book value at June 30,
1998 $0.32
Increase attributable to New Investors $4.11
Net tangible book value after offering $4.33
Dilution to new investors $9.67
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
Initial public offering price per share............................. $ 14.00
Pro forma net tangible book per share value as of June 30,
1998(1)........................................................... $ .22
Increase per share attributable to the Offering..................... $ 4.11
Pro forma net tangible book value after this Offering............... $ 4.33
Dilution per share to new investors................................. $ 9.67
</TABLE>
- ------------------------
(1) Includes shares of CNM's Common Stock issued or sold between June 30, 1998
and October 8, 1998, on a pro forma basis. See "BUSINESS--Prior Private
Placement of Stock." Also includes the prior issuance of 5,000,000 shares of
Common Stock to the President and Chairman of the Board of Directors of the
Company, and 75,000 shares of Series 1 Class B Common Stock to an
unaffiliated prior consultant. Does not include (i) options to purchase
250,000 shares of CNM's Series 1 Class B Common Stock held by Consumer Net
Partners, an affiliated general partnership, or (ii) 2,097,500 management,
employee, and other stock options granted between July 1997 and September
1998. See "MANAGEMENT" and "DESCRIPTION OF CAPITAL STOCK."
The following table sets forth, on an as adjusted basis as of June 30, 1998,
the difference between the number of shares of Common Stock purchased from CNM,
the total consideration paid, and the average price per share paid by the
existing holders of Common Stock and by the new investors, before deducting
estimated offering expenses payable by CNM, at an assumed initial public
offering price of $14.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------------- ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------------- --------- ----------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders(1).......................... 6,609,250(1) 65.2% $ 3,593,500(2) 6.7% $ .54
New Investors..................................... 3,596,577 34.8% $ 50,352,078 93.3% $14.00
---------------- --------- ----------------- --------- ------
Total........................................... 10,130,827 100.0% $ 53,945,578 100.0% $ 5.32
---------------- --------- ----------------- --------- ------
---------------- --------- ----------------- --------- ------
</TABLE>
- ------------------------
(1) Includes shares of CNM's Common Stock issued or sold between June 30, 1998
and October 8, 1998, on a pro forma basis. See "BUSINESS--Prior Private
Placement of Stock." Also includes the prior issuance of 5,000,000 shares of
Common Stock to the President and Chairman of the Board of Directors of CNM,
and 75,000 shares of Series 1 Class B Common Stock to an unaffiliated prior
consultant. Does not include (i) options to purchase 250,000 shares of CNM's
Series 1 Class B Common Stock held by Consumer Net Partners, an affiliated
general partnership, or (ii) 2,097,500 management, employee, and other stock
options granted between July 1997 and September 1998. See "MANAGEMENT" and
"DESCRIPTION OF CAPITAL STOCK."
(2) Does not include $500,000 reflecting the promissory note issued by CNM to
Consumer Net Partners as part of the consideration for all of the
partnership's rights in our business. See "BUSINESS--Previous Financing and
Development Arrangement."
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Financial Statements and Notes to the Financial Statements
included elsewhere in this Prospectus. The statement of operations data for the
period from inception (May 9, 1996) through December 31, 1996 and the balance
sheet data as of December 31, 1996, have been derived from financial statements
audited by Caldwell, Becker, Dervin, Petrick & Co. The statement of operations
data for the year ended December 31, 1997, and the balance sheet data as of
December 31, 1997, have been derived from financial statements audited by
Stonefield Josephson Accountancy Corporation, independent certified public
accountants. The selected financial data as of and for the six months ended June
30, 1997 and June 30, 1998 have been derived from CNM's unaudited financial
statements. In the opinion of management, the unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results for the periods presented.
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STATE COMPANY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
SIX MONTHS ENDED JUNE 30 -------------------------------
-------------------------- INCEPTION
(UNAUDITED) (UNAUDITED) (5/9/96 TO
1998 1997 1997 12/31/96)
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 11,713 $ 6,916 $ 30,697 $ 20,828
Loss before income taxes............................ (602,436) (9,374) (1,101,605) (101,699)
Net Loss............................................ (603,236) (10,174) (1,102,405) (102,499)
Net Income (Loss) per share......................... (.11) (.00) (.22) (.02)
Cash dividends per common share..................... 0 0 0 0
Weighted average number of shares................... 5,273,290 5,003,619 5,037,857 5,000,000
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30 AT DECEMBER 31
----------- -------------------
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets............................................................... $856,970 $ 81,973 $ 25,795
Long-term Obligations...................................................... 0(1) 0(1) 0(1)
</TABLE>
- ------------------------
(1) The long term obligations do not include a non interest-bearing promissory
note in the outstanding principal amount of $500,000 payable by CNM on
demand to an affiliated general partnership. See "BUSINESS--Previous
Financing and Development Arrangement."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. CNM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 6 AND ELSEWHERE
IN THIS PROSPECTUS.
REVENUES
GENERAL
Recurring revenues consist of monthly fees charged to customers for Internet
access and other ongoing services. Other revenues generally represent one-time
setup fees. Recurring revenues are recognized pro rata over the period for which
the services are performed. Other revenues are recognized as earned.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues for the six month period ended June 30, 1998 were $11,713 as
compared to $6,916 for the six month period ended June 30, 1997. The increase in
revenues was due primarily to a modest increase in dial-up and Web hosting
clients. CNM is still a development stage company and comparisons and trends at
this time may not be a meaningful indication of our business prospects. We have
been focused on installing the telecommunications equipment and software
necessary to provide high speed service and to accommodate traffic. We have only
recently commenced our comprehensive marketing program. See "BUSINESS--Marketing
and Revenues."
TWELVE MONTHS ENDED DECEMBER 31, 1997, COMPARED TO PERIOD FROM MAY 9, 1996
(INCEPTION) TO DECEMBER 31, 1996
Revenues for the twelve month period ended December 31, 1997 were $30,697 as
compared to $20,828 for the period from inception, May 9, 1996, to December 31,
1996. The increase in revenues was due primarily to a modest increase in the
dial-up customers, more advertising revenue from the CNM Shopping Mall on the
Internet, and the longer comparative reporting period. Due to the fact that CNM
is a development stage company, comparisons and trends at this time may not be a
meaningful indication of our business prospects. The revenues generated during
this period are primarily from the CNM Shopping Mall.
EXPENSES AND LOSS--GENERAL
GENERAL
Our expenses are generally comprised of (i) telecommunications expenses and
depreciation expense on equipment used in network operations and for ongoing
customer services, (ii) licensing fees, (iii) software development costs, (iv)
marketing and referral costs, and (v) general and administrative costs. A small
portion of the telecommunication costs are access fees paid to CLECs.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Expenses were $613,843 for the six-month period ending June 30, 1998 as
compared to $16,290 for the six-month period ending June 30, 1997. Substantially
higher expenses in the six months ended June 30, 1998 primarily resulted from
greater expenditures by us for advertising, and marketing, as well as the hiring
of a significant number of new computer engineers, systems analysts and support
personnel. The net loss for the six-month period ended June 30, 1998 was
$603,236 compared to a net
23
<PAGE>
loss of $10,174 for the six-month period ended June 30, 1997. The significant
increase in net loss primarily reflects a rapid increase in the rate at which we
added infrastructure and management resources in the first half of 1998 as
compared to the first half of 1997.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM MAY 9, 1996
(INCEPTION) TO DECEMBER 31, 1996
Expenses were $1,132,302 for the twelve month period ended December 31, 1997
or $1,009,775 higher than the $122,527 for the period from inception, May 9,
1996, to December 31, 1996. The increase was primarily due to increases in
salaries, office expenses, outside services, and loss on acquisition of
partnership interest from related party. As we expand, we expect operating
expenses to continue to increase. Due to the fact that this is a development
stage company, comparisons and trends have not been established. The net loss
for the twelve month period ended December 31, 1997 was $1,102,405 compared to a
net loss of $102,499 for the period from inception, May 9, 1996, to December 31,
1996. This increase in the net loss was primarily due to the payment made by us
to Consumer Net Partners, an affiliated California general partnership, on
December 31, 1997, for intangible assets not specifically identified, and the
charge to earnings taken by us in connection with the granting of 250,000
options to purchase 250,000 shares of Series 1 Class B Common Stock for $.50 per
share to Consumer Net Partners.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Our statement of cash flows for the six months ended June 30, 1998 reflects
that operating activities during that period utilized cash of $574,344 as
compared to $4,323 of cash provided during the six months ended June 30, 1997.
The increase in the use of cash flows from operating activities during the six
months ended June 30, 1998 primarily resulted from a higher net loss for the
six-month period ending June 30, 1998 as compared to the six-month period ending
June 30, 1997. The cash provided by financing activities for the six months
ended June 30, 1998 was $769,250 as compared to $4,593 of cash used by financing
activities for the six-month period ending June 30, 1997. The cash used by
investing activities for the six-month period ending June 30, 1998 was $179,652
as compared to none for the six months ended June 30, 1997. The significantly
higher utilization of cash for investing during the first half of 1998 than the
first half of 1997 primarily reflects the acquisition of computer equipment,
software and related assets.
TWELVE MONTHS ENDED DECEMBER 31, 1997, COMPARED TO PERIOD FROM MAY 9, 1996
(INCEPTION) TO DECEMBER 31, 1996
Our statement of cash flows for the twelve month period ended December 31,
1997 reflects that operating activities during that period used cash of $128,679
as compared to $62,398 used for the period from inception, May 9, 1996, to
December 31, 1996. This increase in the use of cash from operating activities
during the twelve month period ended December 31, 1997 primarily resulted from a
higher net loss for the twelve month period ended December 31, 1997. The cash
provided by financing activities for the twelve month period ended December 31,
1997 was $176,264 as compared to $81,977 of cash provided by financing
activities for the period from inception, May 9, 1996, to December 31, 1996. The
cash used by investing activities for the period ended December 31, 1997 was
$41,740, as compared to $18,878 for the period from inception, May 9, 1996, to
December 31, 1996. During the period from inception to December 31, 1997, the
money used by investing activities was primarily for acquisition of computer
equipment, software and related assets.
24
<PAGE>
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, cost of
promotional material, advertising, travel, and third party sales commissions.
Sales and marketing expenses were approximately $180.00, or 0.9% of revenues,
and zero for the period from inception, May 9, 1996, to December 31, 1996, and
the year ended December 31, 1997, respectively. Sales and marketing expenses
were zero and $184,536, or 1,575.5% of revenues for the six months ended June
30, 1997 and June 30, 1998, respectively. We intend to aggressively promote the
CNM brand and as a result expects further significant increases in sales and
marketing expenses in future periods. We do not capitalize costs associated with
the acquisition of customers.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of costs associated
with finance and accounting, human resources, management compensation, legal
expenses, and office operations. General and administration expenses were
approximately $121,334, $394,900, and $427,250 for the period from inception,
May 9, 1996, to December 31, 1996, the year ended December 31, 1997, and the six
months ended June 30, 1998, respectively. General and administration expenses
were approximately $16,290 and $427,250 for the six months ended June 30, 1997
and June 30, 1998, respectively. Since inception, general and administrative
expenses have increased as a result of the increased number of employees,
increased rent, and other general and administrative expenses as we focused on
building an administrative infrastructure in anticipation of an increase in the
number of customers and employees. During the six months ended June 30, 1998, we
hired a number of senior management personnel and moved into a new headquarters
building, which resulted in a significant increase in general and administrative
expenses as compared to the same period in 1997. Management intends to implement
a new management information system and continue to expand staff in order to
support customer growth. As a result, we expect general and administrative
expenses to increase in future periods.
INCOME TAXES
No provision for federal or state income taxes has been recorded as we
incurred net operating losses through December 31, 1997 and through June 30,
1998. At December 31, 1997, we had net operating loss carryforwards for federal
income tax purposes of approximately $150,000 which begin to expire in 2017, and
for state income tax purposes of approximately $149,000, which begin to expire
in 2004. The Tax Reform Act of 1986 includes provisions which limit the net
operating loss carryforwards for use in a given year if significant ownership
changes have occurred. This offering may result in an ownership change limiting
our ability to utilize net operating loss carryforwards to offset future income,
if any. We have provided a full valuation allowance on the deferred tax asset
because of the uncertainty regarding the realizability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
Our operating results have fluctuated significantly in the past and will
likely continue to fluctuate significantly in the future as a result of a
variety of factors, many of which are beyond our control. These factors include
the rates of and costs associated with new customer acquisition, customer
retention, capital expenditures, and other costs relating to the expansion of
operations, the timing of new service and product announcements, changes in the
pricing policies of CNM and our competitors, market acceptance of new and
enhanced versions of our services and products, changes in operating expenses,
including telecommunication costs, changes in our strategy, personnel changes,
the introduction of alternative technologies, the effect of potential
acquisitions, increased competition in our markets and other general economic
factors. In addition, a relatively large portion of our expenses are fixed, and
therefore our operating margins are particularly sensitive to fluctuations in
revenues. Due to these factors, in some future quarter our operating results may
fall below the expectations of
25
<PAGE>
securities analysts and investors. In such event, the market price of our Common
Stock would likely be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the private sales of equity
securities. Our operating activities used net cash of approximately $128,679 and
$574,344 during 1997 and the six months ended June 30, 1998, respectively.
During 1997 and the six months ended June 30, 1998, net cash used in operations
resulted primarily from net losses.
Cash used by investing activities has consisted primarily of equipment
purchases for our Simi Valley headquarters, for its POPs and for network
expansion. For the year ended December 31, 1997 and the six months ended June
30, 1998, capital expenditures amounted to approximately $41,740 and $179,652,
respectively. Including the $179,652 spent during the first six months of 1998,
we anticipate investing approximately $1,100,00 during 1998 on network
enhancements, including leasehold improvements and investments in network
equipment, with commitments for approximately an additional $11,000,000.
Cash from financing activities provided us with approximately $769,250 the
six months ended June 30, 1998, and $176,264 during the twelve months ended
December 31, 1997. Our financing activities have consisted of the private sale
of Common Stock. From inception through June 30, 1998, we raised $897,600
through the private sale of Common Stock.
As of December 31, 1997 and June 30, 1998, we had cash and cash equivalents
of approximately $6,546 and $21,800, respectively, and negative working capital
of approximately $615,391 and $643,745, respectively. We do not intend to make
private offerings of its stock while this Prospectus is in registration or while
this offering is being conducted. On September 15, 1998 we ceased our private
placement of Common Stock pursuant to which we had raised a total of $3,068,500
since it began in October 1997.
We believe that the net proceeds from this offering will be sufficient to
meet our operating expenses and capital requirements for a certain period of
time, depending on the amount of capital raised by this offering. In the absence
of any capital from this offering, or from an alternative source, we estimate
that CNM could be depleted of working capital by the end of 1998. See "RISK
FACTORS--No Minimum Capital Requirement--Additional Capital May Be Required."
26
<PAGE>
BUSINESS
GENERAL
CNM was incorporated under the laws of the State of California on May 9,
1996. CNM is a full-service Internet Service Provider and Internet Presence
Provider on the World Wide Web, providing dial-up access, dedicated
connectivity, virtual Web hosting, Web creation, virtual domain hosting, Web
server co-location, technical support, training, and link-up services for
businesses and individuals. We give particular attention to providing exemplary
customer service at competitive prices. In July 1998, CNM, as an Internet
Service Provider, began offering to individuals and businesses dial-up access to
the Internet. We offer reliable, fast and inexpensive 56K V.90 Personal Access,
112K V.90 Personal Access, and 64k/128k ISDN Personal Access to the Internet. We
provide complete business solutions in ISDN, frame relay, IDSL and many other
Digital Subscriber Lines ("DSL") products and services, corporate firewalls,
security audits, and network intrusion investigations.
We are expanding the scope of sophisticated Internet services that we can
provide by installing state-of-the-art Ascend Communications switching equipment
and entering into strategic telecommunications access arrangements with
competitive local exchange carriers ("CLECs"). We intend to provide high
quality, high speed voice and data communication services to businesses and
individuals by utilizing analog dialup, ISDN, frame relay, DSL, Voice over
Internet Protocol ("VoIP"), T-1 and T-3 circuits, and primary rate interface
("PRI") with multiple telephone lines. The wiring in our data center is CAT-5
enhanced, capable of handling 1.2 gigabytes per second. We operate a high
capacity OC12x3 ATM SONET that is linked directly to the Internet backbone. We
are currently implementing the equipment and software necessary to provide VoIP.
This equipment, along with Ascend GRF 1600 routers, Ascend Max TNTs, Ascend Max
6000s, Ascend GRF 400 routers, and CBX 500 ATM switches enables CNM to provide
data communications and quality of service ("QOS") voice telecommunications.
Through access arrangements with competitive local exchange carriers ("CLECs"),
we are installing our switching equipment in several "Points of Presence"
("POPs") to expand our telecommunications network, initially in California and
subsequently on a national basis. We plan to implement additional POPs in other
countries that would enable us to provide Internet services and VoIP to
customers on a global basis.
We recently completed the development of proprietary software to enable
secure commercial transactions (i.e., purchases and sales) to be conducted
within the CNM Network-TM- and on other Web sites. We also recently developed a
proprietary provisioning system allowing users complete and simplified
automation of all our services.
CNM provides two levels of service. These services are classified as
"Personal" and "Business." Personal Services are defined as services designed
and implemented for the individual user. Business Solutions are defined as
services designed and implemented for business owners, executives, and
employees. Through relationships acquired by CNM with Ascend Communications, ICG
Telecom Group, Inc., Pacific Bell Internet, PacNet, Covad, and other high
profile companies, we will implement both levels of service in Southern
California up through Northern California, including San Francisco and
Sacramento. Our short term plan is to expand coverage of both levels of service
on a national basis. Our long term plan is to implement these same services on a
global basis. Although we provide high quality service at low prices for
individuals, our primary focus is providing complete business solutions
worldwide.
27
<PAGE>
PERSONAL SERVICES
<TABLE>
<CAPTION>
INTERNET CONNECTIVITY INTERNET PRESENCE TELEPHONY SERVICES
- -------------------------- -------------------------- --------------------------
<S> <C> <C>
Analog Dial-up CNM Network Web Space Inter-Local Long Distance
ISDN Dedicated/Dial-up CNM Network Email Long Distance
Frame Relay Dedicated Internet Software Facsimile Services
xDSL Dedicated Technical Support On-Line Account
Maintenance
Point-To-Point Dedicated On-Line Account
Maintenance
On-Line Account
Maintenance
</TABLE>
BUSINESS SOLUTIONS
<TABLE>
<CAPTION>
INTERNET/NETWORK
INTERNET CONNECTIVITY INTERNET PRESENCE TELEPHONY SERVICES CONSULTING
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Analog Dial-up Web Site Hosting Inter-Local Long Distance Security Evaluation
ISDN Dedicated/Dial-up Email Hosting Long Distance Web Design
Frame Relay Dedicated Secure E-Commerce Facsimile Services Intranet/Extranet Design
xDSL Dedicated Domain Name Service On-Line Account Maintenance LAN/WAN Design
Point-To-Point Dedicated Site Promotion
On-Line Account Maintenance Co-location Services
On-Line Account Maintenance
</TABLE>
CNM has recently entered into extensive advertising agreements with Eller
Media Company, Advo, Visa Card, Cable Networks, and several major Southern
California radio stations, as well as multiple reseller agreements to conduct
our retail marketing program for prospective dial-up and business solution
customers. See "BUSINESS--Marketing and Revenues."
CNM also developed, owns, and operates the Consumer Net Marketplace shopping
mall on the Internet, which has been on-line since September 1996. Consumer Net
Marketplace provides information and sources for the purchase of consumer
products and services over the Internet in a convenient shopping mall
presentation. Since the introduction of our shopping mall, we maintain over
1,200 businesses averaging 1,000,000 hits per month by Internet users.
28
<PAGE>
We recognize that the Internet represents a rapidly expanding medium to a
growing number of on-line users. Our objective is to capitalize on this
opportunity by providing enhanced and expanded Internet services to businesses
and individuals nationwide, beginning with the State of California.
INDUSTRY BACKGROUND
The Internet is an increasingly significant global medium for
communications, information, and online commerce. International Data Corporation
("IDC") estimates that the number of Internet users was 81 million is 1997 and
will reach 177 million by 2000. In addition, IDC projects that ISP revenues in
the United States will grow from $4.6 billion in 1997 to $18.3 billion in 2000,
implying a compound annual growth rate of 58.5% per year. Continued growth in
Internet usage is expected to be fueled by several factors, including the large
and growing installed base of personal computers in the workplace and home,
advances in the performance and speed of personal computers and modems,
improvements in network infrastructure, easier and cheaper access to the
Internet, and increased general awareness of the Internet.
The networks that comprise the Internet are connected in a variety of ways,
including by public switched telephone network and by high speed, dedicated
leased lines. Communications on the Internet are enabled by Internet Protocol
("IP"), an inter-networking standard that enables communication across the
Internet regardless of the hardware and software used.
Over time, as businesses have begun to utilize email, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an ISP became more prevalent. ISPs offer access, email,
customized content, and other specialized services and products aimed at
allowing both commercial and residential customers to obtain information from,
transmit information to, and utilize resources available on the Internet.
ISPs generally operate networks comprised of dedicated lines leased from
Internet backbone providers using IP-based switching and routing equipment and
server-based applications and databases. Customers are connected to the ISP's
POP by facilities obtained by the customer or the ISP from either I-LECs or
C-LECs through a dedicated access line or the placement of a circuit-switched
local telephone to call the ISP. The rapidly growing need for Internet access
and technology has resulted in a highly fragmented industry with the
proliferation of over 2000 ISPs operating within the United States. These ISPs
are primarily made up of a few large national providers focused on high
bandwidth access and a large number of small providers with limited resources
focused on serving local markets. Often the solutions offered by these companies
fail to address certain elements required to ensure that customers'
mission-critical Internet operations are reliable, scalable, and high-performing
and these companies fail to provide a broad array of efficient, low-cost
communications products and services. We believe that customer service has
emerged as an increasingly important element of providing Internet services and
that often the large, national ISPs do not offer individual customers the level
of support desired and that many of the small, regional ISPs do not have the
resources necessary to offer adequate customer support.
CNM NETWORK SERVICES
Internet Connectivity for Businesses and Individuals
ANALOG DIAL-UP. CNM provides high-speed access to the Internet over
standard telephone lines. Access speeds range from 2400bps to 112kbps. CNM
provides access for connections up to 56Kbps for a flat monthly fee of $14.95
and a one-time set-up fee of $25.00. For Multi-Link (2 modems) users, CNM
provides access for a flat rate of $18.00 per month and a one time set-up fee of
$25.00.
29
<PAGE>
ISDN (INTEGRATED SERVICES DIGITAL NETWORK). CNM provides high-speed digital
Internet access via ISDN for both dedicated and dial-up customers. Access speeds
range from 64Kbps to 128Kbps. Dial-up ISDN fees range from $20.00 to $28.00
depending upon connection speeds. A one-time set-up fee of $25.00 applies to
this service. Dedicated ISDN fees range from $125.00 to $235.00 depending upon
connection speeds and contract length. A one-time set-up fee of $200.00 applies
to this service.
xDSL (DIGITAL SUBSCRIBER LINES). XDSL is a burgeoning method of Internet
connectivity that includes aDSL (Asymmetric Digital Subscriber Line), sDSL
(Symmetric Digital Subscriber Line), raDSL (Rate Adaptive Digital Subscriber
Line), and iDSL (ISDN Digital Subscriber Line). DSL is a promising technology
that dramatically increases a subscriber's bandwidth, utilizes telephone wiring
already installed in virtually every home and business, and offers faster
set-up/connection times than the public switched telephone network. These
digital circuits enable businesses to connect a LAN (Local Area Network) to the
Internet at high speeds for reduced costs. Access speeds range from 144Kbps to
1.54Mps. Fees for xDSL range from $250.00 to $850 per month depending upon
access speed. All xDSL customers are charged a one-time set-up fee that varies
depending upon service level.
FRAME RELAY. CNM offers high-speed dedicated/24 hour connectivity via frame
relay. Frame relay connections range from 56Kbps up to 1.544Kbps. Fees for frame
relay range from $105.00 to $605.00 depending upon access speed. CNM also
charges a one-time set-up fee that varies depending upon access speed.
POINT-TO-POINT DEDICATED CIRCUITS. CNM provides high speed private
dedicated digital circuits with access speeds ranging from 1.53M(T-1) to
45M(T-3).
ON-LINE ACCOUNT MAINTENANCE. We provide all customers with on-line account
maintenance capability. This capability allows both business and personal users
to access their account information in order to review and/or update account
information.
Internet Presence for Businesses
VIRTUAL WEB SITE HOSTING. Virtual Web Site Hosting is a service through
which CNM hosts Web pages on behalf of our customers. Targeted for retailers and
other businesses, this service enables customers to have a continued presence on
the Internet. CNM customers are also able to offer on-line customer service and
electronically facilitated order processing. We offer space on our proprietary
virtual web hosting network for corporate customers. Virtual Web Hosting
accommodates businesses and organizations who demand an individualized address
on the World Wide Web (i.e. "www.mycompany.com"). Web hosting features include
database connectivity, Microsoft FrontPage compatibility, CGI scripting
capabilities, and unlimited FTP (File Transfer Protocol) access. Site promotion
is provided for customers who purchase certain Virtual Web Hosting packages. We
also offer "upper level host names," a unique Web service that allows a virtual
web hosting customer to have several unique address on the world wide web all of
which are based upon the customer's individual domain name (i.e.
"sales.mycompany.com"). Prices for Virtual Web Hosting range from $20.00 to
$345.00 per month depending upon the package selected by the customer. CNM also
charges a one-time set-up fee that also depends upon the package selected. We
currently support approximately 200 virtual Web hosting customers.
CNM supports and promotes Web sites by providing:
- Web production and hosting service.
- On-line sales (e-commerce).
- Animation/3D graphics.
30
<PAGE>
- Sound and live audio environments.
- Local, national and global 24-hour access and exposure.
- Daily technological research and developments.
- Extensive customer service.
- Wide varieties of media coverage.
- Technical support and training.
VIRTUAL EMAIL HOSTING. CNM provides SMTP (Simple Mail Transport Protocol)
and POP (Post Office Protocol) for virtual domains. These services are included
in Virtual Web Site Hosting packages and can also be purchased separately. As
with Virtual Web Hosting, Virtual Email Hosting offers business and
organizations a unique presence on the Internet (i.e. [email protected]). Email
hosting features include unlimited Email "forwarding," and "aliases," and
"autoresponders." Fees for Virtual Email Hosting depend upon the number of
virtual email users and the amount of storage space required.
SECURE E-COMMERCE. CNM also offers secured transaction processing via the
Internet. Utilizing our experience, virtual hosting customers may implement
secured transaction processing over the Internet. Secure E-Commerce allows
customers to process transactions on-line in an encrypted manner. Thus, both CNM
customers and end users have a safe and secure way to conduct transactions over
the Internet. Secure E-Commerce is included with certain Virtual Web Site
Hosting packages and can also be purchased with Co-location services.
DOMAIN NAME SERVICE. Domain Name Registration allows for unique addresses
on the Internet (i.e. "mycompany.com"). CNM charges $75.00 for initial Domain
Name Registration. Customers then pay renewal fees on a yearly basis to an
Internet Domain Registration Agency, Internic. We include Domain Name Service in
all Virtual Web Hosting packages and with co-location services.
CO-LOCATION SERVICES. CNM also provides Web server co-location services to
allow medium and large scale businesses the ability to house their proprietary
servers on CNM's own switches. Co-located customers are provided with a switched
ethernet connection to our backbone. This service provides companies with the
ability to control their own specific bandwidth and the flexibility to make
day-to-day changes, as well as to receive substantial traffic without delays.
Customers may purchase "Maintenance Contracts" from CNM to obtain
high-level/on-site technical support for their servers. Fees for co-location
services vary depending upon transfer rate and rack space needs. We currently
support four co-location servers in our Simi Valley headquarters.
PROVISIONING SYSTEM. Pursuant to an agreement with Comat Systems Solutions
Private Limited, a software development company based in India, the Company has
developed a provisioning system to support a retail customer base for virtual
and co-location Web hosting. As a split wire application, this system allows
automatic end user order processing for Web sites, including DNS registration
and host resources set-up. CNM customers can troubleshoot, add additional disk
space, and add additional email accounts automatically through the provisioning
system. Additionally, the system can initialize accounting records, process
bills, generate invoices, and maintain customer accounts for CNM and our
clients.
VIRTUAL BUSINESS CENTER. The advent of high power, low cost hardware
coupled with public domain operating systems and server software has
significantly enhanced the profit potential in this Internet market. To take
advantage of this market, we plan to implement the CNM Network-TM- virtual
business center through which we can offer a tool kit for domain registration,
Web site creation, resource allocation, and Web site maintenance. The service
would be offered at various levels of sophistication,
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ranging from simple Web sites to business Web sites and Web sites with
e-commerce capability. We plan to include a credit card module for payment to
facilitate secure commercial purchases and sales on the Internet. Other planned
features include site account database record creation, co-location, name
servers, virtual FTP host, email/smpt host, central file services, accounting
and virtual domain maintenance modules. Co-located servers are also expected to
provide different levels of virtual domain registration and hosting.
ON-LINE ACCOUNT MAINTENANCE. CNM provides all customers with on-line
account maintenance capability. This allows both business and personal users to
access their account information in order to review and/or update account
information.
Internet Presence for Individuals
CNM NETWORK WEB SPACE. CNM offers individual users Web space on the CNM
Network Web site. This service is included with all personal connectivity
packages and may also be purchased separately. Fees are based upon storage
needs.
CNM NETWORK EMAIL. CNM includes one email account with all connectivity
packages from which Customers may send and receive electronic mail. Additional
email accounts can be purchased separately.
INTERNET SOFTWARE. Through collaborations with several software developers,
CNM has developed an Internet software package that enables customers to use the
Internet in a simple and efficient manner. This software package includes a web
browser, a news reader, several email client programs, and an audio/video
streaming client. The CNM software package is free to all CNM customers.
TECHNICAL SUPPORT. To ensure a simple and enjoyable Internet experience, we
offer superior technical support to all customers. Customer problems are handled
in an expedient and efficient manner. A detailed on-line knowledge base is
available to all CNM users. Technical support is free for all customers.
ON-LINE ACCOUNT MAINTENANCE. CNM provides all customers on-line account
maintenance capability. This allows both business and personal users to access
their account information in order to review and/or update account information.
Internet and Network Consulting for Businesses
BUSINESS NETWORK SECURITY SERVICES. CNM offers three levels of security
services. The first level consists of a one-time security check-up. This
involves intrusion testing of a company's network. Once complete, we will
identify the appropriate measures needed to improve the security flaws found
during the intrusion test. The price of this service varies based upon the size
and topology of the network and any fees involved in upgrading the company's
network, including, but not limited to software patches on servers and router
updates. The second level is an option available to customers who purchase a
turnkey dedicated connection package from CNM. CNM technicians, after
establishing the network connection, will implement a core level of security
measures into the network equipment, such as router enhancements to block
malicious network traffic which can disrupt the various computers connected to
the network and disrupt a business. The third level of security service involves
constant security monitoring of a company's network. Upon entering into a
"security support contract," a company will receive constant security monitoring
of its network, as well as continuous upgrading of network equipment to guard
against network intrusion. At this time, the third level of security service is
only available to those who purchase their connectivity from CNM.
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WEB PRODUCTION. Web production is one of the fastest growing segments of
the Internet industry. Our Web production services include Web site design, Web
site creation, and technical support. CNM customers are able to offer
interactive, multimedia advertising displays. This provides businesses with
direct gateways to offer goods and services in an attractive and user friendly
environment to anyone on the Internet. We utilize several high-quality Web site
designers. These designers are available to all CNM customers. Fees for web site
design vary depending upon Web site size and content.
LAN/WAN DESIGN. Custom network design is provided by our engineering task
force. Customized networks can be designed and implemented by CNM. These
networks include Local Area Networks and Wide Area Networks. Fees for LAN/WAN
design are dependent upon the size and configuration of the customers network
needs.
Telephony Services for Business and Individuals
INTER-LOCAL LONG DISTANCE. We will offer inter-local long distance service
to both businesses and individuals at highly competitive rates outside and
within the network calling radius.
LONG DISTANCE. We will provide long distance service to both businesses and
individuals within the network calling radius. Outside the network calling
radius, long distance rates will be offered through a collaborative arrangement
with other companies at the lowest rate possible.
FACSIMILE SERVICES. MultiVoice reduces remote site communication costs by
routing voice and facsimile across our intranet connection. Customers who use
our MultiVoice equipment will be charged CNM's inter-local long distance and
long distance rates for facsimiles.
TELECOMMUNICATIONS NETWORK INFRASTRUCTURE
CNM is installing telecommunications equipment and entering into access
agreements to build a full service telecommunications network that is presently
conceived to encompass the Southwestern United States from California to Texas,
and north to Colorado. We are currently collaborating with RBOC's such as
Pacific Bell and CLECs, primarily ICG Communications, Inc. and Covad
Communications, Inc., to provide access for our switching equipment to the
Internet backbone, fiber optic cable, and telephone lines. The Company's main
switching and related telecommunications equipment is located at its Simi Valley
headquarters facility. We have established POPs in several locations throughout
Southern California and is expected to install more POPs in California by the
end of the year, including ones in San Francisco, San Jose, and San Diego. Each
of these POPs provides, or is expected to provide, Primary Rate Interface with
multiple telephone lines through Pacific Bell and others. The CLECs providing
access for our telecommunications equipment generally charge fixed monthly fees
for the access service.
Our POPs are established to permit high speed local dial-up access to the
Internet. All of our POPs are expected to contain sufficient switching equipment
to provide local dial-up service and frame relay voice and data transmissions.
Certain of our POPs installed in strategic locations are also expected to
contain CBX 500 ATM switches to enable QOS voice and data long distance
transmission on dedicated lines. Larger POPs are currently planned for San Diego
and Sacramento, California, as well as Las Vegas and Reno, Nevada, Phoenix,
Arizona, Albuquerque, New Mexico, El Paso, Amarillo, San Antonio, and
Dallas/Fort Worth, Texas, Oklahoma City, Oklahoma, Denver, Colorado and Salt
Lake City, Utah. We also plan to offer DSL service pursuant to access and
co-location arrangements with Covad Communications, Inc. DSL service capability
may be incorporated into our existing and planned POPs, and may also be
installed in separate POPs on dedicated switching locations. We cannot assure
the timing or whether or not we will complete our telecommunications network as
presently planned. See "RISK FACTORS" beginning on page 6.
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VOICE OVER INTERNET PROTOCOL
The most significant trend in the Internet and indeed in the broader
telecommunications industry, is the convergence of voice and data communications
to a singular mode of transmission. Traditional circuit-switch based
communications systems establish a dedicated channel for each communication
(such as a telephone call for voice and fax), maintain the channel for the
duration of the call, and disconnect the channel at the conclusion of the call.
With the inception of faxes and computer data in the late seventies and early
eighties, the resources of such circuit-switch based networks became taxed and
the need for greater bandwidth became evident. Today, voice, data, and video
transmission can be transmitted through a single high-speed data packaging
network with the TCP/IP data transmission standard becoming the most widely used
methodology. Originally constructed as a network of computer networks, the
Internet revolves around the TCP/IP, which moves data in a series of packets.
These packets are disassembled at the point of transmission, routed over the
Internet backbone in the most efficient manner and reassembled at the point of
receipt. The disadvantage of these packets is that they are cumbersome and
occupy large amounts of space on telephone wires. As a result, data is slow to
arrive at its destination. Various solutions have been created to address this
problem, yet to date the most common and effective method is to access a high
bandwidth network for transmission.
Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communication sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, certain
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communications transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.
Many initiatives are under way to develop technology to address the
disadvantages of packet-switched based systems. Many companies are migrating
their data networks to carrier-provided virtual private networks ("VPNs"), using
IP, frame relay, and ATM, which are more efficient means of transporting voice,
video, and data. These companies are realizing cost savings and improved
performance. We believe that the IP standard, which is an "open networking
standard" broadly adopted on the Internet and elsewhere, should remain a primary
focus of these development efforts. We expect the benefits of these efforts to
be improved communications, reduced latency and lower networking hardware costs.
Already, VoIP, or transmission of voice calls from a telephone to a telephone
using the Internet Backbone to transmit the data, is being offered to consumers.
This new voice and data network solution is evolving for several reasons:
- Voice and facsimile communications are currently separate from the
corporate data network. The result is inefficient, two incompatible
network infrastructures.
- With the integration of voice and data traffic onto one network, companies
will realize savings in network infrastructure, maintenance, and
management costs.
- According to a recent CMP survey, over 40% of an organization's long
distance costs are attributable to voice. For the average company,
integration of voice traffic with data traffic can amount to significant
savings.
CNM is offering a totally integrated solution for delivering voice and data
services over a single data network. We recently acquired additional equipment
from Ascend Communications to expand further its POPs and the VoIP equipment
needed for voice over data over our network. Ascend's MultiVoice-TM- for IP,
frame relay, and ATM is the only product on the market to guarantee IP QOS
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from the access area to the core of the public network. Using MultiVoice, we can
transparently integrate services between its circuit switched voice/fax and
packet switched ATM, frame relay, and IP networks. MultiVoice enables a single
data network to carry efficiently and cost-effectively voice, fax, and data,
allowing us to guarantee quality and provide transparent telephony to our
customers.
VoIP provides the customer with the ability to make digital local long
distance calls through our network for nearly half the cost of traditional
telephone companies. We will provide IP over our own network as opposed to over
the Internet. We will use our high-speed fault-tolerant backbone, whose main
purpose is to transport VoIP signals. The use of a dedicated backbone for this
transport has numerous advantages over the current trend of transporting VoIP
signals across the public Internet. The private CNM backbone will render VoIP
traffic immune to the current glitches and saturation issues that are currently
felt by the ever-expanding Internet. The highest priority on the CNM VoIP agenda
is to provide a QOS that rivals that of the current Public Service Telephone
Network ("PSTN"). Another advantage of carrying VoIP traffic across a high speed
ATM backbone is fine-tuned control over the backbone bandwidth. This control
will allow CNM to use the inherent traffic-shaping abilities provided by the ATM
specification to ensure a truly incredible QOS to the customer. The private
backbone also ensures a higher level of security and data-confidence, which not
only aids the VoIP side, but will also increase the confidentiality of
electronic commercial transactions. The combination of this emerging VoIP
technology along with the security and stability of a high-speed private
backbone gives the customer the best of the current PSTN, which is dedicated
solely to the purpose of voice based telecommunications, and the IP based
network, whose flexibility and redundancy give it the ability to continue
running, even in the face of massive failure on the part of other sections of
the network.
COMMERCE ON THE INTERNET
The emergence of the Web has created major opportunities for companies to
advertise and promote their products and services in a targeted, interactive and
multimedia market. IDC HTTP:// WWW.IDCRESEARCH.COM estimates that the number of
users accessing the Web will grow from over 50 million in 1997 to over 200
million by 2000. A large and growing base of personal computers installed in the
workplace and home, advances in the performance and speed of computers and
modems, the amazing technological advances recently developed that are now being
implemented such as "Web Television," improvements in network infrastructure,
easier and cheaper access to the Internet, and increased awareness of the
Internet among consumer and trade customers are contributing to the growth. A
study by O'Reilly & Associates (HTTP://WWW.ORA.COM) in 1997 indicated that 50%
of large, 25% of mid-sized and 8% of small businesses had access to the
Internet, for a total of more than half a million businesses. Based on a study
by O'Reilly & Associates on US Business Establishments with Internet Access,
past growth curves, and the expected incorporation of the Internet into banking
and credit card activity, ACTIVMedia (HTTP://WWW.ACTIVMEDIA.COM) predicts that
those numbers will swell to over 5.9 million, or 92% of United States business
establishments, by 2001. With nearly every large US business (i.e., more than
500 employees) connected to the Internet and with pressure to upgrade mounting,
the connectivity market is expected to remain vibrant.
Although the international market has been slower to embrace the advantages
of the Internet, ACTIVMedia predicts that the European and Pacific Rim Web
populations will grow at an "exponential rate." Based on its study of Web
marketers, the upward curve in sales generated by the Internet is only just
beginning as Web users become more accustomed to shopping on-line. Even in the
United States, where Internet use is most advanced, Internet commerce is still
in its infancy and experiencing tremendous growth. During the 1997 holiday
season, on-line orders soared.
Internet on-line services are fast becoming a new social phenomenon in
shopping. "Electronic malls" are exerting a powerful on-line presence and the
concept of electronic shopping malls and e-commerce, in our view, will shape the
future of world economics. CNM owns and operates a fully
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designed, state of the art Internet shopping presence on the World Wide Web
named Consumer Net Marketplace (HTTP://WWW.CONSUMERMARKET.COM). Internet "search
engines" offer on-line users quick and easy access to the Consumer Net
Marketplace shopping mall.
One of the crucial developmental aspects of on-line shopping malls is
advancement of technologies. Design in three dimensional appearances enables
users to simulate walking among stores from their computers or televisions while
at the same time engaging in shopping. On-line stores provide text and/or
catalog pictures of goods and services which can be purchased electronically and
delivered directly to the customer. With proper design and technology, an
Internet shopping mall has the capacity to rent space to an unlimited number of
stores with unlimited inventory. As such, each store transcends the notion of a
traditional store and can provide information hubs and service centers in
addition to normal merchandise. New products and services, special discounts,
and "sale items" can be advertised and changed daily. With an ever increasing
global market, an Internet mall can generate substantial sales.
We commenced operating our electronic shopping mall Web site in September
1996. Our electronic mall operates under the name Consumer Net Marketplace or
"CNM" at HTTP:// WWW.CONSUMERMARKET.COM. Since the introduction of our shopping
mall, we maintain over 1,200 businesses averaging 1,000,000 hits per month by
Internet users. CNM is listed with most major and secondary Internet search
engines such as Yahoo, Alta Vista, Infoseek, Excite, Magellan, Lycos, HotBot and
others.
CNM plans to make on-line shopping increasingly cost effective, convenient
and enjoyable as the CNM business plan envisions. The CNM Web site was awarded:
- "FAME", a prestigious Award of Excellence for 1997.
- "Starting Point", HotSite's Award in 1997.
CNM suppliers include such companies as Netscape, Microsoft, Superior Bank
Card Services, Advo Direct Marketing, BMD Solutions, Softbank, Modem Media, Left
Field, Integrated Telemanagement Services, Yahoo, Excite, Web Crawler, Visa,
Master Card, American Express and many other leading industry providers. Our
customers are a wide range of independent private or public businesses now
on-line or which need a presence on the Web, particularly small and medium
sized, specialized vendors who would not otherwise have the national market
exposure offered by the CNM shopping mall. The advertising customers currently
include Amazon.com, USA Today, 800-Florals by Phillip's, Loralie, Hollywood
Cookie Studio, Wired News, Advanced Comfort, Excite, Sports Center On-Line,
Vinylvendors, Virtual Vineyards, C/NET, Toys R Us, Zip2, Fragrance Counter and
many others within the CNM Network-TM-.
CNM STRATEGY
CNM's objective is to become a global ISP and VoIP telecommunications
provider to our personal and business solution users of the Internet. The key
elements of CNM's strategy include:
EXPANSION OF CUSTOMER BASE. We believe that a key to our success in the
competitive ISP market is to rapidly expand our user base, thereby amortizing
our fixed assets over a larger revenue base and enhancing our ability to enter
into favorable arrangements. We plan to accelerate our efforts and financial
commitments to attract new users and will continue to aggressively advertise and
promote our services to individuals and the business community.
PERSONAL SERVICES AND BUSINESS SOLUTIONS. CNM offers an extensive range of
services to both individuals and businesses. In order to continue to attract and
retain individual users, we will offer user friendly Internet access and
services. Accordingly, we will continue to devote significant resources to
expanding our customer and technical support and enhancing our network
operations capability. The
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CNM software, which includes front-end software and documentation for Windows 95
and Windows 98 users, is designed to make it easy for users to register and
configure their system for Internet access. At the same time, we are enhancing
our network infrastructure to offer highly sophisticated and complete business
solutions, including VoIP, high end dedicated access, state of the art
co-location services, and four highly demanded flavors of DSL products (aDSL,
iDSL, sDSL, and xDSL). Moreover, CNM constantly works to develop new services,
content and features to enhance that user experience.
UTILIZATION OF THIRD PARTY SERVICE PROVIDERS. In order to maintain our
focus on user needs, we leverage the infrastructure of others by leasing POP
capacity from ICG Telecom Group, Inc., Pacific Bell Internet, Covad
Communications, Inc., and IBM Technologies. In addition to lowering required
capital expenditures, we believe that this approach gives us flexibility to
rapidly expand our service coverage. Moreover, access to multiple networks
provides users with increased service quality resulting from redundant network
access. We will continue to pursue this strategy so that we can devote our
significant resources to our sales and marketing efforts and to improving our
users' Internet experience.
ENHANCE MARKETING AND DISTRIBUTION. We plan to expand our targeted
marketing programs and distribution efforts in geographic markets other than
California in order to achieve a nationwide presence and obtain brand
recognition. In order to achieve these goals we will utilized print publication,
radio, billboards, and direct mail. CNM closely monitors the results of our
marketing techniques as part of an ongoing effort to increase the
cost-effectiveness of its marketing efforts.
ENHANCE NETWORK INFRASTRUCTURE. To effectively attract new customers and
continue to offer high quality service, we are making significant capital
investments, including the expansion of our data center, accounting, and billing
systems. CNM believes that our planned infrastructure will be adequate to manage
a significant increase in its customer base.
AGREEMENT WITH STARNET. Recently we entered into an agreement with Starnet,
Inc. Under this agreement we will lease POPs throughout the United States from
Starnet, Inc. These POPs, in conjunction with the Company's existing POPs, will
allow us to offer our Internet connectivity services on a national basis.
COMPANY RESEARCH AND DEVELOPMENT
VOICE OVER INTERNET PROTOCOL. At present, we are continuing our research
and development of VoIP technology. VoIP technology simulates telephone
conversations by processing analog signals which cannot be done on regular
networks. VoIP technology allows the conversion of analog signals into digital
data. The data is then moved digitally and transformed back into analog. The
receiving telephone then produces the same high quality sound of the
conversation as if it were a regular phone call.
CNM is working on improving the existing VoIP technology which is still
undergoing major developments. The key to VoIP's success in business
applications is high quality voice reproduction, low bandwidth consumption, and
gateway payback periods of less than 18-24 months. To that end, CNM is
developing proprietary VoIP service to offer toll quality levels of sound
reproduction, ensuring more widespread usage among its clients.
The second key to VoIP's success is minimizing WAN bandwidth consumption.
CNM is improving on "silence suppression" technology which recognizes periods of
silence in a conversation or facsimile transmittal, and stops the transmission
of IP speech packets during those periods. This technology can reduce bandwidth
consumption by up to 60%.
The most attractive aspect of VoIP technology is the cost savings it can
bring to businesses. The cost savings can come from several areas: (1) reduced
intracompany voice and facsimile communications costs, (2) reduced selected PSTN
communications costs by using off-net calling,
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(3) reduced selected 800 number calling costs by making local numbers that ride
over the corporate IP network available to outside callers, and (4) reduced
costs from reducing the number of telephone lines in proportion to the
offloading of calling volume to the VoIP network.
PROVISIONING SYSTEM. CNM has developed a proprietary provisioning system
for allocating resources for its Web Server/ATM. This system allows the end user
to set up various levels of virtual Web services without a system administrator.
The end user is able to:
- register a domain name
- move a domain name from another ISP
- determine the resources the end user requires, including
- number of email accounts
- monthly transfer
- disk space
- database access
- front page access
- e-commerce merchant accounts
- add or subtract incremental offerings to the end user's site at a later
date, including
- additional email users
- additional disk space
- higher transfer
- select payment options
The end user can also use the provisioning system as a maintenance tool kit.
If the end user experiences a problem with his site, the end user can use the
CNM provisioning system tool kit to analyze the site for errors. In many
instances, the tool kit can fix the problem. If the tool kit is unable to fix
the problem, the provisioning system tool kit will provide the CNM administrator
with a diagnostic printout.
The provisioning system interacts with the CNM billing system allowing for
various departments to access an end user's history information. The
provisioning system can also be used to:
- set up and sell dedicated connectivity services
- set up and sell personal dial up products
- set up resources for co-located services
- manage and maintain these accounts
The provisioning system reduces costs in terms of the following:
- reduced system administrative personnel for handling account settings and
troubleshooting
- reduced staff costs for account billing and tracking
- increased customer satisfaction
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MARKETING AND REVENUES
Our current or anticipated sources of revenue are derived from (i) Web site
development fees paid by customers, primarily businesses, which engage CNM to
design and establish Web sites for them on the Internet, (ii) Web site hosting
fees, (iii) fees for virtual domain hosting, (iv) fees for co-location services
(v) fees for business consulting relating to conducting commerce and advertising
on the Internet, (vi) fees for designing Intranet and Internet solutions for
networking projects, (vii) Web site advertising fees from advertisers on the CNM
Network-TM- Web site, (viii) fees for monitoring and upgrading Web sites for
other businesses, (ix) fees for dial-up Internet access service, X2, 56K Flex
ISDN and frame relay, and (x) fees for developing corporate firewalls and other
Internet security features. We are presently designing the infrastructure and
are retaining additional management with the technical expertise to enable us to
provide the following services from which future revenue may potentially be
earned: (a) secure commercial transactions on the Internet utilizing our
proprietary e-commerce (shopping cart) technology which is planned for use on
the CNM Network-TM- Web site and for licensing to third parties, (b) VoIP, (c)
QOS voice and data telecommunications, (d) video and real audio streaming, (e)
Web support provisioning system software for use by us and our licensees, (f)
licensing our proprietary search engine currently in development and (g) other
proprietary products which may be developed by us in the future. We recently
established a high capacity OC-12x3 ATM SONET to provide Internet backbone
solutions nationwide beginning with the State of California.
We currently promote and advertises our business via the Internet and a wide
variety of other media campaigns. We recently entered into extensive advertising
agreements with Eller Media Company, Advo, Visa Card, Cable Networks and several
major Southern California radio stations as well as multiple reseller agreements
to conduct our retail marketing program for prospective dial-up and business
solution customers.
Through our agreement with VISA, customers in the Los Angeles area who
already charge monthly Internet access service fees will receive information in
their monthly VISA statements about the Company's dial-up access service. These
advertisements will allow customers to sign-up for our service and to charge the
monthly access fee directly to their VISA accounts. The term of our agreement
with VISA is month to month.
We entered into an advertising agreement with Eller Media Company in June
1998. In addition, Eller Media Company has agreed in principle to provide us
with extensive billboard and other outdoor advertising in Southern California at
certain rates in exchange for the right to subscribe for up to 1,000,000 shares
of the Company's Common Stock. See "BUSINESS--Proposed Agreement with Eller
Media."
CNM has an agreement with Advo Direct Marketing for direct mass mailings of
our advertising materials to specific areas of the Southern California market.
The direct mailing campaign may be expanded to other areas of the United States
in the future, in coordination with the planned expansion of our
telecommunications network. The current mailing campaign with Advo commenced in
May 1998 and is scheduled to continue through December 1998. We also plan to
advertise our Internet access services on local radio stations from San Diego to
Santa Barbara beginning in September 1998. We have already purchased advertising
time on a month-to-month basis.
CNM's in-house sales and marketing force conducts the marketing activities
for the Consumer Net Marketplace Shopping Mall. CNM screens and identifies
potential vendors via email, facsimile, and telephone, and then prioritize each
vendor accordingly. Our criteria for vendors in our shopping mall include
diversity, name recognition, commercial reputation and sales volume.
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AGREEMENT WITH ELLER MEDIA
CNM is currently conducting a major billboard advertising campaign
throughout Southern California with Eller Media Company, an advertising firm
specializing in marketing programs utilizing outdoor billboards, shelters and
other outdoor venues. In connection with the current program, Eller Media
Company and CNM entered into a subscription agreement on October 7, 1998
pursuant to which Eller Media has agreed to provide additional remnant outdoor
advertising space to CNM at a price equal to 50% of the negotiated rate for
outdoor advertising space in the market where the remnant space is available
(excluding any production costs), in consideration for shares of CNM's Common
Stock at a price of $2.00 per share. Eller Media will subscribe for shares as
CNM orders advertising services. Eller Media has the right to subscribe for up
to 1,000,000 shares of CNM's Common Stock pursuant to the agreement, depending
on the level of orders made by CNM. The subscription agreement terminates on
December 31, 1999, regardless of the number of shares of CNM Common Stock to
which Eller Media subscribes by that date pursuant to the agreement. The
subscription agreement also provides that Eller Media Company has certain
piggyback registration rights with respect to its shares of CNM, applicable to
the next registration statement (except on Form S-4 or S-8) after the
registration statement encompassing this Prospectus, to the extent that Eller
Media Company cannot sell such shares pursuant to Rule 144. If the next
registration statement has an underwriter, then the underwriter may reduce the
number of Eller Media Company's shares registered if other selling security
holders' shares on the registration statement, if any, are also reduced on a pro
rata basis.
PREVIOUS FINANCING AND DEVELOPMENT ARRANGEMENT
Fredrick Rice and certain associates formed Consumer Net Partners, a
California general partnership ("CNP"), in 1996 with $500,000 of contributed
equity. Approximately 85% of the of the partnership equity (after deducting
expenses related to the operation and formation of the general partnership) was
allocated to Consumers On-Line Development Group, Inc. ("COLD Group"). Pursuant
to a Management Agreement with CNP, COLD Group was engaged to manage and oversee
the development of an on-line shopping mall. COLD Group was also engaged to
purchase equipment and design software programming for the CNM electronic
shopping mall and for the development of merchant participation in the mall,
including the preparation of marketing and lead-generation materials to promote
the mall. The COLD Group served as the managing partner of CNP with Fredrick
Rice as the principal shareholder and President of the COLD Group. The COLD
Group dissolved in July 1997 and assigned all of its rights to CNP. See "CERTAIN
TRANSACTIONS." The remaining partnership equity, approximately 15%, was
allocated to CNM to participate in the promotion and start up operation of the
CNM electronic shopping mall. CNP also advanced funds to CNM to finance CNM's
ability to provide support services to CNP and the COLD Group for the CNM
shopping mall. CNM is repaying the advance as part of CNM's purchase of all of
CNP's and the COLD Group's interest in the CNM electronic shopping mall and
related intangible assets.
Pursuant to the CNP Partnership and Management Agreements, 75% of net income
generated by the CNM shopping mall would be paid to CNP and allocated as
follows: 75% to the CNP general partners (after deducting partnership expenses)
and 25% to the COLD Group. On December 31, 1997, we purchased all of the rights
and interests held by CNP in our potential income for a combination of a
promissory note payable on demand and options to purchase the Company's Series 1
Class B Common Stock. The aggregate purchase price was (i) $500,000, payable by
issuance of a noninterest-bearing promissory note payable to CNP upon demand
(which includes repayment of the advance by CNP, the proceeds of which will be
allocated among the CNP partners along with the balance of the Company's payment
on the promissory note), plus (ii) options to purchase 250,000 shares of Series
1 Class B Common Stock for a period of three years at a purchase price of $.50
per share. Pursuant to CNP's General Partnership Agreement, the written consent
of a majority-in-interest of the partners of
40
<PAGE>
CNP must approve the sale of rights to CNM. The consent of a
majority-in-interest of the partners of CNP has been obtained.
PRIOR PRIVATE PLACEMENT OF STOCK
Commencing on October 1, 1997, we made a private placement of its Series 1
Class A Common Stock to investors for a purchase price of $2.00 per share
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of the Regulation D promulgated under Section 4(2). The private placement
terminated on October 8, 1998. Pursuant to the private placement, we issued
1,534,250 shares of its Common Stock and raised $3,068,500 in total capital. See
"SELLING SECURITY HOLDERS."
COMPETITION
The market for our Internet related services is diverse and highly
competitive. The competition is expected to continue to increase significantly.
The Internet is characterized by few barriers to entry, relatively low
participation costs, and innovative and rapidly expanding services. We expect
competition to persist, intensify, and increase in the future. Most of our
current and potential competitors have longer operating histories, greater name
recognition, larger installed customer bases, and significantly greater
financial, technical, and marketing resources than CNM. Although we believe that
the diversity of the Internet market will provide opportunities for a variety of
marketing techniques, it is possible that the industry could become dominated by
a limited number of entities. We compete directly with several other ISPs, IPPs,
and companies offering a variety of on-line services. Some of these existing
competitors, as well as potential future competitors, have or could have
significantly greater financial, technical, and marketing resources than CNM. We
believe that the principal competitive factors in our market are Web site
location recognition, variety of products and services, and technological
innovation. We believe that our current ISP and IPP services, VoIP services, and
shopping mall configuration will provide us with the opportunity to compete
effectively in the market. See "RISK FACTORS-- Competition" on page 13.
GOVERNMENT REGULATION
CNM is not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to commerce on the
Internet. Nevertheless, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
telephone services, and characteristics and quality of services. The adoption of
any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for our services and increase our cost of
doing business, or otherwise have an adverse effect on our business, operating
results and financial condition. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, telephony, libel and
personal privacy is uncertain. See "RISK FACTORS--Government Regulatory Policy
Risks" on page 10.
PROPRIETARY RIGHTS
We believe our trademark, service marks, trade secrets, and intellectual
property are essential to our success. We rely upon trademark and copyright law,
trade secret protection, and confidentiality agreements with our employees,
customers and others to protect our proprietary rights. We have registered the
domain names "cnmnetwork.com," "consumermarket.com," and "cnminc.com" with
Internic for the exclusive use of such names on the Internet. We have registered
our service marks and trademarks in the United States and internationally,
including "CNM Network-TM-," "CNM Inc.," "Consumer Market," and "Consumer Net
Marketplace." While we will endeavor to rely on trademark,
41
<PAGE>
trade secret, and copyright law to protect our technology, we believe that
factors such as the technologies and creative skills of our personnel, new
product developments, frequent product enhancements, name recognition, and
reliable product maintenance are more essential to establishing and maintaining
a technology leadership position. We presently have no patents or patent
applications pending. We cannot assure that others will not develop technologies
that are similar or superior to our technologies.
We have entered into confidentiality or license agreements with our
employees, consultants and vendors, and generally controls access to and
distribution of our other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products or technology without authorization, or to develop similar technology
independently. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries, and the global nature of
the Internet makes it virtually impossible to control the ultimate destination
of the Company's products. To license our products, we will primarily rely on
licenses that are not signed by the end-user and, therefore, may be
unenforceable under the laws of certain jurisdictions. We cannot assure that the
steps taken by us will prevent misappropriation of our technology or that such
agreements will be enforceable. Furthermore, while we attempt to monitor the
product quality and customer service provided by CNM, we cannot assure that such
participants will not offer and sell products or services that might adversely
affect the reputation or utilization of the CNM Network-TM-. See "RISK FACTORS"
beginning on page 6.
EMPLOYEES
As of October 7, 1998 CNM employs 32 full-time and over 20 part time
employees, including four senior executive officers, twelve computer engineering
systems administrators and programmers, seven administrative personnel, nine
marketing representatives and assistants, and multiple customer support
personnel. CNM may engage outside consultants in the future, including systems
and software analysts and marketing personnel. See "MANAGEMENT."
We are highly dependent on the technical and managerial skills of our key
employees, including technical, sales, marketing, financial, and executive
personnel, and on our ability to identify, hire and retain additional personnel.
Competition for such personnel is intense, and we cannot assure that we will be
able to retain existing personnel or to identify or hire additional personnel.
In addition, we are highly dependent on the continued services of its senior
management team, which currently is composed of a small number of individuals.
The inability to attract, hire or retain the necessary technical, sales,
marketing, financial and executive personnel, or the loss of the services of any
member of our senior management team, could have a material adverse effect on
our business, financial condition and results of operations.
SEASONALITY
Our operations are not expected to be affected by seasonal fluctuations,
although our cash flow may be affected by fluctuations in the timing of cash
receipts from our customers.
FACILITIES
Our executive offices are located at 1900 Los Angeles Avenue, Second Floor,
Simi Valley, California 93065, (805) 520-7170. Our Internet addresses are:
WWW.CNMNETWORK.COM, WWW.CONSUMERMARKET.COM, and WWW.CNMINC.COM. Our email
address is: [email protected]. Information contained on our World Wide Web
site shall not be deemed to be a part of this Prospectus. CNM has signage rights
at our executive offices, which are expected to accommodate projected demand for
space over the next two years.
42
<PAGE>
CNM has also secured POP sites in several other locations throughout the Los
Angeles Metropolitan Area to provide dial-in coverage for personal dial up
access to the Internet. Additional POPs are expected to be obtained either (i)
pursuant to traditional leases for space or (ii) pursuant to equipment
facilities (barter) agreements under which we will receive space for our
switching equipment in consideration for providing a certain amount of bandwidth
access to the landlord. We anticipate that we will obtain future POP locations
primarily through barter arrangements.
LEGAL PROCEEDINGS
We are not currently aware of any legal proceedings or claims that we
believe will or could have a material adverse effect on our financial position
or results of operation.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to CNM's
directors and executive officers as of October 7, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- ----------- -----------------------------------------------------------------
<S> <C> <C>
Fredrick J. Rice......................... 40 Chairman of the Board of Directors, President,
Chief Executive Officer and
Chief Financial Officer
Donald Lee Carver........................ 43 Vice President of International Network Development
Christopher Young........................ 26 Senior Computer Systems Engineer and Systems Analyst
Jon P. DeOng............................. 26 Senior Computer Systems Engineer and Systems Analyst
Christopher Fogel........................ 25 Senior Computer Systems Engineer and Systems Analyst
Laura Murtagh............................ 29 Secretary
Kenneth K. Lattin........................ 52 Director
Charles Rice............................. 34 Director
Dr. Douglas Benson....................... 67 Director
Mark J. Richardson....................... 45 Director
</TABLE>
FREDRICK J. RICE is the founder of Consumer Net Marketplace, Inc. Mr. Rice
has been President, Chairman of the Board of Directors, Chief Executive Officer
and Chief Financial Officer of CNM since our inception in January 1996. Prior to
founding CNM, in 1995, Mr. Rice was the President and Chairman of the Board of
Directors of Consumers On-Line Development, Inc., the managing partner of
Consumer Net Partners, a California general partnership. See "CERTAIN
TRANSACTIONS." Mr. Rice, from 1990 through 1995, held various positions in the
securities and financial services industry involving stocks, funds and venture
capital interests and was a securities broker registered with the National
Association of Securities Dealers, Inc. Mr. Rice settled an administrative
proceeding with the Securities and Exchange Commission which permanently enjoins
him from any violations of certain sections of the Securities Act of 1933, as
amended and the Securities Exchange Act of 1934, as amended. Mr. Rice has an
extensive advertising and marketing background in print media, radio and
television broadcast for over 14 years. Fredrick Rice is the brother of Charles
Rice.
DONALD LEE CARVER has been the Vice President of International Network
Development for CNM since March 1998. Mr. Carver oversees our development of our
global network by utilizing his relationships with foreign government officials
and representatives of other telecommunication companies developed during his
career. Prior to joining CNM, Mr. Carver was the Senior Systems Administrator
for the Web Hosting Division of Netcom On-line Communications, Inc. from
November 1996 until March 1998, where he was responsible for the administration
and maintenance of co-located servers. He was also responsible for developing
and implementing a centralized NFS server farm and automated backup recovery
strategy for the Web hosting section, as well as developing and implementing
strategies to migrate from 10 BaseT passive hub base network for the server farm
to a fully switched 100 BaseTx network. Mr. Carver worked with Pentium 200 Web
servers, along with a variety of other related hardware, and NT3.51, NT4.0,
Irix, Linux and other related software. From July 1996 until November 1996, Mr.
Carver was an Internet Software Developer for Comat InterActive and the Web
Master for www.comat.com. During his tenure with Comat, Mr. Carver developed
international relationships for networking and Internet development. These
relationships included individuals in the ministries of telecommunications in
India and Pacific Rim nations. Mr. Carver has also fostered relationships with
representatives of major telecommunication firms doing business in
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<PAGE>
these countries. Mr. Carver worked for the Dallas Planning Department as a
UNIX/WinNT Network Administrator from December 1989 until July 1996, where he
installed and configured the City's Internet connection and services. Mr. Carver
was a GIS Analyst for the City of Dallas Planning Department from February 1986
until December 1989. Mr. Carver attended the University of North Texas
commencing in 1984 where he earned most of the credits necessary for a Bachelors
of Science in Urban Geography and Earth Sciences. Mr. Carver earned an Associate
Degree in Applied Science-Horticulture from Tarrant County Junior College in
1981. Mr. Carver has earned several supplemental certificates in various systems
and network administration environments.
CHRISTOPHER L. YOUNG has been a Senior Computer Engineer and Systems Analyst
with CNM since March 1998. Prior to joining CNM, Mr. Young was a Systems
Administrator with Netcom On-line Communications, Inc. in Dallas, Texas from May
1997 until March 1998, where he was responsible for managing a wide variety of
Web servers, primarily utilizing Linux, Intel hardware and the Apache Web
server. Mr. Young was responsible for third level technical support on all Web
hosting related services, including domain home services, FTP services,
electronic mail service, SQL services and Front Page services. Mr. Young was
also responsible for monitoring Netcom's network, installing and configuring the
Oracle Database System, and utilizing a variety of hardware and software tools,
including 3Com's HP Openview, Sun Microsystem's workstations, Digital's servers,
Budtool, Sun OS, Windows NT Sever and Workstation and Mac OS. From June 1996
until May 1997, Mr. Young was a Systems Administrator for Hownet Communications,
where he managed Hownet's computer network (Internet), administered all
accounts, database security, and hardware and software technical support, and
performed HTML programming, graphic design and photography. Mr. Young has also
been a Web page designer for WebStuff Networks and a Sales and Technical Support
Trainer for The Internet Store. Mr. Young's basic skills include UNIX
administration, networking, operating systems, and software programming and
applications.
JON P. DEONG has been a Senior Computer Engineer and Systems Analyst with
CNM since March 1998. Prior to joining CNM, Mr. DeOng was a Senior Systems
Administrator in the Web Hosting Department of Netcom On-line Communications,
Inc. in Dallas, Texas from June 1996 until March 1998. As the Senior Systems
Administrator, Mr. DeOng was responsible for the business center design and
software specification, administrative tool set, installation, configuration,
maintenance and monitoring of over 50 secure Unix Internet Web servers, eight
secure NT Internet Web servers and co-located servers and customers. Mr. DeOng
was also responsible for third level technical support for all Web hosting
related services, including domain home services, FTP services, electronic mail
services, SQL services and FrontPage services. Mr. DeOng also worked with the
development group to design, implement and support Automated Web Hosting
Software, on-line payment services, and dial-up access service. From June 1994
until June 1996, Mr. DeOng worked with the Texas Department of Health as a
Technical Clerk III in the NICADS Department. From February 1992 until June
1994, Mr. DeOng was an Information Systems Supervisor for Labels On The Go. Mr.
DeOng has computer software and systems experience in troubleshooting,
automation, firewall setup, network traffic information, disk usage information,
processing Internic data, establishing list servers and collecting statistics.
CHRISTOPHER FOGEL has been a Senior Computer Engineer and Systems Analyst
with CNM since March 1998. Prior to joining CNM, Mr. Fogel was a Senior Systems
Administrator in the Web Hosting Department of Netcom On-line Communications,
Inc. in Dallas, Texas from September 1996 until March 1998. As the Senior
Systems Administrator, Mr. Fogel was the business center architect, responsible
for data flows and software module specification and coding various Perl
interfaces, the installation, configuration, maintenance and monitoring of over
50 secure Unix Internet Web servers, eight secure NT Internet Web servers and
co-located servers and customers. Mr. Fogel was also responsible for third level
technical support for all Web hosting related services, including domain home
services, FTP services, electronic mail services, SQL services and FrontPage
services. Mr. Fogel also worked with the development group to design, implement
and support Automated Web Hosting
45
<PAGE>
Software, on-line payment services, and dial-up access service. From January
1996 until September 1996, Mr. Fogel worked with CyberRamp L.L.C. in Dallas,
Texas as a Systems Administrator. Mr. Fogel was responsible for System
Maintenance of six UNIX machines, maintenance of machine service including: Web
Servers, Domain Name Service (DNS), Users accounts, Email, FTP servers and POP
servers. Configuration and usage of network equipment including: Ascend MAX
4000, Ascend Pipeline 25 (and 50), Gandalf Edge Router, Cisco 4000 and Motorola
BitSurfer Pro. From September 1994 until January 1996, Mr. Fogel was the System
Administrator of Project Development for Moorhead State University in Moorhead,
MN. Mr. Fogel was responsible for designing all facets of the schools existing
Web server and site, system maintenance of the UNIX machine upon which the Web
site and all pertaining data was placed, assisting students with computer
related problems and related projects.
LAURA MURTAGH became the Secretary of CNM on September 30, 1998. Ms. Murtagh
has been in the private practice of law since 1994. In August 1998, Ms. Murtagh
joined the law firm of Richardson & Associates where she practices in the areas
of corporate and securities law. Prior to joining Richardson & Associates, Ms.
Murtagh was an associate with the law firm of Preston, Gates & Ellis LLP. At
Preston, Gates & Ellis LLP, Ms. Murtagh practiced in the area of high technology
intellectual property law. Prior to joining Preston, Gates & Ellis LLP, Ms.
Murtagh was corporate counsel for Zenith Information Systems, Inc. Ms. Murtagh
graduated from the University of California, Berkeley with honors in 1991 with a
Bachelors of Arts. Ms. Murtagh earned a Juris Doctor from Boston University
School of Law in 1994, graduating cum laude. Ms. Murtagh is a member of the
California State Bar.
KENNETH K. LATTIN became a Director in August 1998. Mr. Lattin has been an
active real estate broker for over 18 years, specializing in office, commercial,
and industrial property. Mr. Lattin is President of the Edwin S. Johnson
Company, a real estate investment and development company, and owns Trevent
Management, a property management and real estate consulting company. After
graduating from the University of Southern California in 1972 with a Bachelor of
Science in Business with an emphasis in Accounting, Mr. Lattin worked for five
years as a senior auditor for Price Waterhouse assisting clients such as Disney,
Toyota, and U.S. Steel. As a First Lieutenant in the U.S. Army, Mr. Lattin
served in Vietnam as a platoon leader, company commander, and battalion and
brigade operations officer. He was awarded the Silver Star, Bronze Star with V
divice, Bronze Star with oak leaf cluster, Army Commendation medal, and Purple
Heart.
CHARLES RICE became a Director in August 1998. Since 1990, Mr. Rice has been
the President of Cmeca Corporation, a production services corporation for film,
television, commercials, and video. Involved in over 300 feature film products
and award winning videos, Mr. Rice has worked with Warner Brothers, Universal,
Saban, Sony, Disney, NBC, ABC, CBS, FOX, and Paramount. At Cmeca, Mr. Rice has
developed sales, direct marketing, and administrative service divisions and
designed marketing campaigns and a training program. Prior to working at Cmeca,
in 1985 Mr. Rice founded Perfect Image, an industrial advertising and marketing
corporation, with offices throughout Southern California. At Perfect Image, Mr.
Rice developed advertising and promotional campaigns for subsidiaries of Unocal,
Chevron, Texaco, Mobil, and other major oil companies. In 1982 Mr. Rice joined
National Image's sales department and eventually became a regional vice
president. Mr. Rice attended California State University of Northridge where he
earned a degree in Business Administration with an emphasis in Finance and a
minor in real estate. Mr. Rice is the brother of Fredrick Rice.
DR. DOUGLAS BENSON became a Director in August 1998. Dr. Benson has
practiced family medicine in Los Angeles, California for 37 years. Dr. Benson
received his Bachelor degree from Andrews University and his Doctor of Medicine
from Loma Linda University. Dr. Benson served on the Board of Directors of
Andrews University for over ten years. He was a founder, majority stockholder,
and Director of Heritage Bank in Berrien Springs, Michigan which received praise
from the Michigan Bank
46
<PAGE>
Examiners Office as the first bank to show a profit in the first year of
business. Now retired, Dr. Benson manages his investments which include
commercial and farm real estate, real estate development, and Hardwood Equities,
a company that produces black walnut trees. Dr. Benson is the general partner of
Edwin S. Johnston Co., a purchaser of shares of CNM in CNM's previous private
placement of stock. See "SELLING SECURITY HOLDERS."
MARK J. RICHARDSON has been a Director of CNM since September 30, 1998. Mr.
Richardson has been in the private practice of law since 1978 in the areas of
corporate and securities law, and has had his own law firm in those practice
areas since June 1993. Prior to forming his own law firm, Mr. Richardson was a
partner and an associate in private law firms and the Vice-President of a
Southern California savings and loan institution, responsible for real estate
securities. Mr. Richardson graduated from the University of Michigan summa cum
laude in 1975 with a Bachelors of Science from the School of Natural Resources,
with Phi Beta Kappa honors. Mr. Richardson earned a Juris Doctor from the
University of Michigan Law School in 1978, graduating cum laude. Mr. Richardson
is a member of the California State Bar and Los Angeles County Bar Associations.
He was a contributing author to the Prentice Hall publication CALIFORNIA STATE
PARTNERSHIP LAW from 1985 to 1993.
All directors hold office until the next annual meeting of stockholders and
until their successors are elected. Officers are elected to serve, subject to
the discretion of the Board of Directors, until their successors are appointed.
BOARD OF DIRECTORS AND COMMITTEES
CNM's Board of Directors presently consists of five members: Fredrick J.
Rice, Charles Rice, Mark J. Richardson, Kenneth K. Lattin, and Dr. Douglas
Benson. The Board of Directors may be expanded in the future. All employee and
consultant compensation, including payroll expenditures, salaries, stock
options, stock incentives, and bonuses, must be approved by the unanimous
consent of the members of the Compensation Committee of CNM's Board of
Directors, whose members have not yet been determined. The Compensation
Committee is expected to be comprised of Directors who are not executive
officers of CNM. The Bylaws of CNM generally provide for majority approval of
directors in order to adopt resolutions.
The Board of Directors intends to appoint an Audit Committee. The Audit
Committee will be authorized by the Board of Directors to review, with CNM's
independent accountants, the annual financial statements of CNM prior to
publication, and to review the work of, and approve non-audit services preformed
by, such independent accountants. The Audit Committee will make annual
recommendations to the Board for the appointment of independent public
accountants for the ensuing year. The Audit Committee will also review the
effectiveness of the financial and accounting functions and the organization,
operations and management of CNM.
EXECUTIVE COMPENSATION
No executive officer of CNM received compensation from CNM in excess of
$100,000 during the fiscal year ending December 31, 1997. Upon the availability
of funds, CNM expects to commence paying an annual salary to Fredrick Rice, the
President and Chairman of the Board of Directors of CNM, equal to $180,000 per
year, as well as a company automobile allowance. The compensation payable to
CNM's executive officers will generally not exceed that which is customarily
paid in the industry by companies of comparable size and in the same geographic
areas. Directors receive no cash compensation for their services to CNM as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors.
47
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board are expected
to be an officer or employee of CNM. No executive officer of CNM serves as a
member of the Board of Directors or compensation committee of any other entity
that has one or more executive officers serving on CNM's Compensation Committee.
EMPLOYMENT AGREEMENTS AND STOCK OPTION PLAN
We have entered into employment agreements with our executive officers and
other key employees of CNM. All of the employment agreements are terminable at
will. A stock incentive program (the "1997 Stock Option Plan") for the
directors, executive officers, employees and key consultants of the Company has
been adopted pursuant to which 2,000,000 shares of authorized but unissued
Series 1 Class A Common Stock and 100,000 shares of authorized but uninsured
Series 1 Class B Common Stock have been reserved for issuance to the officers,
directors, employees and key consultants of CNM. Within 90 days after the
effective date of the Registration Statement encompassing this Prospectus, CNM
intends to file a Form S-8 Registration Statement registering CNM's 1997 Stock
Option Plan under the Securities Act of 1933, as amended, as well as the other
stock options issued outside of the 1997 Stock Option Plan. See "DESCRIPTION OF
CAPITAL STOCK--Stock Options Granted Outside of the Plan." As of October 7,
1998, the following stock options have been issued to the directors, executive
officers and key employees of CNM under the 1997 Stock Option Plan:
OPTIONS FOR SERIES 1 CLASS A COMMON STOCK
<TABLE>
<CAPTION>
DATE OF NUMBER OF VESTING EXERCISE EXPIRATION
NAME OF GRANTEE GRANT OPTIONS SCHEDULE(1) PRICE(2) DATE
- --------------------------------------------- --------- ----------- ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Randy D. Greene.............................. 12/15/97 200,000 40,000: 12/15/97 $ 2.00 12/15/2000
40,000: 12/15/98 12/15/2001
40,000: 12/15/99 12/15/2002
40,000: 12/15/00 12/15/2003
40,000: 12/15/01 12/15/2004
Donald Lee Carver............................ 3/25/98 200,000 40,000: 3/25/98 $ 2.00 3/25/2001
40,000: 3/25/99 3/25/2002
40,000: 3/25/00 3/25/2003
40,000: 3/25/01 3/25/2004
40,000: 3/25/02 3/25/2005
Christopher L. Young......................... 3/16/98 100,000 20,000: 3/16/98 $ 2.00 3/16/2001
20,000: 3/16/99 3/16/2002
20,000: 3/16/00 3/16/2003
20,000: 3/16/01 3/16/2004
20,000: 3/16/02 3/16/2005
Christopher L. Young......................... 8/31/98 100,000 20,000: 8/31/98 $ 2.00 8/31/2001
20,000: 8/31/99 8/31/2002
20,000: 8/31/00 8/31/2003
20,000: 8/31/01 8/31/2004
20,000: 8/31/02 8/31/2005
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
DATE OF NUMBER OF VESTING EXERCISE EXPIRATION
NAME OF GRANTEE GRANT OPTIONS SCHEDULE(1) PRICE(2) DATE
- --------------------------------------------- --------- ----------- ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Jon P. DeOng................................. 3/16/98 100,000 20,000: 3/16/98 $ 2.00 3/16/2001
20,000: 3/16/99 3/16/2002
20,000: 3/16/00 3/16/2003
20,000: 3/16/01 3/16/2004
20,000: 3/16/02 3/16/2005
Jon P. DeOng................................. 8/31/98 100,000 20,000: 8/31/98 $ 2.00 8/31/2001
20,000: 8/31/99 8/31/2002
20,000: 8/31/00 8/31/2003
20,000: 8/31/01 8/31/2004
20,000: 8/31/02 8/31/2005
Christopher Fogel............................ 3/31/98 100,000 20,000: 3/30/98 $ 2.00 3/30/2001
20,000: 3/30/99 3/30/2002
20,000: 3/30/00 3/30/2003
20,000: 3/30/01 3/30/2004
20,000: 3/30/02 3/30/2005
Christopher Fogel............................ 8/31/98 100,000 20,000: 8/31/98 $ 2.00 8/31/2001
20,000: 8/31/99 8/31/2002
20,000: 8/31/00 8/31/2003
20,000: 8/31/01 8/31/2004
20,000: 8/31/02 8/31/2005
Olivia Salyer................................ 12/15/97 20,000 4,000: 12/15/97 $ 2.00 12/15/2000
4,000: 12/15/98 12/15/2001
4,000: 12/15/99 12/15/2002
4,000: 12/15/00 12/15/2003
4,000: 12/15/01 12/15/2004
Olivia Salyer................................ 5/01/98 10,000 2,000: 5/01/98 $ 2.00 5/01/2001
2,000: 5/01/99 5/01/2002
2,000: 5/01/00 5/01/2003
2,000: 5/01/01 5/01/2004
2,000: 5/01/02 5/01/2005
Richard Knittle.............................. 7/01/98 20,000 4,000: 7/01/98 $ 2.00 7/01/2001
4,000: 7/01/99 7/01/2002
4,000: 7/01/00 7/01/2003
4,000: 7/01/01 7/01/2004
4,000: 7/01/02 7/01/2005
Charles Rice................................. 7/01/98 300,000 60,000: 7/01/98 $ 2.00 7/01/2001
60,000: 7/01/99 7/01/2002
60,000: 7/01/00 7/01/2003
60,000: 7/01/01 7/01/2004
60,000: 7/01/02 7/01/2005
Kenneth K. Lattin............................ 8/04/98 400,000 80,000: 8/04/98 $ 2.00 8/04/2001
80,000: 8/04/99 8/04/2002
80,000: 8/04/00 8/04/2003
80,000: 8/04/01 8/04/2004
80,000: 8/04/02 8/04/2005
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
DATE OF NUMBER OF VESTING EXERCISE EXPIRATION
NAME OF GRANTEE GRANT OPTIONS SCHEDULE(1) PRICE(2) DATE
- --------------------------------------------- --------- ----------- ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Dr. Douglas Benson........................... 8/31/98 100,000 20,000: 8/31/98 $ 2.00 8/31/2001
20,000: 8/31/99 8/31/2002
20,000: 8/31/00 8/31/2003
20,000: 8/31/01 8/31/2004
20,000: 8/31/02 8/31/2005
Judd L. Bourgeois............................ 8/31/98 10,000 2,000: 8/31/98 $ 2.00 8/31/2001
2,000: 8/31/99 8/31/2002
2,000: 8/31/00 8/31/2003
2,000: 8/31/01 8/31/2004
2,000: 8/31/02 8/31/2005
William J. Lawrence.......................... 8/31/98 5,000 1,000: 8/31/98 $ 2.00 8/31/2001
1,000: 8/31/99 8/31/2002
1,000: 8/31/00 8/31/2003
1,000: 8/31/01 8/31/2004
1,000: 8/31/02 8/31/2005
Eric Hankins................................. 8/31/98 20,000 4,000: 8/31/98 $ 2.00 8/31/2001
4,000: 8/31/99 8/31/2002
4,000: 8/31/00 8/31/2003
4,000: 8/31/01 8/31/2004
4,000: 8/31/02 8/31/2005
Denise J. Garcia............................. 8/31/98 5,000 1,000: 8/31/98 $ 2.00 8/31/2001
1,000: 8/31/99 8/31/2002
1,000: 8/31/00 8/31/2003
1,000: 8/31/01 8/31/2004
1,000: 8/31/02 8/31/2005
Mark J. Richardson........................... 9/30/98 50,000 10,000: 9/30/98 $ 2.00 9/30/2001
10,000: 9/30/99 9/30/2002
10,000: 9/30/00 9/30/2003
10,000: 9/30/01 9/30/2004
10,000: 9/30/02 9/30/2005
Laura D. Murtagh............................. 9/30/98 25,000 5,000: 9/30/98 $ 2.00 9/30/2001
5,000: 9/30/99 9/30/2002
5,000: 9/30/00 9/30/2003
5,000: 9/30/01 9/30/2004
5,000: 9/30/02 9/30/2005
William Wu................................... 10/07/98 5,000 1,000: 10/07/98 $ 2.00 10/7/2001
1,000: 10/07/99 10/7/2002
1,000: 10/07/00 10/7/2003
1,000: 10/07/01 10/7/2004
1,000: 10/07/02 10/7/2005
</TABLE>
- ------------------------
(1) The vesting of stock options granted to certain officers, directors, key
employees and consultants accelerates under certain circumstances in the
event that we sell all or substantially all of our assets, merges with
another company, are acquired by another company, or enter into a similar
business combination.
50
<PAGE>
(2) The exercise price is equal to the fair market value of each share of CNM's
Common Stock on the date of the issuance of the options. Each stock option
for Series 1 Class A Common Stock confers upon the holder the right to
purchase one share of CNM's Series 1 Class A Common Stock for a price of
$2.00 per share at any time from the vesting date to the expiration date.
KEY EMPLOYEES AND CONSULTANTS
We have certain key employees and consultants who will assist in product and
solution development, and implementation and marketing for us. These key
employees and consultants will also perform marketing, administrative, and other
services for us.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Under California Corporation Law and CNM's Amended and Restated Articles of
Incorporation, CNM's directors will have no personal liability to CNM or CNM's
stockholders for monetary damages incurred as the result of the breach or
alleged breach by a director of his "duty of care". This provision does not
apply to the director's (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its shareholders or that involve the absence of good faith on the part of the
director, (iii) approval of any transaction from which a director derives an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the corporation or its shareholders in circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
corporation or its shareholders, (v) acts or omissions that constituted an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders, or (vi) approval of an unlawful
dividend, distribution, stock repurchase or redemption. This provision would
generally absolve directors of personal liability for negligence in the
performance of duties, including gross negligence.
The effect of this provision in CNM's Amended and Restated Articles of
Incorporation is to eliminate the rights of CNM and CNM's stockholders (through
stockholder's derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of his fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (vi) above.
This provision does not limit nor eliminate the rights of CNM or any stockholder
to seek non-monetary relief such as an injunction or rescission in the event of
a breach of a director's duty of care. In addition, CNM's Amended and Restated
Articles of Incorporation provide that if California law is amended to authorize
the future elimination or limitation of the liability of a director, then the
liability of the directors will be eliminated or limited to the fullest extent
permitted by the law, as amended. The California Corporations Code grants
corporations the right to indemnify their directors, officers, employees and
agents in accordance with applicable law. CNM's Bylaws provide for
indemnification of such persons to the full extent allowable under applicable
law. These provisions will not alter the liability of the directors under
federal securities laws.
CNM intends to enter into agreements to indemnify CNM's directors and
officers, in addition to the indemnification provided for in CNM's Bylaws. These
agreements, among other things, indemnify CNM's directors and officers for
certain expenses (including attorney's fees), judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by or in the right of CNM, arising out of such person's services as a
director or officer of CNM, any subsidiary of CNM or any other company or
enterprise to which the person provides services at the request of CNM. CNM
believes that these provisions and agreements are necessary to attract and
retain qualified directors and officers.
51
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling CNM pursuant to
the foregoing provisions, CNM has been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Under the California Corporations Code, a corporation's articles of
incorporation can be amended by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote, and a majority of the
outstanding stock of each class entitled to vote as a class, unless the
certificate requires the vote of a larger portion of the stock. CNM's Restated
Articles of Incorporation do not require a larger percentage affirmative vote.
As is permitted by the California Corporations Code, CNM's Bylaws give our Board
of Directors the power to adopt, amend or repeal CNM's Bylaws. CNM's
shareholders entitled to vote have concurrent power to adopt, amend or repeal
CNM's Bylaws.
CERTAIN TRANSACTIONS
Fredrick Rice and certain associates formed Consumer Net Partners, a
California general partnership ("CNP") in 1996. CNP provided the start-up equity
for the Internet shopping mall concept and previously held certain rights and
interests in the electronic shopping mall business. Pursuant to CNP's
Partnership Agreement, it retained a right to receive 75% of net income
generated by CNM. From inception through December 31, 1997 the CNM shopping mall
business had not generated any net income. Fredrick Rice also serves as the
President and sole shareholder of Consumers On-Line Development, Inc. Consumers
On-Line Development, Inc. was primarily responsible for managing and overseeing
the development, creation, establishment and marketing of the CNM electronic
shopping mall. Pursuant to a Management Agreement with CNP, Consumers On-Line
Development, Inc. had a 25% net revenue interest in revenue received by CNP
which is generated by the CNM electronic shopping mall business.
In July 1997, Consumers On-Line Development, Inc. dissolved and assigned all
of its rights to CNP. On December 31, 1997, CNM purchased all the rights and
interest held by CNP in the CNM Internet shopping mall business, including all
rights pursuant to the Management Agreement between CNP and Consumers On-Line
Development, Inc. CNM issued to CNP a non interest-bearing promissory note in
the principal amount of $500,000, payable on demand, and an option to purchase
250,000 shares of CNM's Series 1 Class B Common Stock at an exercise price of
$.50 per share for a period of three years, in consideration for CNP's rights in
CNM's business. See "BUSINESS--Previous Financing And Development Arrangement."
CNM has not and does not anticipate obtaining an independent valuation of the
rights and interests being purchased. Although the Company believes the purchase
consideration to be fair and reasonable, we cannot assure that such
consideration reflects the true value of the rights and interests being
acquired.
Due to the positions held by Mr. Rice, he has a potential conflict of
interest in any transactions between CNM and CNP. Mr. Rice is aware of these
conflicts and will endeavor at all times to do what is in the best interest of
each entity with which he is affiliated. If an objection is raised or if he
should determine, on his own volition, that he cannot overcome any real or
perceived conflict, Mr. Rice would withdraw from participating in such
transaction. As indicated previously, CNM's purchase of rights from CNP received
the approval of a majority in-interest of the general partners of CNP. Mr. Rice
does not personally have any voting rights in the CNP general partnership.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
GENERAL
The following table sets forth certain information regarding the beneficial
ownership of CNM's Common Stock as of October 8, 1998: (a) by each person who is
known by CNM to own beneficially more than 5% of CNM's Common Stock, (b) by each
of CNM's executive officers and directors, and (c) by all officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF OWNER OWNED(1) OFFERING(2) OFFERING(3)
- ----------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Fredrick Rice(4) ................................................
1900 Los Angeles Ave., Second Floor
Simi Valley, California 93065 5,000,000 76.5% 46.9%
All officers and directors
as a group (5 persons)......................................... 5,000,000(5) 76.5% 46.9%
</TABLE>
- ------------------------
(1) The person named in the table has sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by him,
except as otherwise indicated.
(2) Reflects 1,534,250 shares of CNM's Common Stock previously issued (as of
October 8, 1998) in a private placement to outside investors. See
"BUSINESS--Prior Private Placement of Stock."
(3) Assumes the issuance of 3,596,577 Shares offered by this Prospectus and the
sale of 250,000 outstanding shares of Common Stock owned by Fredrick Rice.
See "SELLING SECURITY HOLDERS."
(4) Fredrick Rice is the President, Chief Financial Officer, and Chairman of the
Board of Directors of CNM. Mr. Rice received these shares as the founder of
CNM. See "MANAGEMENT."
(5) Does not include (a) 75,000 shares of Series 1 Class B Common Stock owned by
a prior unaffiliated consultant to CNM, (b) stock options to purchase up to
1,970,000 shares of CNM's Series 1 Class A Common Stock held by the
executive officers, directors and employees of CNM, 394,000 of which are
currently vested, (c) stock options to purchase up to 250,000 shares of CNM
Series 1 Class B Common Stock held by Consumer Net Partners, an affiliated
general partnership, and (d) stock options to purchase up to 127,500 shares
of CNM's Series 1 Class A Common Stock granted to certain investors outside
of CNM's 1997 Stock Option Plan, 25,500 of which are currently vested. See
"MANAGEMENT--Employment Agreements and Stock Options," "BUSINESS--Previous
Financing and Development Arrangement," and "DESCRIPTION OF CAPITAL
STOCK--Stock Options Granted Outside Plan."
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
CNM's authorized capital stock consists of 50,000,000 shares of Series 1
Class A Common Stock, no par value per share, of which 6,534,250 are issued and
outstanding, 1,000,000 shares of Series 1 Class B Common Stock, $.001 par value
per share, of which 75,000 shares are issued and outstanding and 1,000,000
shares of Preferred Stock, no par value per share, none of which is issued. See
"CAPITALIZATION."
COMMON STOCK
CNM is authorized to issue 50,000,000 shares of Series 1 Class A Common
Stock, no par value per share, of which 6,534,250 shares are issued and
outstanding as of October 8, 1998. Holders of Series 1 Class A Common Stock are
entitled to dividends when, as, and if declared by the Board of Directors out of
funds available therefor, subject to any priority as to dividends for Preferred
Stock that may be outstanding. See "DIVIDEND POLICY." Holders of Series 1 Class
A Common Stock are entitled to cast one vote for each share held at all
stockholder meetings for all purposes, including the election of directors. The
holders of more than 50% of the Series 1 Class A Common Stock issued and
outstanding are entitled to vote, present in person or by proxy and constitute a
quorum at all meetings of stockholders. The vote of the holders of a majority of
Series 1 Class A Common Stock present at such a meeting will decide any question
brought before such meeting, except for certain actions such as amendments to
CNM's Restated Articles of Incorporation, mergers or dissolution's which require
the vote of the holders of a majority of the outstanding Series 1 Class A Common
Stock. Upon liquidation or dissolution, the holder of each outstanding share of
Series 1 Class A Common Stock will be entitled to share equally in the assets of
CNM legally available for distribution to such stockholder after payment of all
liabilities and after distributions to preferred stockholders legally entitled
to such distributions. Holders of Series 1 Class A Common Stock do not have any
preemptive, subscription or redemption rights. They are entitled to cumulative
voting rights under the California Corporations Code. Under cumulative voting,
minority shareholders may have the right to vote one or more members onto CNM's
Board of Directors. See "DESCRIPTION OF CAPITAL STOCK--Cumulative Voting." The
Series 1 Class B Common Stock essentially has all of the same rights as the
Series 1 Class A Common Stock on a pro rata basis, including with respect to a
liquidation, except that the holders of Series 1 Class B Common Stock have no
voting or dividend rights. Each share of Series 1 Class B Common Stock is
convertible into one share of Series 1 Class A Common Stock at any time. All
outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
CNM has authorized 1,000,000 shares of Preferred Stock, no par value. As of
October 8, 1998 CNM has not issued any shares of Preferred Stock. The Preferred
Stock may be issued in such series as are designated by CNM's Board of
Directors, and the Board of Directors may fix the number of authorized shares of
Preferred Stock for each series, and the rights, preferences, and privileges of
each series of Preferred Stock.
STOCK OPTIONS GRANTED OUTSIDE PLAN
CNM has granted stock options to purchase a total of 127,500 shares of CNM's
Series 1 Class A Common Stock to 15 individuals outside of the 1997 Stock Option
Plan. The exercise price of all of these stock options is $2.00 per share and
they are exercisable for three years after vesting. The stock options were
granted during the period of June 20, 1997 to August 31, 1998. The stock options
vest one-fifth upon grant and one-fifth each year thereafter over a four year
vesting period. Accordingly, as of October 7, 1998, 25,500 of the 127,500 stock
options granted had vested. The stock options granted
54
<PAGE>
outside of the plan include 5,000 stock options granted to Bruce Seidel,
President of the Southern California Shelter Division of Eller Media Company,
and 5,000 stock options granted to Paul Thompson, Account Executive of the
Southern California Division of Eller Media Company. The stock options granted
outside of the plan also include 50,000 stock options granted to Edward Allen
Consulting, an Internet marketing consulting firm. Edward Allen consulting is
owned by the brother of Fredrick Rice, the President of CNM. These stock options
were granted during the period from July 1997 to August 1998. See
"BUSINESS--Proposed Agreement with Eller Media."
CUMULATIVE VOTING
Pursuant to CNM's Bylaws and in accordance with the California Corporations
Code, each holder of Series 1 Class A Common Stock is entitled to one vote for
each share of CNM's Common Stock held, and such holders may be entitled to
cumulative voting rights in the election of directors. Under the California
Corporations Code, cumulative voting is not required unless, at the annual
meeting and prior to the voting, at least one shareholder gives notice of his
intention to cumulate his votes. If one shareholder gives notice of an intention
to cumulate votes, then all shareholders have cumulative voting rights in the
election of directors. If no such notice is given, voting for directors is
non-cumulative, which means that a simple majority of the shares voting may
elect all of the directors. Under cumulative voting, each shareholder entitled
to vote has the right to give one candidate a number of votes equal to the
number of authorized directors multiplied by the number of votes to which his
shares are entitled, or to distribute his votes on the same principle among as
many candidates as he desires. As a result, each share of CNM's Series 1 Class A
Common Stock has a number of votes equal to the number of authorized directors.
The California cumulative voting law applies only to the election of directors
and not to any other matters as to which shareholders may vote.
TRANSFER AGENT AND REGISTRAR
CNM has selected US Stock Transfer Corporation in Glendale, California as
the Transfer Agent and Registrar.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for CNM's Common Stock.
Future sales of Common Stock in the public market could adversely affect market
prices prevailing from time to time. Sales of substantial amounts of Common
Stock of CNM in the public market after various restrictions lapse could
adversely affect the prevailing market price and the ability of CNM to raise
equity capital in the future.
Upon the completion of this offering, assuming that the maximum number of
Shares offered by this Prospectus are sold, CNM will have 10,130,827 shares of
Common Stock, of which 3,596,577 Shares of Common Stock and 403,423 Outstanding
Shares sold in this offering will be freely tradable without restriction under
the Securities Act. The 6,609,250 shares of Common Stock held by existing
stockholders prior to this offering were issued and sold by CNM in reliance on
exemptions from the registration requirements of the Securities Act and are
deemed "restricted shares" under Rule 144. These shares may be sold in the
public market only if registered, or pursuant to an exemption from registration
such as Rules 144, 144(k) or 701 under the Securities Act of 1933, as amended.
The existing shareholders of CNM have not entered into any lock-up or other
agreements pursuant to which they have agreed not to sell the stock of CNM that
they own. Accordingly, 5,075,000 shares will become eligible for immediate
public resale subject to Rule 144, including the volume limitations of Rule
144(e). The remaining 1,534,250 shares held by existing stockholders will become
eligible for public resale at various times following expiration of the one-year
holding periods pursuant to Rule 144(d), subject to the volume limitations of
Rule 144(e). After a holding period of two years, non-affiliates of CNM may sell
their shares without volume limitations pursuant to Rule 144(k).
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 10,130,827
shares immediately after this offering) or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to certain manner of sale provisions and notice requirements
and to the availability of current public information about CNM. Under Rule
144(k), a person who is not deemed to have been an affiliate of CNM at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 of the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144 without having to
comply with the holding period requirements of Rule 144 and, in the case of
persons who are not affiliates of CNM, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.
56
<PAGE>
SELLING SECURITY HOLDERS
THE OUTSTANDING SHAREHOLDERS
The selling shareholders include (i) Fredrick Rice who was issued a total of
5,000,000 founder's shares, and (ii) 120 investors who purchased 1,534,250
shares in a private placement between October 1, 1997 and October 8, 1998. The
selling security holders are offering 10% of their shareholdings in CNM pursuant
to this Prospectus, except Frederick Rice, the President and Chairman of the
Board of Directors of CNM, who is offering 5% of his shares in CNM. The
following table lists the selling security holders who are Outstanding
Shareholders and the number of outstanding shares of common stock offered by
them for sale.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF OUTSTANDING SHAREHOLDER(2) OUTSTANDING SHARES
- ------------------------------------------------------ ------------------
<S> <C>
Fredrick Rice(1)...................................... 250,000
Millard & Yvonne Fry.................................. 250
Bernice Harray........................................ 2,800
George F. Carlsten.................................... 1,150
Woodrow Cunningham.................................... 375
Francois Jamati....................................... 850
Vance H. Watland Trust................................ 250
Virgil C. Buhrman..................................... 250
Edward Greist & Margaret Layton....................... 500
Carl H. Karduck....................................... 500
Delores Henne......................................... 3,350
John & Henrietta Marino............................... 1,000
Bette Carmer & George Bailey.......................... 250
Thomas G. Nolta....................................... 6,250
Naomi F. Smith........................................ 225
Joseph Kadlec, Sr..................................... 872
Jack E. Allen......................................... 225
Albin J. Konchar...................................... 400
Laurence B. Falk...................................... 62
Joseph Brown, Jr...................................... 250
Howell L. Tarver...................................... 1,000
Leonard Eisner........................................ 250
Douglas Ariyoshi Family Trust......................... 250
John D. Rice.......................................... 1,500
David Gharaman........................................ 650
Peter & Jeanne McCauley............................... 400
Joseph & Mary Spisich................................. 300
Roger McClure......................................... 150
W. Andrew Stone....................................... 225
James L. Lafferty..................................... 1,000
Muriel Brobst......................................... 1,000
Paul & Sharon Montagne................................ 62
Walter Wulff.......................................... 1,000
Oran Bly.............................................. 125
Margaret G. Terrill................................... 100
Kenneth W. Terrill.................................... 100
Kenneth Hare.......................................... 62
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME OF OUTSTANDING SHAREHOLDER(2) OUTSTANDING SHARES
- ------------------------------------------------------ ------------------
<S> <C>
Stan Norman........................................... 250
Mary E. Peters........................................ 500
Robert C. Gregg....................................... 500
Robert W. Hitt........................................ 350
Terry D. Lee.......................................... 125
Nicholas F. Shehadi................................... 900
Judith Lampert........................................ 500
Edward & Joan Rodberg................................. 850
Lisa Rodberg.......................................... 250
Althea Jacobs......................................... 100
Bradley H. & Donn Greene.............................. 100
Yakov & Lillian Sapozhnikov........................... 500
George Walcott........................................ 125
Louis & Peggy Youlos.................................. 500
Joyce Johnson......................................... 100
Muriel Shandler....................................... 100
Laura Berg............................................ 300
Lillian Dickmon....................................... 625
Terry Harper.......................................... 500
William Kugler........................................ 500
Laroma Management..................................... 200
Alfred & Andrea Medina................................ 250
Alan & Dale Rodberg................................... 150
Estelle Tenenbaum..................................... 300
Lois Welsh............................................ 800
Wanda Wirick.......................................... 3,000
Rick & Renita Dechellis............................... 200
Ann McCauley.......................................... 50
Maureen McCauley...................................... 50
Edward J. Snider...................................... 5,250
Pearl N. Eyre......................................... 450
Lonnie Gene Prewitt................................... 1,250
Elaine Halko.......................................... 750
Labahn Personal Trust................................. 1,000
Patricia L. Gapik..................................... 150
Erwin Heiser.......................................... 1,500
William W. Straub, III................................ 500
Allen L. & Virginia Redfield.......................... 600
Theodore Nalepa....................................... 1,150
George & Paula Rountree............................... 100
Victor Suits.......................................... 125
Debra A. Boone........................................ 100
William & Marge Crombie............................... 200
John Sherman.......................................... 500
Charles Stewart....................................... 150
Dennis Bassett........................................ 2,500
Virgil Ice............................................ 125
Terry Daus............................................ 125
George M. Long........................................ 1,300
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME OF OUTSTANDING SHAREHOLDER(2) OUTSTANDING SHARES
- ------------------------------------------------------ ------------------
<S> <C>
Tom Johnson........................................... 250
Edwin S. Johnston Co.................................. 25,600
Jeffery Phillips & Barbara Rapaport................... 440
Robert & Jaqueline Haynes............................. 1,150
Bruce Lairmore........................................ 350
John M. Pata.......................................... 100
Paula Grassel......................................... 100
Brian Hurd............................................ 50
William Joseph Lucas.................................. 1,500
George M. Toran, Jr................................... 750
Anton and Hedy Grasl.................................. 1,000
Arthur Schoen......................................... 500
Corbin 22 Ltd......................................... 450
Candace Lee........................................... 500
Dede P. Wandel........................................ 500
Dennis & Patricia Rozsa............................... 500
Dennis D. Silver...................................... 1,500
Constante & Jane Tacata............................... 150
Jay George Stone...................................... 250
Robert & Shirley Torrey............................... 2,000
Anthony & Karen Wolosowski............................ 350
Frederick W. Brienen.................................. 100
Craig DeSalvo......................................... 600
Keith & Eunice Ethell................................. 250
Cornett Ferrell....................................... 500
Kenneth Hitts......................................... 125
Gerald Kopstein....................................... 125
Cyd Lucas............................................. 500
John & Irene Meany.................................... 2,500
Jane N. Park.......................................... 1,000
John & Ivalee Patterson............................... 125
Dr. Marvin A. Piper................................... 37,500
Mary Poulos........................................... 750
Louis Rahhal.......................................... 750
Charles Rice.......................................... 3,500
Lou Rice.............................................. 1,750
James Skeoch.......................................... 200
William R. Jones...................................... 75
John Oppelt........................................... 75
Karen Angone.......................................... 500
Dan Prunk............................................. 400
Mark Shah............................................. 200
Joseph Quenneville.................................... 250
Mitesh Parikh......................................... 500
Mary Hankins.......................................... 500
Dr. C. Todd and Lori Bridges.......................... 500
George Bridges........................................ 500
Dr. George I. "Trace" Bridges, III.................... 500
Jack Bryan............................................ 1,000
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME OF OUTSTANDING SHAREHOLDER(2) OUTSTANDING SHARES
- ------------------------------------------------------ ------------------
<S> <C>
Major Gregory Lang.................................... 500
Matthias Dautremont................................... 50
Paresh Patel.......................................... 300
Kalyan Majmundar...................................... 100
Paul Pantera.......................................... 150
American Mortgage Professionals, Inc.................. 200
Mary Jane Von Bokel................................... 125
Robert & Victoria Brooks.............................. 250
</TABLE>
- ------------------------
(1) Fredrick Rice is the President and Chairman of the Board of Directors.
(2) These individuals, other than Mr. Rice, purchased these Outstanding Shares
for $2.00 per share in a private placement of Common Stock made by CNM
commencing on October 1, 1997 and terminating on October 8, 1998.
PLAN OF DISTRIBUTION
The Shares are being offered by CNM on a best-efforts basis by our officers,
directors and employees, and possibly through registered broker-dealers selected
by us who are members of the National Association of Securities Dealers, Inc. or
independent referral sources. As of the date of this Prospectus, the Company had
not entered into selling agreements with any registered broker-dealers. No
selling commissions will be paid to the officers, employees or directors of CNM
for Common Stock or outstanding shares of Common Stock sold by or through them.
CNM will pay selling commissions to participating broker-dealers equal to a
percentage of the purchase price of the Common Stock and outstanding shares of
Common Stock sold by them, to be determined by management in negotiations with
such parties. CNM may also reimburse participating broker-dealer firms for due
diligence costs on an accountable or non-accountable basis. CNM will indemnify
participating broker-dealer firms, if any, with respect to the disclosures made
in this Prospectus. The Common Stock and outstanding shares of Common Stock will
be sold together as shares are sold in this offering, in proportion to the
relative number of shares of Common Stock and outstanding shares of Common Stock
covered by this Prospectus, subject to mathematical rounding when necessary.
Accordingly, when a lot of 100 shares is sold pursuant to this Prospectus, nine
shares will be outstanding shares of Common Stock and 91 shares will be shares
of Common Stock issued by CNM. As among the outstanding shareholders of Common
Stock, their shares will be sold on a pro rata basis in accordance with the
relative number of outstanding shares of Common Stock offered by them pursuant
to this Prospectus.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by CNM and may not
be indicative of the market price of the Common Stock following this offering.
Among the factors to be considered in such determination are prevailing market
conditions, certain financial information of CNM, market valuations of other
companies that CNM believes to be comparable to CNM, estimates of the business
potential of CNM, the present state of CNM's development and other factors
deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Richardson & Associates, Santa Monica,
California. Mark J. Richardson, Esq. and Laura Murtagh, Esq, members of the law
firm, are a director and corporate secretary of CNM, respectively, positions
which they have held since September 30, 1998. Mr. Richardson and Ms. Murtagh
have stock options in CNM. See "MANAGEMENT."
60
<PAGE>
EXPERTS
The financial statements as of December 31, 1997 and for the twelve month
period ending December 31, 1997 included in this Prospectus and Registration
Statement have been so included in reliance on the report of Stonefield
Josephson, independent certified accountants, given on the authority of said
firm as experts in auditing and accounting. The financial statements as of
December 31, 1996 and for the period from inception on May 9, 1996 to December
31, 1996 included in this Prospectus and Registration Statement have been so
included in reliance on the report of Caldwell, Becker, Dervin, Petrick & Co.,
independent certified public accountants, given on the authority of said firm as
experts in auditing and accounting.
GLOSSARY
<TABLE>
<S> <C>
ADSL...................... Asymmetric Digital Subscriber
Line
CLEC...................... Competitive Local Exchange
Carrier
CNM....................... Consumer Net Marketplace, Inc.
CNP....................... Consumer Net Partners, a
California general partnership
COLD Group................ Consumers On-Line Development
Group, Inc.
DSL....................... Digital Subscriber Lines
FCC....................... Federal Communications
Commission
IDC....................... International Data Corporation
IDSL...................... ISDN Digital Subscriber Line
IPP....................... Internet Presence Provider
ISP....................... Internet Service Provider
IXC....................... Interexchange Carrier
LAN....................... Local Area Network
NASDAQ.................... The National Automated Dealer
Quotation System operated by
the NASDAQ Stock Market, Inc.
NASDAQ Small Cap Market... An interdealer quotation system
for smaller companies operated
by NASDAQ
Offering.................. Our initial public offering of
shares under this prospectus and
registered under our
registration statement
POP....................... Point of Presence
Prospectus................ This document
PVC....................... Public Utility Commission
QOS....................... Quality of Service
RADSL..................... Rate Adaptive Digital Subcriber
Line
RBOC...................... Regional Bell Operating Carrier
</TABLE>
61
<PAGE>
<TABLE>
<S> <C>
Registration Statement.... Our registration statement on
the Form S-1 filed with the SEC
as of the date of this
prospectus, which includes
exhibits and other information
that is not included in this
prospectus
SDSL...................... Symmetric Digital Subscriber
Line
SEC....................... The Securities and Exchange
Commission
Securities Act............ The Securities Act of 1933, as
amended
SMTP...................... Simple Mail Transport Protocol
Transfer Agent............ US Stock Transfer Corporation
VoIP...................... Voice Over Internet Protocol
VPN....................... Virtual Private Network
WAN....................... Wide Area Network
"We"...................... Consumer Net Marketplace, Inc.
</TABLE>
ADDITIONAL INFORMATION
CNM has filed a registration statement on Form S-1 (the "Registration
Statement") with the Commission under the Securities Act in respect of the
Common Stock offered hereby. This Prospectus omits certain information contained
in the Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to CNM and the Common Stock
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto, and Financial Statements and Notes thereto filed as a part
thereof. Statements herein concerning the contents of any contract or other
document filed with the Commission as an exhibit to the Registration Statement
are not necessarily complete and are qualified in all respects by such
reference. Copies of the Registration Statement, including all exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the Public
Reference Section of the Commission upon payment of certain fees prescribed by
the Commission.
We intend to furnish our stockholders with annual reports containing audited
financial statements certified by our independent accountants and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial information.
62
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Stonefield Josephson, Inc., Independent Auditors at December 31, 1997........................... F-1
Report of Independent Auditors at December 31, 1996....................................................... F-2
Balance Sheet at June 30, 1998 (unaudited), December 31, 1997 and December 31, 1996....................... F-3
Statement of Operations for the six months ended June 30, 1998 (unaudited) and June 30, 1997 (unaudited)
and for the years ended December 31, 1997 and December 31, 1996 and for the period from May 9, 1996
(date of inception) to June 30, 1998.................................................................... F-4
Statement of Shareholders' Deficit for the six months ended June 30, 1998 (unaudited) and June 30, 1997
(unaudited) and for the years ended December 31, 1997 and December 31, 1996 and for the period from May
9, 1996 (date of inception) to June 30, 1998............................................................ F-5
Statements of Cash Flows for the six months ended June 30, 1998 (unaudited) and June 30, 1997 (unaudited)
and for the years ended December 31, 1997 and December 31, 1996 and for the period from May 9, 1996
(date of inception) to June 30, 1998.................................................................... F-7
Notes to Financial Statements............................................................................. F-10
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Consumer Net Marketplace, Inc.
Simi Valley, California
We have audited the accompanying balance sheet of Consumer Net Marketplace,
Inc. as of December 31, 1997, and the related statements of operations,
shareholders' deficit and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 statement. An audit 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 financial statements referred to above present fairly,
in all material respects, the financial position of Consumer Net Marketplace,
Inc. at December 31, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13, the Company
has had significant losses in the past, and has been dependent on outside equity
investors to finance its operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans with
respect to these matters are described in Note 13 to the financial statements.
The financial statements do not included any adjustments that might result from
the outcome of these uncertainties.
Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
August 25, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
August 22, 1997
To the Board of Directors and Stockholders
Consumer Net Marketplace
Simi Valley, California
We have audited the accompanying balance sheet of Consumer Net Marketplace,
(A California S Corporation), (a development stage company) as of December 31,
1996, and the related statements of (loss), stockholder(1)s (deficit), and cash
flows for the period from inception (May 10, 1996) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit 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, such financial statements referred to above present fairly,
in all material respects, the financial position of Consumer Net Marketplace as
of December 31, 1996, and the results of its operations and its cash flows for
the initial period then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, there is doubt about the ability of the Company to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
- ------------------------------------------------------------
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
F-2
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
JUNE 30, ------------- ------------
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................... $ 21,800 $ 6,546 $ 701
Accounts and advances receivable, net of allowance for doubtful
accounts......................................................... 2,365 1,940 2,043
Prepaid advertising................................................ 573,600 -- --
Loan receivable, shareholder....................................... 500 500 500
------------- ------------- ------------
Total current assets............................................. 598,265 8,986 3,244
------------- ------------- ------------
PROPERTY AND EQUIPMENT, net.......................................... 214,480 55,574 20,092
DEFERRED OFFERING COSTS.............................................. 14,998 15,137 --
OTHER ASSETS......................................................... 29,227 2,276 2,459
------------- ------------- ------------
258,705 72,987 22,551
------------- ------------- ------------
$ 856,970 $ 81,973 $ 25,795
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, related party....................................... $ 500,000 $ 500,000 $ 87,037
Note payable, bank................................................. 8,510 -- --
Accounts payable and accrued expenses.............................. 159,900 124,377 40,757
Accrued advertising expenses....................................... 573,600 -- --
------------- ------------- ------------
Total current liabilities........................................ 1,242,010 624,377 127,794
------------- ------------- ------------
CONTINGENCIES AND COMMITMENTS
SHAREHOLDERS' DEFICIT:
Common stock; Series 1, Class A, no par value, 20,000,000 shares
authorized, 5,448,800 shares issued and outstanding.............. 898,100 137,500 500
Common stock; Series 1, Class B, convertible, par value $.001,
1,000,000 shares authorized, 75,000 shares issued and
outstanding...................................................... 525,000 525,000 --
Deficit accumulated during the development stage................... (1,808,140) (1,204,904) (102,499)
------------- ------------- ------------
Total shareholders' deficit...................................... (385,040) (542,404) (101,999)
------------- ------------- ------------
$ 856,970 $ 81,973 $ 25,795
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-3
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 9, 1996 MAY 9, 1996
SIX MONTHS YEAR ENDED (INCEPTION) TO (INCEPTION)
ENDED JUNE DECEMBER 31, DECEMBER 31, TO JUNE 30,
30, 1997 1997 1996 1998*
----------- -------------- -------------- -----------
SIX MONTHS
ENDED JUNE (UNAUDITED)
30, 1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 11,713 $ 6,916 $ 30,697 $ 20,828 $ 63,238
Selling, general and
administrative expense....... 611,786 16,290 394,900 121,334 1,128,020
Loss on acquisition of
partnership interest from
related party................ -- -- 733,562 -- 733,562
Bad debt expense............... 2,057 -- 3,840 1,193 7,090
----------- ----------- -------------- -------------- -----------
Net loss from operations....... (602,130) (9,374) (1,101,605) (101,699) (1,805,434)
Interest expense............... (306) -- -- -- (306)
----------- ----------- -------------- -------------- -----------
Net loss before income taxes... (602,436) (9,374) (1,101,605) (101,699) (1,805,740)
Provision for income taxes..... (800) (800) (800) (800) (2,400)
----------- ----------- -------------- -------------- -----------
Net loss....................... $(603,236) $ (10,174) $ (1,102,405) $ (102,499) ($1,808,140)
----------- ----------- -------------- -------------- -----------
----------- ----------- -------------- -------------- -----------
Net loss per common share basic
and diluted.................. $ (.11) $ (.00) $ (.22) $ (.02) $ (.14)
----------- ----------- -------------- -------------- -----------
----------- ----------- -------------- -------------- -----------
Weighted average number of
shares outstanding basic and
diluted...................... 5,273,290 5,003,619 5,037,857 5,000,000 5,273,290
----------- ----------- -------------- -------------- -----------
----------- ----------- -------------- -------------- -----------
</TABLE>
* Audited from inception to December 31, 1997 and unaudited from January 1,
1998 to June 30, 1998.
See accompanying independent auditors' report and notes to financial statements.
F-4
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES 1, CLASS A COMMON SERIES 1, CLASS B DEFICIT
STOCK COMMON STOCK ACCUMULATED DURING TOTAL
------------------------ -------------------- THE DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STAGE DEFICIT
------------ ---------- --------- --------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception
May 9, 1996.............................. 10,000,000 $ 1,000 -- $ -- $ -- $ 1,000
Cancellation of shares..................... (5,000,000) (500) -- -- -- (500)
Net loss for the year ended December 31,
1996..................................... -- -- -- -- (102,499) (102,499)
------------ ---------- --------- --------- ------------------ ------------
Balance at December 31, 1996............... 5,000,000 500 -- -- (102,499) (101,999)
Issuance of shares in connection with
services provided to the Company......... 75,000 150,000 -- 150,000
Issuance of shares in connection with
private placement........................ 72,250 137,000 -- -- -- 137,000
Issuance of Series 1, Class B Common Stock
options for repurchase of partnership
interest with related party.............. -- -- -- 375,000 -- 375,000
Net loss for the year ended December 31,
1997..................................... -- -- -- -- (1,102,405) (1,102,405)
------------ ---------- --------- --------- ------------------ ------------
Balance at December 31, 1997............... 5,072,250 137,500 75,000 525,000 (1,204,904) (542,404)
Issuance of shares in connection with
private placement (unaudited)............ 376,550 760,600 -- -- -- 760,600
Net loss for the six months ended June 30,
1998 (unaudited)......................... -- -- -- -- (603,236) (603,236)
------------ ---------- --------- --------- ------------------ ------------
Balance at June 30, 1998 (unaudited)....... 5,448,800 $ 898,100 75,000 $ 525,000 $ (1,808,140) $ (385,040)
------------ ---------- --------- --------- ------------------ ------------
------------ ---------- --------- --------- ------------------ ------------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-5
<PAGE>
(This page intentionally left blank.)
F-6
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM MAY PERIOD FROM
9, 1996 MAY 9, 1996
SIX MONTHS YEAR ENDED (INCEPTION) TO (INCEPTION)
ENDED JUNE DECEMBER 31, DECEMBER 31, TO JUNE 30,
30, 1997 1997 1996 1998*
----------- --------------- --------------- ------------
SIX MONTHS
ENDED JUNE (UNAUDITED)
30, 1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net loss......................... $(603,236) $ (10,174) $(1,102,405) $(102,499) $(1,808,140)
----------- ----------- --------------- --------------- ------------
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization.... 20,838 3,997 6,441 3,029 30,308
Non-reciprocal expenses paid by
affiliate...................... -- -- -- 880 880
Loss on acquisition of
partnership interest from
related party.................. -- -- 733,562 -- 733,562
Issuance of common stock for
services received.............. -- -- 150,000 -- 150,000
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable.............. (2,484) 1,706 (3,735) (3,236) (9,455)
Allowance for doubtful
accounts....................... 2,057 (1,193) 3,838 1,193 7,088
Other assets..................... (27,043) -- -- (2,520) (29,563)
Prepaid advertising costs........ (573,600) -- -- -- (573,600)
INCREASE (DECREASE) IN LIABILITIES:
Increase in accounts payable,
accrued expenses and other
liabilities.................... 35,524 9,987 83,620 40,755 159,899
Accrued advertising expenses..... 573,600 -- -- -- 573,600
----------- ----------- --------------- --------------- ------------
Total adjustments.............. 28,892 14,497 973,726 40,101 1,042,719
----------- ----------- --------------- --------------- ------------
Net cash provided by (used for)
operating activities......... (574,344) 4,323 (128,679) (62,398) (765,421)
----------- ----------- --------------- --------------- ------------
</TABLE>
* Audited from inception to December 31, 1997 and unaudited from January 1,
1998 to June 30, 1998.
See accompanying independent auditors' report and notes to financial statements.
F-7
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM MAY PERIOD FROM
9, 1996 MAY 9, 1996
SIX MONTHS YEAR ENDED (INCEPTION) TO (INCEPTION)
ENDED JUNE DECEMBER 31, DECEMBER 31, TO JUNE 30,
30, 1997 1997 1996 1998*
----------- --------------- --------------- ------------
SIX MONTHS
ENDED JUNE (UNAUDITED)
30, 1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS USED FOR INVESTING
ACTIVITIES--
purchase of property and
equipment (179,652) -- (41,740) (18,878) (240,270)
----------- ----------- --------------- --------------- ------------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Proceeds from sale of common
stock.......................... 760,600 -- 137,000 -- 897,600
Proceeds from issuance of note
payable, related party......... -- 16,300 54,401 81,977 136,378
Principal payment of notes
payable, bank.................. (1,349) -- -- -- (1,349)
(Increase) decrease in deferred
offering costs................. 139 (20,893) (15,137) -- (14,998)
Note payable, bank............... 9,860 -- -- -- 9,860
----------- ----------- --------------- --------------- ------------
Net cash provided by (used for)
financing activities......... 769,250 (4,593) 176,264 81,977 1,027,491
----------- ----------- --------------- --------------- ------------
NET INCREASE (DECREASE) IN CASH.... 15,254 (270) 5,845 701 21,800
CASH, beginning of period.......... 6,546 701 701 -- --
----------- ----------- --------------- --------------- ------------
CASH, end of period................ $ 21,800 $ 431 $ 6,546 $ 701 $ 21,800
----------- ----------- --------------- --------------- ------------
----------- ----------- --------------- --------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid.................... $ 306 $ -- $ -- $ -- $ 306
----------- ----------- --------------- --------------- ------------
----------- ----------- --------------- --------------- ------------
Income taxes paid................ $ -- $ 1,600 $ 800 $ -- $ 2,400
----------- ----------- --------------- --------------- ------------
----------- ----------- --------------- --------------- ------------
</TABLE>
* Audited from inception to December 31, 1997 and unaudited from January 1,
1998 to June 30, 1998.
See accompanying independent auditors' report and notes to financial statements.
F-8
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
1. During 1997, the Company issued Series 1, Class B Common Stock for services
rendered provided to the Company with stock valued at $150,000.
2. On December 31, 1997, the Company purchased certain rights and interest from
Consumer Net Partners (CNP), a related party and issued notes and stock
options for such rights and cash advances from CNP as mentioned in Note 4 as
follows:
<TABLE>
<S> <C>
Promissory note issued............................................... $ 500,000
Options for Series 1, Class B Common Stock issued and valued at...... 375,000
Cash advances received from CNP during:
1996............................................................... (87,037)
1997............................................................... (54,401)
-----------
Consideration for certain rights and interest from CNP which was
written off in 1997................................................ $ 733,562
-----------
-----------
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
F-9
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS:
Consumer Net Marketplace, Inc. (the "Company") is in the development stage
of business as a full service Internet Service Provider ("ISP") and Internet
Presence Provider ("IPP") on the World Wide Web (the "Web") which includes Web
services, Web creating, virtual Web hosting, server co-location, technical
support, training, and link-up services for individuals and businesses. CNM is
focused on providing complete individual and business products and services over
the Internet.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include all
highly liquid debt instruments with original maturities of three months or less
which are not securing any corporate obligations.
PROPERTY AND EQUIPMENT:
Property and equipment, recorded at cost, are depreciated or amortized using
the straight-line and accelerated methods over the estimated useful lives of the
assets, which is generally five to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of their estimated
lives or the lease.
INCOME TAXES:
At inception (May 9, 1996), the Company elected to taxed under the
provisions of subchapter S of the Internal Revenue Code. Under these provisions,
the Company does not pay federal income taxes on its taxable income. Instead,
the stockholders were liable for individual federal and California income taxes
on their respective shares of the Company's taxable income. On September 1,
1997, the Company elected to revoke S corporation status and will be taxed as a
C corporation.
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting basis and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations
of credit risk consists principally of cash investments. CNM's cash investment
policies limit investments to short-term, low risk instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
CNM's financial instruments principally consist of accounts receivable,
accounts payable, line of credit, note payable to a bank, and notes payable to a
related party as defined by Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments." The carrying value of
accounts receivable and accounts payable approximate of their fair value due to
the
F-10
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
short-term nature of these instruments. The carrying value of the line of credit
and note payable to a bank approximates its fair market value since these
financial statements carry a floating interest rate. The fair market value of
the note payable to a related party approximated its carrying value based on
current market rates for such debt
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET LOSS PER COMMON SHARE:
CNM has adopted Statement of Financial Accounting Standard No. 128, Earnings
per Share ("SFAS No. 128"), which is effective for annual and interim financial
statements issued for periods ending after December 15, 1997. In accordance with
SFAS No. 128, prior years per share amounts have been restated. SFAS No. 128 was
issued to simplify the standards for calculating earnings per share ("EPS")
previously in APB No. 15, Earnings Per Share. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. The new rules also
require dual presentation of basic and diluted EPS on the face of the statement
of operations.
For the six months ended June 30, 1998 and 1997, and the years ended
December 31, 1997 and for the period from May 9, 1996 (inception) to December
31, 1996, the per share data is based on the weighted average number of common
and common equivalent shares outstanding, and are calculated in accordance with
Staff Accounting Bulletin of the Securities and Exchange Commission (SAB) No. 98
whereby common stock, options or warrants to purchase common stock or other
potentially dilutive instruments issued for nominal consideration must be
reflected in basic and diluted per share calculations for all periods in a
manner similar to a stock split, even if anti-dilutive. Accordingly, in
computing basic earnings per share, nominal issuances of common stock are
reflected in a manner similar to a stock split or dividend. In computing diluted
earnings per share, nominal issuances of common stock and potential common stock
are reflected in a manner similar to a stock split or dividend.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The accompanying unaudited condensed financial statements for the interim
periods ended June 30, 1998 and 1997 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Regulation SX. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
F-11
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY AND EQUIPMENT:
A summary of property and equipment, recorded at cost is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1998 --------------------
(UNAUDITED) 1997 1996
------------- --------- ---------
<S> <C> <C> <C>
Data communications equipment............................ $ 28,986 $ 6,371 $ --
Office and other equipment............................... 163,304 58,429 23,060
Leasehold improvements................................... 52,162 -- --
------------- --------- ---------
244,452 64,800 23,060
Less accumulated depreciation and amortization........... 29,972 9,226 2,968
------------- --------- ---------
$ 214,480 $ 55,574 $ 20,092
------------- --------- ---------
------------- --------- ---------
</TABLE>
Depreciation and amortization expense charged to operations amounted to
$20,838, $3,997, $6,441 and $3,029 for the six months ended June 30, 1998 and
1997 and the years ended December 31, 1997 and for the period from May 9, 1996
(inception) to December 31, 1996, respectively.
(4) RELATED PARTY TRANSACTIONS:
Fredrick Rice, officer and major shareholder of the Company, and certain
associates formed Consumer Net Partners, a California general partnership
("CNP") in 1996. CNP provided the start-up equity for the Internet shopping mall
concept and previously held certain rights and interest in the electronic
shopping mall business. Pursuant to CNP's Partnership Agreement, it retained a
right to receive 75% of net income generated by the Company. From inception
through December 31, 1997, the CNM shopping mall business had not generated any
net income. Fredrick Rice also serves as the President and sole shareholder of
Consumers On-Line Development, Inc., which services as the Managing Partner of
CNP. Consumers On-Line Development, Inc. was primarily responsible to manage and
oversee the development, creation, establishment and marketing of the CNM
electronic shopping mall. Pursuant to a Management Agreement with CNP, Consumers
On-Line Development, Inc. had a 25% net revenue interest in revenue received by
CNP which is generated by the CNM electronic shopping mall business. No payments
have been made to Consumers On-Line Development, Inc. pursuant to its Management
Agreement.
On December 31, 1997, the Company purchased all the rights and interest held
by CNP in the CNM Internet shopping mall business, including all rights pursuant
to the Management Agreement between CNP and Consumers On-Line Development, Inc.
CNM issued to CNP a non-interest bearing note in the principal amount of
$500,000, payable on demand from the proceeds of this offering, and an option to
purchase 250,000 shares of the Company's Series 1, Class B common stock at an
exercise price of $.50 per share, valued at an aggregate amount of $375,000 for
a period of three years, in consideration for CNP's rights in the Company's
business and for cash advances and property received from CNP to the Company
amounted to $141,438 ($54,401 in 1997 and $87,037 in 1996).
Pursuant to Accounting Principles Board opinion No. 17, the costs of
developing, maintaining, or restoring intangible assets which are not
specifically identifiable, have indeterminable lives, or are inherent in a
continuing business and related to an enterprise as a whole, such as goodwill,
should be
F-12
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) RELATED PARTY TRANSACTIONS: (CONTINUED)
deducted from income when incurred. Since there was no specifically identifiable
asset received from the partnership, a charge to 1997 operations of $733,562,
net of payments from CNP, was recorded.
CNM also leases property from one of the board of directors of the Company
(see Note 7).
(5) LINES OF CREDIT:
CNM has secured a revolving credit agreement with its bank under which the
Company may borrow up to a maximum principal amount of $15,000 with interest at
18% per annum. The line of credit is secured by company assets as stated in the
agreement. Payments of 3.5% of the outstanding balance plus accrued interest are
due monthly. The outstanding principle balance under these lines of credit was
$8,511 at June 30, 1998.
(6) NOTE PAYABLE, RELATED PARTY:
Note payable issued in connection with the purchase of Consumer Net
Partners' Rights in the Company's business as mentioned in Note 4 above. The
note is non-interest bearing and is payable on demand.
(7) COMMITMENTS AND CONTINGENCIES:
LEASES
CNM leases its facilities under noncancellable operating leases expiring in
various years through 2003. One of the facilities was leased from a related
party at a monthly rate of $818. Rent expense for all periods were accounted for
under the straight-line method.
Total rent expense for the six months ended June 30, 1998 and 1997 and for
the years ended December 31, 1997 and for the period from May 9, 1996
(inception) to December 31, 1996 for all operating leases amounted to $37,016,
$2,235, $11,235 and $6,786, respectively.
The minimum lease payments for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1998............................................................................ $ 46,237
1999............................................................................ 112,120
2000............................................................................ 108,030
2001............................................................................ 110,911
2002............................................................................ 112,351
2003 and thereafter............................................................. 37,450
----------
$ 527,099
----------
</TABLE>
SIGNIFICANT AGREEMENT
In April 1998, the Company entered into an agreement with Pacific Bell
Internet to provide Internet access service to the Company at a monthly fee of
$30,664 for a period of five years.
F-13
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
EMPLOYMENT AGREEMENT
CNM has entered into an employment agreement with an officer of the Company
requiring payment effective July 1997, of annual compensation of $180,000 plus
future increases, if appropriate.
CNM has also entered into various employment agreements with other
executives of the Company requiring payment of annual compensation ranging from
$24,000 to $60,000.
(8) PREPAID ADVERTISING COSTS:
In June 1998, the Company entered into various contracts with two
advertising companies to provide outdoor and in-home advertising for the Company
from July 1998 to November 1998 for a total cost of $573,600. These advertising
costs will be amortized over the periods in which advertising space is used.
Subsequent to June 30, 1998, the Company entered into additional contracts
and agreements with one of the advertising companies (see Note 12).
Advertising expense for the six months ended June 30, 1998 and 1997 and for
the year ended December 31, 1997 and for the period from May 9, 1996 (inception)
to December 31, 1996 is $28,563, $531, $5,070 and $65,434, respectively.
(9) INCOME TAXES:
The stockholders, upon incorporating the Company, elected to treat the
Company as an S Corporation under the Internal Revenue Code. On September 1,
1997, this election was revoked by all stockholders of the Company. CNM is now
subject to income taxes on income earned after August 31, 1997. At December 31,
1997, the Company had net operating loss carryforwards for federal income tax
purposes totaling approximately $153,000, which begin to expire in 2017.
Operating loss carryforwards for state income tax purposes totaling
approximately $149,000, which will begin to expire in 2004. The Tax Reform Act
of 1986 includes provisions which may limit the net operating loss carryforwards
available for use in any give year if certain events occur, including
significant changes in ownership. If the Company is successful in completing its
proposed initial public offering, utilization of the Company's net operating
loss carryforwards to offset future income may be limited.
Deferred tax assets at December 31, 1997 include the following:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforwards.................................................. $ 61,200
Valuation allowance............................................................... (61,200)
----------
$ --
----------
----------
</TABLE>
CNM recorded a full valuation allowance for net deferred tax assets as
management does not believe it is more likely than not that the deferred tax
asset will be realized.
F-14
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK OPTION PLAN:
CNM has established stock option plans for its Directors, employees and
consultants (the "1997 Stock Option Plan").
The 1997 Stock Option Plan allows for options (including Incentive Stock
Options) to be granted to directors, employees and consultants at less that fair
market value at date of grant. These options vest at 20% each year commencing at
the date of grant and expire three years from the date of vesting. The total
number of options available to grant under this plan is 2,000,000 shares of
Series 1, Class A common stock and 100,000 shares of Series 1, Class B common
stock. A summary of the Stock Option Plan-- Series 1, Class A Common Stock as of
and for the six months ended June 30, 1998 and the year ended December 31, 1997
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------
DECEMBER 31, 1997
(UNAUDITED) ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...................... 582,500 $ 2.00 -- $
Granted............................................. 510,000 2.00 582,500 2.00
Exercised........................................... --
Forfeited/Expired................................... (240,000) --
---------- ---------
Outstanding at June 30, 1998 and December 31, 1997,
respectively........................................ 852,500 582,500
---------- ---------
---------- ---------
</TABLE>
A summary of the Stock Option Plan-- Series 1, Class B Common Stock as of
and for the six months ended June 30, 1998 and the year ended December 31, 1997
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------
DECEMBER 31, 1997
(UNAUDITED) ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...................... 5,000 $ .50 --
Granted............................................. -- 5,000 $ .50
Exercised........................................... -- --
Forfeited/Expired..................................... -- --
---------- ---------
Outstanding at June 30, 1998 and December 31, 1997,
respectively........................................ 5,000 5,000
---------- ---------
---------- ---------
</TABLE>
CNM has elected, as permitted by FASB Statement No. 123, "Accounting for
Stock Based Compensation" ("FASB 123"), to account for its stock compensation
arrangements under the provisions of Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-15
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK OPTION PLAN: (CONTINUED)
Subsequent to June 30, 1998, the Company granted 835,000 shares of Series 1,
Class A common stock options at $2.00 per share, exercisable at 20% each year
commencing on the grant date. The additional stock options granted included
300,000 stock options granted to a person who is related to the Company's
principal shareholder.
Proforma information regarding net income and earnings per share as if the
Company had accounted for its employee stock options under the fair value method
of such pronouncement has not been presented as the amounts are not materially
different.
(11) SERIES 1--CLASS B COMMON STOCK:
In 1997, the Company and its Board of Directors agreed to authorize and
provide for the issue of 1,000,000 shares of Series 1, Class B common stock. The
shares are not entitled to receive dividends. Each Series 1, Class B share will
automatically be converted into 1 share of Series 1, Class A common stock upon
the closing of an initial public offering.
(12) SUBSEQUENT EVENTS:
COMMON STOCK
Subsequent to June 30, 1998, the Company issued 207,250 shares of common
stock at $2.00 per share in a private placement, raising total proceeds of
$414,500.
LEASES
In July 1998, the Company entered into a capital lease agreement. The
following is a schedule of future minimum lease payments for agreements entered
into subsequent to June 30, 1998:
<TABLE>
<CAPTION>
CAPITAL
LEASES
----------
<S> <C>
Year ending December 31,
1998............................................................................ $ 76,436
1999............................................................................ 152,872
2000............................................................................ 152,872
2001............................................................................ 76,436
----------
458,617
Less amount representing interest................................................. (84,700)
----------
Present value of future lease payments............................................ $ 373,917
----------
----------
</TABLE>
PURCHASE COMMITMENT
In August 1998, the Company entered into an agreement with a vendor to
purchase computer network equipment at a cost of approximately $2.6 million. The
agreement provides the Company to pay the vendor with a full cash payment upon
the completion of the Company's initial public offering or enter into an
equipment lease agreement for the entire amount by December 15, 1998.
F-16
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) SUBSEQUENT EVENTS: (CONTINUED)
ADVERTISING AGREEMENT
In August 1998, the Company entered into a tentative agreement with an
advertising company to provide additional outdoor advertising for the Company.
CNM will issue 1,000,000 shares of common stock Series 1, Class A at $2.00 per
share in exchange for advertisement space at a discounted price. These outdoor
advertising spaces would be preemptable. Shares to be issued to the advertising
company are kept in an escrow account and released as advertising services are
provided.
Subsequent to June 30, 1998, the Company entered into additional contracts
and agreements with the same advertising company for additional advertising
space for a total fee of $365,370.
(13) GOING CONCERN:
CNM's financial statements for the six months ended June 30, 1998 and 1997
and for the years ended December 31, 1997 and for the period from May 9, 1996
(inception) to December 31, 1996 have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. CNM expects to incur
substantial expenditures to produce Internet services to the public. CNM's
working capital plus limited revenue from its current operations will not
provide sufficient funds for the Company's ongoing operations.
Management recognizes that the Company must generate additional resources to
enable it to continue operations. Management's plans include the sale of
additional equity securities. Towards this goal, management is in the process of
preparing the initial public offering of the Company's common stock. However, no
assurance can be given that the Company will be successful in raising additional
capital. Further, there can be no assurance, assuming the Company successfully
raises additional equity, that the Company will achieve profitability or
positive cash flow.
(14) RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENT:
The December 31, 1996 financial statements were restated to reclassify paid
in capital of $87,037 to notes payable, related party due to items were
inadvertently misclassified. This restatement did not affect net income (loss)
for the same period ended December 31, 1996.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
CNM............................................ 3
Risk Factors................................... 6
Use of Proceeds................................ 18
Dividend Policy................................ 18
Capitalization................................. 19
Dilution....................................... 20
Selected Financial Data........................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 27
Legal Proceedings.............................. 43
Management..................................... 44
Certain Transactions........................... 52
Principal Stockholders......................... 53
Description of Capital Stock................... 54
Shares Eligible for Future Sale................ 56
Selling Security Holders....................... 57
Plan of Distribution........................... 60
Legal Matters.................................. 60
Experts........................................ 61
Glossary....................................... 61
Additional Information......................... 62
Financial Statements........................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PRELIMINARY PROSPECTUS
---------------------
NOVEMBER 12, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses, other than underwriting discounts
and commissions, to be borne by the Company in connection with the issuance and
distribution of the Common Stock being registered:
<TABLE>
<CAPTION>
ITEM AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
Securities and Exchange Commission registration fee............................. $ 16,520.00
NASD filing fee................................................................. *
Nasdaq Small Cap Market listing fee............................................. *
Blue Sky fees and expenses...................................................... *
Printing and engraving expenses................................................. *
Legal fees and expenses......................................................... *
Accounting fees and expenses.................................................... *
Transfer Agent and Registrar fee................................................ *
Miscellaneous................................................................... *
------------
Total......................................................................... $ *
------------
------------
</TABLE>
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CNM's Amended and Restated Articles of Incorporation provide that directors
of the Company will not be personally liable for monetary damages to the Company
or its stockholders for breaches of their fiduciary duty of care or other duties
as directors to the extent provided by California law. CNM's Bylaws and
Indemnification Agreements with each director provide that the Company will
indemnify (i) directors who succeed in the defense of any proceeding to which
the director was a party; or (ii) directors who are made a party to a proceeding
because of their service for or on behalf of the Company if the directors acted
in good faith in or not against the Company's best interest or if the directors
had no reasonable cause to believe their conduct was unlawful. Indemnification
is not available to directors who are adjudged liable to the Company, who
receive improper benefits, who make unlawful distributions, or who appropriate a
business opportunity of the Company. CNM's Board of Directors has the discretion
to apply these provisions to officers, employees and agents of the Company.
In appropriate circumstances, the Company will advance or reimburse
reasonable expenses if authorized by the Board of Directors, legal counsel, or
the stockholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in May 1996, the Registrant has issued unregistered
securities in the following transactions:
SHARES OF COMMON STOCK
1. On May 9, 1996, the Company issued 5,000,000 shares of Series 1 Class A
Common Stock to Mr. Fredrick Rice as founder's stock for an aggregate price of
$500.00.
II-1
<PAGE>
2. On August 20, 1997, the Company issued 75,000 shares of Series 1 Class B
Common Stock to a prior unaffiliated consultant, for services rendered.
3. From October 1, 1997 until October 8, 1998, the Company sold 1,534,250
shares of Series 1 Class A Common Stock to investors in a private placement
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D promulgated thereunder, at a purchase price of $2.00 per share.
OPTIONS TO PURCHASE COMMON STOCK
4. From June 20, 1997 to August 31, 1998, the Company granted a total of
127,500 stock options to purchase 127,500 shares of its Series 1 Class A Common
Stock for a purchase price of $2.00 per share. These options were not issued
pursuant to the Company's 1997 Stock Option Plan.
5. On December 15, 1997, the Company granted options to purchase 200,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 per share
to Ms. Vickie C. McLoughlin in consideration for Ms. McLoughlin's development
efforts and employment with the Company. These options were granted pursuant to
the Company's 1997 Stock Option Plan. Upon termination by Ms. McLoughlin of her
employment on June 26, 1998, 60,000 of these options had vested and the balance
expired. The vested options expire on September 26, 1998 in accordance with
their terms unless they are exercised before that date.
6. On December 15, 1997, the Company granted options to purchase 200,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Randy D. Greene in consideration for his continuing efforts to develop the
Company and its business. These options were granted pursuant to the Company's
1997 Stock Option Plan.
7. On December 15, 1997, the Company granted options to purchase 20,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Ms.
Olivia Sayler in consideration for her continuing efforts to develop the Company
and its business. These options were granted pursuant to the Company's 1997
Stock Option Plan.
8. On December 31, 1997, the Company granted options to purchase 250,000
shares of Series 1 Class B Common Stock at an exercise price of $0.50 per share
to Consumer Net Partners in exchange for all rights and interest held by
Consumer Net Partners in the CNM Internet shopping mall business. These options
were not issued pursuant to the Company's 1997 Stock Option Plan.
9. On March 25, 1998, the Company granted options to purchase 200,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Donald Lee Carver in consideration for his continuing efforts to develop the
Company and its business. These options were granted pursuant to the Company's
1997 Stock Option Plan.
10. On March 16, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Christopher L. Young in consideration for his continuing efforts to develop the
Company and its business. These options were granted pursuant to the Company's
1997 Stock Option Plan.
11. On March 16, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr. Jon
P. DeOng in consideration for his continuing efforts to develop the Company and
its business. These options were granted pursuant to the Company's 1997 Stock
Option Plan.
12. On March 31, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Christopher Fogel in consideration for his
II-2
<PAGE>
continuing efforts to develop the Company and its business. These options were
granted pursuant to the Company's 1997 Stock Option Plan.
13. On May 1, 1998, the Company granted options to purchase 10,000 shares of
Series 1 Class A Common Stock at an exercise price of $2.00 to Ms. Olivia Sayler
in consideration for her continuing efforts to develop the Company and its
business. These options were granted pursuant to the Company's 1997 Stock Option
Plan.
14. On July 1, 1998, the Company granted options to purchase 20,000 shares
of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr. Rick
Knittle in consideration for his continuing efforts as a key consultant to
develop the Company and its business. These options were granted pursuant to the
Company's 1997 Stock Option Plan.
15. On July 1, 1998, the Company granted options to purchase 300,000 shares
of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr. Charles
Rice in consideration for his service as a director of the Company. These
options were granted pursuant to the Company's 1997 Stock Option Plan.
16. On August 4, 1998, the Company granted options to purchase 400,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Kenneth K. Lattin in consideration for his service as a director of the Company.
These options were granted pursuant to the Company's 1997 Stock Option Plan.
17. On August 31, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Dr.
Douglas Benson in consideration for his service as a director of the Company.
These options were granted pursuant to the Company's 1997 Stock Option Plan.
18. On August 31, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Christopher L. Young in consideration for his continuing efforts to develop the
Company and its business. These options were granted pursuant to the Company's
1997 Stock Option Plan.
19. On August 31, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr. Jon
P. DeOng in consideration for his continuing efforts to develop the Company and
its business. These options were granted pursuant to the Company's 1997 Stock
Option Plan.
20. On August 31, 1998, the Company granted options to purchase 100,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Christopher Fogel in consideration for his continuing efforts to develop the
Company and its business. These options were granted pursuant to the Company's
1997 Stock Option Plan.
21. On August 31, 1998, the Company granted options to purchase 10,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Judd L. Bourgeois in consideration for his continuing efforts to develop the
Company and its business. These options were granted pursuant to the Company's
1997 Stock Option Plan.
22. On August 31, 1998, the Company granted options to purchase 5,000 shares
of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr. William J.
Lawrence in consideration for his continuing efforts to develop the Company and
its business. These options were granted pursuant to the Company's 1997 Stock
Option Plan.
23. On August 31, 1998, the Company granted options to purchase 20,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Eric Hankins in consideration for his
II-3
<PAGE>
continuing efforts to develop the Company and its business. These options were
granted pursuant to the Company's 1997 Stock Option Plan.
24. On August 31, 1998, the Company granted options to purchase 5,000 shares
of Series 1 Class A Common Stock at an exercise price of $2.00 to Ms. Denise J.
Garcia in consideration for her continuing efforts to develop the Company and
its business. These options were granted pursuant to the Company's 1997 Stock
Option Plan.
25. On September 30, 1998, the Company granted options to purchase 50,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr.
Mark J. Richardson in consideration for his service as a director of the
Company. These options were granted pursuant to the Company's 1997 Stock Option
Plan.
26. On September 30, 1998, the Company granted options to purchase 25,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 to Ms.
Laura D. Murtagh in consideration for her service as the Corporate Secretary of
the Company. These options were granted pursuant to the Company's 1997 Stock
Option Plan.
27. On October 7, 1998, the Company granted options to purchase 5,000 shares
of Series 1 Class A Common Stock at an exercise price of $2.00 to Mr. William Wu
in consideration for his consulting services to the Company. These options were
granted pursuant to the Company's 1997 Stock Option Plan.
All issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 promulgated thereunder. All of the securities
were acquired by the investors for investment and with no view toward the resale
or distribution thereof. In each instance, the investor was either an employee
of the Company or a sophisticated investor, the offers and sales were made
without any public solicitation and the stock certificates bear restrictive
legends. No underwriter was involved in the transactions and no commissions were
paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 The Amended and Restated Articles of Incorporation of Consumer Net Marketplace, Inc.+
3.2 The Bylaws, as amended, of Consumer Net Marketplace, Inc.+
3.3 Amendment to Amended and Restricted Articles of Incorporation of Consumer Net Marketplace, Inc.+
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of
holders of Common Stock.
4.2 Specimen Stock Certificate.+
4.3 Stock Option Plan for Directors, Employees and Key Consultants of Consumer Net Marketplace, Inc.+
4.4 Form of Stock Option Agreement for the Plan.+
4.5 Form of Stock Option Agreement for Series 1 Class B Common Stock Not Subject to the Stock Option Plan.+
4.6 Amendment to Stock Option Plan for Directors, Employees, and Key Consultants of Consumer Net
Marketplace, Inc.*
4.7 Certificate of Determination for the Series B Common Stock.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq.
10.1 Agreement by and between Eller Media Company and Consumer Net Marketplace, Inc. dated June 5, 1998.+
10.2 Agreement by and between Eller Media Company and Consumer Net Marketplace, Inc. dated July 10, 1998.+
10.3 Agreement by and between Eller Media Company and Consumer Net Marketplace, Inc. dated June 4, 1998.+
10.4 Consulting Agreement by and between Comat Systems Solutions Private Limited, India and Consumer Net
Marketplace, Inc.+
10.5 Lease Agreement by and between Ascend Credit Corporation and Consumer Net Marketplace, Inc. dated July
1, 1998.+
10.6 Purchase Order for additional equipment from Ascend Communications, Inc. dated August 12, 1998.+
10.7 Sales Agreement by and between Pacific Bell Internet Services and Consumer Net Marketplace, Inc. dated
March 4, 1998.+
10.8 ISP Customer Agreement by and between Covad Communications Company and Consumer Net Marketplace, Inc.+
10.9 Forms of CNM Network-TM- Reseller Terms and Conditions.+
10.10 Lease Agreement by and between Levitt, Levitt & Lijgash and Consumer Net Marketplace, Inc. dated April
8, 1998.+
10.11 Lease Agreement by and between Edwin S. Johnston Company and Fred Rice doing business under the name
Consumer Net Marketplace, Inc. dated May 28, 1998.+
10.12 Facility Agreements for Equipment Placement by Consumer Net Marketplace, Inc.+
10.13 Agreement by and between Advo Direct Marketing and Consumer Net Marketplace, Inc.+
10.14 License Agreement by and Between Netscape, Inc. and Consumer Net Marketplace, Inc.+
10.15 License Agreement by and between Qualcomm, Inc. and Consumer Net Marketplace, Inc.+
10.16 Promissory Note, dated December 31, 1997, payable by Consumer Net Marketplace, Inc. to Consumer Net
Partners.+
10.17 Assignment, dated December 31, 1997, by and between Consumer Net Marketplace, Inc. and Consumer Net
Partners.+
10.18 Subscription Agreement by and between the Company and Eller Media Company, dated October 7, 1998.*
10.19 Agreement with Starnet, Inc., dated October 6, 1998.*
10.20 Service Agreement by and between the Company, Consumer Net Partners, and Consumers On-Line Development,
Inc., dated May 10, 1996.+
23.1 Consent of Stonefield Josephson, independent public accountants.
23.2 Consent of Caldwell, Becker, Dervin, Petrick & Co., independent certified public accountants.
27 Financial Data Schedule+
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment. + Confidential treatment requested.
(b) Financial Statement Schedules:
II-5
<PAGE>
All of the financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable and have therefore been
omitted, except for the Financial Data Schedule referenced above as Exhibit 27
and filed herewith; provided, however, that Exhibit 27 shall not be deemed filed
for purposes of Section 11 of the Securities Act, Section 18 of the Exchange Act
and Section 323 of the Trust Indenture Act, or otherwise be subject to the
liabilities of such sections, nor shall it be deemed a part of this Registration
Statement.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons to the Company,
the Company 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 Company
of expenses incurred or paid by a director, officer or controlling person of the
Company 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 Company 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of a prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Simi Valley, State of
California, on the 12th day of November, 1998.
<TABLE>
<S> <C> <C>
CONSUMER NET MARKETPLACE, INC.--REGISTRANT
By: /s/ FREDRICK J. RICE
-------------------------------
Fredrick J. Rice
PRESIDENT AND CHAIRMAN
OF THE BOARD OF DIRECTORS
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mark J. Richardson, Esq. his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, 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, as fully to all intents
and purposes as he might do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents of each of them, or their or his substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 12th day of November, 1998,
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ FREDRICK J. RICE President, Chairman of the
- ------------------------------ Board of Directors,
Fredrick J. Rice Chief Executive Officer
/s/ KENNETH K. LATTIN
- ------------------------------ Director
Kenneth K. Lattin
/s/ CHARLES RICE
- ------------------------------ Director
Charles Rice
/s/ DR. DOUGLAS BENSON
- ------------------------------ Director
Dr. Douglas Benson
/s/ MARK J. RICHARDSON
- ------------------------------ Director
Mark J. Richardson
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 The Amended and Restated Articles of Incorporation of Consumer Net Marketplace, Inc.+
3.2 The Bylaws, as amended, of Consumer Net Marketplace, Inc.+
3.3 Amendment to Amended and Restricted Articles of Incorporation of Consumer Net Marketplace, Inc.+
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of
holders of Common Stock.
4.2 Specimen Stock Certificate.+
4.3 Stock Option Plan for Directors, Employees and Key Consultants of Consumer Net Marketplace, Inc.+
4.4 Form of Stock Option Agreement for the Plan.+
4.5 Form of Stock Option Agreement for Series 1 Class B Common Stock Not Subject to the Stock Option Plan.+
4.6 Amendment to Stock Option Plan for Directors, Employees, and Key Consultants of Consumer Net
Marketplace, Inc.*
4.7 Certificate of Determination for Series B Common Stock.
5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq.
10.1 Agreement by and between Eller Media Company and Consumer Net Marketplace, Inc. dated June 5, 1998.+
10.2 Agreement by and between Eller Media Company and Consumer Net Marketplace, Inc. dated July 10, 1998.+
10.3 Agreement by and between Eller Media Company and Consumer Net Marketplace, Inc. dated June 4, 1998.+
10.4 Consulting Agreement by and between Comat Systems Solutions Private Limited, India and Consumer Net
Marketplace, Inc.+
10.5 Lease Agreement by and between Ascend Credit Corporation and Consumer Net Marketplace, Inc. dated July
1, 1998.+
10.6 Purchase Order for additional equipment from Ascend Communications, Inc. dated August 12, 1998.+
10.7 Sales Agreement by and between Pacific Bell Internet Services and Consumer Net Marketplace, Inc. dated
March 4, 1998.+
10.8 ISP Customer Agreement by and between Covad Communications Company and Consumer Net Marketplace, Inc.+
10.9 Forms of CNM Network-TM- Reseller Terms and Conditions.+
10.10 Lease Agreement by and between Levitt, Levitt & Lijgash and Consumer Net Marketplace, Inc. dated April
8, 1998.+
10.11 Lease Agreement by and between Edwin S. Johnston Company and Fred Rice doing business under the name
Consumer Net Marketplace, Inc. dated May 28, 1998.+
10.12 Facility Agreements for Equipment Placement by Consumer Net Marketplace, Inc.+
10.13 Agreement by and between Advo Direct Marketing and Consumer Net Marketplace, Inc.+
10.14 License Agreement by and Between Netscape, Inc. and Consumer Net Marketplace, Inc.+
10.15 License Agreement by and between Qualcomm, Inc. and Consumer Net Marketplace, Inc.+
10.16 Promissory Note, dated December 31, 1997, payable by Consumer Net Marketplace, Inc. to Consumer Net
Partners.+
10.17 Assignment, dated December 31, 1997, by and between Consumer Net Marketplace, Inc. and Consumer Net
Partners.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.18 Subscription Agreement by and between the Company and Eller Media Company, dated October 7, 1998.*
10.19 Agreement with Starnet, Inc., dated October 6, 1998.*
10.20 Service Agreement by and between the Company, Consumer Net Partners, and Consumers On-Line Development,
Inc., dated May 10, 1996.+
23.1 Consent of Stonefield Josephson, independent public accountants.
23.2 Consent of Caldwell, Becker, Dervin, Petrick & Co., independent certified public accountants.
27 Financial Data Schedule+
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment. + Confidential treatment requested.
(b) Financial Statement Schedules:
All of the financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable and have therefore been
omitted, except for the Financial Data Schedule referenced above as Exhibit 27
and filed herewith; provided, however, that Exhibit 27 shall not be deemed filed
for purposes of Section 11 of the Securities Act, Section 18 of the Exchange Act
and Section 323 of the Trust Indenture Act, or otherwise be subject to the
liabilities of such sections, nor shall it be deemed a part of this Registration
Statement.
<PAGE>
CERTIFICATE OF DETERMINATION
of
SERIES 1 CLASS B COMMON STOCK
of
CONSUMER NET MARKETPLACE
a California corporation
The undersigned, Fredrick Rice and Vickie McLoughlin certify that:
1. They are the President and the Secretary, respectively, of Consumer
Net Marketplace, a California corporation (the "Corporation").
2. The number of authorized shares of Class B common stock, par value
$.001, is 1,000,000, of which no series has yet been established.
3. The Board of Directors wishes to establish a series of Class B
common stock to be designated "Series I Class B Common."
4. Pursuant to the authority given by the Corporation's Articles of
Incorporation, as amended, the Board of Directors of the Corporation has duly
adopted the following Recitals and Resolutions.
WHEREAS, Article Third of the Amended and Restated Articles of
Incorporation of this Corporation authorizes a class of shares designated as
Class B common stock, consisting of 1,000,000 shares; and
WHEREAS, Article Third of said Amended and Restated Articles of
Incorporation authorizes issuance of the Class B common stock from
time-to-time in one or more series and authorizes the Board of Directors to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed on any wholly unissued series of preferred stock and to
increase or decrease (but not below the number of shares of such series then
outstanding) the number of any such series subsequent to the issue of shares
of that series; and
WHEREAS, it is now the desire of the Board of Directors pursuant to the
authority vested in them by the Restated Articles of Incorporation to fix and
determine the rights, preferences, privileges and restrictions of a series of
said Class B common stock;
NOW THEREFORE,
BE IT RESOLVED that the Board of Directors does hereby provide for the
issue of a Series 1 Class B Common stock of this Corporation and does hereby
fix and determine the rights, preferences, privileges and restrictions of,
and other matters relating to, said series as follows:
A. DESIGNATION AND AMOUNT. The first series of Class B common stock shall
be designated Series I Class B common stock ("Class B Shares"). It shall consist
of 1,000,000
1
<PAGE>
shares. The rights, preferences, privileges and restrictions granted to or
imposed on the Class B Shares are as follows:
B. DIVIDEND RIGHTS. The holders of Class B Shares shall not be
entitled to receive any dividends.
C. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, the Class B
Shares then outstanding shall have no preference over any class of the
Corporation's common stock then outstanding. Holders of the Class B Shares
shall share, pro-rata with the outstanding common stock, any remaining assets
of the Corporation available for distribution to shareholders.
D. REDEMPTION RIGHTS. The Class B Shares provide for no rights of
redemption.
E. VOTING RIGHTS. The holders of the Class B Shares shall have no
voting rights. nor any right to notice of shareholders meetings, except as
otherwise required by law or as provided in Section G below.
F. CONVERSION RIGHTS.
1. VOLUNTARY CONVERSION. Each Class B Share shall be convertible,
without the payment of any additional consideration and at the option of the
holder thereof, at any time after 12 months have elapsed from the date of
issuance of such Shares, at the office of the Corporation (or any transfer
agent for the Class B Shares) into Class A common shares ("Class A Common
Stock") at the then-effective Class B Conversion Rate (as defined in Section
3 below).
2. AUTOMATIC CONVERSION.
a. Conversion in the Event of a Public Offering. Each Class
B Share shall automatically be converted into Class A Common Stock at the
then-effective Class B Conversion Rate (as defined in Section 3 below) upon
the closing of an initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
''1933 Act"), relating to the offer and sale of Class A Common Stock for the
account of the Corporation to the public: provided that any such holder of
Class B Shares shall not be deemed to have converted such Class B Shares into
Class A Common Stock until immediately prior to the closing of said public
offering.
b. Conversion in the Event of a Reorganization, Sale of
Assets, Liquidation and Dissolution. Upon adoption by the Board of Directors
of the Corporation of (i) a plan of reorganization which requires the
separate vote of each class or series of stock, (ii) a plan for sale of
substantially all of the assets of the Corporation, or (iii) a plan of
liquidation or of dissolution, or commencement of a voluntary action under
the federal bankruptcy laws or any other applicable state or federal
bankruptcy, insolvency or similar law, or consent to the entry of an order
for relief in any involuntary case under such law. or the appointment of a
receiver, liquidator, assignee, custodian, trustee or sequestrator (or
similar official) of the Corporation, or
2
<PAGE>
admission in writing of its inability to pay its debts generally as they
become due and on account of such event the Corporation shall liquidate,
dissolve or wind-up. then, in each such event listed above, each Class B
Share automatically shall convert pro-rata into fully paid and non-assessable
shares of common stock at the then-current Class B Conversion Rate.
c. Issuance of Fractional Shares. If the aggregate shares of
Class A Common Stock issued to holders of Class B Shares upon conversion
result in a fraction of a share of Class A Common Stock, such fractional
shares shall be paid in cash based upon the average price of a share of Class
A Common Stock as reported on a securities exchange including the Nasdaq
Bulletin Board or if the Class A Common Stock is not listed on any securities
exchange, the value of any fractional shares shall be determined by the Board
of Directors.
3. CLASS B CONVERSION RATE. Subject to the adjustments provided
in subsections (c) through (e) of this Section (3), each Class B Share shall
be convertible into one fully paid and non-assessable share of Class A Common
Stock (the "Class B Conversion Rate").
a. Mechanics of Conversion. Before any holder of Class B
Shares shall be entitled to voluntarily convert the same into Class A Common
Stock pursuant to Section (I) above. he/she shall surrender the
certificate(s) therefor, duly endorsed, at the office of the Corporation or
of any transfer agent for the Class B Shares and shall give written notice to
the Corporation at such office that he/she elects to convert the same and
shall state therein his/her name or the name or names of his/her nominees in
which he/she wishes the certificate(s) for shares of Class A Common Stock to
be issued. The Corporation shall, as soon as practicable thereafter, issue
and deliver to such holder of Class B Shares, or to his/her nominee(s), a
certificate(s) for the number of Class A Common Stock to which he/she shall
be entitled as aforesaid, together with cash in lieu of any fractional shares.
No other event or action shall be necessary to affect an
Automatic Conversion of Class B Shares pursuant to Section (2) above. The
holder of Class B Shares need not surrender the Class B Share certificate(s)
in exchange for the Class A Common Stock certificates(s) but may do so by
delivering to the office of the Corporation duly endorsed Class B Share
certificate(s).
b. Effective Date of Conversion. Such conversion shall be
deemed to occur immediately prior to the close of business on the date of
surrender of the Class B Shares to be converted in the case of a Voluntary
Conversion, and the person(s) entitled to receive the Class A Common Stock
issuable upon conversion shall be treated for all purposes as the record
holder(s) of such Class A Common Stock on such date.
If the conversion is in connection with a public offering of
securities pursuant to an effective registration statement under the 1933
Act, the conversion will be conditioned upon the closing of the sale of
securities pursuant to such public offering. in which event the person(s)
entitled to receive the Class A Common Stock issuable upon such conversion of
the Class B Shares shall not be deemed to have converted such Class B Shares
until immediately prior to the closing of such sale of securities.
3
<PAGE>
If the conversion is in connection with reorganization, sale
of assets, liquidation or dissolution, the conversion will be conditioned
upon the Board of Directors of the Corporation approving any such event. The
Class B Shares shall be deemed to have been converted immediately after such
Board action, such that the holders of the Class B Shares shall be entitled
to any voting rights thereafter applicable to holders of Class A Common Stock.
c. Adjustments for Subdivisions and Combinations. If the
Corporation shall at any time or from time-to-time after the effective date
of a written agreement by the Corporation for the initial sale of the Class B
Shares (the "Class B Original Issue Date") effect a subdivision of the
outstanding Class A Common Stock, the Class B Conversion Rate then in effect
immediately before such subdivision shall be proportionately increased, and
conversely, if the Corporation shall at any time or from time-to-time after
the Class B Original Issue Date combine the outstanding Class A Common Stock,
the Class B Conversion Rate then in effect immediately before such
combination shall be proportionately decreased. Any adjustment under this
subsection (c) shall become effective at the close of business on the date
such subdivision or combination becomes effective.
d. Adjustments for Certain Dividends and Distributions. In
the event the Corporation at any time or from time-to-time after the Class B
Original Issue Date shall make or issue or fix a record date for the
determination of holders of Class A Common Stock entitled to receive a
dividend or other distribution payable in additional Class A Common Stock,
then and in each such event the Class B Conversion Rate then in effect shall
be increased as of the time of such issuance or, in the event such a record
date shall have been fixed, as of the close of business on such record date,
by multiplying the Class B Conversion Rate then in effect by a fraction:
(1) The numerator of which shall be the total number of
shares of Class A Common Stock issued and outstanding immediately prior to
the time of such issuance or the close of business on such record date, plus
the number of shares of Class A Common Stock issuable in payment of such
dividend or distribution and,
(2) The denominator of which shall be the total number
of shares of Class A Common Stock issued and outstanding immediately prior to
the time of such issuance or the close of business on such record date;
provided, however, if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Class B Conversion Rate shall be recomputed
accordingly as of the close of business on such record date and thereafter
the Class B Conversion Rate shall be adjusted pursuant to this subsection (d)
as of the time of actual payment of such dividends or distributions.
e. Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time-to-time after the Class B
Original Issue Date shall make or issue, or fix a record date for the
determination of holders of shares of Class A Common Stock entitled to
receive, a dividend or other distribution payable in securities of the
Corporation other than shares of Class A Common Stock, then and in each such
event, provision shall be made so that the holders of Class B Shares shall
receive upon conversion thereof, in addition to the
4
<PAGE>
number of shares of Class A Common Stock receivable thereupon, the amount of
securities of the Corporation that they would have received had their Class B
Shares been converted into shares of Class A Common Stock on the date of such
event and had such holders thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period giving application to all
adjustments called for during such period under this subsection (e) with
respect to the rights of the holders of the Class B Shares.
f. Adjustments for Reorganization, Reclassification or Other
Change. If the shares of Class A Common Stock issuable upon the conversion of
the Class B Shares shall be changed into the same or a different number of
shares of any class or classes of stock of the Corporation, whether by
capital reorganization, reclassification, sale of assets, dissolution or
otherwise (other than by a subdivision, a combination or a stock dividend as
provided for elsewhere in this Section (3), then and in each event the holder
of Class B Shares shall have the right thereafter to convert such shares into
the kind and amount of shares of stock or other securities and property
receivable upon such reorganization, reclassification, sale of assets,
dissolution or other change by the holders of the number of shares of Class A
Common Stock into which such Class B Shares might have been converted
immediately prior to such reorganization, reclassification. sale of assets,
dissolution or other change, all subject to further adjustment as provided
elsewhere in this Section (3).
g. Certificate of Adjustment. In each case of an adjustment
or readjustment of the Class B Conversion Rate for the number of shares of
Class A Common Stock or other securities issuable upon conversion of the
Class B Shares, the Corporation shall compute such adjustment or readjustment
in accordance herewith and shall cause the independent public accountants
selected by the Corporation to verify such computation and the Corporation
shall prepare a certificate showing such adjustment or readjustment, and
shall send such Certificate to each holder of Class B Shares at the address
provided by such holder to the Secretary of the Corporation. The certificate
shall set forth such adjustment or readjustment, showing in detail the tarts
upon which such adjustment or readjustment is based.
h. Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Class A Common Stock solely for the purpose
of effecting the conversion of the Class B Shares such number of its shares
of Class A Common Stock as shall from time-to-time be sufficient to effect
the conversion of all outstanding Class B Shares. If at any time the number
of authorized but unissued shares of Class A Common Stock shall not be
sufficient to effect the conversion of all then outstanding Class B Shares,
the Corporation shall take such corporate action as may in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Class
A Common Stock to such number of shares as shall be sufficient for such
purpose.
i. Status of Converted Class B Shares. In case any Class B
Shares shall be converted pursuant to Sections (1) or (2) above the shares so
converted shall resume the status of authorized but unissued shares of Class
B Common Stock.
G. CHANGE AFFECTING CLASS B COMMON STOCK.
5
<PAGE>
1. CHANGES TO CLASS B SHARES. So long as any Class B Shares are
outstanding, the Corporation shall not without first obtaining the approval
by vote or written consent of the holders of a majority of the total number
of Class B Shares outstanding, voting separately as a class, alter or change
any or all of the rights, preferences, privileges and restrictions granted to
or imposed upon the Class B Shares or amend the provisions of this subsection
(G)(1).
2. NOTICES OF RECORD DATE. In the event of: (i) establishing a
record of holders of any class or series of securities for the purpose of
conducting a vote by such class or series of securities; or (ii) any
reclassification or recapitalization of the capital stock of the Corporation,
sale of substantially all of the assets by the Corporation, or any voluntary
or involuntary dissolution, liquidation or winding-up of the Corporation, the
Corporation shall send to each holder of Class B Shares at the address
provided by such holder to the Secretary of the Corporation, at least 30 days
prior to the record date specified therein, a notice specifying (a) the date
on which any such record is to be taken for the purpose of providing for a
vote of the Class B Shares as a class, (b) the date on which any such
reorganization, sale of assets, reclassification, dissolution, liquidation or
winding-up is expected to become effective, and (c) the time, if any is to be
fixed, as to when the holders of record of shares of Class A Common Stock (or
other securities) shall be entitled to exchange their shares of Class A
Common Stock (or other securities) for securities or other property
deliverable upon such reorganization, reclassification, sale of assets,
dissolution, liquidation or winding-up.
BE IT FURTHER RESOLVED that the authorized number of shares of Class B
Common Stock of this Corporation is 1,000,000. The number of shares of Class
B Common Stock constituting the Series 1 Class B Common Stock is 1,000,000.
None of the shares of this series have been issued.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this Certificate are true and
correct as of our own knowledge.
IN WITNESS WHEREOF. Consumer Net Marketplace has caused this Certificate
to be duly executed by its President and attested by its Secretary this 20th
of August. 1997.
CONSUMER NET MARKETPLACE
/S/
------------------------------
Fredrick J. Rice, President
/S/
------------------------------
Vickie McLoughlin, Secretary
6
<PAGE>
EXHIBIT 5.1
[RICHARDSON & ASSOCIATES LETTERHEAD]
November , 1998
Consumer Net Marketplace, Inc.
1900 Los Angeles Avenue, Second Floor
Simi Valley, California 93065
RE: CONSUMER NET MARKETPLACE, INC--VALIDITY OF ISSUANCE OF SHARES
Ladies and Gentlemen:
We have acted as special counsel to you in connection with the registration
on Form S-1 under the Securities Act of 1933, as amended ("Registration
Statement"), of a total of 4,000,000 shares of the Common Stock of Consumer Net
Marketplace, Inc. no par value, comprised of (i) 3,596,577 shares of Common
Stock to be issued (the "Shares") and (ii) 403,423 outstanding shares of Common
Stock (the "Outstanding Shares"). You have requested our opinion in connection
with the registration of the Shares and the Outstanding Shares covered by the
Prospectus, dated November 12, 1998 (the "Prospectus"). In connection with our
acting as counsel, we have examined the laws of the State of California together
with certain other documents and instruments prepared on behalf of Consumer Net
Marketplace, Inc. as we have deemed necessary and relevant in the preparation of
our opinion as hereinafter set forth.
In our examination, we have assumed the genuineness of all signatures on
original documents and the authenticity of all documents submitted to us as
originals, the conformity to original documents to all documents submitted to us
as certified, conformed or photostatic copies of originals, the authenticity of
such latter documents, and the proper execution, delivery and filing of the
documents referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares and the
Outstanding Shares and the Shares sold by Consumer Net Marketplace, Inc.
pursuant to the terms of the Prospectus have been and will be duly created and
have been and will be validly issued shares of the Common Stock, no par value,
of Consumer Net Marketplace, Inc. Upon payment for the Shares and the
Outstanding Shares and full compliance with all of the terms and conditions
relating to the issuance of the Shares and the sale of the Outstanding Shares
set forth in the Prospectus, the Shares and the Outstanding Shares will be fully
paid and nonassessable.
For the purposes of this opinion, we are assuming the that the appropriate
certificates are duly filed and recorded in every jurisdiction in which such
filing and recordation is required in accordance with the laws of such
jurisdictions. We express no opinion as to the laws of any state or jurisdiction
other than California.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and we further consent to the use of our name in the Registration
Statement and the Prospectus which is a part of said Registration Statement.
Respectfully submitted,
Mark J. Richardson
MJR:csc
<PAGE>
EXHIBIT 23.1
CONSENT OF STONEFIELD JOSEPHSON
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The undersigned independent certified public accounting firm hereby consents
to the inclusion of its report on the financial statements of Consumer Net
Marketplace, Inc. for the year ending December 31, 1997, and to the reference to
it as experts in accounting and auditing relating to said financial statements,
in the Registration Statement for Consumer Net Marketplace, Inc., dated November
12, 1998.
/s/ STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------
STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF CALDWELL, BECKER, DERVIN, PETRICK & CO.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The undersigned independent certified public accounting firm hereby consents
to the inclusion of its report on the financial statements of Consumer Net
Marketplace, Inc. for the period from inception (May 9, 1996) to December 31,
1996, and to the reference to it as experts in accounting and auditing relating
to said financial statements, in the Registration Statement for Consumer Net
Marketplace, Inc., dated November 12, 1998.
/s/ CALDWELL, BECKER, DERVIN, PETRICK & CO.
- -----------------------------------------------
CALDWELL, BECKER, DERVIN, PETRICK & CO.
Los Angeles, California
November 12, 1998
