<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1999
REGISTRATION NO. 333-65489
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE AMENDMENT
NUMBER 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
CONSUMER NET MARKETPLACE, INC.
(Exact Name of Issuer as specified in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 4825 95-4580601
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
1900 LOS ANGELES AVE., SECOND FLOOR
SIMI VALLEY, CALIFORNIA 93065
(805) 520-7170
(Address and Telephone Number of Principal Executive Offices)
FREDRICK RICE, CHAIRMAN OF THE BOARD OF DIRECTORS
CONSUMER NET MARKETPLACE, INC.
1900 LOS ANGELES AVE., SECOND FLOOR
SIMI VALLEY, CALIFORNIA 93065
(805) 520-7170
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
RICHARDSON & ASSOCIATES
MARK J. RICHARDSON, ESQ.
LAURA D. MURTAGH, ESQ.
1299 OCEAN AVENUE, SUITE 900
SANTA MONICA, CALIFORNIA 90401
(310) 393-9992
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act of
1933 registration statement number of the earlier registration statement for the
same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock......................... 4,000,000 $14.00 $56,000,000 $16,520.00
Total................................ 4,000,000 $14.00 $56,000,000 $16,520.00*
</TABLE>
* Already paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 8, 1999
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
Our proposed offering price is $14 per share. The total proceeds to CNM will be
$56,000,000. 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
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. who will use their best efforts to sell the Common Stock. We may
pay selling commissions to firms that are members of the National Association of
Securities Dealers, Inc. for 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."
Consumer Net Marketplace, Inc., a California corporation, is a full service
Internet Service Provider and Internet Presence Provider.
This is our initial public offering. The offering price may not reflect the
market price of our shares after the offering.
PROPOSED TRADING SYMBOL:
NASDAQ SMALL CAP MARKET -- CNMN
------------------------
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.
------------------------
<PAGE>
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, 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 and Internet Presence Provider. 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 Digital
Subscriber Lines and many other telecommunications products and services. CNM
also provides Web hosting and creation, virtual domain hosting, co-location
services, technical support, and training.
CNM is currently implementing the equipment and software necessary to
provide telephone service utilizing our own telecommunications network. Through
access arrangements with competitive local exchange carriers, we are installing
our switching equipment in several points of presence to expand our
telecommunications network, initially in California and subsequently on a
national basis. CNM plans to implement additional points of presence in other
countries that would enable us to provide Internet services and telephone
service over our own network 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 recently developed a proprietary provisioning system allowing users
complete and simplified automation of all our services, including allowing
customers to process transactions on-line in an encrypted manner which is not
done by all companies on the Internet.
CNM has recently entered into extensive advertising agreements with Eller
Media Company, 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--Marketing and Revenues."
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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
<TABLE>
<S> <C>
Type of Security Registered.......................... Common Stock, no par value.
Number of Outstanding Shares of Series 1 Class A
Common Stock(1).................................... 6,584,250(2)
Number of Outstanding Shares of Series 1 Class B
Common Stock(1).................................... 75,000
Common Stock Offered................................. 4,000,000 shares
Common Stock Outstanding after this Offering......... 10,584,250 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 Common Stock includes the Series 1 Class A Common Stock and the Series 1
Class B Common Stock. Each share of Series 1 Class B Common Stock is
convertible at any time into one share of Series 1 Class A Common Stock, and
will automatically be converted upon the closing of this offering.
(2) Based on shares of Common Stock outstanding as of January 7, 1999. This
amount excludes
- (A) 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,
- (B) 1,995,000 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,
- (C) 157,500 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
- (D) 5,000 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.
The number of shares of Common Stock outstanding also do not include any
shares which may be acquired by Eller Media Company pursuant to its proposed
subscription agreement with us. See "BUSINESS--Agreement with Eller Media
Company."
4
<PAGE>
SUMMARY FINANCIAL DATA
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
PRO FORMA(3)
NINE MONTHS ENDED NINE MONTHS ENDED PERIOD FROM ----------------------
SEPTEMBER 30, SEPTEMBER 30, INCEPTION ON 9/30/98 12/31/97
1998 1997 YEAR ENDED 5/9/96 TO ---------- ----------
(UNAUDITED) (UNAUDITED) DECEMBER 31, 1997 12/31/96
----------------- ----------------- ----------------- ---------------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................... $ 37,697 $ 20,665 $ 30,697 $ 20,828
Loss before income taxes... (2,098,110) (179,547) (1,101,605) (101,699)
Net Loss................... (2,098,910) (180,347) (1,102,405) (102,499)
PER COMMON SHARE DATA:
Net Loss................... (.38) (.04) (.22) (.02)
Cash Dividends............. 0 0 0 0
Book Value................. (.10) (.03) (.11) (.02)
Number of Shares, weighted
average(1)............... 5,466,897 5,015,082 5,037,857 5,000,000
Pro forma net loss per
share(3)................. (.37) (.21)
Pro forma weighted average
shares outstanding(3).... 5,716,897 5,287,887
BALANCE SHEET DATA:
Total Assets............... 1,708,336 63,562 81,973 25,795 1,333,336 (293,027)
Long-Term Debt(2).......... 1,197,815 0 500,000 0 697,815 0
Shareholders' Equity....... (631,314) (132,000) (542,404) (101,999) (506,314) (417,404)
</TABLE>
- ------------------------------
(1) Includes 75,000 shares of Series 1 Class B Common Stock. See "DESCRIPTION OF
CAPITAL STOCK."
(2) Includes 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." Includes $697,815 which represents the long-term
portion of capitalized lease obligations.
(3) Adjusted to give effect to the net proceeds of $125,000 from the exercise of
outstanding options to purchase 250,000 shares of Series 1 Class B Common
Stock and the payment of a noninterest-bearing promissory note of $500,000.
5
<PAGE>
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.
CNM HAS A LIMITED OPERATING HISTORY
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.
CNM'S NET OPERATING LOSSES
Since inception, CNM has incurred operating losses. As of September 30,
1998, CNM had an accumulated deficit of $3,303,814. For the year ended December
31, 1997, CNM had a net loss of $1,102,405, and for the nine months ended
September 30, 1998, the Company had a net loss of $2,098,910. 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 CNM'S INTERNET 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
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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 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.
QUALIFICATION OF CNM'S AUDIT REPORT
The report of the independent certified public accountants with respect to
CNM's financial statements for the fiscal years ending December 31, 1996 and
1997 raise doubts regarding CNM's ability to continue as a going concern because
of CNM's net operating losses.
RISKS OF DEVELOPING NEW INTERNET PRODUCTS AND SERVICES
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 high quality telephone service 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, Internet Presence Provider, planned provider of Internet telephone
service, and the number of visitors who access our Web sites. 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 telephone services. See "BUSINESS."
RISK OF INTERNET OR CNM 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 points of presence,
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. 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. 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
7
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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.
COMPETITION IN TELEPHONE SERVICE INDUSTRY AFFECTING CNM
CNM's planned long distance telephone service over its developing
telecommunications network will place us in direct competition with
interexchange carriers 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 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.
CNM'S 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, which is the World Wide Web client software that we license from
Netscape Communications Corporation. The ongoing development of our provisioning
systems software by an independent software development company currently under
contract is important to our Web hosting business. 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."
CNM'S 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 APPLICABLE TO CNM'S BUSINESS
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
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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 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.
GOVERNMENT MAY ALTER REGULATORY POLICIES AFFECTING CNM
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. The FCC has considered the issue of whether Internet
Service Providers should be subject to access charges, Universal Service Fund
support fees, and regulation. The FCC may change its policy at any time and
impose new regulations and charges on CNM's services, increasing CNM's costs and
reducing its revenues. 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
Regional Bell Operating Carriers and other companies to enter the long distance
business and enables other entities 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. 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.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH CNM'S NETWORK
The law relating to the liability of Internet Service Providers and online
service companies for information carried on or disseminated through their
networks has not yet been definitively established. Internet access and content
providers such as CNM 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 CNM and
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other Internet access and service providers, as well as additional costs and
technological challenges in complying with any statutory or regulatory
requirements imposed by such legislation. We cannot assure the final result
regarding the constitutionality of the 1996 Telecommunications Act, or as to the
scope and content of any other legislation in the U.S. or foreign jurisdictions
restricting the type of content being provided over the Internet. Furthermore,
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, which may have a material adverse
effect on CNM.
CNM IS DEPENDENT ON THE INTERNET
A lack of public confidence in or use of the Internet would have a material
adverse impact on CNM's operating results and financial condition. 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. These reasons include, 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 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. 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 THAT CNM WILL BE PROFITABLE
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 INCURRED BY INVESTORS
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 $9.50 per
share. To the extent that currently outstanding options to purchase shares of
Common Stock are exercised, there will be further dilution. See "DILUTION."
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CNM MUST ADAPT TO 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. Integrating technological advances may require
substantial time and expense, and we cannot assure that we will succeed in
adapting our network infrastructure. 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 Internet Service Providers must provide customers with the
appropriate products, services, and guidance to best take advantage of the
rapidly evolving Internet. 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.
POSSIBLE IMPACT OF YEAR 2000 PROBLEM ON CNM'S BUSINESS
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
has decided to switch its current credit card process provider to a credit card
process provider that in our assessment is Year 2000 ready. Additionally, with
respect to third-party software, computer technology, and services that are not
Year 2000 ready, CNM will develop and implement a remediation plan. 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. Under the worst case scenario, we would not be able to
provide service if our power is disrupted due to a programming problem with the
electric company.
CNM SUBJECT TO INTENSE 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 Internet telephone service, 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
11
<PAGE>
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 Internet telephone 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 CNM'S 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 CNM RETAINING CUSTOMERS
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
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
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<PAGE>
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.
CNM'S 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 OF CNM 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 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.
CNM 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.
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POTENTIAL FOR PRODUCT AND SERVICE LIABILITY INCURRED BY CNM
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 OF CNM
CNM's Chairman of the Board of Directors and President will beneficially own
approximately 47.5% of CNM's outstanding shares of Common Stock following this
offering, assuming that 4,000,000 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."
CNM MAY INCUR 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 OF CNM
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.
CNM'S 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
14
<PAGE>
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.
NO MINIMUM CAPITAL REQUIREMENT--ADDITIONAL CAPITAL FOR CNM 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.
BEST EFFORTS OFFERING BY CNM
The Shares are being offered on a "best efforts" basis by the Company and no
individual, firm, underwriter or other person or entity has agreed to purchase
any of the Shares. Consequently, we may not raise any capital from this offering
or only minimal capital. If CNM is not adequately funded from this offering,
investors who do purchase Shares could lose their entire investment in CNM.
FUTURE ISSUANCE OF STOCK BY CNM
Following this offering, we expect to have outstanding 10,584,250 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 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."
CNM 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.
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EFFECT OF CERTAIN CNM 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 OF CNM
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 CNM 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.
DETERMINATION OF CNM'S 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.
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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
- 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.
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USE OF PROCEEDS
The net proceeds from the sale of 4,000,000 shares of Common Stock offered
hereby are estimated to be approximately $47,600,000 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. The
offering expenses are expected to be incurred for legal, accounting, mailing,
printing and related offering costs, as well as selling commissions payable to
broker-dealer firms registered with the National Association of Securities
Dealers, Inc., to the extent that Shares are sold through broker-dealers that
participate in 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, to pay the $500,000
noninterest bearing promissory note payable by CNM to an affiliated partnership,
and for working capital and other general corporate purposes. We estimate that
approximately 40% of the net proceeds of the offering will be utilized for
additional equipment and related network infrastructure, 25% for CNM's marketing
programs, 20% for research and development of new products and services,
$500,000 to repay the note payable to Consumer Net Partners, and 15% for general
working capital purposes. If less than the maximum proceeds from this offering
are received by CNM, then CNM would reduce the allocation of proceeds to its
retail marketing program and scale down its investment in equipment for its
planned Internet infrastructure expansion. Management may reallocate the net
proceeds in different percentages if it deems a reallocation to be appropriate
or necessary. 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.
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.
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CAPITALIZATION
The following table sets forth as of September 30, 1998 (i) the
capitalization of CNM and (ii) the capitalization of CNM as adjusted to reflect
the sale of the 4,000,000 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>
PRO FORMA
AS OF SEPTEMBER 30, AS ADJUSTED
1998 AS ADJUSTED (UNAUDITED)
(UNAUDITED) (UNAUDITED) (5)
----------------------- -------------- --------------
<S> <C> <C> <C>
Indebtedness:
Long-term indebtedness(1)............................. $ 1,197,815 $ 697,815 $ 697,815
Stockholders' Equity:
Preferred Stock, no par value per share,
1,000,000 shares authorized,
none issued and outstanding......................... $ 0 $ 0 $ 0
Common Stock, Series 1 Class A, no par value per
share,
50,000,000 shares authorized,
6,073,500 issued and outstanding(2)
10,584,250 as adjusted(3)........................... $ 2,147,500 $ 50,395,560 $ 50,395,560
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 $ 650,000
Additional Paid-in Capital............................ $ 0 $ 0 $ 0
Accumulated Deficit During Development Stage.......... $ (3,303,814) $ (3,303,814) $ (3,303,814)
----------- -------------- --------------
Total Shareholders' Equity (Deficit).................. $ (631,314) $ 47,616,746 $ 47,741,746
----------- -------------- --------------
Total Capitalization.................................. $ 566,501 $ 48,314,561 $ 48,439,561
----------- -------------- --------------
----------- -------------- --------------
</TABLE>
- ------------------------------
(1) Includes a noninterest-bearing demand promissory note payable by CNM to an
affiliated general partnership. See "BUSINESS--Previous Financing and
Development Arrangement." Includes $697,815 which represents the long-term
portion of capitalized lease obligations.
(2) Includes 1,073,500 shares of CNM's Common Stock (as of September 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 7, 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 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 $56,000,000. The Common Stock capital, as
adjusted, reflects the issuance of 4,000,000 Shares, after deducting
offering costs estimated to be 15% of the gross proceeds of the offering. To
the extent that more or less than $50,000,000 is raised from the placement
of Common Stock, the figures would be adjusted proportionately. Includes
510,750 shares of Common Stock issued after September 30, 1998 in the
Company's private placement, and assumes offering costs of 16% of the gross
proceeds of the private placement. 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 at any time on a share-for-share basis. See
"DESCRIPTION OF CAPITAL STOCK--Common Stock."
(5) Adjusted to give effect to the net proceeds of $125,000 from the exercise of
options to purchase 250,000 shares of Series 1 Class B Common Stock and the
payment of a noninterest-bearing promissory note of $500,000.
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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 September 30, 1998, the PRO FORMA net tangible book value of CNM was
$(631,314) or approximately $(.96) per share of Common Stock. 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
September 30, 1998, other than to give effect to the sale of the 4,000,000
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, the PRO FORMA net tangible book value at September 30, 1998,
would have been $47,616,746 or approximately $4.50 per share. As of September
30, 1998, the net tangible book value per share of Common Stock owned by CNM's
current stockholders would have increased by approximately $5.46 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 $9.50 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 September 30,
1998 ($0.96)
Increase attributable to new investors $5.46
Net tangible book value after offering $4.50
Dilution to new investors $9.50
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
Initial public offering price per share............................. $ 14.00
Pro forma net tangible book value per share as of September 30,
1998(1)........................................................... $ (0.96)
Increase per share attributable to the Offering..................... $ 5.46
Pro forma net tangible book value after this Offering............... $ 4.50
Dilution per share to new investors................................. $ 9.50
</TABLE>
- ------------------------
(1) 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) 2,152,500 management, employee, and other stock options
granted between July 1997 and October 1998. See "MANAGEMENT" and
"DESCRIPTION OF CAPITAL STOCK."
After giving effect to the exercise of options to purchase 250,000 shares of
Series 1 Class B Common Stock at an exercise price of $.50 per shares and the
payment of noninterest-bearing promissory note of $500,000, the pro forma net
tangible book value of the Company as of September 30, 1998 would be $47,741,746
or approximately $4.41 per share. The following table illustrates the dilution
which investors participating in this offering will incur and the benefit to
current stockholders as a result of this offering, and assuming the exercise of
the 250,000 Series 1 Class B Common Stock options and repayment of the $500,000
promissory note:
<TABLE>
<S> <C>
Initial public offering price per share............................. $ 14.00
Pro forma net tangible book value per share as of September 30,
1998.............................................................. $ (0.96)
Increase per share attributable to the Offering..................... $ 5.37
Pro forma net tangible book value after this Offering............... $ 4.41
Dilution per share to new investors................................. $ 9.59
</TABLE>
The following table sets forth, on an as adjusted basis as of September 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).......................... 6,659,250(1) 62.5% $ 4,193,500(2) 7.0% $ .63
New Investors..................................... 4,000,000 37.5% $ 56,000,000 93.0% $14.00
---------------- ------- ----------------- ------- ------
Total........................................... 10,659,250 100.0% $ 60,193,500 100.0% $ 5.65
---------------- ------- ----------------- ------- ------
---------------- ------- ----------------- ------- ------
</TABLE>
- ------------------------
(1) Includes shares of CNM's Common Stock issued or sold between October 7, 1997
and October 7, 1998. 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) 2,152,500 management, employee, and other stock options
granted between July 1997 and November 1998. See "MANAGEMENT" and
"DESCRIPTION OF CAPITAL STOCK."
(2) Includes $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 nine months ended
September 30, 1997 and September 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>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31
SEPTEMBER 30 ------------------------------
------------------------ INCEPTION PRO FORMA(3)
(UNAUDITED) (UNAUDITED) (5/9/96 TO ----------------------
1998 1997 1997 12/31/96) 9/30/98 12/31/97
----------- ----------- ----------- ----------------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 37,697 $ 20,665 $ 30,697 $ 20,828
Loss before income taxes.................... (2,098,110) (179,547) (1,101,605) (101,699)
Net Loss.................................... (2,098,910) (180,347) (1,102,405) (102,499)
Net Income (Loss) per share................. (.38) (.04) (.22) (.02)
Cash dividends per common share............. 0 0 0 0
Weighted average number of shares........... 5,466,897 5,015,082 5,037,857 5,000,000
Pro forma net loss per share................ (.37) (.21)
Pro forma weighted average shares
outstanding............................... 5,716,897 5,287,887
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER PRO
30 AT DECEMBER 31 FORMA(3)
------------- ------------------- ----------
1998 1997 1996 9/30/98
------------- -------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets............................................................. $1,708,336 $ 81,973 $ 25,795 1,333,336
Long-term Obligations.................................................... $1,197,815(1) $500,000(2) $ 0 697,815
<CAPTION>
12/31/97
----------
<S> <C>
BALANCE SHEET DATA:
Total Assets............................................................. (293,027)
Long-term Obligations.................................................... 0
</TABLE>
- ------------------------------
(1) The long term obligations include a noninterest-bearing promissory note in
the outstanding principal amount of $500,000 payable by CNM on demand to an
affiliated general partnership and $697,815 which represents the long-term
portion of capitalized lease obligations. See "BUSINESS--Previous Financing
and Development Arrangement."
(2) The long term obligations include a noninterest-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."
(3) Reflects on a pro forma basis the receipt of net proceeds of $125,000 from
the exercise of outstanding options to purchase 250,000 shares of Series 1
Class B Common Stock and the payment of a noninterest-bearing promissory
note of $500,000.
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.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues for the nine month period ended September 30, 1998 were $37,697 as
compared to $20,665 for the nine month period ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Expenses were $2,120,094 for the nine-month period ending September 30, 1998
as compared to $199,222 for the nine-month period ending September 30, 1997.
Substantially higher expenses in the nine months ended September 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. Approximately $744,000 of the
increase was attributable to
23
<PAGE>
greater expenditures for advertising and marketing, and approximately $400,000
for hiring new computer engineers, systems analysts and support personnel. The
net loss for the nine-month period ended September 30, 1998 was $2,098,910
compared to a net loss of $180,347 for the nine-month period ended September 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 nine months of 1998 as compared to the first nine months 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
employment compensation due to the addition of new employees, salaries, office
expenses, outside services, and loss on acquisition of partnership interest from
related party. The loss on acquisition of partnership interest from related
party was $733,562. 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
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Our statement of cash flows for the nine months ended September 30, 1998
reflects that operating activities during that period utilized cash of
$2,098,910 as compared to $180,347 of cash provided during the nine months ended
September 30, 1997. The increase in the use of cash flows from operating
activities during the nine months ended September 30, 1998 primarily resulted
from a higher net loss for the nine-month period ending September 30, 1998 as
compared to the nine-month period ending September 30, 1997. The cash provided
by financing activities for the nine months ended September 30, 1998 was
$1,940,292 as compared to $8,938 of cash provided by financing activities for
the nine-month period ending September 30, 1997. The increase in cash provided
by financing during the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997 primarily resulted from the capital raised
by CNM in its private placement of Common Stock at $2.00 per share. The cash
used by investing activities for the nine-month period ending September 30, 1998
was $359,461 as compared to none for the nine months ended September 30, 1997.
The significantly higher utilization of cash for investing during the first nine
months of 1998 than the first nine months 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,
24
<PAGE>
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.
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 $1,063, or 5% and $13,162 or 813% of revenues for the nine months ended
September 30, 1997 and September 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 $2,120,094 for the period from inception,
May 9, 1996, to December 31, 1996, the year ended December 31, 1997, and the
nine months ended September 30, 1998, respectively. General and administration
expenses were approximately $198,159 and $1,006,932 for the nine months ended
September 30, 1997 and September 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
nine months ended September 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 September
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,
25
<PAGE>
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 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. If we raise
the maximum amount of capital from this offering, we estimate that the net
proceeds will be sufficient to meet our operating expenses and capital
requirements for approximately two years or until CNM achieves sufficient
profitability to fund its expected costs. We expect to utilize the net proceeds
from this offering for the purchase of equipment, hiring additional staff,
marketing and advertising, research and development, general operating expenses,
and working capital. 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 middle of 1999. If we obtain capital from an alternative source, we
estimate that CNM would have sufficient capital to operate beyond the middle of
1999, depending on the amount of alternative capital obtained. See "RISK
FACTORS--No Minimum Capital Requirement--Additional Capital for CNM 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 to the Internet, dedicated connectivity to
the Internet, Web creation, virtual domain hosting, rack space for businesses'
server equipment to the Internet, Web server co-location, technical support, and
training. 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 personal access to the Internet. We provide
complete business solutions which include high speed data transmission in the
form of 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 have also developed a proprietary provisioning system allowing users
complete and simplified automation of all our services including secured
transactions. CNM does not currently have any customer that accounts for 10% or
more of its annual revenues. CNM estimates that it expended approximately
$80,000 for research and development during the year ended December 31, 1996,
approximately $240,000 for research and development during the year ended
December 31, 1997, and approximately $550,000 for research and development
during the nine months ended September 30, 1998.
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, 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. According to the U.S. Commerce
Department, Internet traffic is doubling every 100 days, resulting in an annual
growth rate of more than 700%. NUA, one of Europe's leading online consultants
and developers, estimates that there are currently 100.5 million Internet users
and that this number will jump to 200 million by the year 2000. In addition,
International Data Corporation ("IDC") projects that from 1999 through 2002
buyers will spend nearly $900 billion online. 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.
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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 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
allowing customers to create and access databases through their own web sites,
allowing customers to run programs on CNM's servers, and allowing customers who
build their web sites using Microsoft Front Page to upload their web sites
automatically to CNM, providing customers with the ability to make unlimited
changes to their web sites from any location. 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.
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- 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 a software development 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, ranging from simple Web
sites to business Web sites and Web sites with e-commerce capability. We
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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.
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
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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 from
the access area to the core of the public network. Using MultiVoice, we can
transparently
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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. According to IDC the number of users accessing the Web will
surge 28% to 147 million in 1999. Forrester Research estimates that business to
business transactions on the Internet will grow from $7.8 billion in 1997 to
$326.4 billion in 2002. Although the international market has been slower to
embrace the advantages of the Internet, IDC predicts that the market in western
Europe will grow from 14.2 million users in 1997 to almost 58 million by the end
of 2001. 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 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.
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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.
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 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
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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 because the
communications will primarily be routed on CNM's dedicated telecommunications
network rather than through the traditional long distance, regional and local
telephone companies, which add their interstate and intrastate boundary cross
over charges. The areas of savings include the pass through to customers of: (1)
reduced voice and facsimile communications costs, (2) reduced selected PSTN
communications costs by using off-net calling, (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
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- 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
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)
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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 advertise our business via the Internet and a wide
variety of other media campaigns. We recently entered into extensive advertising
agreements with Eller Media Company, 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. Prior direct mailing advertising agreements with Advo Direct
Marketing and Visa Card have recently been terminated by CNM.
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--Agreement with Eller Media."
CNM had an agreement with Advo Direct Marketing for direct mass mailings of
our advertising materials to specific areas of the Southern California market.
The mailing campaign with Advo commenced in May 1998 and was scheduled to
continue through December 1998, but was terminated by us in September 1998
because of a billing dispute. Advo asserts that we owe them an aggregate of
approximately $70,000 in past due billings. We dispute the amount due. The
dispute has not been settled. No litigation has commenced and CNM is open to
further discussions with Advo to resolve the dispute. There is no assurance that
the dispute will be settled or that litigation between CNM and Advo may not
occur.
We also advertise our Internet access services on local radio stations from
San Diego to Santa Barbara, a campaign which began in September 1998. We have
purchased radio advertising time on a month-to-month basis. In addition, we have
entered into an agreement with Cable Networks to broadcast television
advertisements on selected cable channels in Southern California. The television
advertisements have been running since October 1998.
The following table summarizes our advertising agreements which are
currently in place:
<TABLE>
<CAPTION>
NAME OF VENDOR ADVERTISING SERVICE CONTRACT PERIOD PAYMENT TERMS
- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Eller Media Company Outdoor Billboards 1/1/99 - 12/31/99 Monthly
ABC Radio Radio Commercials Two weeks cancellation One week prior to airing
notice
Disney Radio Radio Commercials Two weeks cancellation One week prior to airing
notice
Harte Hank Shopper Direct Mail Week to Week Monthly
KLOS Radio Commercials Two weeks cancellation One week prior to airing
notice
Y107 Radio Commercials Two weeks cancellation One week prior to airing
notice
Cable Network Television Month to Month One week prior to airing
Advertisements
</TABLE>
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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We recently hired an exclusive in house marketing and public relations
consultant. In the near future, CNM intends to engage a professional outside
public and investor relations firm to assist CNM with its marketing programs.
CNM anticipates that these professionals will assist with the design of a second
phase of marketing by CNM, and enhance our ability to promote our products and
services.
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.
RECENT DEVELOPMENTS
On October 2, 1998, CNM entered into a MegaPOP Agreement with StarNet, Inc.
for network access services, including proxy radius service. Proxy radius
service allows CNM to authenticate dial-up callers utilizing its own radius
server. This agreement allows CNM to provide dial-up Internet access to
customers throughout the United States. StarNet, Inc. receives a minimum of $500
per month for one year and a one time set up fee of $500. The actual monthly fee
is dependent upon the number of dial-up customers set-up by CNM utilizing the
MegaPOP service.
On October 23, 1998, CNM leased additional equipment from Ascend
Communications, Inc. This equipment includes 11 Max TNT systems and eight Max
6000s. The value of this equipment is estimated to be $2.3 million. CNM is
leasing the equipment for $28,995.13 for the first six months and $111,081.59
for the next 24 months. The lease payments commence on February 15, 1999.
On November 25, 1998, CNM entered into an agreement with WinStar/PacNet to
establish a point to point DS-3 circuit between Las Vegas and Simi Valley.
WinStar/PacNet receives $7,828 per month for 36 months and a one time
installation fee of $1,000. Local access charges to CNM are an additional $2,894
per month.
On December 31, 1998, CNM entered into an ISP Customer Agreement for
Telespeed Services with Covad Communications Company pursuant to which Covad
will provide Digital Subscriber Line access services to CNM on a nationwide
basis, starting with ten major metropolitan areas throughout the United States.
CNM expects to utilize the Digital Subscriber Lines provided by Covad to market
to its customers as part of CNM's telecommunications services.
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<PAGE>
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 "RELATED
PARTY 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 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 7, 1998. Pursuant to the private placement, we issued
1,584,250 shares of our Common Stock and raised $3,168,500 in total capital.
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
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<PAGE>
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--CNM Subject to Intense
Competition" on page 11.
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 May Alter
Regulatory Policies Affecting CNM" on page 9.
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.
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 result in 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 Regional Bell Operating
Carriers and other companies to enter the long distance business and enables
other entities, including entities affiliated with power utilities, Competitive
Local Exchange Carriers, 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
42
<PAGE>
support mechanism to be competitively neutral. The FCC also noted the novel
status of Internet telephony, and noted that it may continue the investigation
of the regulatory status of Internet telephony. While Internet services,
including Internet telephony, remain 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.
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, 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 January 7, 1999 CNM employs 38 full-time and over 26 part time
employees, including five senior executive officers, 14 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
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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 leased 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. Our executive offices are expected to accommodate
projected demand for space over the next two years.
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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to CNM's
directors and executive officers as of January 7, 1999.
<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 Chief Technical Officer
Christopher Fogel........................ 25 Senior Computer Systems Engineer and Systems Analyst
Laura Murtagh............................ 29 Secretary
Kenneth K. Lattin........................ 52 Chief Financial Officer and Director
Charles Rice............................. 34 Chief Operations Officer and 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 "RELATED PARTY
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 web site servers. He was also responsible for developing and
implementing a centralized server farm and automated backup recovery strategy
for the Web hosting section. 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 these
countries. Mr. Carver worked for the Dallas Planning
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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. From October 1995
until June 1996, Mr. Young was a web page designer for WebStuff Networks. From
December 1994 until October 1995, Mr. Young was 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. Mr. Young attended the University of Texas from 1993 until 1995.
JON P. DEONG has been CNM's Chief Technical Officer since November 1998 and
a Senior Computer Engineer and Systems Analyst for CNM from March 1998 to
November 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
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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 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 and the Chief Financial
Officer on November 13, 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 and the Chief Operating
Officer on November 13, 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
studied for 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
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Director of Heritage Bank in Berrien Springs, Michigan which received praise
from the Michigan Bank 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.
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. CNM's Chief Executive
Officer, President, and Chairman of the Board of Directors, Fredrick Rice, did
not receive any compensation of any kind. Fredrick Rice was paid an annual
salary of $180,000 during the fiscal year ending December 31, 1998, and an
automobile allowance of $500 per month. The salaries for CNM's recently
appointed Chief Financial Officer and Chief Operating Officer have not yet been
established. 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.
48
<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 January 7,
1999, 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
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
</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>
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
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
</TABLE>
50
<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........................... 11/13/98 25,000 5,000 11/13/98 $ 2.00 11/13/2001
5,000 11/13/98 11/13/2002
5,000 11/13/98 11/13/2003
5,000 11/13/98 11/13/2004
5,000 11/13/98 11/13/2005
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, merge with
another company, are acquired by another company, or enter into a similar
business combination.
51
<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. The fair value of
the shares of CNM's Common Stock has been deemed to be $2.00 per share,
which is equal to the price at which CNM sold its shares of Common Stock in
a private placement of securities made by us from October 1, 1997 to October
7, 1998. 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.
52
<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.
RELATED PARTY 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.
CNM leases its Glendale point of presence from Edwin S. Johnston Company, a
purchaser of shares of CNM's Common Stock in CNM's previous private placement of
stock. Dr. Douglas Benson, one of CNM's directors, is the general partner of the
Edwin S. Johnson Company. CNM leases its point of presence in Glendale at a
monthly rental rate of $818.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
GENERAL
The following table sets forth certain information regarding the beneficial
ownership of CNM's Common Stock as of January 7, 1999: (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% 47.5%
All officers and directors
as a group (5 persons).......................... 5,000,000(5) 76.5% 47.5%
</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 1,584,250 shares of CNM's Common Stock previously issued (as of
January 7, 1999) in a private placement to outside investors. See
"BUSINESS--Prior Private Placement of Stock."
(3) Assumes the issuance of 4,000,000 Shares offered by this Prospectus.
(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
1,995,000 shares of CNM's Series 1 Class A Common Stock held by the
executive officers, directors and employees of CNM, 399,000 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 157,500 shares
of CNM's Series 1 Class A Common Stock granted to certain investors outside
of CNM's 1997 Stock Option Plan, 31,500 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."
54
<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 6,584,250 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 6,584,250 shares are issued and
outstanding as of January 7, 1999. 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.
PREFERRED STOCK
CNM has authorized 1,000,000 shares of Preferred Stock, no par value. As of
January 7, 1999 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 157,500 shares of CNM's
Series 1 Class A Common Stock to 17 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 November 13, 1998. The stock
options vest one-fifth upon grant and one-fifth each year thereafter over a four
year vesting period. Accordingly, as of January 7, 1999, 31,500 of the 157,500
stock options granted had vested. The stock options granted outside of the plan
include 5,000 stock options granted to Bruce Seidel, President of the Southern
55
<PAGE>
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--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 American Stock Transfer Company in Denver, Colorado as the
Transfer Agent and Registrar.
56
<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 10,584,250 shares of
Common Stock, of which 4,000,000 Shares of Common Stock sold in this offering
will be freely tradable without restriction under the Securities Act. The
6,659,250 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 1,584,250 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 10,584,250
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.
57
<PAGE>
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.
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. Presently the initial public offering price is anticipated to
be $14 per share. CNM completed a private placement of its Common Stock on
October 7, 1998 pursuant to which it sold shares for a price of $2.00 per share,
and all outstanding stock options granted by CNM have an exercise price of $2.00
per share. CNM's most recent grant of stock options occurred on November 13,
1998.
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."
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
</TABLE>
58
<PAGE>
<TABLE>
<S> <C>
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
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>
59
<PAGE>
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. All material provisions of all documents are summarized in this
Prospectus. 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. The Commission's Internet address is www.sec.gov.
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.
60
<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 September 30, 1998 (unaudited), December 31, 1997 and December 31, 1996.................. F-3
Statement of Operations for the nine months ended September 30, 1998 (unaudited) and September 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 September 30, 1998....................................................... F-4
Statement of Shareholders' Deficit for the nine months ended September 30, 1998 (unaudited) and September
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 September 30, 1998.............................................. F-5
Statements of Cash Flows for the nine months ended September 30, 1998 (unaudited) and September 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 September 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.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
Certified Public Accountants
20750 Ventura Boulevard, Suite 140
Woodland Hills, California 91364
F-2
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................................................... $ 1,815 $ 6,546 $ 701
Accounts and advances receivable, net of allowance for doubtful accounts...... 3,016 1,940 2,043
Prepaid advertising........................................................... 417,689 -- --
Loan receivable, shareholder.................................................. 500 500 500
----------- ------------ ------------
Total current assets........................................................ 423,020 8,986 3,244
----------- ------------ ------------
PROPERTY AND EQUIPMENT, net..................................................... 1,182,806 55,574 20,092
DEFERRED OFFERING COSTS......................................................... 63,923 15,137 --
OTHER ASSETS.................................................................... 38,587 2,276 2,459
----------- ------------ ------------
1,285,316 72,987 22,551
----------- ------------ ------------
$1,708,336 $ 81,973 $ 25,795
----------- ------------ ------------
----------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, related party.................................................. $ 500,000 $ 500,000 $ 87,037
Note payable, bank............................................................ 7,780 -- --
Accounts payable and accrued expenses......................................... 335,890 124,377 40,757
Accrued advertising expenses.................................................. 659,165 -- --
Obligations under capitalized leases, current portion......................... 139,000 -- --
----------- ------------ ------------
Total current liabilities................................................... 1,641,835 624,377 127,794
----------- ------------ ------------
LONG-TERM LIABILITIES:
Obligations under capitalized leases, long-term portion....................... 697,815 -- --
----------- ------------ ------------
Total liabilities........................................................... 2,339,650 624,377 127,794
CONTINGENCIES AND COMMITMENTS
SHAREHOLDERS' DEFICIT:
Common stock; Series 1, Class A, no par value, 20,000,000 shares authorized,
6,073,500 shares issued and outstanding..................................... 2,147,500 137,500 500
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.............................. (3,303,814 ) (1,204,904) (102,499)
----------- ------------ ------------
Total shareholders' deficit................................................. (631,314 ) (542,404) (101,999)
----------- ------------ ------------
$1,708,336 $ 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
NINE MONTHS NINE MONTHS PERIOD FROM MAY MAY 9, 1996
ENDED ENDED 9, 1996 (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED (INCEPTION) TO SEPTEMBER 30,
1998 1997 DECEMBER 31, 1997 DECEMBER 31, 1996 1998*
------------- ------------- ----------------- ----------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 37,697 20,665 $ 30,697 $ 20,828 $ 89,222
Selling, general and administrative
expense.................................. 2,120,094 199,222 394,900 121,334 2,636,328
Loss on acquisition of partnership interest
from related party....................... -- 733,562 -- 733,562
Bad debt expense........................... 2,057 990 3,840 1,193 7,090
------------- ------------- ----------------- ----------------- --------------
Net loss from operations................... (2,084,454) (179,547) (1,101,605) (101,699) (3,287,758)
Interest expense........................... 13,656 -- -- -- 13,656
------------- ------------- ----------------- ----------------- --------------
Net loss before income taxes............... (2,098,110) (179,547) (1,101,605) (101,699) (3,301,414)
Provision for income taxes................. 800 800 (800) (800) (2,400)
------------- ------------- ----------------- ----------------- --------------
Net loss................................... (2,098,910) (180,347) $(1,102,405) $ (102,499) $(3,303,814)
------------- ------------- ----------------- ----------------- --------------
------------- ------------- ----------------- ----------------- --------------
Net loss per common share basic and
diluted.................................. $ (.38) $ (.04) $ (.22) $ (.02) $ (.60)
------------- ------------- ----------------- ----------------- --------------
------------- ------------- ----------------- ----------------- --------------
Weighted average number of shares
outstanding basic and diluted............ 5,466,897 5,015,082 5,037,857 5,000,000 5,466,897
------------- ------------- ----------------- ----------------- --------------
------------- ------------- ----------------- ----------------- --------------
</TABLE>
* Audited from inception to December 31, 1997 and unaudited from January 1,
1998 to September 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)........ 1,001,250 2,010,000 -- -- -- 2,010,000
Net loss for the nine months ended
September 30, 1998 (unaudited)....... -- -- -- -- 2,098,910 (2,098,910)
------------ ------------ --------- ---------- ------------------ ------------
Balance at September 30, 1998
(unaudited).......................... 6,073,500 2,147,500 75,000 525,000 (3,303,814) (631,314)
------------ ------------ --------- ---------- ------------------ ------------
------------ ------------ --------- ---------- ------------------ ------------
</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
9, 1996 PERIOD FROM MAY 9,
NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO 1996 (INCEPTION) TO
SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1998*
------------------ ----------------- ----------------- -------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED FOR) OPERATING
ACTIVITIES:
Net loss.............. $ (2,098,910) $ (180,347) $(1,102,405) $(102,499) $(3,303,814)
------------------ ---------- ----------------- ----------------- -------------------
ADJUSTMENTS TO RECONCILE
NET LOSS TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and
amortization........ 97,746 5,043 6,441 3,029 107,216
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 -- 150,000
CHANGES IN ASSETS AND
LIABILITIES:
(INCREASE) DECREASE IN
ASSETS:
Accounts receivable... (3,132) (6,365) (3,735) (3,236) (10,103)
Allowance for doubtful
accounts............ 2,056 -- 3,838 1,193 7,087
Other assets.......... (36,311) (1,267) -- (2,520) (38,831)
Prepaid advertising
costs................. (417,689) -- -- -- (417,689)
INCREASE (DECREASE) IN
LIABILITIES:
Increase in accounts
payable, accrued
expenses and other
liabilities......... 211,513 27,913 83,620 40,755 335,888
Accrued advertising
expenses.............. 659,165 -- -- -- 659,165
------------------ ---------- ----------------- ----------------- -------------------
Total adjustments... 513,348 175,324 973,726 40,101 1,527,175
------------------ ---------- ----------------- ----------------- -------------------
Net cash provided by
(used for)
operating
activities........ (1,585,562) (5,023) (128,679) (62,398) (1,776,639)
------------------ ---------- ----------------- ----------------- -------------------
</TABLE>
* Audited from inception to December 31, 1997 and unaudited from January 1,
1998 to September 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
9, 1996 PERIOD FROM MAY 9,
NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO 1996 (INCEPTION) TO
SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1998*
------------------ ----------------- ----------------- -------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS USED FOR
INVESTING ACTIVITIES--
purchase of property
and equipment (359,461) -- (41,740) (18,878) (420,079)
---------- -------- ----------------- ----------------- -------------------
CASH FLOWS PROVIDED BY
(USED FOR) FINANCING
ACTIVITIES:
Proceeds from sale of
common stock........ 2,010,000 -- 137,000 -- 2,147,000
Proceeds from issuance
of note payable,
related party....... -- 40,201 54,401 81,977 136,378
Payments on obligations
under capitalized
leases................ (28,702) -- -- -- (28,702)
Principal payment of
notes payable,
bank................ (2,080) -- -- -- (2,080)
(Increase) decrease in
deferred offering
costs............... (48,786) (31,263) (15,137) -- (63,923)
Note payable, bank.... 9,860 -- -- -- 9,860
---------- -------- ----------------- ----------------- -------------------
Net cash provided by
(used for)
financing
activities........ 1,940,292 8,938 176,264 81,977 2,198,533
---------- -------- ----------------- ----------------- -------------------
NET INCREASE (DECREASE)
IN CASH............... (4,731) 3,915 5,845 701 1,815
CASH, beginning of
period................ 6,546 701 701 -- --
---------- -------- ----------------- ----------------- -------------------
CASH, end of period..... $ 1,815 $ 4,616 $ 6,546 $ 701 $ 1,815
---------- -------- ----------------- ----------------- -------------------
---------- -------- ----------------- ----------------- -------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Interest paid......... $ 13,656 $ -- $ -- $ -- $ 13,656
---------- -------- ----------------- ----------------- -------------------
---------- -------- ----------------- ----------------- -------------------
Income taxes paid..... $ 800 $ 800 $ 800 $ -- $ 1,600
---------- -------- ----------------- ----------------- -------------------
---------- -------- ----------------- ----------------- -------------------
</TABLE>
* Audited from inception to December 31, 1997 and unaudited from January 1,
1998 to September 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>
3. During 1998, the Company incurred obligations under capitalized leases for
equipment totalled to $865,517.
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.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
The accompanying unaudited condensed financial statements for the interim
periods ended September 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 nine months
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
REVENUES RECOGNITION POLICY
Recurring revenues from monthly internet service are recognized over the
period services are provided. One time sign up fees which are not significant
are recognized as revenue when earned.
COMPREHENSIVE INCOME
Comprehensive income consists mainly net income.
ADVERTISING COSTS
Advertising costs are included in sales and marketing expenses. Such costs
are expensed as advertising spaces are used and or expenses incurred.
F-11
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Advertising expenses for the nine months ended September 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 $745,110, $1,063, $5,070 and $65,434
respectively.
(3) PROPERTY AND EQUIPMENT:
A summary of property and equipment, recorded at cost is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1998 --------------------
(UNAUDITED) 1997 1996
------------------ --------- ---------
<S> <C> <C> <C>
Telephone equipment................................. $ 35,406 $ 6,371 $ --
Office and other equipment.......................... 330,034 58,429 23,060
Leasehold improvements.............................. 58,821 -- --
Capitalized equipment............................... 865,517
------------------ --------- ---------
1,289,778 64,800 23,060
Less accumulated depreciation and amortization...... 106,972 9,226 2,968
------------------ --------- ---------
$ 1,182,806 $ 55,574 $ 20,092
------------------ --------- ---------
------------------ --------- ---------
</TABLE>
Depreciation and amortization expense charged to operations amounted to
$97,746, $5,043, $6,441 and $3,029 for the nine months ended September 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
F-12
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) RELATED PARTY TRANSACTIONS: (CONTINUED)
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 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 8).
(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
$7,780 at September 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) OBLIGATIONS UNDER CAPITALIZED LEASES
In July 1998, the Company entered into a capital lease agreement to purchase
data communication equipment with the option to purchase the equipment at a
bargain price at the end of the lease. The following is a schedule of future
minimum lease payments for agreements entered into subsequent to September 30,
1998:
<TABLE>
<CAPTION>
CAPITAL
LEASES
------------
<S> <C>
Year ending December 31,
1998.......................................................................... $ 65,217
1999.......................................................................... 298,752
2000.......................................................................... 419,464
2001.......................................................................... 231,948
------------
1,015,381
Less amount representing interest............................................... (178,566)
------------
Present value of future lease payments.......................................... $ 836,815
------------
------------
</TABLE>
F-13
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) 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 September 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 $63,962,
$3,235, $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
During 1998, the Company entered into an agreement with Pacific Bell
Internet to provide bandwidth for Internet access service to the Company at a
monthly fee of approximately $35,000 for a period of five years. The Company
also entered into an agreement with a company to provide dedicated transport
service to the Company at a monthly fee of approximately $21,000 for a period of
three years.
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.
(9) PREPAID ADVERTISING COSTS:
In June and July 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. These advertising costs are amortized over the
periods in which advertising space is used. Prepaid advertising includes the
unamortized portion of these advertising costs and other media advertising to
take place after September 30, 1998.
Subsequent to September 30, 1998, the Company entered into additional
contracts and agreements with one of the advertising companies (see Note 13).
F-14
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) 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.
(11) 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 fair 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 nine months ended September 30, 1998 and the year ended December 31, 1997
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 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...................... 577,500 $ 2.00 -- $
Granted............................................. 1,830,000 2.00 577,500 2.00
Exercised........................................... --
Forfeited/Expired................................... (300,000) --
---------- ---------
Outstanding at September 30, 1998 and December 31,
1997, respectively.................................. 2,107,500 577,500
---------- ---------
---------- ---------
</TABLE>
F-15
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK OPTION PLAN: (CONTINUED)
A summary of the Stock Option Plan-- Series 1, Class B Common Stock as of
and for the nine months ended September 30, 1998 and the year ended December 31,
1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 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 September 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-16
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK OPTION PLAN: (CONTINUED)
Subsequent to September 30, 1998, the Company granted 45,000 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.
(12) 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.
(13) SUBSEQUENT EVENTS:
COMMON STOCK
Subsequent to September 30, 1998, the Company issued 510,750 shares of
common stock at $2.00 per share in a private placement, raising total proceeds
of $1,021,500.
LEASES
In November 1998, the Company entered into a capital lease agreement with
option to purchase equipment at various times at cost. The following is a
schedule of future minimum lease payments for agreements entered into subsequent
to September 1998:
<TABLE>
<CAPTION>
CAPITAL
LEASES
------------
<S> <C>
Year ending December 31,
1998..........................................................................
1999.......................................................................... $ 583,498
2000.......................................................................... 1,066,387
2001.......................................................................... 622,059
------------
2,271,944
Less amount representing interest............................................... 416,934
------------
Present value of future lease payments.......................................... $ 1,855,010
------------
------------
</TABLE>
ADVERTISING AGREEMENT
In October 1998, the Company finalized an agreement, which was tentatively
entered into in August 1998, 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
F-17
<PAGE>
CONSUMER NET MARKETPLACE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(13) SUBSEQUENT EVENTS: (CONTINUED)
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. None of the
advertising space contracted under the contract has been used as of October
1998.
(14) GOING CONCERN:
CNM's financial statements for the nine months ended September 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.
(15) 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-18
<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.............................. 44
Management..................................... 45
Related Party Transactions..................... 53
Principal Stockholders......................... 54
Description of Capital Stock................... 55
Shares Eligible for Future Sale................ 57
Plan of Distribution........................... 58
Legal Matters.................................. 58
Experts........................................ 58
Glossary....................................... 58
Additional Information......................... 60
Financial Statements........................... F-1
</TABLE>
------------------------
UNTIL , 1999 (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
---------------------
JANUARY 8, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 7, 1998, the Company sold 1,584,250
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 November 13, 1998, the Company granted a total of
157,500 stock options to purchase 157,500 shares of its Series 1 Class A Common
Stock for a purchase price of $2.00 per share. These options were not granted
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.
28. On November 13, 1998, the Company granted options to purchase 25,000
shares of Series 1 Class A Common Stock at an exercise price of $2.00 for Dr.
Douglas Benson in consideration for his services as a director of the Company.
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 Restated 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.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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.+
4.8 Amendment to Form of Stock Option Agreement for the Plan.
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 2, 1998.
10.20 Service Agreement by and between the Company, Consumer Net Partners, and Consumers On-Line Development,
Inc., dated May 10, 1996.+
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.21 Form of agreements executed by the employees of the Company.
10.22 Master Lease Agreement between the Company and Ascend Credit Corporation.
10.23 Agreement between the Company and WinStar/PacNet, dated November 25, 1998.
10.24 ISP Customer Agreement for Telespeed Services between CNM and Covad Communications Company, dated
December 31, 1998.
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.
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 8th day of January, 1999.
<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 8th day of January, 1999, 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, Chief Financial
Kenneth K. Lattin Officer and Controller
/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.+
4.8 Amendment to Form of Stock Option Agreement for the Plan.
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.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 2, 1998.
10.20 Service Agreement by and between the Company, Consumer Net Partners, and Consumers On-Line Development,
Inc., dated May 10, 1996.+
10.21 Form of agreements executed by the employees of the Company.
10.22 Master Lease Agreement between the Company and Ascend Credit Corporation.
10.23 Agreement between the Company and WinStar/PacNet, dated November 25, 1998.
10.24 ISP Customer Agreement for Telespeed Services between CNM and Covad Communications Company, dated
December 31, 1998.
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>
AMENDMENT TO
STOCK OPTION PLAN
FOR DIRECTORS, EXECUTIVE OFFICERS, AND EMPLOYEES OF AND KEY
CONSULTANTS TO CONSUMER NET MARKETPLACE, INC.
The following provision is hereby added as Section 19 of the Stock Option
Plan for Directors, Executive Officers, and Employees of and Key Consultants to
Consumer Net Marketplace, Inc. (the "Plan"):
19. ACCELERATED VESTING OF STOCK OPTIONS.
Notwithstanding anything else in the Plan to the contrary, all
outstanding Options and Options granted after the adoption of this Amendment
to any officer, director, or employee which have not vested will accelerate
to a date at least ten (10) business days prior to the closing date of a sale
by the Company of all or substantially all of its assets, a merger of the
Company with another company, the sale of more than 50% of the total issued
and outstanding voting stock of the Company to another party or parties in a
single transaction or in a series of related transactions, or a similar
business combination or extraordinary transaction involving the Company. The
exercise of Options the vesting of which has accelerated pursuant to this
Amendment shall not be effective until the closing date of an
above-referenced extraordinary transaction or business combination. Vested
Options under this Amendment shall terminate on the date of the closing of
the event causing the vesting of the Options to accelerate. The vesting of
the Options is conditioned upon the closing of the transaction that causes
the vesting of the Options to accelerate. If said transaction does not close
within 30 days from the acceleration date, then the vesting of the
accelerated Options will not be effective, and the Options shall revert to
their original vesting schedule, subject to acceleration again in accordance
with this Amendment if another extraordinary transaction or business
combination is proposed and closes.
All Options granted after the adoption of this Amendment to any Key
Consultant which have not vested will terminate on the closing date of a sale by
the Company of all or substantially all of its assets, a merger of the Company
with another company, the sale of more than 50% of the total issued and
outstanding voting stock of the Company to another party or parties in a single
transaction or in a series of related transactions, or a similar business
combination or extraordinary transaction involving the Company.
-1-
<PAGE>
The Stock Option Plan for Directors, Executive Officers, and Employees of
and Key Consultants to Consumer Net Marketplace, Inc. shall remain in effect as
modified by this Amendment except to the extent that the Plan contradicts the
Amendment, in which case the Amendment shall govern.
CONSUMER NET MARKETPLACE, INC.
a California Corporation
By:
--------------------------------------
Fredrick Rice, President
Dated: September 30, 1998
-2-
<PAGE>
AMENDMENT TO
STOCK OPTION AGREEMENT
FOR DIRECTORS, OFFICERS, AND EMPLOYEES OF AND KEY CONSULTANTS TO
CONSUMER NET MARKETPLACE, INC.
9. ACCELERATED VESTING OF OPTIONS.
The vesting of all unvested Options granted to the Optionee under the Plan
accelerates to a date at least ten (10) business days immediately prior to the
closing of an extraordinary transaction described below, in the event that the
Company or its shareholders sell all or substantially all of the Company's
assets, merges with another company, is acquired by another company, sells a
controlling interest in the voting stock of the Company, or enters into a
similar business combination or extraordinary transaction with another entity or
person. The exercise of Options the vesting of which has accelerated pursuant to
this Amendment shall not be effective until the closing date of an
above-referenced extraordinary transaction or business combination. Vested
Options under this Amendment shall terminate on the date of the closing of the
event causing the vesting of the Options to accelerate. The vesting of the
Options is conditioned upon the closing of the transaction that causes the
vesting of the Options to accelerate. If said transaction does not close within
30 days from the acceleration date, then the vesting of the accelerated Options
will not be effective, and the Options shall revert to their original vesting
schedule, subject to acceleration again in accordance with this Amendment if
another extraordinary transaction or business combination is proposed and
closes.
The Stock Option Agreement Under the Consumer Net Marketplace, Inc. Stock
Option Plan (the "Agreement") shall remain in effect as modified by this
Amendment except to the extent that the Agreement contradicts the Amendment, in
which case this Amendment shall govern.
OPTIONEE: CONSUMER NET MARKETPLACE, INC.
a California Corporation
By:
- ------------------------ ---------------------------------
Fredrick Rice, President
Dated: September 30, 1998
<PAGE>
EXHIBIT 5.1
[RICHARDSON & ASSOCIATES LETTERHEAD]
January , 1999
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 (the "Shares") of the Common Stock
of Consumer Net Marketplace, Inc. no par value. You have requested our opinion
in connection with the registration of the Shares covered by the Prospectus,
dated January 8, 1999 (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 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 full compliance with all of the terms and conditions relating to
the issuance of the Shares set forth in the Prospectus, the 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>
IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING; SIGNIFICANT REPRESENTATIONS
ARE CALLED FOR HEREIN.
CONSUMER NET MARKETPLACE, INC.
SUBSCRIPTION AGREEMENT
Consumer Net Marketplace, Inc.
1900 Los Angeles Street, Second Floor
Simi Valley, California 93065
Attention: Fredrick Rice, President
1. SUBSCRIPTION. The undersigned desires to purchase the number of
shares of Series 1 Class A Common Stock, no par value (the "Common Stock"), of
Consumer Net Marketplace, Inc., a California corporation (the "Corporation"), as
provided in SECTION 2 hereof.
The undersigned agrees to be bound by all of the terms and provisions
of the offering of the Common Stock as described herein, and acknowledges that
the Corporation will be relying on the information and representations with
respect to it set forth herein in determining whether an investment in the
Common Stock is suitable for it and whether the undersigned otherwise qualifies
to purchase the Common Stock. The undersigned represents and warrants that such
information is true and correct as of the date of this Subscription Agreement.
2. AMOUNT AND PRICE; ADVERTISING PROGRAM. The maximum number of shares
of Common Stock which may be subscribed for by the undersigned pursuant to this
Subscription Agreement is 1,000,000 shares at a purchase price of $2.00 per
share. The purchase price of the Common Stock subscribed for hereunder shall be
payable from time to time by the undersigned in the form of outdoor advertising
space as follows:
The undersigned will supply remnant space on certain of the
undersigned's outdoor advertising display faces on a space available
preemptable basis to the extent ordered by the Corporation in writing.
Such remnant space shall be valued for purposes of this Subscription
Agreement at fifty percent (50%) of the negotiated rate for outdoor
advertising space in the market where the remnant space is available
(excluding any production costs). The undersigned will be deemed to have
purchased and paid for shares of Common Stock immediately upon the
undersigned's provision of any remnant outdoor advertising space to the
Corporation. From time to time, the undersigned may submit written
requests for stock certificates representing shares of Common Stock that
have been purchased under this Subscription Agreement. The Corporation
shall promptly prepare and deliver stock certificates representing shares
of Common Stock that have been
<PAGE>
purchased under this Subscription Agreement upon receipt of written request
from the undersigned.
In the event the Corporation fails to make complete and timely payment
of any and all amounts due to the undersigned for outdoor advertising space
purchased from the undersigned for cash, the undersigned's subscription for
the shares of Common Stock hereunder may be revoked solely at the option of
the undersigned, in which case this Subscription Agreement shall be null
and void and of no further effect; provided, however, that such revocation
shall not apply to any shares which have already been purchased pursuant to
this Subscription Agreement through the undersigned's provision of remnant
outdoor advertising space as provided for above.
3. RISK FACTORS. THE UNDERSIGNED ACKNOWLEDGES THAT AN INVESTMENT IN THE
CORPORATION INVOLVES A HIGH DEGREE OF RISK WHICH MAY RESULT IN THE LOSS OF THE
ENTIRE AMOUNT OF MY INVESTMENT. There can be no assurance that the Corporation
will be profitable. The undersigned understands that the Corporation is still
in the development stage, does not have a significant operating history and has
incurred losses to date. The undersigned has such knowledge and experience in
financial and business matters that the undersigned is capable of determining
and evaluating the merits and risks of an investment in the Corporation.
4. REPRESENTATIONS AND WARRANTIES. The undersigned represents and
warrants to the Corporation that:
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated by the Securities and Exchange Commission pursuant
to the Securities Act of 1933, as amended (the "Securities Act") insofar as
the undersigned is a corporation, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000.
(b) The undersigned has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks
of an investment in the Corporation.
(c) The undersigned has the ability to bear the economic risks of
Investor's prospective investment, and is able, without materially
impairing its financial condition, to hold the Common Stock for an
indefinite period of time and to suffer complete loss on its investment
(d) The undersigned is not acting on the basis of any promotional
sales materials, or representations and warranties by any person or
contained in any document, except for this Agreement and the business plan
and financial information provided to it and any other documents or
information furnished by the Corporation upon request by it or its
advisors, including, but not limited to a preliminary draft of the
Company's registration statement on Form S-1 that the Company has indicated
it
2
<PAGE>
proposes to file in substantially the same form with the United States
Securities and Exchange Commission.
(e) The securities for which the undersigned is subscribing will be
acquired for its own account for investment purposes only and not with a
view to, or for resale in connection with, any distribution of securities
within the meaning of the Securities Act, and the undersigned does not now
have any reason to anticipate any change in circumstances or other
particular occasion or event which would cause it to sell or transfer such
securities.
(f) The address and federal employer identification number set forth
herein are true and correct. The undersigned represents and warrants that
its principal place of business is within the state set forth on the
signature page hereof. The Common Stock subscribed for has been offered
and will be purchased in such state.
(g) The undersigned understands that no Commissioner of Securities of
any state or other jurisdiction has made any finding or determination
relating to the fairness of an investment in the Common Stock, that no
Commissioner of Securities of any state or other jurisdiction has endorsed
the Common Stock, and that the undersigned must bear the economic risk of
an investment in the Common Stock for an indefinite period of time because
the Common Stock has not been registered under any securities laws and
therefore cannot be sold without registration under applicable securities
laws or an exemption from such registration is available.
(h) The execution and delivery of this Subscription Agreement and the
purchase of the Common Stock hereunder is within the undersigned's power
and authority, and has been duly authorized by all necessary action.
(i) The information provided to the Corporation herein is true and
correct in all respects as of the date hereof. The undersigned agrees to
notify the Corporation immediately if any of the statements made herein
shall become untrue.
5. RESTRICTIONS ON TRANSFER. The undersigned understands that it must
bear the economic risk of the purchase of the Common Stock for an indefinite
period of time, because (a) the Common Stock has not been registered under the
Securities Act and applicable state securities laws; (b) the Common Stock may
therefore not be sold, transferred, pledged or otherwise disposed of unless the
shares are subsequently so registered or, in the opinion of counsel for or
satisfactory to the Corporation, registration under the Securities Act or any
applicable state securities laws is not required; (c) except as provided in
SECTION 6 below, the Corporation neither has an obligation to register the
Common Stock nor has it agreed to do so, nor has it contemplated doing so in the
future; and (d) the Corporation is under no obligation to perfect any exemption
for resale of the Common Stock.
3
<PAGE>
6. REGISTRATION RIGHTS.
(a) After the Corporation's initial registered public offering, the
Corporation shall use its best efforts to comply with the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Securities Exchange
Act"). If, at any time or from time to time, the Corporation shall determine to
register any of its securities, either for its own account or the account of a
security holder or holders, other than a registration relating solely to
employee benefit plans on Form S-8 or similar forms which may be promulgated in
the future or a registration on Form S-4 or similar forms which may be
promulgated in the future relating solely to a Securities and Exchange
Commission Rule 145 or similar transaction, the Corporation will (i) promptly
give to the undersigned written notice thereof and (ii) include in such
registration (and any related qualification under Blue Sky laws or other
compliance), and in any underwriting involved therein, all Registrable
Securities of the undersigned as specified in a written request or requests made
within thirty (30) days after receipt of such written notice from the
Corporation. For the purposes of this Subscription Agreement, the term
"Registrable Securities" shall mean all shares of Common Stock purchased under
this Subscription Agreement owned by the undersigned and other securities issued
or issuable with respect to such Common Stock by way of a stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or reorganization; provided, however, that a Registrable
Security will cease to be a Registrable Security when (i) a registration
statement covering such Registrable Security has been declared effective by the
Securities and Exchange Commission (the "Commission") and it has been disposed
of pursuant to such effective registration statement or (ii) it is eligible to
be sold under circumstances in which all of the applicable conditions of Rule
144 (or any similar provisions then in force) under the Securities Act are met.
(b) If the registration of which the Corporation gives notice is for
a registered public offering involving an underwriting, the Corporation shall so
indicate in the notice given pursuant to SECTION 6(a). In such event the right
of the undersigned to registration pursuant to this SECTION 6 shall be
conditioned upon the undersigned agreeing to participate in such underwriting
and in the inclusion of the undersigned's Registrable Securities in the
underwriting to the extent provided herein. The undersigned shall (together
with the Corporation and the other holders distributing their securities through
such underwriting) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the
Corporation or by other holders exercising any demand registration rights.
Notwithstanding any other provision of this SECTION 6, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten, the underwriter may exclude some of the Registrable
Securities or other securities from such registration and underwriting and the
securities to be included in the registration and underwriting shall be
allocated PRO RATA among the undersigned and the other holders based on the
number of Registrable Securities and other securities initially included in such
registration and underwriting. If the undersigned disapproves of the terms of
any such underwriting, the undersigned may elect to withdraw therefrom by
written notice to the Corporation and the underwriter. Any securities excluded
or withdrawn from such underwriting shall be withdrawn from such registration.
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<PAGE>
(c) The Corporation will indemnify the undersigned, each of its
officers and directors and partners, and each person controlling the undersigned
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
SECTION 6, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages and liabilities (or actions in respect
thereof), including any of the foregoing incurred in any litigation, commenced
or threatened, arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
violation by the Corporation of any rule or regulation promulgated under the
Securities Act applicable to the Corporation and relating to action or inaction
required of the Corporation in connection with any such registration,
qualification or compliance, and will reimburse the undersigned, each of its
officers and directors and partners, and each person controlling the
undersigned, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Corporation will not be liable in
any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or alleged
untrue statement or omission, made in reliance upon and in conformity with
written information furnished to the Corporation by an instrument duly executed
by the undersigned or underwriter and stated to be specifically for use therein.
7. INDEMNIFICATION. The undersigned understands the meaning and legal
consequences of its representations and warranties set forth in Paragraph 4 and
5 hereof and elsewhere herein and the undersigned acknowledges that the
Corporation has relied upon such representations and warranties, and the
undersigned agrees to indemnify and hold harmless the Corporation, and its
officers, directors, employees, agents and representatives from and against any
and all claims, demands, losses, damages, expenses or liabilities (including
attorneys' fees) due to or arising out of a breach of any such representations
or warranties.
8. REPRESENTATIONS AND WARRANTIES OF CORPORATION. The Corporation hereby
represents and warrants to the undersigned that the following is true and
correct on the date hereof and on the date of the issuance of the Common Stock:
8.1 ORGANIZATION. The Corporation is a corporation duly organized
and validly existing under, and by virtue of, the laws of the State of
California and is in good standing under such laws. The Corporation has all
requisite corporate power to own and operate its properties and assets, and to
carry on its business as presently conducted and as proposed to be conducted.
The Corporation is qualified to do business as foreign corporation in any
jurisdiction in which failure to qualify would have a material adverse effect on
the Corporation's business.
5
<PAGE>
8.2 AUTHORITY. The Corporation has all requisite legal and corporate
power and authority to execute and deliver this Agreement, to sell and issue the
shares of Common Stock, and to carry out and perform its obligations under the
terms of this Agreement.
8.3 NO VIOLATION. The execution, delivery and performance of and
compliance with this Agreement and the issuance of the Common Stock have not
resulted and will not result in any violation of, or conflict with, or
constitute a default under any terms of its Articles of Incorporation or Bylaws,
or in any material respect of any term or provision of any mortgage, indenture,
contract, agreement, instrument, judgment or decree foregoing, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Corporation.
8.4 BINDING OBLIGATION. All corporate action on the part of the
Corporation, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement, the
authorization, sale, issuance and delivery of the Common Stock and the
performance of the Corporation's obligations hereunder has been taken. This
Agreement shall constitute the valid and binding obligations of the Corporation,
enforceable against the Corporation in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies. No consent, approval, order or authorization of or
designation, declaration or filing with any state or federal governmental
authority on the part of the Corporation is required in connection with the
valid execution and delivery of this Agreement, or the offer, sale or issuance
of the Common Stock, or the consummation of any other transaction contemplated
hereby, except qualification (or taking such action as may be necessary to
secure an exemption from qualification, if available) under applicable Blue Sky
laws, or the offer and sale of the Common Stock, which filing and qualification,
if required, will be accomplished in a timely manner prior to or promptly upon
the issuance of the Common Stock.
8.5 CAPITALIZATION. After the filing of the Company's proposed
Amended and Restated Articles of Incorporation, the authorized capital stock of
the Corporation shall consist of 50,000,000 shares of Common Stock and 1,000,000
shares of Series 1 Class B Common Stock, of which 6,462,500 shares of Common
Stock and 75,000 shares of Series 1 Class B Common Stock will be issued and
outstanding prior to the issuance of the shares contemplated hereby. All such
issued and outstanding shares will be, and all currently issued and outstanding
shares are, duly authorized, validly issued, fully paid and nonassessable. The
Corporation has reserved for issuance up to 2,500,000 shares of Common Stock
issuable upon exercise of options granted or available for grant under the
Corporation's stock option plans. Except as set in this Section 8.5, there are
no options, warrants, conversion privileges or other rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the capital stock or other securities of the Corporation, nor any agreements
or understandings with respect thereto. The Corporation is not a party or
subject to any agreement or understanding, and, to the Corporation's knowledge,
there is no agreement or understanding between any persons or
6
<PAGE>
entities, which affects or relates to the voting or giving of consents with
respect to any security or by a director of the Corporation.
8.6 ISSUANCE OF COMMON STOCK. The Common Stock, when issued, sold
and delivered in compliance with the provision of this Agreement, will be duly
and validly issued and will be fully paid and nonassessable and free and clear
of all liens, pledges, charges, security interests, encumbrances, title
retention agreements, preemptive rights, options or restrictions of any kind;
PROVIDED, HOWEVER, that the Common Stock will be subject to restrictions on
transfer under state or federal securities laws. There are no outstanding rights
of first refusal or preemptive rights applicable to the Common Stock.
8.7 PRIOR EXCEPTIONS FROM REGISTRATION. All offers and sales of the
Corporation's capital stock to the date hereof (i) were exempt from the
registration requirements of Section 5 of the Securities Act and (ii) were in
all material respects made in compliance with all applicable state securities
laws.
8.8 FINANCIAL STATEMENTS. The Corporation has delivered to the
undersigned the Corporation's balance sheet and related statements of income and
loss for the year-ended December 31, 1997 (the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, are in accordance with the books and records of the Corporation, and
fairly present the financial condition and operating results of the Corporation
for the periods indicated. Except as set forth in the Financial Statements, the
Corporation does not have any liabilities, absolute, contingent or otherwise,
except for liabilities and obligations incurred in the ordinary course of
business since January 1, 1998.
8.9 INSURANCE. The Corporation has in full force and effect fire,
casualty and liability insurance policies with recognized insurers with such
coverages as are sufficient in amount to allow replacement of the tangible
properties of the Corporation that might be damaged or destroyed, subject to
usual and customary deductibles.
8.10 EXEMPT TRANSACTION. Based in part upon the accuracy of the
undersigned's representations herein, the offer, sale and issuance of the Common
Stock to be issued in conformity with the terms of this Agreement constitute
transactions exempt from the registration requirements of Section 5 of the
Securities Act.
8.11 FULL DISCLOSURE. No statement by the Corporation contained in
this Agreement or in any certificate furnished or to be furnished to the
undersigned and none of the other information or documents furnished to the
undersigned by the Corporation or its agents in connection with the sale of the
Common Stock, when taken as a whole, contains or will contain any untrue
statement of material fact or omits or will omit to state a material fact
necessary in order to make the statement contained herein or therein not
misleading in light of the circumstances under which they were made.
8.12 BROKER FEES. The Corporation has not incurred, and will not
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or
7
<PAGE>
any similar charges in connection with this Agreement or any transaction
contemplated hereby.
8.13 INDEMNIFICATION. The Corporation understands the meaning and
legal consequences of its representations and warranties set forth in this
Section 8 and elsewhere herein and it acknowledges that the undersigned has
relied upon such representations and warranties, and it agrees to indemnify and
hold harmless the undersigned, and its officers, directors, employees agents and
representatives from and against any and all claims, demands, losses, damages,
expenses or liabilities (including attorneys' fees) due to or arising out of a
breach of any such representations or warranties.
8.14 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Corporation, the
Corporation agrees to:
(a) Use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act at all times after the effective date of the first registration
under the Securities Act filed by the Corporation for an offering of its
securities to the general public;
(b) Use its best efforts to then file with the Commission in a
timely manner all reports and other documents required of the Corporation under
the Securities Exchange Act at any time after it has become subject to such
reporting requirements;
(c) So long as the undersigned owns any Common Stock, to furnish
to the undersigned forthwith upon request a written statement by the Corporation
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Corporation for an offering of its securities to the general
public) and of the Securities Act and the Securities Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Corporation, and such other reports and
documents of the Corporation as the undersigned may reasonably request in
availing itself of any rule or regulation of the Commission allowing the
undersigned to sell such Common Stock without registration.
8.15 BROADCAST PROPERTIES. The Corporation does not own or have an
official position or ownership interest in any broadcast station or other mass
media entity regulated by the FCC pursuant to the Communications Act of 1934, as
amended, including but not limited to a cable television system or newspaper
property.
8
<PAGE>
9. ACCEPTANCE; REVOCATION. The Corporation hereby acknowledges and
agrees that it is not entitled to reject this subscription or otherwise withdraw
from, terminate or revoke this Subscription Agreement following the time at
which the undersigned begins placing the Corporation's advertising on the remant
space.
10. GENERAL. This Agreement is governed by the laws of the State of
Arizona. This Agreement sets forth the entire understanding of the parties
hereto concerning the subject matter herein. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, and their respective
successors, personal representatives and assigns. In the event any provision of
this Subscription Agreement is held to be unenforceable or invalid by any court
of competent jurisdiction, the validity and enforceability of the remaining
provisions shall not be affected thereby.
11. TERMINATION. This Subscription Agreement shall lapse and be of no
further force or effect with respect to shares of Common Stock not purchased and
paid for by the undersigned pursuant to the terms of SECTION 2 of this Agreement
prior to December 31, 1999.
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
THE FOLLOWING SIGNATURE PAGE SHOULD BE DULY EXECUTED BY THE PURCHASER AND THE
ENTIRE EXECUTED SUBSCRIPTION AGREEMENT SHOULD BE DELIVERED TO CONSUMER NET
MARKETPLACE, INC., ATTN: FREDRICK RICE, AT 1900 LOS ANGELES STREET, SECOND
FLOOR, SIMI VALLEY, CALIFORNIA 93065.
9
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURE PAGE FOR SUBSCRIPTION AGREEMENT FOR
CONSUMER MARKETPLACE, INC.
- --------------------------------------------------------------------------------
The undersigned hereby subscribes for up to 1,000,000 shares of Common
Stock at a price of $2.00 per share payable from time to time by the undersigned
in the form of outdoor advertising space pursuant to the terms set forth in the
above subscription agreement.
The undersigned represents that it has read the above Subscription
Agreement and the representations therein made by it are true and correct.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
undersigned as of October __, 1998, at _____________________________________
(location).
ELLER MEDIA COMPANY
By:
--------------------------------
Name:
------------------------
Title:
------------------------
Address:
EIN:
------------------------------
SUBSCRIPTION ACCEPTED AND AGREED TO BY:
CONSUMER NET MARKETPLACE, INC.
By:
-------------------------------------
Fredrick Rice, President
Date:
-------------------------------------
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<PAGE>
Mega POP-TM- Services Selected
This form must be completed to activate any MegaPOP-TM- services.
MegaPOP-TM- Customer ID _________ Application Date 10-2-98
Company Name CONSUMER NET MARKETPLACE (CNM Network)
Address 1900 E. Los Angeles Ave., 2nd Floor
City Simi Valley State CA Zip 93065
Phone 805-520-7170 Fax 805-520-7211
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
SERVICES SELECTED APPLICABLE FEES
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Standard MegaPOP-TM- Set-Up: Yes No $250
Set-Up Fee: $250
- ------------------------------------------------------------------------------------------------------------------------------------
Proxy Radius (Realms) Set-Up: ten Yes No $250
Set-Up Fee: $250 If YES, the MegaPOP-TM- Proxy
Radius Form must be completed.
- ------------------------------------------------------------------------------------------------------------------------------------
Filtered Access l)ial-Up Service: if you are using Proxy Radius for
Authentication another MegaPOP
Set-Up Fee: $250 Yes No Proxy Radius Form must he completed
- ------------------------------------------------------------------------------------------------------------------------------------
Packet Filter Set-Up: Yes No IF YES, THE MEGAPOP-TM-
Packet Filter Form must
Set-Up Fee: $250 be completed.
- ------------------------------------------------------------------------------------------------------------------------------------
Email Services Requested: Yes No
Set-Up Fee: $4,500
Domain Name to be used
Is this a New err Existing Domain Name?
- ------------------------------------------------------------------------------------------------------------------------------------
Personal Web Services Requested: Yes No
Set-Up Fee: $4,500
- ------------------------------------------------------------------------------------------------------------------------------------
UseNet Services Requested Yes No
Set-Up Fee: $ 100
- ------------------------------------------------------------------------------------------------------------------------------------
I hereby authorize StarNet, Inc. to activate these selected services and agree I
am bound to all conditions and restrictions described within the MegaPOP-TM-
Wholesale Services and StarNet, Inc. Terms of Service Agreement. $500
Total set-up fees
SIGNATURE REQUIRED: (RANDY GREENE) DATE: 10/2/98
- ------------------------------------------------------------------------------------------------------------------------------------
Set-Up Fees Paid By: Company Check /X/ Credit Card / /
If paying by Credit Card, please complete the following:
Name on Credit Card
Card Number
Signature of Card Holder Expiration Date
</TABLE>
ALL APPLICABLE SET-UP FEES MUST BE PAID IN FULL PRIOR TO ACTIVATION OF SERVICES.
ALL MEGASOP-TM- SERVICES ARE HELD TO THE STARNET TERMS OF SERVICE DOCUMENT AND
THE MEGAPOP-TM- WHOLESALE SERVICE AGREEMENT
StarNet, Inc. 579 First Bank Drive, Suite 100, Palatine, IL 60067 (847) 963-0116
Voice, (847) 963-1302 Fax
www.megapop.net [email protected]
<PAGE>
MEGAPOP-TM- Wholesale Service Agreement
100198
This Agreement, made and entered into this 2 day of October, 1998 (hereinafter
referred to as "date of this Agreement") by and between StarNet, Inc., a
corporation having it's principal place of business at 579 First Bank Drive,
Suite 100, Palatine, IL 60067 (hereinafter "SNI") and
CONSUMER NET MARKETPLACE, Inc.
a corporation having it's principal place of business at
1900 E. LOS ANGELES AVE. 2ND. FLOOR
SIMI VALLEY, CA 93065 (HEREINAFTER "ISP").
WITNESSETH
Whereas, ISP is in the business of Providing various Services on the worldwide
computer network known as the Internet and of providing support for various
advertising and telemarketing sales forces;
Whereas, SNI is in the business of providing various services to third parties
on the Internet, including but not limited to providing access to the Internet
for individuals and business entities;
Whereas, ISP desires a provider of access to the Internet for its customers and
clients;
Whereas, SNI desires to provide access to the Internet for customers and clients
of ISP;
Whereas, the parties hereto are desirous of setting forth, in writing, terms and
conditions, under which ISP shall direct their customers to SNI for service and
SNI shall provide such customers with access to the Internet;
Now therefore, in consideration of the premises set forth in the foregoing
recitals, which are hereby made a part thereof anti incorporated herein by
reference, and further, of the mutual promises, covenants, agreements,
conditions, terms and acknowledgments contained herein and other good and
valuable consideration, the receipt and Sufficiency of w high are hereby
acknowledged, ISP and SNI hereby agree as follows:
ARTICLE ONE - DURATION
1.1. TERM.
Except as otherwise provided herein and subject to earlier
termination hereof in accordance with the terms of this Agreement,
the "initial term" of this Agreement shall be one (1) year from the
date hereof.
1.2. EXTENSION.
This Agreement shall be automatically extended beyond the initial
term unless earlier terminated as otherwise provided in this
Agreement or unless either party provides written notice of
termination to the other as set forth immediately hereinbelow. A
written notice of termination must be provided by one party to the
other no later than sixty (60) days prior to the expiration of the
initial term, and hereafter on no less than sixty (60) days prior
written notice hereinafter, the initial term and any extension
thereof shall sometimes collectively be referred to as the "term of
this Agreement".
ARTICLE TWO - DUTIES AND RESPONSIBILITIES OF ISP
2.1. CUSTOMERS.
ISP Shall not be limited to directing all of it s customers to SNI
for purposes of providing access to the Internet under the terms and
conditions of this Agreement.
2.2. ADVERTISING AND PROMOTION.
ISP shall solely be responsible for and shall incur reasonable
expense in connection with advertising and promotional activities
designed specifically to generate customers who are interested in
access to the Internet.
2.3. SIGN UP.
ISP shall document and maintain information pertaining to each
customer who has committed to the
<PAGE>
Internet Services to be provided by SNI under the terms of this
Agreement The pertinent information, specifically the followings 1.
ISP assigned (12) digit PPP logon name, 2 ISP assigned PPP password,
3PPP account activation/deactivation symbol, and 4. The preferred
MegaPOP-TM- dial-up location for the specific customer, shall be
forwarded to SNI by ISP, via electronic file transfer to a
pre-determined SNI authentication server, in a pre-determined format,
to SNI for activation on the SNI system for eventual service.
2.4. TERMS AND CONDITIONS.
ISP shall make such warranties, and representations and may limit its
liability to any customer, in such terms, conditions and limitations
substantially identical to those set forth in existing ISP customer
liabilities.
2.5. CUSTOMER CONTACT.
SNI shall not contact an ISP customer without prior written
permission of ISP whose permission shall not be unreasonably
withheld.
2.6. ISP PPP ACCOUNT NAMES
ISP shall assign and be responsible for the assignment of ISP PPP
account names. Account names shall be defined within the twelve (12)
digit account name definition whereas the preceding four (4) digits
of the ISP PPP account name will be defined as the four (4) digit
code assigned exclusively to ISP. The succeeding eight (8) digits in
the ISP PPP account name will be assigned and managed by ISP. ISP
agrees to limit the assignment of ISP PPP account names to one ISP
PPP account name per PPP account assigned.
2.7. PPP ACCOUNT PASSWORDS
ISP shall be responsible for the assignment and maintenance of all
ISP PPP account passwords.
ARTICLE THREE - DUTIES AND RESPONSIBILITIES OF SNI
3.1. TO ISP.
Within (1) business day after the execution of this agreement by the
parties hereto, SNI shall provide to ISP the following:
(a) complete PPP access to the Internet for all ISP customers
described within this Agreement.
(b) complete 2 B channel ISDN access to the Internet for all ISP
customers described within this Agreement.
3.2. TO THE CUSTOMERS.
Within one (1) business day of receipt of notice from ISP of an
electronic delivery of customer access information, SNI shall
perform, cause to be performed, or provide, as the case may be, the
following:
(a) SNI shall establish a new PPP account for each customer delivered
to SNI, via electronic file transfer, with access to all SNI
MegaPOP-TM- PPP dial-up servers;
(b) For each customer, SNI shall provide unlimited dial-up access to
the Internet through SNI PPP dial-up servers. ISP understands that
their customers will be subject to a minimum of 10 minute idle time
cutoff, whereas each connected customer will lose their connection in
the even they do not make use of their connection for a minimum
period of 10 minutes.
3.3. BUSY SIGNAL CONDITION(S).
SNI will make every reasonable effort to maintain a user to modem
ratio, on a city to city basis, equal to or less than 10:1. In the
event the user to modem ratio exceeds 10:1, SNI must take immediate
action to remedy this situation within 30 days. In the event the user
to modem ratio does not reduce to less than 10:1 in the allotted 30
day period, ISP may make claims for the reduction of their monthly
MegaPOP-TM- invoices for the affected service month, following the 30
day period, for up to 25% of their total service invoice. ISP must
itemize the total number of affected customers using the MegaPOP-TM-
services in the affected city.
ARTICLE FOUR - TECHNICAL SUPPORT AND CUSTOMER INQUIRIES
4.1. SERVICES OF SNI.
SNI shall perform technical support services, to ISP, solely relevant
to connection of a customer to access to the Internet, including but
not limited to the customer's modem, but excluding any services
relevant to the ISP provided customer software. All of said services
shall be performed by SNI during its normal and regular business
hours.
<PAGE>
4.2. SERVICES OF ISP.
ISP shall address any and all customer inquiries of any nature
whatsoever and shall perform any and all technical support services
relevant to the ISP software provided to its customers.
ARTICLE FIVE - PAYMENT
5.1. AMOUNT.
ISP shall make payment to SNI in the amount, described in Addendum A
"MegaPOP-TM- Price Schedule" per customer per month for each ISP
customer that SNI provides PPP access to the Internet under the terms
of this Agreement. Payment shall be made to SNI on or before the 10th
day of each succeeding calendar month. Payment in full shall be made
to SNI as provided hereinabove, not withstanding customer connection
to or termination from the Internet at any time during the preceding
calendar month. SNI shall provide written notice to ISP, for any
changes in the Addendum A "MegaPOP-TM- Price Schedule", with a
minimum sixty (60) days notice prior to the effectivity; of such
changes, for all existing recurring fee services
5.2. BILLING AND COLLECTION.
ISP shall Provide all services of billing and collection and shall be
responsible for all costs and expenses incurred in connection with
services rendered by SNI under the terms of this Agreement.
5.3. FAILURE TO BILL OR COLLECT.
ISP shall make payment to SNI as described under the terms of this
Agreement notwithstanding ISP's failure to bill or collect from an
ISP customer for services provided by SNI under the terms of this
Agreement.
5.4. REFUND.
ISP may utilize its reasonable discretion in making a determination
whether monies should be refunded to an ISP customer as a result of
ineffective services provided by SNI to a customer under the terms of
this Agreement. Ineffective services of SNI shall be defined as the
failure by SNI to provide customers with uninterrupted access to
Internet the for a cumulative time period of less than ninety-seven
percent (97%) of the total available time for connection to the
internet during a given calendar month Total time available for
connection to the Internet shall be determined by multiplying the
number of days in the calendar month by twenty four (24) hours. The
log-in history of SNI s user access logs which shall be recorded by
SNI on one of their servers shall be used to determine service
interruptions. Any such refund provided to an ISP customer due to the
described ineffective service shall be taken from the payment owed to
SNI by ISP for the successive calendar month.
5.5. AMOUNT CALCULATION FOR CUSTOMERS ADDED.
ISP may provide internet access for their customers via any
MegaPOP-TM- access location. Access Authentication enabling a
customer s connection to the MegaPOP-TM- system may be achieved
through the MegaPOP-TM- Account Massager Interface or the ISP s own
Authentication Server. ISP reserves the right to activate and manage
their accounts via their own Authentication Server instead of the
MegaPOP-TM- Account Manager Interface Authentication Server.
(A) ISP agrees to pay SNI the full amount for each customer account
successfully added to the SNI system through the MegaPOP-TM- Account
Manager Interface within each preceding month for each customer
account activated from the first (1st) day of the calendar month
through the last day of the calendar month.
(B) ISP agrees to pay SNI the full amount for each of their customers
who have signed onto the MegaPOP-TM- system for any period of time
between 12:00 AM on the first (1st) day of the calendar month through
the 11 59:59 PM on the last day of the calendar month and who aren't
activated within the MegaPOP-TM- Account Manager Interface
Authentication Server. These ISP accounts may gain access to the
MegaPOP-TM- system via the Authentication Server under the direct
control and ownership of the ISP.
5.6 AMOUNT OF CALCULATION FOR CUSTOMERS DELETED.
(Item 5.6. applies only to those accounts activated and managed
within the MegaPOP-TM- Account Manager Interface Authentication
Server.) ISP agrees to pay SNI the full amount for each customer
deleted from the MegaPOP-TM- Account Manager Interface Authentication
Server during a calendar month for customers deleted on or after the
first (1st) day of the calendar month.
5.7. AMOUNT CALCULATION FOR ISDN ONLINE TIME.
Charges for online time for ISDN accounts will be calculated based
upon a monthly start point of 12:00:00
<PAGE>
AM on the 1st day of a month and ending with 11:59:59 PM on the last
calendar day of the same month. ISDN Online time billing will be
rounded down to the nearest minute and charged in one minute
increments. ISDN Online time will be billed after 150 hours of online
time per month. All MegaPOP ISDN service is offered at 128K, 2 B
Channel service. Online time is calculated using the total single
channel time, divided by two (2). Monthly online free time per B
Channel is 150 hours for a tot al of 300 channel hours. ISP agrees to
pay the agreed upon hourly rate, for all its customer's online time
exceeding 150 free hours per month, per ISP ISDN customer. ISDN
online time will be determined using SNI's log-on accounting server
log files. Online time disputes will be resolved only through the
examination of SNI's log-on accounting server log files. SNI's log-on
accounting server log files will be available to the ISP in the event
a dispute occurs.
ARTICLE SIX - NON-EXCLUSIVITY
6.1. ISP and SNI agree to the terms of this Agreement with the
understanding that both ISP and SNI can and may offer similar
services to the market as competitors. ISP and SNI agree to the terms
of this Agreement with the understanding that the right to offer PPP
accounts to the market is non-exclusive and mutually competitive.
ARTICLE SEVEN - NON-SOLICITATION
7.l. ISP and SNI, each to the other, hereby agree that during, the term of
this Agreement and for a period of Sixth (60) days after termination
of this Agreement, neither party shall solicit any business from any
customer(s) of the other party.
ARTICLE EIGHT - COVENANT NOT TO COMPETE
8.1. STARNET PERSONNEL.
Unless otherwise agreed to by the parties in writing, SNI shall not
hire, employ or engage in any manner the services of any employee,
servant, director, or shareholder of ISP during the term of thus
Agreement.
ARTICLE NINE - LIMITATION OF LIABILITY
9.1. CONTRACT.
Neither SNI, nor any of its agents, contractors, technicians, or any
tier shall be liable to ISP or any other person or organization in
contract for any general, special, indirect, incidental, or
consequential damage whatsoever, including but not limited to, any
lost data, lost time or other system related damages, damage or loss
of property or equipment, loss of profits or revenues, cost of
capital, etc. which arises out of or is in connection with the
services of SNI covered or furnished within the terms of this
Agreement.
9.2. TORT.
Neither SNI nor any of its agents, contractors, technicians or any
tier shall be liable to ISP or any other person or organization for
any damage Whatsoever in tort (whether based in negligence, willful
conduct or strict liability) for any act or omission by ISP or any of
its servants, employees, or agents or for any use (other than its own
intended purpose), tampering, or illegal use of the by the customers
which arises out of or is in connection with the services of SNI
covered by the terms of this Agreement.
9.3. The remedies of ISP set forth herein are exclusive and the total
cumulative liability of SNI and any of its agents, contractors,
technicians and any tier with respect to this Agreement, or any thing
done in connection herewith such as performance or breach hereof, or
from installation, configuration, startup/initialization,
programming, or any other services of SNI covered by or furnished
under the terms of this Agreement, in tort (including negligence or
strict liability), or otherwise, shall not exceed the monthly service
fee payable to SNI on which such liability is based
ARTICLE TEN - INDEMNIFICATION
10.1. Notwithstanding anything to the contrary herein contained, each party
agrees to indemnify and hold the other harmless against any and all
liability, loss, claim, judgment, damage and expense (including
without limitation attorney's fees and costs of litigation) incurred
or suffered by the indemnified party as the result of negligence,
willful misconduct, or breach of any terms of this Agreement by the
indemnifying party, including but not limited to claims, liabilities,
losses damage, judgment and expense which arise out of alleged injury
or death of any person or damage to property of every kind and
description. The indemnifying party will not be responsible for ANY
COMPROMISE or settlement made without its written
<PAGE>
consent, which consent will not be unreasonably withheld. Each party
shall promptly notify the other in writing of any claim for which its
obligated under this indemnity and for which it may seek
indemnification front the other. The indemnifying party shall have
the right to sue the defense of any such claim. Both parties shall
confer as to and agree on the legal counsel(s) to be selected in such
defense.
ARTICLE ELEVEN - NONDISCLOSURE
11.1. GENERAL.
Both parties agree not to disclose to any third party any proprietary
or Confidential information obtained from the other during the
negotiation or performance of this Agreement while the Agreement is
in force and for five years thereafter, including any and all
technology and trade secrets now existing or arising in the future,
price, schedules and customer lists.
ARTICLE TWELVE - REMEDIES FOR BREACH
12.1. Except as otherwise limited by Article Nine, if either party breaches
any of the terms and provisions of this Agreement on its part to be
performed, whether such breach pertains to a default in payment or
otherwise, the non-breaching party shall have the right, if it so
elects, to serve upon the breaching party a written notice of its
intention to terminate this agreement this Agreement and the nature
of the breach.
(a) The breaching party shall thereupon have a period of thirty (30)
days, after written notice as such has been served within which to
remedy the breach.
(b) If the breaching party fails to duly remedy the breach, then upon
the expiration of the thirty (30) days this Agreement and any rights
herein granted shall in all respects cease and terminate, and the
breaching party Shall have no further rights hereunder
(c) Notwithstanding such termination, each party's rights arising out
of this Agreement or in connection therewith or existing prior
thereto shall nevertheless continue in full force and effect,
including such party's right to sue for damages caused to them by the
other party s breach and failure to cure the same within the
aforementioned time period.
12.2. Nothing in this Agreement shall bar either party's right to seek
specific performance of the provisions of this Agreement and
injunctive relief against threatened conduct that will cause it loss
or damages under customary equity rules, including applicable rules
for obtaining restraining orders and preliminary injunctions. Both
parties agree that the non-breaching party may seek such injunctive
relief in addition to such further or relief as may be available at
equity by law.
12.3. If a claim for amounts owed by either party is asserted in any
judicial proceeding, or if either party is required to enforce this
Agreement in a judicial or arbitration proceeding, the party
prevailing in such proceeding shall be entitled to reimbursement of
its costs and expenses, including but not limited to, reasonable
accounting, attorney's and attorney assistant fees.
ARTICLE THIRTEEN - TERMINATION
13.1. GENERAL.
Unless other vise agreed to in writing by ISP and SNI and except as
may be otherwise provided herein, this Agreement shall automatically
terminate upon the occurrence of any of the following events:
(a) a party files for bankruptcy or is or becomes insolvent or is
declared insolvent or bankrupt, or makes an assignment or another
arrangement for the benefit of its creditors or is involuntarily the
subject of a bankruptcy filing,
(b) a party has all or any substantial portion of its equity or
assets expropriated by any governmental authorities;
(c) a party is dissolved or liquidated; or
(d) a party disposes of substantially all of its assets.
13.2. DEACTIVATION OF CUSTOMERS.
Upon termination of this Agreement and by no later than the end of
the month succeeding the calendar month in which this Agreement has
been terminated, SNI shall deactivate all ISP PPP accounts, thereby
<PAGE>
terminating an ISP customer's access to the Internet, and SNI shall
be entitled to all payments from ISP in accordance with the terms of
this Agreement up to and including the date of deactivation.
13.3. TERMINATION PENALTY.
ISP's Termination of this Agreement, prior to the agreed sport
termination date as described in article 1.1 of this Agreement, will
result in a penalty pas meat calculated according to the following
formula:
Number of Remaining Months of Agreement X Average Monthly Usage Fees
for prior Months of Agreement
ISP agrees to pay this amount in the event of ISP's Termination of
this Agreement prior to the agreed termination date described in
article 1.1. of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
in duplicate as of the date set forth hereinbelow.
STARNET, INC.
An Illinois Corporation
By: Date:
--------------------------------- --------------------------
Signature and Title
ISP
By: (Randy Green, VP Sales) Date: 10-02-98
--------------------------------- --------------------------
Signature and Title
ISP Initials: (RG)
Page 5 of 5
STARNET, INC. 579 First Bank Drive, Suite 100, Palatine, IL 60067
(847) 963-0116 Voice, (847) 963-1302 Fax, www.megapop.net
<PAGE>
NON-CIRCUMVENTION & NON-DISCLOSURE AGREEMENT
This is to confirm that each of the named signatories, separately and
individually and their associates hereby agree that his/her corporation(s),
division(s), employees, agents and/or consultants will not disclose, make
contact with or otherwise be involved in any transaction involving that certain
proprietary information and/or client(s), merchant(s), customer(s) has been
disclosed by the following companies;
Consumers On-Line Development Group, Inc., C.O.L.D.
Consumer Net Partners C.N.P.
Consumer Net Marketplace C.N.M.
CNM Network C.N.M.N.
SportCenter Partners S.C.P.
SportCenter On-Line S.C.O.L.
hereinafter referred to as the "THE COMPANIES", which is hereby made a part
hereto this agreement, without the express approval of THE COMPANIES. I/we
further agree that in consideration of that certain information of this
agreement that I/we fully agree to hold all information confidential and that
such information will remain the express property of THE COMPANIES.
It is understood that this agreement is a reciprocal one between the signatories
concerning the exchange of privileged information and contacts and will be held
as confidential unless otherwise released or agreed as to the release only in
written documentation by THE COMPANIES.
It is also understood that a signatory cannot be considered or adjudged to be in
violation of this agreement when the violation is involuntary, due to the
situations beyond his/her control: examples being acts of GOD and/or civil
disturbances. Essentially, the spirit behind this agreement is one of mutual
trust and confidence, and one of reliance on each other to do what is fair and
equitable.
It is agreed that any disputes that result between the parties whose signatures
appear below shall be submitted to arbitration in accordance with The State of
California Code of Procedure. The written determination of the arbitration
shall be final, binding, and conclusive on the parties.
If either party sues the other party to enforce any of the terms of this
agreement, the prevailing party shall, in addition to all other damages, be
entitled to recover any and all legal fees incurred.
IN REPRESENTATION OF:
------------------------- -------------------------
THE COMPANIES FREDRICK J. RICE
IN REPRESENTATION OF:
------------------------- -------------------------
DATE
* All parties hereto of this agreement for any and all international rules and
or laws governing Non-Circumvention as to this agreement.
<PAGE>
MASTER LEASE AGREEMENT
No. _______________
This Master Lease Agreement (the "MLA") is entered into by and between Ascend
Credit Corporation ("Lessor"), having its principal place of business at 1701
Harbor Bay Parkway, Alameda, CA 94502 and CONSUMER NET MARKET PLACE, INC.
("Lessee"), having its principal place of business at 1900 Los Angeles Ave., 2nd
Floor, Simi Valley, CA 93065.
1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee agrees to lease
from Lessor, the equipment (the "Equipment") referenced in each of the Schedules
(the "Schedule" or "Schedules") which incorporate this MLA therein (the
"Lease").
2. TERM. Each Lease shall be effective upon the execution of the MLA and the
related Schedule by the Lessor and the Lessee. The lease term (the "Lease Term")
of the Equipment referenced in each of the Schedules shall commence on the rent
commencement date specified in each Schedule (the "Rent Commencement Date"). The
Rent Commencement Date shall be the date 30 days from the date that the
Equipment is shipped by the supplier (the "Ship Date") as evidenced by a
shipping document provided by the supplier related to the Equipment (the
"Shipping Document"). Lessor will provide Lessee with a copy of the Shipping
Document evidencing the Ship Date.
3. RENT. The rent (the "Rent") for the Equipment referenced in any Schedule
shall be as stated in such Schedule and shall be payable according to the
provisions of such Schedule. If any amount payable under a Schedule is not
received by Lessor within 10 days of the due date, Lessee agrees to pay an
Overdue Charge, as defined herein, with respect to such amount.
4. SELECTION AND ASSIGNMENT. Lessee will select the type, quantity and Supplier
of each item of Equipment designated in a Schedule, and Lessee hereby assigns to
Lessor all of its right, title and interest in and to the related equipment
purchase agreement, a copy of which has been provided to Lessor by Lessee (the
"Agreement"). The Agreement may be amended with the consent of Lessor. Any such
assignment with respect to Equipment shall become binding upon Lessor when
Lessor and Lessee have entered into a Lease with respect to such Equipment and
as of the Rent Commencement Date referenced in such Lease. Upon such an
assignment becoming effective, Lessor shall be obligated to purchase the
Equipment from the Supplier in accordance with the provisions of the Agreement.
It is expressly agreed that Lessee shall at all times remain liable to Supplier
under the Agreement to perform all duties and obligations of Lessee thereunder,
except for the obligation to purchase the Equipment to the extent expressly
assumed by the Lessor hereunder, and that the Lessee shall be entitled to the
same rights of the purchaser of the Equipment under the Agreement, except such
right, title and interest in the Equipment retained exclusively by the Lessor as
owner of the Equipment. Lessor shall have no liability for a Supplier's failure
to meet the terms and conditions of the Agreement.
5. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment of all
transportation, packing, installation, testing and other charges associated with
the delivery, installation or use of any Equipment which are not included in the
Agreement with respect to such Equipment.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS
OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS MERCHANTABILITY, OR ITS
FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE LIABLE TO LESSEE OR ANY
OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
ARISING FROM LESSEE'S USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON STRICT OR
ABSOLUTE TORT LIABILITY OR LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY
ACKNOWLEDGES THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO
THE EQUIPMENT ARE FOR THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE
FOREGOING, LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE
PERFORM ITS OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
7. TITLE TO AND LOCATION OF EQUIPMENT. Lessor shall retain title to each item of
Equipment. Lessee, at its expense, shall protect Lessor's title and keep the
Equipment free from all claims, liens, encumbrances and legal processes. The
Equipment is personal property and is not to be regarded as part of the real
estate on which it may be situated. If requested by Lessor, Lessee will, at
Lessee's expense, furnish a landlord or mortgagee waiver with respect to the
Equipment. The Equipment shall not be removed from the location specified in the
Schedule without the written consent of Lessor. Lessee shall, upon Lessor's
request, affix and maintain plates, tags or other identifying labels, showing
Lessor's ownership of the Equipment in a prominent position on the Equipment.
8. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment by Lessee
shall conform with all applicable laws, insurance policies, and warranties of
the manufacturer or Supplier of the Equipment. Lessor shall have the right to
inspect the Equipment at the premises where the Equipment is located. Lessee
shall notify Lessor promptly of any claims, liens, encumbrances or legal
processes with respect to the Equipment.
9. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the Equipment leased pursuant to a true lease shall not
be deemed evidence of any intent to create a security interest under the Uniform
Commercial Code.
10. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain each item of
Equipment in good condition, normal wear and tear excepted. Lessee shall not
make any addition, alteration, or attachment to the Equipment without Lessor's
prior written consent. Lessee shall make no repair, addition, alteration or
attachment to the Equipment which interferes with the normal operation or
maintenance thereof, creates a safety hazard, or might result in the creation of
a mechanic's or materialman's lien.
11. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to perform any
of its obligations under a Lease, Lessor may perform any act or make any payment
which Lessor deems necessary for the maintenance and preservation of the
Equipment subject thereto and Lessor's title thereto. All sums so paid by Lessor
(together with all related Overdue Charges), and reasonable attorneys' fees
incurred by Lessor in connection therewith, shall be additional rent payable to
Lessor on demand. The performance of any such act or the making of any such
payment by Lessor shall not be deemed a waiver or release of any obligation or
default on the part of Lessee.
12. INDEMNIFICATION. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against, all
liabilities, obligations, losses, damages, injuries, claims, demands, penalties,
actions, costs and expenses, including, without limitation, reasonable
attorneys' fees, of whatever kind and nature, in contract or in tort, arising
out of the use, condition, operation, ownership, selection, delivery, leasing or
return of any item of Equipment, regardless of when, how and by whom operated,
or any failure on the part of Lessee to perform or comply with any of its
obligations under a Lease, excluding, however, any of the foregoing which result
from the gross
<PAGE>
negligence or willful misconduct of Lessor. Such indemnities and assumptions of
liabilities and obligations shall continue in full force and effect,
notwithstanding the expiration or other termination of such Lease. Nothing
contained in any Lease shall authorize Lessee to operate the Equipment subject
thereto so as to incur or impose any liability on, or obligation for or on
behalf of, Lessor.
13. NO OFF-SET. All Rents shall be paid by Lessee irrespective of any off-set,
counterclaim, recoupment, defense or other right which Lessee may have against
Lessor, the manufacturer or Supplier of the Equipment or any other party.
14. ASSIGNMENT BY LESSEE. Lessee shall not, without Lessor's prior written
consent, (a) sell, assign, transfer, pledge, hypothecate, or otherwise dispose
of, encumber or suffer to exist a lien upon or against, any of the Equipment or
any Lease or any interest therein, by operation of law or otherwise, or (b)
sublease or lend any of the Equipment or permit any of the Equipment to be used
by anyone other than Lessee.
15. ASSIGNMENT BY LESSOR. Lessor may assign, sell or encumber its interest in
any of the Equipment and any Lease. Upon Lessor's written consent, Lessee shall
pay directly to the assignee of any such interest all Rent and other sums due
under an assigned Lease. THE RIGHTS OF ANY SUCH ASSIGNEE SHALL NOT BE SUBJECT TO
ANY ABATEMENT, DEDUCTION, OFF-SET, COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER
RIGHT WHICH LESSEE MAY HAVE AGAINST LESSOR OR ANY OTHER PERSON OR ENTITY.
Notwithstanding the foregoing, any such assignment (a) shall be subject to
Lessee's right to possess and use the Equipment subject to a Lease so long as
Lessee is not in default thereunder, and (b) shall not release any of Lessor's
obligations hereunder.
16. DEINSTALLATION AND RETURN OF EQUIPMENT. Upon the expiration of the Rental
Period of the Lease Saleable (the "Expiration Date"), Lessee shall, at its sole
expense, deinstall and return the Equipment to Lessor in good repair, condition,
and working order, ordinary wear and tear resulting from proper use excepted, to
a location in the continental United States speified by Lessor. In the event
that the Lessor has not received the Equipment five (5) business days beyond the
Expiration Date, Lessee shall pay to Lessor as Damages five hundred and fifty
percent (550%) of the daily rent for the Leased Item. Daily rent is determined
by dividing the monthly Basic Rent for the Leased Item by thirty (30) and be due
the 1 st day after the Expiration Date until such time as Lessor takes physical
possession of the equipment.
17. EVENTS OF DEFAULT. The occurrence of any of the following shall be deemed to
constitute an Event of Default hereunder: (a) Lessee fails to pay Rent, any
other amount it is obligated to pay under a Lease or any other amount it is
obligated to pay to Lessor and does not cure such failure within 10 days of such
amount becoming due; (b) Lessee fails to perform or observe any obligation or
covenant to be performed or observed by Lessee hereunder or under any Schedule,
including, without limitation, supplying all requested documentation, and does
not cure such failure within 10 days of receiving written notice thereof from
Lessor; (c) any warranty, representation or statement made or furnished to
Lessor by or on behalf of Lessee is proven to have been false in any material
respect when made or furnished; (d) the attempted sale or encumbrance by Lessee
of the Equipment, or the making of any levy, seizure or attachment thereof or
thereon; or (e) the dissolution, termination of existence, discontinuance of
business, insolvency, or appointment of a receiver of any part of the property
of Lessee, assignment by Lessee for the benefit of creditors, the commencement
of proceedings under any bankruptcy, reorganization or arrangement laws by or
against Lessee, or any other act of bankruptcy on the part of Lessee.
18. REMEDIES OF LESSOR. At any time after the occurrence of any Event of
Default, Lessor may exercise one or more of the following remedies: (a) Lessor
may terminate any or all of the Leases with respect to any or all items of
Equipment subject thereto; (b) Lessor may recover from Lessee all Rent and other
amounts then due and to become due under any or all of the Leases; (c) Lessor
may take possession of any or all items of Equipment, wherever the same may be
located, without demand or notice, without any court order or other process of
law and without liability to Lessee for any damages occasioned by such taking of
possession, and any such taking of possession shall not constitute a termination
of any Lease; (d) Lessor may demand that Lessee return any or all items of
Equipment to Lessor in accordance with Paragraph 16; and (e) Lessor may pursue
any other remedy available at law or in equity, including, without limitation,
seeking damages, specific performance or an injunction. Upon repossession or
return of any item of the Equipment, Lessor shall sell, lease or otherwise
dispose of such item in a commercially reasonable manner, with or without notice
and on public or private bid, and apply the net proceeds thereof (after
deducting the estimated fair market value of such item at the expiration of the
term of the applicable Lease, in the case of a sale, or the rents due for any
period beyond the scheduled expiration of such Lease, in the case of any
subsequent lease of such item, and all expenses, including, without limitation,
reasonable attorneys' fees, incurred in connection therewith) towards the Rent
and other amounts due under such Lease, with any excess net proceeds to be
retained by Lessor. Each of the remedies under this Lease shall be cumulative,
and not exclusive, and in addition to any other remedy referred to herein or
otherwise available to Lessor in law or in equity. Any repossession or
subsequent sale or lease by Lessor of any item of Equipment shall not bar an
action for a deficiency as herein povided, and the bringing of an action or the
entry of judgment against Lessee shall not bar Lessor's right to repossess any
or all items of Equipment.
19. CREDIT AND FINANCIAL INFORMATION. Within 90 days of the close of each of
Lessee's fiscal years, Lessee shall deliver to Lessor a copy of Lessee's annual
report, if any, and an audited balance sheet and profit and loss statement with
respect to such year. If audited financial statements of Lessee for such year
are not prepared, Lessee may provide financial statements certified by an
officer of Lessee. At Lessor's request, Lessee shall deliver to Lessor a balance
sheet and profit and loss statement for any of its fiscal quarters, certified by
an officer of Lessee.
20. INSURANCE. As of the date that risk of loss for the Equipment passes from
the Supplier to the Lessee under the terms of the Agreement, Lessee shall obtain
and maintain through the end of the Lease Term of each Lease (and any renewal or
extension thereof), at its own expense, property damage and personal liability
insurance and insurance against loss or damage to the Equipment, including,
without limitation, loss by fire (with extended coverage), theft and such other
risks of loss as are customarily insured against with respect to the types of
Equipment leased hereunder and by the types of businesses in which such
Equipment will be used by Lessee. Such insurance shall be in such amounts, with
such deductibles, in such form and with such insurers as shall be satisfactory
to Lessor; provided, however, that the amount of the insurance against loss or
damage to the Equipment shall not be less than the greater of the replacement
value of the Equipment, from time to time, or the original purchase price of the
Equipment. Each insurance policy shall name Lessee as an insured and Lessor as
an additional insured or loss payee, and shall contain a clause requiring the
insurer to give Lessor at least 30 days prior written notice of any alteration
in the terms of such policy or of the cancellation thereof. Lessee shall furnish
to Lessor a certificate of insurance or other evidence satisfactory to Lessor
that such insurance coverage is in effect; provided, however, that Lessor shall
be under no duty either to ascertain the existence of or to examine such
insurance policy or to advise Lessee in the event such insurance coverage shall
not comply with the requirements hereof. Lessee shall give Lessor prompt notice
of any damage to, or loss of, any of the Equipment, or any part thereof, or any
personal injury or property damage occasioned by the use of any of the
Equipment.
21. TAXES. Lessee hereby assumes liability for, and shall pay when due, and, on
a net after-tax basis, shall indemnify, protect and hold harmless Lessor against
all fees, taxes and governmental charges (including, without limitation,
interest and penalties) of any nature imposed on or in any way relating to
Lessor, Lessee, any item of Equipment or any Lease, except state and local taxes
on or measured by Lessor's net income (other than any such tax which is in
substitution for or relieves Lessee from the payment of taxes
<PAGE>
it would otherwise be obligated to pay or reimburse to Lessor as herein
provided) and federal taxes on Lessor's net income. Lessee shall, at its
expense, file when due with the appropriate authorities any and all tax and
similar returns, and reports required to be filed with respect thereto, for
which it has indemnified Lessor hereunder or, if requested by Lessor, notify
Lessor of all such requirements and furnish Lessor with all information required
for Lessor to effect such filings. Any fees, taxes or other charges paid by
Lessor upon failure of Lessee to make such payments shall, at Lessor's option,
become immediately due from Lessee to Lessor and shall be subject to the Overdue
Charge from the date paid by Lessor until the date reimbursed by Lessee.
22. SEVERABILITY. If any provision of any Lease is held to be invalid by a court
of competent jurisdiction, such invalidity shall not affect the other provisions
of such Lease or any provision of any other Lease.
23. NOTICES. All notices hereunder shall be in writing and shall be deemed given
when sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to which it is being sent at its address set forth herein
or to such other address as such party may designate in writing to the other
party.
24. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule constitute
the entire agreement between Lessor and Lessee with respect to the lease of the
Equipment subject to such Schedule, and supersede all previous communications,
understandings, and agreements, whether oral or written, between the parties
with respect to such subject matter. No provision of any Lease may be changed,
waived, amended or terminated except by a written agreement, specifying such
change, waiver, amendment or termination, signed by both Lessee and Lessor,
except that Lessor may insert, on the appropriate schedule, the serial number of
Equipment, after delivery of such Equipment, and the Rent Commencement Date for
the Equipment. No waiver by Lessor of any Event of Default shall be construed as
a waiver of any future Event of Default or any other Event of Default. At the
expiration of the Lease Term with respect to a Lease, upon notice given by
Lessee at least ninety (90) days prior thereto, (a) such Lease shall be renewed
or the Equipment subject thereto shall be purchased under the terms and
conditions set forth herein for a term and rent amount or purchase price, as the
case may be, to be agreed upon, or (b) if no such agreement is reached prior to
the expiration of such Lease Term or such notice specifies that Lessee intends
to return the Equipment, then Lessee shall return the Equipment to Lessor in the
manner prescribed in paragraph 16 of this MLA. In the absence of Lessor's timely
receipt of the notice contemplated by the preceding sentence, the Lease shall be
automatically extended, on a month-to-month basis, until terminated (upon notice
by either party given at least ninety (90) days prior to the end of the month on
which the termination is to be effective) or until renewed or the Equipment
subject thereto is purchased by agreement of the parties. Unless otherwise
agreed, Lessee shall continue to pay Rent for each month following such Lease
Term until the Equipment subject to such Lease is returned pursuant to Paragraph
16 of this MLA.
25. CONSTRUCTION. This MLA shall be governed by and construed in accordance with
the internal laws, but not the choice of laws provisions, of the State of
California. The titles of the sections of this MLA are for convenience only and
shall not define or limit any of the terms or provisions hereof. Time is of the
essence in each of the provisions hereof.
26. PARTIES. This MLA shall be binding upon, and inure to the benefit of, the
permitted assigns, representatives and successors of the Lessor and Lessee. If
there is more than one Lessee named in this MLA, the liability of each shall be
joint and several.
27. COUNTERPARTS. Each Lease may be executed in two or more counterparts, each
of which shall be deemed an original and all of which together shall constitute
but one and the same instrument.
28. OVERDUE CHARGE. Overdue Charge shall mean an amount equal to 2% per month of
any payment under a Lease which is past due, including, without limitation, any
amounts not included in any payment of Rent hereunder, or the highest charge
permitted by law, whichever is lower.
The person executing this MLA on behalf of Lessee hereby certifies that he or
she has read, and is duly authorized to execute, this MLA.
Accepted by:
Ascend Credit Corporation LESSEE: CONSUMER NET MARKET PLACE, INC.
BY: BY:
-------------------------------- -----------------------------------
NAME: NAME:
----------------------------- --------------------------------
Print
TITLE: TITLE:
----------------------------- --------------------------------
DATE: DATE:
----------------------------- --------------------------------
<PAGE>
AMENDMENT
This Amendment is to Master Lease Agreement No. for Lease Schedule No. 01 by and
between Ascend Credit Corporation ("Lessor") and Consumer Net Market Place, Inc.
("Lessee").
Paragraph 5 - Paragraph 5 is deleted and replaced by the following:
"Rent: $28,995.13 for the first six months (exclusive of sales and/or use
taxes), $111,081.59 for the next twenty-four months (exclusive of sales and/or
use taxes) due and payable at the Rent Commencement Date and on the same date of
each succeeding month of the Lease Term.
Except as modified by this Amendment, the terms and conditions of the Master
Lease Agreement and Lease Schedule shall remain in full force and effect.
Accepted by:
Lessor: Lessee:
Ascend Credit Corporation Consumer Net Market Place, Inc.
By: By:
---------------------------- -------------------------------------
Name: Name:
--------------------------- ------------------------------------
Title: Title:
-------------------------- -----------------------------------
Date: Date:
-------------------------- -----------------------------------
<PAGE>
WinStar PacNet Electronic Order Form
Instructions
This Excel workbook contains three WinStar PacNet forms:
DATA SERVICE ORDER FORM
PVC ASSIGNMENT SHEET
CREDIT APPLICATION
Each of these form may be filled out electronically, or printed and filled
out manually, or a combination of both. Follow the instructions below.
1. Before you begin, save this file to your hard drive.
2. Select the form you want by clicking its tab below.
3. Information may be entered only into certain areas. The grey-bordered space
at the beginning of each box indicates where to begin typing. All other areas
have been password protected to eliminate inadvertent changes for the form.
4. Tab from one active cell to the next or use your cursor.
5. To use the check boxes, place your cursor over the box. A little hand will
appear. Position the index finger in the center of the desired box and click.
A check mark will appear. To remove the check, click again.
6. After completing the forms electronically, SAVE AS the customer name and send
via e-mail to Heather Calvert at [email protected].
7. IMPORTANT
The purpose of this electronic format is ease of entering the information and
legibility. The Data Service Order and Credit Application both require the
customer's signature. After obtaining the customer's signature, those forms
must be faxed to Heather Calvert at 206-574-3058 before the provisioning
process will begin.
8. It is not possible to copy a form and paste it to a new worksheet. Some of
the key elements of the form will be lost. The correct method is to use the
SAVE AS function and save the spreadsheet under a different name.
-----------------------------------------------------------------------------
NOTE: With Excel, what you see on your screen is not always what prints. Do
not be concerned by what seem to be errors in the form design. (The customer
agreement text on the Data Service Order Form, for instance, may look as
though it is running off the side margin.) The forms will print correctly.
-----------------------------------------------------------------------------
<PAGE>
WINSTAR 665 Andover Park West TEL: 800-223-6893
PACNET Seattle, WA 96168 FAX: 206-574-3058
DATA SERVICES ORDER
<TABLE>
<CAPTION>
<S><C>
SIGNED SERVICE AGREEMENT AND PRICING FORM MUST BE ATTACHED OR ON FILE.
- -----------------------------------------------------------------------------------------------------------------------------------
BILLING NAME SERVICE ORDER #
CNM Network Loc B
- -----------------------------------------------------------------------------------------------------------------------------------
BILLING ADDRESS CITY STATE ZIP
1900 Los Angeles Ave. 2nd Floor Simi Valley CA 93065
- -----------------------------------------------------------------------------------------------------------------------------------
BILLING CONTACT NAME PHONE NUMBER FAX SALES REP NAME SALES REP ID#
Randy Greene 805-520-7170 805-520-7211 Joe Quenneville / /
- -----------------------------------------------------------------------------------------------------------------------------------
/X/ STANDARD INTERVAL SERVICE COMMITMENT PERIOD
REQUESTED DUE DATE: 12-01-98 / / 12 MONTH / / 24 MONTH / / 36 MONTH / / 48 MONTH / / 60 MONTH
- -----------------------------------------------------------------------------------------------------------------------------------
/ / EXPEDITED ORDER* (REQUIRES ADDITIONAL CUSTOMER SIGNATURE) CUSTOMER SIGNATURE/TITLE DATE
*THE SERVICE REQUESTED WITHIN THIS ORDER REPRESENTS AN EXPEDITED INTERVAL.
--------------------------------------------------------
THIS IS AUTHORIZATION FOR AN INTERNAL PACNET EXPEDITE AND/OR LOCAL EXCHANGE CARRIER EXPEDITE WITH ASSOCIATED CHARGES.
- -----------------------------------------------------------------------------------------------------------------------------------
SERVICE ORDER TYPE
- -----------------------------------------------------------------------------------------------------------------------------------
/X/ ORIGINAL ORDER / / CHANGE ORDER / / OTHER Point to point DS-3
/X/ Private Line / / Add PVCs / / Disconnect Site ----------------------------
/ / Frame Relay / / Change PVCs / / Disconnect PVCs ----------------------------
/ / Dedicated Internet / / Change Port Connection Speed Requested Speed / / ORIGINAL ORDER # / /
- ------------------------------------------------------------------------------------------------------------------------------------
CIRCUIT TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
PRIVATE LINE / / T-1 B8ZS / / T-1 AMI / / FT-1 / / 56Kb
- ------------------------------------------------------------------------------------------------------------------------------------
FRAME RELAY / / FR T-1 / / FR Fraction Fractional Speed / / / / 56Kb / / LEC FR Access
- ------------------------------------------------------------------------------------------------------------------------------------
DEDICATED INTERNET / / INT T-1 / / INT 64/56 / / INT Fraction Fractional Speed / / / / OTHER (Specify below)
- ------------------------------------------------------------------------------------------------------------------------------------
PACNET CHARGES IXC Mileage / / REQUIRES ENGINEERING REVIEW
------------------
PACNET Quote # / / / / LD Access / / DACS-ing / / EUSA / / 56Kb
- ------------------------------------------------------------------------------------------------------------------------------------
MONTHLY RECURRING DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------------------------
$ Point to Point DS-3 Between Las Vegas and Simi Valley
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
NON-RECURRING DESCRIPTION
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
SPECIAL INSTRUCTIONS
Establish a point to point DS-3 circuit between Las Vegas and Simi Valley. Las Vegas PoP is co location space for Williams Network
Contact is Bob Frazier @ 314-506-4225 NPA NXX is 702/891 See attached quote # 16116
- ------------------------------------------------------------------------------------------------------------------------------------
LOCAL ACCESS CHARGES
- ------------------------------------------------------------------------------------------------------------------------------------
MONTHLY RECURRING DESCRIPTION PROVIDER MEET-POINT JACK TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
$ Sprint
- ------------------------------------------------------------------------------------------------------------------------------------
$ LOCAL ACCESS TYPE OF SERVICE
- ------------------------------------------------------------------------------------------------------------------------------------
NON-RECURRING DESCRIPTION PRIVATE LINE FRAME RELAY OTHER
- --------------------------------------------
$ 0 Installation / / 56/64K PL / / 56K FR LOOP TERM
- -------------------------------------------- -------------------------------------
$ / / T-1 PL / / FRAC T-1 FR
- -------------------------------------------- -------------------------------------
CONTACT NAME CONTACT PHONE NUMBER / / WINSTAR WIRELESS SPEED / / CARRIER QUOTE #
- -------------------------------------------- -------------------------------------
Randy Greene 805-520-7170 LOCAL ACCESS / / T-1 FR
- ------------------------------------------------------------------------------------------------------------------------------------
ADDRESS CITY STATE ZIP
4275 East Saraha Suite 19/20 Las Vegas NV
- ------------------------------------------------------------------------------------------------------------------------------------
DEMARC LOCATION
Suite 19/20
- ------------------------------------------------------------------------------------------------------------------------------------
WinStar PACNET agrees to provide and Customer agrees to accept Services described above for the Service Commitment Period and
Charges above subject to the terms and conditions contained in the WinStar PACNET Services Agreement with the Customer # / /
and any Supplemental Agreements for WinStar PACNET services. Terms that do not conform with these Agreements shall not be binding
on WinStar PACNET and are objected to until accepted by an Authorized Headquarters Representative of WinStar PACNET.
- ------------------------------------------------------------ ------------------------------------------------------------
WINSTAR PACNET NAME/TITLE CUSTOMER NAME/TITLE
- ------------------------------------------------------------ ------------------------------------------------------------
AUTHORIZED SIGNATURE DATE AUTHORIZED SIGNATURE DATE
<PAGE>
WINSTAR
PACNET PVC ASSIGNMENT SHEET
Customer Name
---------------------------------------------
Service Order #
---------------------------------------------
Modification Date Page of
------------------ ---- ----
PVC Requested Requested Requested Destination Node Destination Node Destination Port
Circuits New Existing CIR Committed Burst Excess Burst (City Name) # (SO) Connection Speed
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
Notes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
CREDIT APPLICATION
WINSTAR CUSTOMER AUTHORIZATION
CUSTOMER INFORMATION
COMPANY NAME
- ----------------------------------------------------------------------------------------------------------------------------------
BILLING ADDRESS 1
- ----------------------------------------------------------------------------------------------------------------------------------
BILLING ADDRESS 2
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
MAIN TELEPHONE NUMBER BILLING CONTACT FIRST NAME LAST NAME BILLING CONTACT TELEPHONE NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
PRESIDENT / OWNER / PARTNER NAME PRESIDENT / OWNER / PARTNER SOCIAL SECURITY NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
DUN & BRADSTREET NUMBER TAX ID
- ----------------------------------------------------------------------------------------------------------------------------------
TYPE OF BUSINESS YEARS IN BUSINESS BANKRUPT IN PAST THREE YEARS?
/ / YES / / NO
- ----------------------------------------------------------------------------------------------------------------------------------
LIST RELATED COMPANY NAMES WITH CITY & STATE
- ----------------------------------------------------------------------------------------------------------------------------------
HAS THE COMPANY OR ANY AFFILIATE OF THE COMPANY IF "YES," PLEASE PROVIDE NAME & WINSTAR ACCOUNT NUMBER
APPLIED FOR SERVICE WITH WINSTAR BEFORE? NAME WINSTAR ACCOUNT NUMBER
/ / YES / / NO
- ----------------------------------------------------------------------------------------------------------------------------------
BANK AND TRADE REFERENCES
- ----------------------------------------------------------------------------------------------------------------------------------
BANK NAME CHECKING ACCOUNT NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
CONTACT CONTACT TELEPHONE
- ----------------------------------------------------------------------------------------------------------------------------------
COMPANY NAME - TRADE 1
- ----------------------------------------------------------------------------------------------------------------------------------
ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
CONTACT CONTACT TELEPHONE
- ----------------------------------------------------------------------------------------------------------------------------------
COMPANY NAME - TRADE 2
- ----------------------------------------------------------------------------------------------------------------------------------
ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
CONTACT CONTACT TELEPHONE
I certify that I am a duly authorized representative of the company applying for telecommunications services with WinStar and/or its
affiliates, and all of the information provided is true and accurate to the best of my knowledge. Further, on behalf of the
applicant, I authorize WinStar and/or its affiliates to verify the information provided including the bank/trade references listed
on this application and through outside credit reporting agencies.
-------------------------------------------------- ---------------------------------------------------- -------------
SIGNATURE TITLE DATE
FOR INTERNAL USE
TYPE OF SERVICE BEING ORDERED
/ / Local / / Domestic LD / / Internat'l LD / / Inbound / / Outbound / / Internet / / Frame Relay / / Private Line
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF LINES T-1s DS-3s OTHER
/ / / / / / / /
- ----------------------------------------------------------------------------------------------------------------------------------
WINSTAR MONTHLY RECURRING CHARGE ORDER TRACKING NUMBER RELATED ORDER NUMBER
$
- ----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT EXECUTIVE AE TELEPHONE NUMBER SOURCE OF SALE
/ / WINSTAR / / CUSTOMER INITIATED
- ----------------------------------------------------------------------------------------------------------------------------------
SERVICE ENGINEER SE TELEPHONE NUMBER SERVICE COORDINATOR SC TELEPHONE NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
WINSTAR-PROVIDED CPE $ AMOUNT MASTER ACCOUNT NUMBER
$
- ----------------------------------------------------------------------------------------------------------------------------------
ORDER TRACKING #
--------------------
BRANCH ID
--------------------
MASTER ACCOUNT #
--------------------
</TABLE>
<PAGE>
WinStar PacNet Electronic Order Form
Instructions
This Excel workbook contains three WinStar PacNet forms:
DATA SERVICE ORDER FORM
PVC ASSIGNMENT SHEET
CREDIT APPLICATION
Each of these form may be filled out electronically, or printed and filled
out manually, or a combination of both. Follow the instructions below.
1. Before you begin, save this file to your hard drive.
2. Select the form you want by clicking its tab below.
3. Information may be entered only into certain areas. The grey-bordered
space at the beginning of each box indicates where to begin typing. All
other areas have been password protected to eliminate inadvertent changes
for the form.
4. Tab from one active cell to the next or use your cursor.
5. To use the check boxes, place your cursor over the box. A little hand will
appear. Position the index finger in the center of the desired box and
click. A check mark will appear. To remove the check, click again.
6. After completing the forms electronically, Save As the customer name and
send via e-mail to Heather Calvert at [email protected].
7. IMPORTANT
The purpose of this electronic format is ease of entering the information
and legibility. The Data Service Order and Credit Application both require
the customer's signature. After obtaining the customer's signature, those
forms must be faxed to Heather Calvert at 206-574-3058 before the
provisioning process will begin.
8. It is not possible to copy a form and paste it to a new worksheet. Some of
the key elements of the form will be lost. The correct method is to use
the Save As function and save the spreadsheet under a different name.
-----------------------------------------------------------------------------
NOTE: With Excel, what you see on your screen is not always what prints. Do
not be concerned by what seem to be errors in the form design. (The customer
agreement text on the Data Service Order Form, for instance, may look as
though it is running off the side margin.) The forms will print correctly.
-----------------------------------------------------------------------------
<PAGE>
WINSTAR 665 Andover Park West TEL: 800-223-6893
PACNET Seattle, WA 96168 FAX: 206-574-3058
DATA SERVICES ORDER
<TABLE>
<CAPTION>
<S><C>
SIGNED SERVICE AGREEMENT AND PRICING FORM MUST BE ATTACHED OR ON FILE.
- -----------------------------------------------------------------------------------------------------------------------------------
BILLING NAME SERVICE ORDER #
CNM Network CNM-101
- -----------------------------------------------------------------------------------------------------------------------------------
BILLING ADDRESS CITY STATE ZIP
1900 Los Angeles Ave. 2nd Floor Simi Valley CA 93065
- -----------------------------------------------------------------------------------------------------------------------------------
BILLING CONTACT NAME PHONE NUMBER FAX SALES REP NAME SALES REP ID#
Randy Greene 805-520-7170 805-520-7211 Joe Quenneville
- -----------------------------------------------------------------------------------------------------------------------------------
/X/ STANDARD INTERVAL SERVICE COMMITMENT PERIOD
REQUESTED DUE DATE: 2-01-99 / / 12 MONTH / / 24 MONTH /X/ 36 MONTH / / 48 MONTH / / 60 MONTH
- -----------------------------------------------------------------------------------------------------------------------------------
/ / EXPEDITED ORDER* (REQUIRES ADDITIONAL CUSTOMER SIGNATURE) CUSTOMER SIGNATURE/TITLE DATE
*THE SERVICE REQUESTED WITHIN THIS ORDER REPRESENTS AN EXPEDITED INTERVAL.
-----------------------------------------------------
THIS IS AUTHORIZATION FOR AN INTERNAL PACNET EXPEDITE AND/OR LOCAL EXCHANGE CARRIER EXPEDITE WITH ASSOCIATED CHARGES.
- -----------------------------------------------------------------------------------------------------------------------------------
SERVICE ORDER TYPE
- -----------------------------------------------------------------------------------------------------------------------------------
/X/ ORIGINAL ORDER / / CHANGE ORDER /X/ OTHER Point to point DS-3
/X/ Private Line / / Add PVCs / / Disconnect Site --------------------------------
/ / Frame Relay / / Change PVCs / / Disconnect PVCs --------------------------------
/ / Dedicated Internet / / Change Port Connection Speed Requested Speed/ / ORIGINAL ORDER #
- -----------------------------------------------------------------------------------------------------------------------------------
CIRCUIT TYPE
- -----------------------------------------------------------------------------------------------------------------------------------
PRIVATE LINE / / T-1 B8ZS / / T-1 AMI / / FT-1 / / 56Kb
- -----------------------------------------------------------------------------------------------------------------------------------
FRAME RELAY / / FR T-1 / / FR Fraction Fractional Speed / / 56Kb / / LEC FR Access
- -----------------------------------------------------------------------------------------------------------------------------------
DEDICATED INTERNET / / INT T-1 / / INT 64/56 / / INT Fraction Fractional Speed / / OTHER (Specify below)
- -----------------------------------------------------------------------------------------------------------------------------------
PACNET CHARGES IXC Mileage / / REQUIRES ENGINEERING REVIEW
-----------
PACNET Quote # / / / / LD Access / / DACS-ing / / EUSA / / 56Kb
- -----------------------------------------------------------------------------------------------------------------------------------
MONTHLY RECURRING DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
$ 7,828.00 Point to Point DS-3 Between Las Vegas and Simi Valley
- -----------------------------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------------------------
NON-RECURRING DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,000.00 Installation fee
- -----------------------------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------------------------
$
- -----------------------------------------------------------------------------------------------------------------------------------
SPECIAL INSTRUCTIONS
Establish a point to point DS-3 circuit between Las Vegas and Simi Valley. NPA NXX is 805-520 See attached
quote # 16116 for long haul.
- ------------------------------------------------------------------------------------------------------------------------------------
LOCAL ACCESS CHARGES
- ------------------------------------------------------------------------------------------------------------------------------------
MONTHLY RECURRING DESCRIPTION PROVIDER MEET-POINT JACK TYPE
- ------------------------------------------------------------------------------------------------------------------------------------
$ Williams
- ------------------------------------------------------------------------------------------------------------------------------------
$ LOCAL ACCESS TYPE OF SERVICE
- ------------------------------------------------------------------------------------------------------------------------------------
NON-RECURRING DESCRIPTION PRIVATE LINE FRAME RELAY OTHER
- --------------------------------------------
$ 0 Installation / / 56/64K PL / / 56K FR LOOP TERM
- -------------------------------------------- -------------------------------------
$ / / T-1 PL / / FRAC T-1 FR
- -------------------------------------------- -------------------------------------
CONTACT NAME CONTACT PHONE NUMBER / / WINSTAR WIRELESS SPEED / / CARRIER QUOTE #
- -------------------------------------------- -------------------------------------
Randy Greene 805-520-7170 LOCAL ACCESS / / T-1 FR
- ------------------------------------------------------------------------------------------------------------------------------------
ADDRESS CITY STATE ZIP
1900 Los Angeles Ave, 2nd Floor Simi Valley CA 93065
- ------------------------------------------------------------------------------------------------------------------------------------
DEMARC LOCATION
Suite 19/20
- ------------------------------------------------------------------------------------------------------------------------------------
WinStar PACNET agrees to provide and Customer agrees to accept Services described above for the Service Commitment Period and
Charges above subject to the terms and conditions contained in the WinStar PACNET Services Agreement with tand any Supplemental
Agreements for WinStar PACNET services. Terms that do not conform with these Agreements shall not be binding on WinStar PACNET and
are objected to until accepted by an Authorized Headquarters Representative of WinStar PACNET.
------------------------------------------------------------- -------------------------------------------------------------
WINSTAR PACNET NAME/TITLE CUSTOMER NAME/TITLE
------------------------------------------------------------- -------------------------------------------------------------
AUTHORIZED SIGNATURE DATE AUTHORIZED SIGNATURE DATE
<PAGE>
WINSTAR
PACNET PVC ASSIGNMENT SHEET
Customer Name
---------------------------------------------
Service Order #
---------------------------------------------
Modification Date Page of
------------------ ---- ----
PVC Requested Requested Requested Destination Node Destination Node Destination Port
Circuits New Existing CIR Committed Burst Excess Burst (City Name) # (SO) Connection Speed
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
- ----------- ------ ---------- ---------- ------------------ -------------- ---------------- ----------------- --------------------
Notes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<PAGE>
CREDIT APPLICATION
WINSTAR CUSTOMER AUTHORIZATION
CUSTOMER INFORMATION
COMPANY NAME
- ----------------------------------------------------------------------------------------------------------------------------------
BILLING ADDRESS 1
- ----------------------------------------------------------------------------------------------------------------------------------
BILLING ADDRESS 2
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
MAIN TELEPHONE NUMBER BILLING CONTACT FIRST NAME LAST NAME BILLING CONTACT TELEPHONE NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
PRESIDENT / OWNER / PARTNER NAME PRESIDENT / OWNER / PARTNER SOCIAL SECURITY NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
DUN & BRADSTREET NUMBER TAX ID
- ----------------------------------------------------------------------------------------------------------------------------------
TYPE OF BUSINESS YEARS IN BUSINESS BANKRUPT IN PAST THREE YEARS?
/ / YES / / NO
- ----------------------------------------------------------------------------------------------------------------------------------
LIST RELATED COMPANY NAMES WITH CITY & STATE
- ----------------------------------------------------------------------------------------------------------------------------------
HAS THE COMPANY OR ANY AFFILIATE OF THE COMPANY IF "YES," PLEASE PROVIDE NAME & WINSTAR ACCOUNT NUMBER
APPLIED FOR SERVICE WITH WINSTAR BEFORE? NAME WINSTAR ACCOUNT NUMBER
/ / YES / / NO
- ----------------------------------------------------------------------------------------------------------------------------------
BANK AND TRADE REFERENCES
- ----------------------------------------------------------------------------------------------------------------------------------
BANK NAME CHECKING ACCOUNT NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
CONTACT CONTACT TELEPHONE
- ----------------------------------------------------------------------------------------------------------------------------------
COMPANY NAME - TRADE 1
- ----------------------------------------------------------------------------------------------------------------------------------
ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
CONTACT CONTACT TELEPHONE
- ----------------------------------------------------------------------------------------------------------------------------------
COMPANY NAME - TRADE 2
- ----------------------------------------------------------------------------------------------------------------------------------
ADDRESS
- ----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP
- ----------------------------------------------------------------------------------------------------------------------------------
CONTACT CONTACT TELEPHONE
I certify that I am a duly authorized representative of the company applying for telecommunications services with WinStar and/or its
affiliates, and all of the information provided is true and accurate to the best of my knowledge. Further, on behalf of the
applicant, I authorize WinStar and/or its affiliates to verify the information provided including the bank/trade references listed
on this application and through outside credit reporting agencies.
-------------------------------------------------- ---------------------------------------------------- -------------
SIGNATURE TITLE DATE
FOR INTERNAL USE
TYPE OF SERVICE BEING ORDERED
/ / Local / / Domestic LD / / Internat'l LD / / Inbound / / Outbound / / Internet / / Frame Relay / / Private Line
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF LINES T-1s DS-3s OTHER
/ / / / / / / /
- ----------------------------------------------------------------------------------------------------------------------------------
WINSTAR MONTHLY RECURRING CHARGE ORDER TRACKING NUMBER RELATED ORDER NUMBER
$
- ----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT EXECUTIVE AE TELEPHONE NUMBER SOURCE OF SALE
/ / WINSTAR / / CUSTOMER INITIATED
- ----------------------------------------------------------------------------------------------------------------------------------
SERVICE ENGINEER SE TELEPHONE NUMBER SERVICE COORDINATOR SC TELEPHONE NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
WINSTAR-PROVIDED CPE $ AMOUNT MASTER ACCOUNT NUMBER
$
- ----------------------------------------------------------------------------------------------------------------------------------
ORDER TRACKING #
--------------------
BRANCH ID
--------------------
MASTER ACCOUNT #
--------------------
</TABLE>
<PAGE>
[LOGO]
COVAD
Covad Communications Company
and
Consumer Net Marketplace, Inc.
"CNM Network"
ISP Customer Agreement for TeleSpeed-SM- Services
Version 4.0 Rev 2.2
Dated: 12/31/98
--------
This document is for use solely by customers of Covad Communications. It should
not be discussed, shown or referred to outside the customer organization without
prior approval from Covad.
<PAGE>
COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
- --------------------------------------------------------------------------------
Covad Communications Company ("Covad") is pleased to bring CNM Network
("Customer") this offer for Covad's TeleSpeed-SM- Service. Covad's TeleSpeed
Service is a permanent virtual circuit using Digital Subscriber Line ("DSL")
technology and provides a high-speed telecommunications data service for
Customer's Internet access clients ("Clients"). The terms of this agreement are
as follows:
- Customer may place orders for Covad's TeleSpeed Services during the
term of this Agreement. Customer shall pay for, and Covad shall
install, Covad's TeleSpeed Services in accordance with and subject to
the terms of this offer and Covad's procedures.
- Customer shall provide Covad with addresses, direct telephone numbers,
work email address and other information required in the client order
form at the online Customer Care Center for successful installation of
Customer's Clients designated to receive Covad TeleSpeed service under
the terms of this agreement ("Agreement"). Covad shall keep all
Client information confidential.
- Customer understands and agrees that the installation and monthly
charges for Covad's Customer TeleSpeed Circuits and Client TeleSpeed
Circuits and related charges shall be as set forth in the attached
Pricing Schedule.
1. TERM OF CONTRACT. This Agreement has an initial term of two years (the
"initial term") and will continue on a month-to-month basis thereafter.
After the initial term, either party may terminate this Agreement upon
thirty (30) days notice. Upon expiration or termination of this Agreement,
Covad will maintain all of Customer's Customer and Client TeleSpeed
Circuits already ordered and provisioned pursuant to this Agreement,
provided that Customer continues to pay all monthly charges for those
Circuits pursuant to Paragraph 4. The obligations of Paragraphs 2, 4, 6,
7, 11, 12, 13, 14, 15, 16, 17, 18 and 19 shall survive termination of this
Agreement.
2. DEFINITION OF CLIENT TELESPEED CIRCUIT.
2.1 A Covad Client TeleSpeed Circuit is a digital data telecommunications
service that consists of one private virtual circuit between a
Client's premise and a Covad serving wire center that utilizes Digital
Subscriber Line ("DSL") technology and is used by Customer and the
Client for Internet access or other information services. A Client
TeleSpeed Circuit provides upstream and downstream maximum throughput
rates that range from up to 144Kbps to 1.5Mbps. The maximum
throughput rate depends on such factors as the distance of the
Client's premise from a Covad serving wire center and the quality of
the copper telephone line serving the premise.
2.2 Provision of a Client TeleSpeed Circuit does not include any Internet
access service.
2.3 Upon approval of Customer and the Client, Covad may provide additional
private virtual circuits ("additional PVCs") over the same facilities
that are used to provide any Client TeleSpeed Circuit pursuant to this
Agreement. These additional PVCs may be used by Covad, Client or
another party to support a variety of services of the Client's
choosing, including, but not limited to, any form of
telecommunications, telecommunications services, or information
services.
2.4 The parties shall undertake commercially reasonable efforts to work
with each other to meet Customer's needs for Covad's services.
3. COVAD AS PREFERRED PROVIDER OF TELESPEED SERVICES.
3.1 During the term of this Agreement, Covad shall be Customer's preferred
provider of DSL technology access to subscribers in any of the
following metropolitan markets (collectively, the "Preferred
Markets"):
Dallas
Denver
Atlanta
Boston (including portions of NH)
Covad Confidential Page 1
<PAGE>
COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
- --------------------------------------------------------------------------------
Chicago (including portions of WI and IN)
Los Angeles
Miami
New York Tri-State
San Diego
San Francisco Bay Area
Seattle
Washington DC Metro Area (DC, MD and VA)
3.2 The Preferred Market Launch Date for a particular Preferred Market is
the date of Customer's acceptance of the first DS1 or DS3 Customer
TeleSpeed Circuit from Covad (as described in Paragraph 10.1) in the
relevant Preferred Market.
3.3 "Preferred provider" means that Customer in each Preferred Market
shall on a commerically reasonable best efforts basis utilize Covad's
TeleSpeed Services to fullfill orders from its clients for DSL
service. Customer shall check availability for service for a client
utilizing Covad's web-based qualifying tool and if available within 30
days, place the order with Covad. If availability is not available,
or availability of service is more than 30 days from the date the
order is taken, Customer shall have the right to seek alternative
service providers for said order. Covad's status as a Preferred
Provider is conditioned upon Covad providing service and pricing which
is reasonably competitive with alternative providers.
4. PAYMENT TERMS. The rates and charges set forth in the attached Pricing
Schedule will apply to Client and Customer TeleSpeed Circuits provided to
Customer during the term of this Agreement. In addition to the rates and
charges listed in the Pricing Schedule, Covad will also bill all applicable
Federal, state, and local mandated surcharges, fees, user's fees, universal
service contributions, local or state telecommunications infrastructure
fees, and taxes to Customer. Covad shall mail an invoice to Customer by
the first day of the month, prior to the month of service, at 1900 E. Los
Angeles, 2nd floor, Simi Valley, CA 93065. This monthly invoice also will
contain any additional surcharges or cancellation fees as described in this
Agreement. Customer shall pay all charges within 30 calendar days of the
date that Covad's monthly invoices are mailed. Unless otherwise specified
in writing by Covad, all payments shall be made to Covad Communications
Company and mailed to Accounts Receivable Dept., Covad Communications
Company, 2330 Central Expressway, Santa Clara, CA 95050.
5. PRICE PROTECTION AND VOLUME COMMITMENTS.
5.1 PRICE PROTECTION. The rates and charges in the Pricing Schedule are
being provided on the basis of the volume commitments set forth in
this Agreement. In the event Customer fails to meet any of the volume
commitments set forth in this Agreement, Covad reserves the right to
amend, modify, or adjust the Pricing Schedule of this Agreement to
ensure that the prices and discounts offered to Customer match those
offered to other customers with similar volume, terms and conditions.
If the list prices of the TeleSpeed Services provided by Covad are
reduced at any time during the term of this Agreement, Customer has
the option to receive those reduced prices, effective on the date in
which they are made available to other Covad Customers. After the
initial term, Covad and Customer will negotiate in good faith for
renewals of term and volume pricing. A minimum of 60 days notice will
be provided in case of a price increase on Customer or Client
TeleSpeed Circuits.
Covad Confidential Page 2
<PAGE>
COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
- --------------------------------------------------------------------------------
5.2 VOLUME COMMITMENT. Customer agrees to meet the following volume
commitments during the term of this Agreement:
<TABLE>
<CAPTION>
--------------------------------------------------------
DATE IN SERVICE CLIENT
TELESPEED CIRCUITS
--------------------------------------------------------
<S> <C>
April 1, 1999
--------------------------------------------------------
July 31, 1999
--------------------------------------------------------
September 30, 1999
--------------------------------------------------------
December 31, 1999 and each
month thereafter
--------------------------------------------------------
</TABLE>
5.3 FAILURE TO MEET VOLUME COMMITMENT. On each monthly billing date
subsequent to the dates listed in Paragraph 5.2, if Customer has not
met the appropriate volume commitment, Covad will include on the
monthly bill an additional charge, calculated in in the following
manner:
(Monthly charge for a TeleSpeed 144 circuit listed in Pricing Schedule)
-multiplied by-
[ (Appropriate Interim or Final Volume Commitment) -
(Number of Client TeleSpeed Circuits in service as of billing date) ]
5.4 Customer acknowledges and understands that the lack of facilities or
other operational impediments may preclude or delay Covad's ability to
provide any particular TeleSpeed Circuit in any particular market.
Customer will be relieved of the volume commitments set forth in this
Agreement only if Covad is not able to provide its TeleSpeed Services
from at least five hundred (500) central offices by December 31, 1999.
In the event Covad terminates its service and ceases operation in any
Preferred Market, Customer and Covad shall re-negotiate the volume
commitment set forth in Section 5 of this Agreement within 30 days of
any such service termination.
6. LIMITED WARRANTY. Covad warrants to Customer, subject to the limitations
set forth below, that Covad's TeleSpeed services shall operate in
substantial accordance with the terms of this Agreement during the term of
this Agreement.
A. Customer understands and acknowledges that the actual transmission
speeds delivered by Covad may vary from the transmission speeds
otherwise expected by Customer or its Clients based on such factors as
the length and gauge of the line serving the Client and other
operational characteristics of the facilities and equipment used by
Covad. Covad's TeleSpeed Services are subject to the attached Service
Level Agreement ("SLA").
B. Covad shall use commercially reasonable efforts to provide
installation, repair and maintenance functions for Covad's TeleSpeed
Services. In the event that a Client experiences and promptly
notifies Customer, who then promptly notifies Covad, of a substantial
reduction in transmission speed or significant interruption of
service, Covad will undertake, at no charge to Customer, commercially
reasonable efforts to restore Client's TeleSpeed Service. Covad shall
not be responsible for service issues concerning a Client's computer,
network or software.
C. Customer understands and acknowledges and represents and warrants that
it will inform its Clients that Covad's TeleSpeed Service does not
provide 911 or other emergency and ancillary services conventionally
available from incumbent local phone companies.
D. Customer shall provide first-level support for all of its Clients.
Covad shall provide commercially reasonable second-level support.
E. Customer understands and acknowledges that Covad's TeleSpeed Service
is limited to certain regions in the United States. Covad reserves the
sole and exclusive right to determine the expansion of its service
area, and the right to maintain and reconfigure its service.
F. Customer acknowledges and understands that the lack of facilities or
other operational impediments may preclude or delay Covad's actual
installation, repair and maintenance of Covad's TeleSpeed Service in
any particular market and to any particular Client.
Covad Confidential Page 3
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COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
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G. Covad will make reasonable efforts to provide five (5) business-day
notification to Customer on Scheduled Network Maintenance. Covad may
interrupt its provision of service for maintenance and other
operational reasons, without any compensation or notice to Customer
other than described in the attached SLA. Covad also reserves the
sole and exclusive right to terminate its service in any area or cease
operations with 60 days notice to Customer.
H. This limited warranty shall not apply if: (1) the Client's equipment
has been subjected to unusual physical or electrical stress, misuse,
neglect, accident or abuse, or damaged by any other external causes;
(2) Covad's TeleSpeed Service or equipment has been repaired or
altered by anyone other than Covad or Covad's subcontractors or
affiliates, without Covad's express and prior written approval; (3)
Covad's TeleSpeed Service or equipment has been improperly installed
by someone other than Covad or Covad's subcontractors or affiliates;
or (4) Covad's TeleSpeed Service or equipment is used in violation of
applicable law or in violation of instructions furnished by Covad.
I. Warranty: Inside Wire Customer TeleSpeed Circuit & Client TeleSpeed
Circuit. All Covad-installed or repaired premise wiring is warranted
to be free from defects for a period of 30 calendar days from the date
of work completion. Covad may outsource inside wire installations.
J. Warranty: Equipment Client Premise Equipment. If the Customer
purchases client premise equipment directly from Covad, the equipment
will carry a manufacturer's warranty of one year beginning on the
billing start date for the Covad service. In the event that the
equipment is determined to be faulty within this warranty period,
Covad will mail the replacement equipment to the Customer to arrive
within 3 business days.
K. Year 2000 Compliance: Covad has taken active steps to assure that
Covad's TeleSpeed Service is Year 2000 compliant. Covad represents
and warrants that the equipment, software, and systems it has
purchased, developed or deployed to support its TeleSpeed services are
Year 2000 compliant. Customer acknowledges that Covad's TeleSpeed
Service is also dependent on the systems of the local telephone
companies and other carriers. Covad cannot make any representations
with respect to Year 2000 compliance of the systems of these other
carriers.
THE FOREGOING LIMITED WARRANTIES SHALL BE IN LIEU OF AND EXCLUDE ALL OTHER
EXPRESS OR IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION, WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR USE OR PURPOSE.
7. LIMITATION OF LIABILITY. Except as otherwise provided for in this
Agreement, neither party shall have any liability to the other party for
any special, incidental, or consequential damages of any kind, regardless
of whether such damages are foreseeable by either or both parties.
Except as specifically provided in this Agreement , this agreement does not
provide and shall not be construed to provide third parties, including any
Client, with any remedy claim, cause of action or privilege.
8. ORDERING AND PROVISIONING OF TELESPEED SERVICE. Customer will order, and
Covad will install, maintain, and provide Covad TeleSpeed services in
accordance with Covad's Internet Service Provider Program Binder, which may
be changed by Covad from time to time during the term of this Agreement,
provided that no such change shall materially or adversely effect Customer.
Customer acknowledges that it has received a copy of Covad's Internet
Service Provider Program Binder prior to execution of this Agreement.
9. ACCEPTANCE OF CLIENT TELESPEED CIRCUITS AND CPE.
9.1 Client TeleSpeed Circuit. Covad considers an installation successful
if the maximum throughput rate is equal to or greater than 80% of
ordered service. An email will be sent to Customer with the installed
maximum throughput rates and the Client TeleSpeed Circuit to be
billed. The Customer has a 3-business day acceptance period to cancel
or change the installed service. If the Customer does not respond to
cancel or change the service, Covad will assume the installation is
successful. If the Customer decides to cancel the service, there will
be no charge for installation and the equipment will be returned at no
charge. When TeleSpeed 144 is not ordered, but it is the fastest
circuit that can be installed, the Customer may elect to keep the
Covad supplied and installed client premise equipment in place (no
Covad Confidential Page 4
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COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
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additional installation required). The Customer may also elect to
replace the equipment (Covad or Customer supplied) which may require a
new installation (no charge to Customer) for TeleSpeed 144.
10. BILLING START DATES.
10.1 Customer TeleSpeed Circuit. Billing for a Customer TeleSpeed Circuit
will start upon Customer's acceptance of the DS1 or DS3 from Covad
(the "billing start date"). If the Customer TeleSpeed Circuit is
ready from Covad (including port configuration and the firm order
commit date has passed) but the Customer is not ready to accept the
circuit, Covad will begin billing for the Customer TeleSpeed Circuit.
Covad will not assess the monthly charge listed in the attached
Pricing Schedule for the first Customer TeleSpeed DS3 Circuit in each
Preferred Market (the "first Preferred Market DS3") until Customer
places orders for Fifty (50) Client TeleSpeed Circuits in that
Preferred Market after the Preferred Market Launch Date. Upon receipt
of fifty (50) Client TeleSpeed Circuits in that Preferred Market,
Covad will bill Customer 1/2 (on a prorated basis) of the monthly
charge listed in the attached Pricing Schedule for the first Preferred
Market DS3 up to the date in which Customer places its 251st order for
Client TeleSpeed Circuits in that Preferred Market after the Preferred
Market Launch Date. Thereafter, Covad will bill (on a prorated basis)
the full monthly charge for the first Preferred Market DS3. All
subsequent Customer TeleSpeed DS3 Circuits ordered and provided in the
Preferred Market will be billed in full as described in the Pricing
Schedule.
10.2 Client TeleSpeed Circuit. Billing for a Client TeleSpeed Circuit will
start on the date that the service is successfully installed (the
"billing start date"), unless the TeleSpeed service is rejected within
the 3-day Acceptance period as defined herein.
11. CANCELLATION AND RETURN POLICIES.
11.1 Customer TeleSpeed Circuit.
11.1.1 The Customer is required to give 30 calendar days notice to
Covad to disconnect the Customer TeleSpeed Circuit. All
Client TeleSpeed Circuits served in the relevant
metropolitan market must be cancelled prior to disconnecting
the Customer TeleSpeed Circuit.
11.1.2 Customer will notify Covad of all cancellations in writing
(the "notice of cancellation"). Upon receipt of a notice of
cancellation, Covad will bill the circuit to the end of the
service date in addition to other charges described in this
Paragraph.
11.1.3 The minimum initial term for each Customer TeleSpeed Circuit
will be one year, continuing on a month-to-month basis
thereafter. Customer may order a longer initial term for
any particular Customer TeleSpeed Circuit.
11.1.4 If Covad receives a notice of cancellation of a Customer
TeleSpeed Circuit within 60 days of the billing start date,
Customer will not incur any additional cancellation fee.
Covad will NOT refund installation and monthly Customer
TeleSpeed Circuit charges incurred within this 60-day
cancellation period.
11.1.5 If Covad receives a notice of cancellation of a Customer
TeleSpeed Circuit within the first 90 days, all market
Development Funds issued to Customer must be reimbursed to
Covad when Customer cancels the circuit.
11.1.6 If Covad receives a notice of cancellation of a Customer
TeleSpeed Circuit more than 60 days after the billing start
date, Customer must pay installation and monthly charges for
the remainder of the initial term of that particular
Customer TeleSpeed Circuit, unless Covad is notified in
writing of service inadequacies and fails to rectify these
inadequacies within 5 business days of receipt of such
notice.
11.2 Client TeleSpeed Circuit.
Covad Confidential Page 5
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COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
- --------------------------------------------------------------------------------
11.2.1 Customer will notify Covad of all cancellations in writing
or email (the "notice of cancellation"). Upon receipt of a
notice of cancellation, Covad will cancel the Client
TeleSpeed Circuit within one business day. Covad will bill
the circuit to the end of the service date in addition to
other charges described in this Paragraph.
11.2.2 The minimum initial term for each Client TeleSpeed Circuit
will be one year, continuing on a month-to-month basis
thereafter. Customer may order a longer initial term for
any particular Client TeleSpeed Circuit.
11.2.3 If Covad receives a notice of cancellation of a Client
TeleSpeed Circuit within the 3-business day Installation
Acceptance Period, Covad will charge the Customer for
installation only.
11.2.4 If Covad receives a notice of cancellation of a Client
TeleSpeed Circuit within 60 days of the billing start date,
Customer will not incur any additional cancellation fee.
Covad will NOT refund installation and monthly Customer
TeleSpeed Circuit charges incurred within this 60-day
cancellation period.
11.2.5 If Covad receives a notice of cancellation of a Client
TeleSpeed Circuit more than 60 days after the billing start
date and during the first year after the billing start date
for that circuit, Customer will pay the Client TeleSpeed
Circuit Early Cancellation Fee listed in the Pricing
Schedule, unless Covad is notified in writing of service
inadequacies and fails to rectify these inadequacies within
5 business days of receipt of such notice.
11.3 Customer Premises Equipment
11.3.1 Client premise equipment purchased directly from Covad can
be returned to Covad if it is unused and in its original
packing within 30 days from Covad's original shipment date.
A 25% equipment handling and restocking charge will be
charged to the Customer by Covad. Customer should call Covad
Customer Care/Order Administration to receive a Return
Materials Authorization (RMA) number and to ship the
equipment back to Covad (the Customer shall pay all shipping
charges associated with this return).
12. COMMUNICATION. The Customer should refer to Covad's online Customer Care
Center for the majority of communication to and from Covad. All
communication from Covad related to Covad's TeleSpeed Services provided to
Customer will be directed to the Customer. Scheduling of visits to the
Client site will be done by the Customer in conjunction with Covad Customer
Care. All information discussed and agreed to with the Customer will be
available to the Customer in the online Customer Care Center.
13. CONFIDENTIAL INFORMATION. Each party shall limit disclosure of the other
party's confidential information to employees and contractors with a need
to know. Neither party shall disclose confidential information of the other
party to any third party. Nothing herein shall supercede the terms of any
non-disclosure agreement signed by the parties.
14. CUSTOMER REPRESENTATIONS AND RIGHTS.
Customer represents and warrants that it will utilize Covad's TeleSpeed
Services to provide Internet access and other services in accordance with
applicable law. Nothing in this contract shall limit Customer's ability to
provide or resell value-added, "enhanced" or "information" services to
others that utilize telecommunications or telecommunications services
provided to Customer by Covad pursuant to this Agreement. However, at all
times Customer will remain fully responsible for payment for such services
ordered in addition to all other obligations of this Agreement. Nothing in
this Agreement may be construed to prevent Customer or an affiliate of
Customer from ordering additional PVCs to any Client in order to support
telecommunications or telecommunications services for a separate and
additional charge. The provision of such additional PVCs to Customer will
be pursuant to a separate Agreement between Covad and the Customer.
Customer acknowledges that it shall not, in the ordinary course of its
business, when using Covad's network services, be able to identify, and
distinguish between, packet data transmissions that originate and terminate
within the same state (intrastate transmissions), and those packet data
transmissions that originate and terminate in different states (interstate
transmissions), and acknowledges that it is impractical to identify,
distinguish and measure its intrastate and interstate
Convad Confidential Page 6
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COVAD/CNM ISP CUSTOMER AGREEMENT Dated: 12/31/98
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transmissions on Covad's network. Further, Customer estimates (on a good
faith, rough-guess basis) that more than ten percent of all data packets
transmitted on Covad's network, including those to and from the Internet,
will consist of interstate transmissions.
Nothing in Section 14 or any other provision of this Agreement shall limit
or impede the ability of Customer to offer any services, including voice
over IP, to Customer's clients which utilize the Covad TeleSpeed service.
15. FORCE MAJEURE. Covad and customer shall not be responsible for any failure
to perform any obligation or provide service hereunder because of any Act
of God, strikes, work stoppage, equipment or facilities shortages,
governmental acts or directives, war, riot or civil commotion, or any other
force beyond Covad's and customer's, as the case may be, reasonable
control. Customer's and Covad's remedies are limited as set forth herein.
16. ENTIRE AGREEMENT; AMENDMENTS IN WRITING; SEVERABILITY. This Agreement,
which includes all Attachments and Schedules referenced herein, constitutes
the entire Agreement between the parties concerning the subject matter
hereof and supersedes any prior agreements, representations, statements,
negotiations, understandings, proposals or undertakings, oral or written,
with respect to the subject matter expressly set forth herein. Any
amendment or supplement to this Agreement shall be in writing. If any
provision of this Agreement shall be held to be illegal, invalid or
unenforceable, each party agrees that such provision shall be enforced to
the maximum extent permissible so as to effect the intent of the parties,
and the validity, legality and enforceability of the remaining provisions
of this Agreement shall not in any way be affected or impaired thereby. If
necessary to effect the intent of the parties, the parties shall negotiate
in good faith to amend this Agreement to replace the unenforceable language
with enforceable language that reflects such intent as closely as possible.
17. DISPUTE RESOLUTION AND CHOICE OF LAW. The parties shall attempt to resolve
any disputes between them prior to resorting to litigation. Customer's
remedies are limited as set forth herein. Any dispute arising between the
parties shall be governed by California law.
18. ASSIGNMENT. Customer may not assign or transfer the rights or obligations
under this Agreement to any third person (excluding transfers incident to
an acquisition or change in control of Customer) without the prior written
consent of Covad.
19. INTELLECTUAL PROPERTY. Each party will continue to independently own its
intellectual property, including all patents, trademarks, trade names,
service marks, copyrights, trade secrets, proprietary processes and all
other forms of intellectual property. Any improvements to existing
intellectual property will continue to be owned by the party already
holding such intellectual property. The parties agree to authorize use or
cross-license intellectual property only to the extent necessary to meet
their respective commitments of this Agreement.
COVAD COMMUNICATIONS COMPANY CNM NETWORK (CUSTOMER)
------------------------------ ------------------------------
Name Date Name Date
------------------------------ ------------------------------
Title Title
Convad Confidential Page 7
<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 January
8, 1999.
/s/ STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------
STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
January 8, 1999
<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 January 8, 1999.
/s/ CALDWELL, BECKER, DERVIN, PETRICK & CO.
- -----------------------------------------------
CALDWELL, BECKER, DERVIN, PETRICK & CO.
Los Angeles, California
January 8, 1999
