As filed with the Securities and Exchange Commission on March 13, 2000
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CAVION TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Colorado 514191 84-1472763
(State or other (Primary North American (I.R.S. Employer
jurisdiction Industry Classification Identification No.)
of incorporation) System Number)
6446 S. Kenton Street
Englewood, Colorado 80111
(720) 825-1900
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
DAVID J. SELINA
President and Chief Executive Officer
Cavion Technologies, Inc.
6446 S. Kenton Street
Englewood, Colorado 80111
(720) 825-1900
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
Copies to:
S. LEE TERRY, JR., ESQ.
CYNTHIA R. CAIN, ESQ.
Gorsuch Kirgis LLP
Tower I, Suite 1000
1515 Arapahoe Street
Denver, Colorado 80202
(303) 376-5000
Approximate date of commencement of proposed sale to the public: as
soon as practicable after this registration statement becomes effective.
---------------
THE REGISTRANT WILL AMEND 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 THAT SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEN BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING ACCORDING TO SECTION 8(A), MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount
Title of Each Class Amount to Offering Aggregate of
of Securities to be be Price Per Offering Registration
Registered RegisteredShare(1)(2) Price(1)(2) Fee
- ------------------- --------------------- ----------- ------------
<S> <C> <C> <C> <C>
Class A common stock,
$.0001 par value
per share 225,500 $24.125 $5,440,187.50 $1,436.21
Agent's warrants to
purchase Class A
Class A common stock(3) 20,500 $13.20 $270,600.00 $71.44
Representative's
warrants to purchase
Class A common stock(3) 120,000 $0.0008 $100.00 $0.03
Common stock issuable
upon exercise of
representative's
warrants to purchase
Class A common stock(4) 120,000 $8.125 $975,000.00 $257.40
Total $6,685,887.50 $1,765.08
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) The price is based on the last sale price reported on the National
Association of Securities Dealers Automated Quotation System on March
6, 2000.
(3) Each warrant is exercisable for one share of common stock.
(4) Underlying shares of common stock issuable upon exercise of the
representative's warrants.
SUBJECT TO COMPLETION, DATED MARCH 13, 2000
PROSPECTUS
345,500 SHARES
[Logo - cavion.com secure connectivity
from a single-minded
company]
COMMON STOCK
- -----------------------------------------------------------------------
This prospectus relates to 345,500 shares of common stock of Cavion
Technologies, Inc. that may be sold from time to time by the selling
shareholders named in this prospectus.
We will not receive any proceeds from the sales by the selling
shareholders.
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
CAVN. On March 9, 2000, the last reported sale price of the common stock
was $28.625 per share.
INVESTING IN SHARES OF OUR STOCK INVOLVES RISKS. RISK FACTORS BEGIN ON
PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------
-------------, 2000
The information in this prospectus is not complete and may change. We may
not sell these securities until the registration statement filed with the
Securities and Ex change Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
[INSIDE COVER OF PROSPECTUS]
[Blank]
PROSPECTUS SUMMARY
CAVION.COM
cavion.com offers products and services for business to business
communications, secure Internet financial products, such as online banking
and bill paying services, and secure Internet access and services for our
customers. We are also building and managing a secure private
communications network exclusively for the credit union industry, which we
call CUiNET(R). Our network acts as a communications platform for the
delivery of services and information to and from credit unions and related
businesses.
Our principal executive offices are located at 6446 S. Kenton Street,
Englewood, Colorado 80111. Our telephone number is 720-875-1900.
THE OFFERING
Common stock offered
by selling shareholders 345,500 shares
Use of proceeds We will not receive any proceeds
from the sale of the common stock.
Nasdaq symbol CAVN
SUMMARY FINANCIAL INFORMATION
The following tables contain our summary financial data. In addition
to this summary financial data, you should refer to the more complete
financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
cavion.com Pro Forma
Period from Combined
LanXtra August 18,1998 Year Ended
Year Ended (Inception) to Pro Forma December 31,
December 31, December 31, Adjustments 1998
1998 1998 (unaudited) (unaudited)
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF
- ------------
OPERATIONS DATA:
- ---------------
Revenue $ 215,022 $ -- $ -- $ 215,022
Cost of Revenue 222,419 -- -- 222,419
Operating Expenses 1,117,892 6,877 914,146 2,038,915
----------- -------- --------- -----------
Operating Loss (1,125,289) (6,877) (914,146) (2,046,312)
Interest expense,
and other 845,213 29,067 (584,480) 289,800
----------- -------- --------- -----------
Loss from
continuing
operations $(1,970,502) $(35,944) $(329,666) $(2,336,112)
=========== ======== ========= ===========
Basic and diluted
net loss from
continuing
operations per
share $(.77)
=====
Weighted average
common shares
outstanding -
basic and
diluted 3,029,218
===========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Combined
LanXtra cavion.com Year
One Month Year Ended
Ended Ended Pro Forma December 31,
January 31, December 31, Adjustments 1999
1999 1999 (unaudited) (unaudited)
------------ ------------------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF
- ------------
OPERATIONS DATA:
- ---------------
Revenue $ 37,850 $ 618,505 $ -- $ 656,355
Cost of Revenue 31,898 493,244 -- 525,142
Operating Expenses 213,311 4,392,769 79,421 4,685,501
--------- ---------- -------- ----------
Operating Loss (207,359) (4,267,508) (79,421) (4,54,288)
Interest expense,
and other 64,069 486,011 (52,932) 497,148
--------- ---------- -------- ----------
Net Loss $(271,428) $(4,753,519) $(26,489) $(5,051,436)
======== ========== ======= ==========
Basic and diluted
net loss per
share $(1.62)
=======
Weighted average
common shares
outstanding -
basic and
diluted 3,112,424
==========
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
column reflects our receipt of the net proceeds of the 205,000 shares of
common stock we sold in our private offering at $12.00 per share, after
deducting underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
Pro Forma
As Adjusted
cavion.com Pro Forma December 31
December 31, Adjustments 1999
1999 (unaudited) (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
- -------------------
Current Assets $4,585,396 $2,213,200 $ 6,798,596
Total Assets $9,603,277 $2,213,200 $11,816,477
========== ========== ===========
Current Liabilities $2,043,761 $ -- $ 2,043,761
Long-term
Borrowings 386,494 -- 386,494
Putable Stock 200,537 -- 200,537
Stockholders'
Equity 6,972,485 2,213,200 9,185,685
---------- ---------- -----------
Total Liabilities
and Stockholders'
Equity $9,603,277 $2,213,200 $11,816,477
========== ========== ===========
</TABLE>
RISK FACTORS
Because we have a short operating history, you will have limited
historical information about us on which to base your investment decision
- -------------------------------------------------------------------------
Our business plan was developed in January 1998 and we began
acquiring credit union customers, other than our original pilot customers,
in April 1998. Accordingly, we have a limited operating history upon
which you may evaluate us. We face the risks and uncertainties faced by
early-stage companies. Our short operating history makes it difficult to
predict our future financial results.
Because we have not yet been profitable, we may not have sufficient
resources to execute our business plan
- -------------------------------------------------------------------
As of the date of this prospectus, we have not been a profitable
business. We may never achieve profitable operations. Even if we do
become profitable, we may not be able to continue to be profitable.
Combined with LanXtra, we reported a total loss of $5,024,947 for the year
ended December 31, 1999, comprised of a $35,944 net loss for cavion.com
and a net loss of $1,970,502 for LanXtra. We expect to continue to report
losses through most of the year 2000. Today, we receive our revenue from
the license and sale of products and services to our credit union
customers. Our revenue has grown since the start of our business but it
may not continue to grow or even continue at its current level. Because
some of our expenses are fixed, including equipment and real estate
leases, if our revenue does not increase, we may not be able to compensate
by reducing our expenses as much or as quickly as we need to do. It is
possible that our operating losses will continue at present levels or even
increase in the future. Our business, our financial condition and the
results of our operations will be materially and adversely affected if we
can't quickly adjust our operating expense levels to at least match our
revenue levels.
If we are unable to attract more credit union customers, we may not be
able to execute our business plan
- ----------------------------------------------------------------------
As of the date of this prospectus substantially all our revenue has
been derived from network access and connectivity fees and installation
service fees from our credit union customers. We expect that reliance to
continue for at least the next 16 months, after which we expect our
affinity program to generate increasing revenue. Our revenue depends on
information-technology spending by credit unions and we can't be sure that
this type of spending will increase as we expect or even continue at
today's levels. We do expect the credit union industry to grow over the
next several years, partially because credit unions have recently been
allowed to expand their membership beyond a single employee group. We
think that, as the credit union industry grows, its demand for information
technology products will also grow. Still, the demand for our products
and services is unpredictable. Our network currently hosts 102 credit
unions and 12 credit union leagues, corporate credit unions, vendors and
other entities. Our future growth depends on our ability to provide more
services and different kinds of services to our existing and new
customers. We cannot be certain that we will be able to do that. There
are approximately 12,600 credit unions in the United States with combined
assets of more than $375 billion and approximately 73 million members.
Our success in the near term will depend on our ability to capture a
significant percentage of the credit union services market and to expand
the services we provide to our existing credit union customers. We cannot
assure you we will be able to do so.
Because we have not established a backup system, there may be temporary
interruptions in our service
- -----------------------------------------------------------------------
Our business depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. Any system
interruptions that cause our services to be unavailable to our credit
union customers would greatly reduce the attractiveness of our services
and would materially damage our business, financial condition, and
operating results. Substantially all of our computer and communications
hardware is located at a single leased facility in metro Denver, Colorado,
which has finite backup protection. Our systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. We
presently do not have redundant, or backup, systems in separate geographic
locations for our network, nor do we have a formal disaster recovery plan.
We do store copies of critical data from our internal systems and
customers' systems, including the source code of our proprietary software,
at a second location. We carry business interruption insurance which will
compensate us for up to twelve months of actual losses of business income
due to physical loss of or damage to property at our principal facility in
metro Denver. This insurance is limited and may not compensate us for all
of our losses. The design of our network architecture includes some
redundancy and disaster recovery capabilities, but these capabilities will
not be available until we have installed and connected at least one other
network server farm with capacity similar to our Denver facility. We
can't predict today when that second installation will be completed.
Because of the importance to us of David Selina's experience and contacts
in the credit union industry, and Jeff Marshall's technical expertise, our
success may be dependent on our ability to retain these individuals
- -------------------------------------------------------------------------
We believe that the credit union and related management experience of
David J. Selina, our president, chief executive officer and chief
operating officer, is important to our success. We also believe that the
software development ability of Jeff Marshall, vice president of Software
Development, is important to our success. We have employment contracts
with David Selina, Jeff Marshall and another key executive, Marshall
Aster, our chief financial officer. We have purchased $1,000,000 of key
man insurance on each of David Selina and Jeff Marshall. We have relied
on our direct sales force for the sales of our products and services.
Our success may be dependent on our ability to attract and retain
personnel qualified in Internet and network services
- -----------------------------------------------------------------
We will need to hire more people in sales, customer service and other
areas in 2000 and beyond if we grow as we expect to. Competition for
qualified people in the Internet services and software industry,
particularly in the network services field, is intense. We compete with
bigger and better financed software and Internet services companies for
these employees. Our future success may depend on whether we can attract,
retain and motivate highly qualified personnel. We can't assure you that
we will be able to do so.
Because our business involves the transmission of confidential financial
information over the Internet, we could be liable if our electronic
security measures should fail
- ------------------------------------------------------------------------
We represent to our credit union customers that our Internet-based
network and transactional banking software are secured and protected by
multiple security measures, seven days a week, 24 hours a day, with
electronic monitoring and activity tracking, and industry-standard
software encryption. We believe that these features are an important
factor in convincing credit unions to buy our products and services, and
encouraging their members to use our Internet network systems for their
personal and sometimes sensitive financial transactions. Although we
believe our systems will prevent unauthorized access to credit union and
personal information, it is impossible to eliminate all risk of
unauthorized access. Despite all the measures we have taken, our products
may be vulnerable to physical or electronic break-ins, viruses, unknown
software defects and similar problems. If someone does circumvent our
security measures, that person could copy or review our trade secrets
and/or the private information of our credit union customers and their
members. Intruders, or "hackers", could also disrupt our systems and
cause interruptions to our operations. Breaches of our network could
cause us to lose customers, and could make us liable for substantial
damages to our credit union customers or their members.
Because we have only recently begun to use service contracts that limit
our liability to our customers and their members, our earlier customers
who did not enter into service contracts with us will not be contractually
limited in any damages they may seek from us
- -----------------------------------------------------------------------
We began using comprehensive service contracts with our credit union
customers in July, 1999. Prior to that time, we relied on our customers'
written acceptance of our written proposal. As a result, many of the
terms of our agreements with early customers are implied from generally
accepted business practices and customs rather than being spelled out in a
formal document. We are currently using a standard service contract with
our customers, including provisions limiting our liability to our
customers and their members. However, we can't be sure that these
contractual limitations of liability would actually protect us from
liability for damages.
We bear risks common to new companies including volatility of our stock
price and possible delisting from Nasdaq
- -----------------------------------------------------------------------
As a new company, the market price for our common stock is likely to
continue to be highly volatile. The stock market in general, and the
market for Internet-related companies and technology companies in
particular, has been highly volatile for the last several years. In
addition, to continue to be listed on the Nasdaq SmallCap Market, we must
continue to meet their requirements which may be difficult based on the
risks and uncertainties for a start-up company.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We use words
such as "anticipate", "believe", "expect", "future", "may", "will",
"should", "plan", "projected", "intend" and similar expressions to
identify forward-looking statements. These statements are based on our
beliefs and the assumptions we made using information currently available
to us. Because these statements reflect our current views concerning
future events, these statements involve risks, uncertainties and
assumptions. Our actual results could differ materially from the results
discussed in the forward-looking statements. Some, but not all, of the
factors that may cause these differences include those discussed in the
risk factors in this prospectus. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the
selling shareholders.
When the holders of the 120,000 representative's warrants issued in
connection with our initial public offering exercise their warrants at
$8.125 per share through a net exercise at $19.50 per share on November 3,
2000, we will issue an aggregate of 70,000 shares to the holders of the
warrants. If the holders of the 20,500 warrants issued to the agent for
our February 2000 private placement exercise their warrants at $13.20 per
share, we will receive proceeds of $270,600. The shares of common stock
underlying these warrants have been included in the prospectus.
MARKET FOR COMMON STOCK, DIVIDEND POLICY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION. Our common stock began trading on the Nasdaq
SmallCap Market on October 29, 1999 under the symbol CAVN. The following
table gives the high and low sale prices for the common stock since we
began trading on that date. The quotations reflect inter-dealer prices,
with retail mark-up, mark-down or commissions, and may not represent
actual transactions. The information presented has been provided by The
Nasdaq Stock Market, Inc.
1999 Fiscal Year High Low
---------------- ---- ---
Fourth Quarter (from October 29, 1999) $9.00 $5.31
2000 Fiscal Year
----------------
First Quarter (through March 9, 2000) $32.25 $6.13
DIVIDENDS. We have never declared or paid any dividends on our
common stock. We do not intend to pay cash dividends on our common stock.
Holders of shares of our Series A preferred stock were entitled to receive
5% per year cumulative preferred dividends payable quarterly in cash or in
shares of Class A common stock at the discretion of our board of directors
until the preferred stock was automatically converted into common stock on
November 3, 1999. Through December 31, 1999, we had declared and paid
dividends totaling $64,197 on our Series A preferred stock. We plan to
retain our future earnings, if any, to finance our operations and the
expansion of our business. The decision whether to pay cash dividends on
our common stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors
considers significant.
SHAREHOLDER INFORMATION. As of the date of this prospectus, we have
approximately 96 holders of record and in excess of 1,000 beneficial
owners of our common stock.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1999. You should also refer to the more complete financial information
included elsewhere in this prospectus. Our capitalization is presented:
o on audited actual basis
o an unaudited pro forma basis to reflect:
o our receipt of net proceeds from the sale of 205,000 shares
of common stock offered in our private offering at $12.00 per
share, after deducting underwriting discounts and commissions
and offering expenses.
<TABLE>
<CAPTION>
Pro Forma
Actual Pro Forma As Adjusted
(unaudited) (Unaudited) (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Notes and capital leases payable $993,994 $ -- $ 993,994
Putable Class B common stock,
$.0001 par value; 30,000 shares
authorized; 28,648 and 28,648
shares issued and outstanding
actual, pro forma and pro forma
as adjusted, respectively 200,537 -- 200,537
Stockholders' equity
Class A common stock, $.0001
par value; 19,970,000 shares
authorized; 2,706,326, 4,697,326
and 4,902,326 shares issued and
outstanding actual and pro forma,
respectively 470 20 490
Warrants for common stock 507,096 130,590 637,686
Deferred compensation (107,735) -- (107,735)
Additional paid-in capital 11,426,314 2,082,590 13,508,904
Accumulated (deficit) (4,853,660) -- (4,853,660)
---------- ---------- ----------
Total stockholders' equity $6,972,485 $ 2,213,200 $ 9,185,195
========== =========== ===========
Total capitalization $8,167,016 $2,213,200 $10,380,216
========== =========== ===========
</TABLE>
As of the date of this prospectus, we have 4,902,326 shares of common
stock outstanding. We may issue additional shares of common stock under
the following:
o 779,500 shares of common stock issuable upon exercise of
options outstanding under our Equity Incentive Plan.
o An additional 215,000 shares available for issuance under our
Equity Incentive Plan.
o 28,648 shares of Class B common stock which are convertible
into the same number of shares of common stock.
o 30,000 shares of common stock issuable on exercise of warrants
issued in our August 1999 private placement of notes and
warrants.
o 120,000 shares of common stock issuable upon exercise of the
representative's warrants issued to the representative of the
underwriters or its assignees in our initial public offering.
o 20,500 shares of common stock issuable upon exercise of the
warrants issued to the agent for our February 1999 private
placement of common stock.
o 175,000 shares of common stock issuable upon exercise of the
options issued to our public relations firm for consulting
services.
Options available for issuance under the Equity Incentive Plan may be
granted with exercise prices as low as 50% of market value of the common
stock on the grant date. If we grant options below fair market value it
would be dilutive to investors who purchase shares from the selling
shareholders.
SELECTED FINANCIAL INFORMATION
We derived the selected historical and pro forma financial data
represented below from our historical and pro forma financial statements
and related notes included in other parts of this prospectus. The
unaudited balance sheet reflects our December 31, 1999 assets, liabilities
and stockholders' equity.
The statement of operations adjustments reflect:
o our actual expenses for the years ended December 31, 1999 and
1998
o the pro forma amortization expense for goodwill in connection
with the acquisition
o adjustments to interest expense based on our new capital
structure
You should read the selected financial data along with the other
financial information contained in this prospectus and the section of this
prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Following are the unaudited historical balance sheet at December 31,
1999, and the pro forma statement of operations for the year ended
December 31, 1999 and 1998 for LanXtra and cavion.com. For purposes of
the statement of operations, the transaction was assumed to be consummated
on January 1, 1998. Pro forma earnings per share are calculated as if the
Purchase Agreement was completed on January 1, 1998, and excludes the
shares issued in our initial public offering.
<TABLE>
<CAPTION>
Balance Sheet as of December 31, 1999
=====================================
cavion.com
----------
(unaudited)
-----------
<S> <C>
Assets:
- -------
Current assets $4,585,396
Property & equipment, net 666,608
Goodwill and other 4,351,273
----------
Total Assets $9,603,277
==========
Liabilities:
- ------------
Current liabilities $2,043,761
Long-term borrowings 386,494
Putable stock 200,537
Stockholders' equity
Common stock 470
Warrants and options 507,096
Deferred compensation (107,735)
Additional paid-in capital 11,426,314
Accumulated deficit (4,853,660)
----------
Total liabilities and Stockholders' equity $9,603,277
==========
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations for Year Ended December 31, 1998
========================================================
Pro Forma Pro Forma
Adjustments Company
LanXtra cavion.com (unaudited) (unaudited)
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 215,022 $ - $ - $ 215,022
Cost of revenue 222,419 - - 222,419
----------- ---------- --------- -----------
Gross loss (7,397) - - (7,397)
----------- ---------- --------- -----------
Total operating
expenses 1,117,892 6,877 914,146 2,038,915
----------- ---------- --------- -----------
Loss from
operations (1,125,289) (6,877) (914,146) (2,046,312)
----------- ---------- --------- -----------
Interest expense and (612,200)
other, net 845,213 29,067 27,720 289,800
----------- ---------- --------- -----------
Loss from continuing
operations $(1,970,502) $ (35,944) $(329,666) $(2,336,112)
=========== ========== ========= ===========
Net loss per share $(.77)
=====
Weighted average
common shares
outstanding 3,029,218
=========
</TABLE>
Notes to Unaudited Combined Condensed Pro Forma Financial Statements
- --------------------------------------------------------------------
Pro Forma adjustments to the unaudited condensed pro forma statement of
operations for the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Income Statement Item Amount Explanation
- --------------------- ------ -----------
<S> <C> <C>
Amortization of $(914,146) To record amortization expense for
goodwill and other the developed technologies, goodwill
intangible assets and other intangible assets.
Accretion of putable $(612,200) To eliminate the accretion expense
common stock for the terminated putable
common stock.
Accretion of putable $27,720 To record accretion of Cavion's
common stock Class B common stock put options.
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations for Year Ended December 31, 1999
================================================================
Pro Forma
LanXtra cavion.com Combined
One Year Year
Month Ended Ended
Ended December Pro Forma December
January 31, 31, 1999 Adjustments 31, 1999
1999 (unaudited) (unaudited) (unaudited)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 37,850 $ 618,505 $ -- $ 656,355
Cost of revenue 31,898 493,244 -- 525,142
- -------- --------- ------- ----------
Gross profit 5,952 125,261 -- 131,213
-------- --------- ------- ----------
Total operating
expenses 213,311 4,392,769 79,421 4,685,501
-------- --------- ------- ----------
Loss from operations (207,359) (4,267,508) (79,421) (4,554,288)
- -------- --------- ------- ----------
Interest expense and
other, net 64,069 486,011 (52,932) 497,184
-------- ---------- ------- ----------
Net Loss $(271,428)$(4,753,519) $(26,489) $(5,051,436)
======== ========== ======= ==========
Net loss per share $(1.62)
======
Weighted average
common shares
outstanding 3,112,424
=========
</TABLE>
Pro forma adjustments to the unaudited condensed pro forma statement of
operations for the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Income Statement Item Amount Explanation
- --------------------- ------ -----------
<S> <C> <C>
Amortization of goodwill $79,421 To record amortization for
goodwill for January, 1999
Interest expense $(52,932) To eliminate the accretion
expense for the terminated putable
stock
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion of our financial condition and results of
operations should be read together with the financial statements and
related notes included in another part of this prospectus. Those
financial statements and notes should be considered to be incorporated
into this section. This discussion contains forward looking statements
that involve risk and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of factors that include, but are not limited to, the risk factors
listed elsewhere in this prospectus.
We completed our acquisition of the assets of LanXtra on February 1,
1999 as described in the Asset Purchase Agreement. Prior to the
acquisition, we did not conduct any operations except financing activities
and other preparations for the acquisition. The following discussion
relates to LanXtra's historical results of operation since January 1,
1998, the date on which LanXtra commenced the business we acquired, our
operations of the business that we acquired and our plan of operation
following our initial public offering, which was declared effective on
October 29, 1999. In the following discussion, "we" refers both to our
business as operated by LanXtra prior to February 1, 1999, and to our
business as operated by us after February 1, 1999 (referred to below as
the combined results).
Since January 1, 1998, we have been engaged in building a suite of
network products and services for the credit union industry that includes:
o a secure network that enables access to our credit union
customers' products and services via the Internet or an intranet
o secure Internet financial products, including Internet
banking software
o secure Internet access services for credit unions
o secure Internet automated loan application and approval
o e-commerce services
We are in the start-up phase of our operations and generated a net
loss of $4,753,519 for the year ended December 31, 1999 ($5,024,947
combined). For the year ended December 31, 1998, we generated a net loss
of $2,336,112, comprised of a $35,944 net loss for Cavion and a net loss
of $1,970,502 for LanXtra. We expect to incur substantial monthly
operating losses through most of the year 2000.
Since January 1, 1998, our revenues have been derived from recurring
monthly connectivity fees, installation services and monthly recurring
revenue associated with our secure Internet access services and secure
Internet financial products. Beginning in January, 2000, we changed the
way we charge our customers so that they now pay a flat monthly fee for
the services we provide them. Included in this fee is the complete cost
of hardware, software installation, set up, maintenance and technical
assistance for our services. Currently, 102 credit unions and 12 credit
union leagues, corporate credit unions, vendors and other entities have
subscribed to our products and services. Approximately 32% of these
customers are located in Colorado, and the other 68% are located in 23
other states.
Prior to our initial public offering, we financed the development of
our products and services with:
o capital provided by the sale of LanXtra's unrelated business
o a bank loan
o loans from shareholders and employees of LanXtra
o two private placements of promissory notes and related warrants
o a private placement of preferred stock
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(ALL 1999 % COMPARISONS ARE BASED ON THE COMBINED RESULTS OF CAVION AND
LANXTRA FOR 1999 AND ALL 1998 AMOUNTS AND % COMPARISONS ARE BASED ON THE
COMBINED RESULTS OF LANXTRA AND CAVION).
During the years ended December 31, 1999 and 1998, we generated
$618,505 ($656,355 combined) and $215,022, respectively, in revenue. This
revenue was derived from a variety of Internet/intranet activities,
including secure Internet access for credit unions utilizing dedicated
lines, secure credit union network services, secure Internet financial
products such as Internet banking software, sales of related equipment,
and installation fees charged for these services. Cost of sales during
these periods were $493,244 ($525,141 combined) and $222,419, or 75% and
103%, respectively, of revenue. These costs include Internet access fees,
telephone company charges for frame relay lines, equipment purchased for
resale, service personnel, hardware repair and maintenance expenses. We
believe that our margins will improve in the future as a result of our new
pricing structure through which we charge our customers a flat monthly fee
for services and because we expect our connectivity costs to diminish due
to our agreement with Convergent Communications Services, Inc.
Selling and marketing expenses for these periods were $1,384,946
($1,457,446 combined) and $259,066, or 222% and 120%, respectively, of
revenue. Of these expenses, $684,777 (combined), or 104%, and $138,944,
or 65%,of revenue was attributable to salaries and wages for the years
ended December 31, 1999 and 1998, respectively. In addition, of these
expenses, $96,726, or 15%, of revenue was attributable to rent payments
for our sales offices around the country for the year ended December 31,
1999 and $0 was attributable to rent payments for our sales offices for
the year ended December 31, 1998.
General and administrative expenses for these periods were $1,547,940
($1,657,171 combined) and $617,104, or 252% and 287%, respectively, of
revenue. Of these expenses, $381,320 (combined), or 58%, of revenue was
attributable to salaries for the year ended December 31, 1999, and
$271,586, or 126%, of revenue of the year ended December 31, 1998.
Additionally, we incurred $586,250 ($617,830 combined) and $248,599,
respectively, in research and development costs during this period, which
represented an allocation of programmers' and engineers' salaries
applicable to the amount of time they devoted to development activities.
We anticipate that our salaries and wages expense will increase as we hire
additional employees to handle the expected growth of our business.
In May 1998, LanXtra issued Class B common stock in connection with a
debt offering which were replaced by our Class B common stock. The
holders can require cavion.com to repurchase at $7.00 per share during a
60-day exercise period beginning on the date that is 30 days after the
date we have 100 Credit Union customers on our network. For financial
accounting purposes, the increase or accretion of this "putable" common
stock from its issuance price to its redemption value is treated as
interest expense. After the closing of our initial public offering, we
offered the former LanXtra shareholders, who have rights to our Class B
common stock the option to redeem their Class B shares at $7.00 per share,
or to convert each Class B share into one share of our Class A common
stock. On December 31, 1999, we reached our 100 Credit Union Date and
sent out exercise notices to the holders of our Class B shares to inform
them that the exercise period began on January 30, 2000. The holders of
the Class B shares can either have us redeem their shares by March 30,
2000, or those shares will automatically be converted into the same number
of Class A shares on March 31, 2000. To date, no Class B shares have been
redeemed or converted by the former LanXtra shareholders.
LIQUIDITY AND CAPITAL RESOURCES
As of the year ended December 31, 1999, we have funded our cash
requirements primarily through the sale of equity, including our initial
public offering, debt, cash flow from operations and the proceeds from the
sale of LanXtra's prior business. On December 31, 1999, cavion.com had
$4,346,699 in cash, current assets of $4,585,396, and current liabilities
of $2,043,761. We received net proceeds of approximately $6,755,000 in
our initial public offering, which was effective October 29, 1999. In
connection with that offering, we sold, for $100, a representative warrant
entitling the lead underwriter, Neidiger, Tucker, Bruner, Inc., or its
assigns, to purchase 120,000 shares of our common stock. The warrant was
divided at closing and assigned to the persons designated by NTB. The
exercise price of each of the representative's warrants is $8.125, 125% of
the initial public offering price. The representative's warrants contain
anti-dilution provisions and permit the cashless exercise of the warrants
utilizing the value of the warrants being surrendered. We have agreed
with NTB and certain of its assigns that there will be a net exercise by
them of 112,500 of the warrants at $19.50 per share on November 3, 2000,
which result in the issuance by us of 65,625 shares. In exchange, NTB
gave up its right of refusal to act as our investment banker in future
offerings, which right was granted to it in connection with our February
1999 private placement.
In October 1999, we entered into a five-year agreement with
Convergent Communications Services, Inc. under which Convergent will
establish, maintain and support network connectivity between our network
and our customers, including providing equipment, maintenance and related
services for the network. We anticipate purchasing approximately $25
million of services from Convergent over the next five years under this
arrangement. One of our directors, John R. Evans, is the chief executive
officer and chairman of the board of Convergent Communications, Inc., the
parent company of Convergent. We will pay Convergent a monthly service
fee for these services, which began at approximately $28,000 per month and
increases as new credit unions are added to the network. The portion of
this fee relating to each credit union telecommunications circuit will be
passed through to the customer. On October 22, 1999, the effective date
of the agreement, Convergent purchased our network equipment from us for
$286,000. We have secured from Data Sales Company a lease line which
enables us to lease up to $500,000 of computer hardware. Currently, we
have drawn $97,500 on this line.
In August 1999, we raised $300,000 in a private offering of 14% notes
and warrants to purchase common stock. The effective interest rate of the
notes was 36% because of the warrants and the expense of the offering.
Each $50,000 note entitled the purchaser to a warrant to purchase 5,000
shares of common stock. The warrants are exercisable for a period of five
years which commenced on November 3, 1999. The warrants are exercisable
at $6.50, the price per share of the shares of common stock offered in our
initial public offering. The notes were repaid and retired with the
proceeds from that offering.
In April 1999, we completed a private placement of our Series A
preferred stock in which we raised net proceeds of approximately $1.8
million.
In February 2000, we entered into an agreement with Strategic Growth
International, Inc. under which it will provide investor relations
consulting services for a period of one year. In connection with the
agreement, we granted SGI an option to purchase 175,000 shares of our
common stock, exercisable at $11.1875, the closing bid price on February
14, for a period of five years. We will also pay SGI a monthly fee of
$8,000 for its services.
Also, in February 2000, we raised $2,460,000 through a private
placement of 205,000 shares of our common stock at $12.00 per share, the
closing price on February 14, the date of the offering. In connection
with the offering, First Capital Investments, Inc. acted as our placement
agent and received a commission of 8%, or $196,000, and a warrant to
purchase 20,500 shares of our common stock, exercisable at 110% of the
offering price, $13.20, for a period of 5 years.
We have received payments under an agreement with MoneyLine America,
LLC to provide online mortgage lending services for our credit unions and
their members through our network. This agreement calls for minimum
annual payments to us of $300,000 in the first year, which began in
September 1999, escalating to $1,000,000 in years six through ten,
provided we have at least 1,500 credit unions, or 12% of the U.S. credit
unions, on our network by the end of year three. Fifty percent of
MoneyLine America is owned by Boutine Capital, LLC, a principal
shareholder of cavion.com.
The funds raised prior to our initial public offering were used
primarily to fund expansion of our credit union industry network to key
markets across the United States. The net proceeds for our initial public
offering and over-allotment, approximately $6,755,000, has been used to
pay off debts and notes, purchase equipment and will be used to continue
the expansion of our credit union industry network. We anticipate that
the funds raised to date will fulfill our cash needs to proceed with our
financial objectives for the next year. However, we are in the process of
negotiating equipment leasing agreements and we may seek a secondary
offering in the future.
We expect to incur substantial costs in connection with expanding our
telecommunications infrastructure, establishing a sales presence in key
strategic markets, and developing new products. We also expect to incur
increased marketing, costs and general and administrative expenses in
connection with the growth of our secure network for the credit union
industry.
Secured Notes Payable. Prior to our acquisition of LanXtra's assets,
we agreed to provide bridge funding to LanXtra for its business operations
pending the raising of equity financing. In order to provide the bridge
funding, we raised $370,000 in 1998 through the issuance of 15% secured
notes due on October 19, 2000, along with warrants to purchase 2,400
shares of our common stock for every $20,000 in subscriptions at an
exercise price of $.01 per share. The notes are secured by substantially
all of our assets, now owned or acquired after October 19, 1998,
including, cash, equipment, fixtures, general intangibles, and all
products and proceeds of the foregoing collateral, accounts receivable,
inventory, work in process and service contracts receivables. The October
20, 1998 security agreement contains a covenant which prevents us from
incurring any other liens on our assets. We raised an additional $100,000
through this offering in 1999. The warrants were originally exercisable
only after payment of the notes. However, we subsequently agreed to
permit early exercise, and all of the warrants had been exercised for
56,400 shares, as of February 1999.
In connection with our acquisition of LanXtra's assets, we assumed
approximately $1.8 million in existing liabilities of LanXtra, not
including the bridge funding described in the preceding paragraph.
Approximately $1.1 million of these amounts became payable 15 days after
the closing of our initial public offering and have been repaid. These
obligations are described below.
In August 1996, LanXtra had obtained a $600,000 line of credit from
US Bank, Denver, Colorado in connection with its previous business.
LanXtra shareholders British Far East Holdings, Ltd., William M.B. Berger
Living Trust, Martin Cooper, and Fairway Realty Associates, provided cash
collateral for the loan. In May 1998, this line of credit was extended to
January 31, 1999. At the February 1, 1999 closing of the Asset Purchase
Agreement between us and LanXtra, we effectively assumed the loan by
entering into a loan agreement with US Bank on the same terms as the loan
from US Bank to LanXtra, with a maturity date of December 31, 1999, using
the proceeds of our loan to pay off the US Bank loan to LanXtra. The
LanXtra shareholders who provided cash collateral for the US Bank loan
agreed, however, to keep their collateral in place until the completion of
our initial public offering. All amounts available under this line of
credit were utilized. Interest accrued on all outstanding balances at the
rate of 1.5% over the reference rate, as established by US Bank, from time
to time. The reference rate closely tracked the prevailing prime rate.
On November 5, 1999, the loan agreement was repaid in full and all of the
collateral was released.
On May 28, 1998, LanXtra borrowed $260,000 from three of its
shareholders and three of our employees - David J. Selina, Jeff Marshall
and Randal Burtis - for working capital purposes. In the aggregate, we
owed these shareholders, directors and managers $260,000 in principal and
$59,480 in interest. However, an agreement was reached to defer payment
of these amounts, without the accrual of further interest, until the
completion of our initial public offering. These amounts were paid in
full on November 5, 1999. LanXtra also issued putable stock in connection
with this debt offering. We agreed to assume LanXtra's obligations with
respect to the put agreements by issuing to LanXtra at the closing of the
Asset Purchase Agreement 28,648 shares of our Class B common stock, which
are subject to economically equivalent put provisions. By its terms, the
put feature of our Class B common stock became exercisable 30 days after
the date when we had 100 credit union industry customers on our network,
the 100 Credit Union Date. Earlier, we had agreed with the former LanXtra
shareholders who have rights to the Class B stock that their put rights
would mature upon completion of our initial public offering. After
completion of that offering we offered these shareholders the option to
redeem their Class B shares at $7.00 per share, or to convert each Class B
share into one share of our Class A common stock. On December 31, 1999,
we reached our 100 Credit Union Date and sent out exercise notices to the
holders of our Class B shares to inform them that the exercise period
began on January 30, 2000. The holders of the Class B shares can either
have us redeem their shares by March 30, 2000, or those shares will
automatically be converted into the same number of Class A shares on March
31, 2000. Currently, none of the Class B shares had been redeemed or
converted.
Between September 8 and October 15, 1997, Herman Axelrod, a former
president and director of LanXtra, and Mr. Lassen, also a former president
and director of LanXtra, made various factoring loans to LanXtra in the
amounts of $50,190 and $25,000, respectively. Such loans were secured by
an account receivable for computer network integration work LanXtra
performed for Questar Infocomm and bore interest at the rate of 3% of the
factoring loan amount for the first 30 days and 1% for each additional 10
days until the factoring loan was paid in full. Questar disputed
LanXtra's invoice and the dispute was settled in September of 1998 for a
payment of $61,780. This amount was paid against the factoring loans on
September 21, 1998 as follows: $41,238 to Mr. Axelrod and $20,542 to Mr.
Lassen. Accordingly, as of February 1, 1999, LanXtra owed Mr. Axelrod
$28,331 and Mr. Lassen $13,441, and we assumed such obligations. Mr.
Axelrod and Mr. Lassen had agreed that the remaining balance of these
loans would be deferred until the completion of our initial public
offering and would not accrue additional interest in the interim. The
final payments were made on November 5, 1999.
On July 1 and August 1, 1992, LanXtra executed promissory notes for
$25,000 in favor of Mr. Axelrod and Mr. Lassen, respectively, each bearing
interest at the rate of 2% over prime. The principal amounts of these
notes reflected $20,000 in cash loaned by each and $5,000 each of co-
signer liability on a $10,000 credit line at the Bank of Boulder that
LanXtra took out at its inception. The credit line was paid off in August
1996, leaving an aggregate principal balance of $40,000 on the notes. We
assumed the obligation to pay Mr. Axelrod and Mr. Lassen the principal
balance of the notes together with interest as stated above. Mr. Axelrod
and Mr. Lassen, agreed that the remaining balance of these loans would be
deferred until the completion of our initial public offering, and interest
would continue to be paid on a quarterly basis until the notes were paid
in full. The notes were paid on November 5, 1999.
We owed Convergent Communications, Inc. $78,673 for equipment
purchased in connection with a customer network upgrade performed by
LanXtra in December 1997, while Convergent was completing the purchase of
LanXtra's network integration business. Convergent agreed that payment of
this amount would be deferred until the completion of our initial public
offering. We paid Convergent in full on November 5, 1999.
In addition to the obligations described above, upon the closing of
the Asset Purchase Agreement, we assumed any potential liability under a
lawsuit threatened against LanXtra by a dissenting shareholder. Although
we believe the claim in this lawsuit does not have a substantial basis in
fact, we cannot assure you that we will not be required to make a payment
to the dissenter. We have not reserved any funds to cover payment of this
liability or of the potential tax liability if such a payment is
necessary. If we are required to make such a payment, it could result in
significant adverse tax consequences to us.
Inflation. Although our operations are influenced by general
economic conditions, we do not believe that inflation had a material
effect on the results of our operations during the fiscal year ended
December 31, 1999, nor do we expect that inflation will have a material
effect on the results of our future operations.
TRENDS
Management expects that we will continue to operate at a loss as
additional credit unions are solicited and enter into contracts with us.
We are optimistic about our ability to add to the number of credit unions
under contract. We cannot give you any assurance, however, that actual
operating results will be as we presently anticipate.
We plan to continue to expand our network of credit union clients.
These expansion efforts are likely to cause us to incur significant
increases in expenses, both in absolute terms and as a percentage of
revenue, as we prepare for the anticipated future growth in our credit
union customer base. Expenses will increase because of the need to
increase staffing in all categories, acquire additional equipment, and
provide for additional telephone connections. We believe our operating
results may fluctuate significantly as a result of a variety of
factors, some of which are outside of our control. Because of that, we
cannot assure you that we will achieve profitable operations even with
a significant increase in our credit union customer base.
YEAR 2000 DISCLOSURE
Many uncertainties exist within the computer hardware and software
and electronic networking industries about the changeover from the 1999 to
2000 calendar years. In 1998, we initiated a comprehensive program to
assess, plan and manage our Y2K compliance effort. Any extended damage to
our operations due to Y2K issues could have a material adverse effect on
our business. While we are confident in the operability of our products,
services, and our own internal systems, and we have been successfully
operating for most of the first quarter of 2000, there is still some risk
that credit unions will encounter difficulties with one or more of our
products and services because of Y2K issues. Further, we cannot
accurately predict the effect of the Y2K problem on our business due to
our interdependence with numerous other systems.
In our previous filings with the Securities and Exchange Commission
on Form SB-2 and Forms 10-QSB and 10-KSB, extensive descriptions and
definitions of business critical items were presented. To date, nothing
has come to our attention which would cause us to believe that our Y2K
compliance efforts as described in those filings were not successful. We
will continue to monitor for any Y2K related problems. Newly acquired
facilities and equipment will require evaluation and possible remediation
through the first quarter of 2000 or beyond. We estimate these future
expenditures to be less than $50,000. Our current assessment does not
include potential costs related to any of our customers or other claims.
This assessment is subject to change. Since there is no uniform
definition of Y2K readiness and since all situations cannot be
anticipated, particularly those involving third party products, we may see
claims as a result of the Y2K transition. Such claims, if successful,
could have a material adverse impact on future results. To date, no such
claims have been presented to us.
OUR BUSINESS
cavion.com offers products and services for business to business
communications, secure Internet financial products such as online banking
and bill paying services, and secure Internet access and services for our
customers. We are also building and managing a secure private
communications network exclusively for the credit union industry, which we
call CUiNET(R). Our network acts as a communication platform for the
delivery of services and information to and from credit unions and related
businesses. Our products and services utilize our proprietary software.
Currently, the businesses that have subscribed to our products and
services consist of 102 credit unions and 12 credit union leagues,
corporate credit unions, vendors and other entities. Through our e-
commerce program, we have launched the beta testing of our affinity
marketing plan to market third-party products and services to credit union
members. We market our products and services to credit unions and related
entities, such as credit union leagues, that are located in key geographic
areas across the United States which have been selected due to their high
concentration of credit unions. We focus our marketing efforts on credit
unions with $5 million or more in assets, and geographic markets with an
average concentration of more than 300 credit unions.
Products and services
We provide a variety of products and services to the credit union
industry, such as:
o A secure private network that enables individual credit unions
to offer their services to their members via the Internet or an
intranet. This network also facilitates business to business
communication which enables credit unions to move data including
share draft data, called e-Draft, and credit applications and
reports, called CuiLoan.
o Secure Internet financial products, such as transactional
banking services, that enable credit union members to view their
account and loan balances and to make transfers between
accounts, as well as bill paying services which allow credit
union members to pay their bills online.
o Secure Internet access for credit unions, with multiple layers
of security features and dedicated connections designed to
satisfy credit unions' need for confidential communications and
secure transactional processing with one connection.
o Secure consumer loan application and approval products, with
required secure data fields for multiple credit bureaus.
o E-commerce services to credit union members, including our
Preferred Merchant Programs -- mortgage loan services and retail
ISP services, Co-branded Portals -- personal start pages,
shopping and travel online, and Web Site Promotion and Traffic
Control Tools for vendors -- ad serving, search engine
placement, and visitor analysis.
Our products are priced in a way that permits our credit union
customers to offer Internet banking services to their members at a flat
monthly rate.
Overview
The credit union industry. A credit union is a non-profit,
cooperative financial institution, owned and controlled by the members who
use its services. Credit unions are either state or federally chartered.
The Credit Union Membership Access Act of 1998 allows credit unions to
solicit new members outside the once restricted field of membership, and
allows credit unions to offer generally the same products and services as
other financial institutions such as banks and savings and loan
institutions.
In the United States:
o there are approximately 12,600 credit unions with combined
assets of over $375 billion
o these 12,600 credit unions service approximately 73 million
members
o approximately 6,100 of these credit unions have assets of
over $5 million
o these larger credit unions service approximately 70 million
members and have combined assets of approximately $366
billion
The Internet phenomenon. The widespread adoption in recent years of
public and private electronic communications networks, including the
Internet, intranets and extranets, has impacted the manner in which
organizations communicate and conduct business. These advanced networks
provide an attractive medium for communications and commerce because of
their widespread reach, accessibility, use of open standards and ability
to permit interactions on a real-time basis. At the same time, they offer
businesses a user-friendly, low-cost way to conduct a wide variety of
commercial functions electronically. Nielsen/NetRatings estimates that
the number of people who had Internet access from homes in the United
States in 1999 was 119 million, or approximately 50% of the U.S.
population.
In recent years, the development of the Internet, intranets and
extranets has enabled users of personal computers to access and interact
with a broad range of information sources. Financial institutions rapidly
are adopting network communications to conduct electronic banking and
provide customers with access to their account information.
The Internet and credit unions. We believe financial institution
customers increasingly will demand more convenient and more interactive
access to financial information and services. Competitive pressures are
driving banks and credit unions to increase the quality and cost-
effectiveness of such services. New opportunities exist to employ
available and emerging technologies to automate and enhance a credit
union's interactions with its members.
Traditionally, credit unions have used trained service
representatives to serve as the link between their customers and the
information systems that stored and processed the customers' account
information. Reliance on people alone to perform service functions is
expensive and limits growth. Labor costs tend to grow proportionately
with increased demands for service. In addition, the time required to
hire and train service personnel limits the speed with which credit unions
can respond to customer demand or new competitive service offerings. Our
solution is to provide credit unions with network-based technologies that
enable their members to serve themselves through automated, interactive
access to financial information and services.
As technologies continue to advance for network-based solutions,
financial institutions will be able to deploy increasingly sophisticated
network applications. Given its relatively late arrival, online banking
is just now beginning to build momentum. A study conducted by Gomez
Advisors found that, as of the first quarter of 1999, nearly 40% of the
top 100 banks in the United States are offering online services. Online
Banking Report of January, 1998 estimated that by the end of 2000, 17.5
million households will be using online banking and/or a bill payment
application.
Despite this momentum, the market for Internet based network
financial services is new and uncertain. Currently, our products and
services have been sold to credit unions located in 24 states. While we
are marketing our products and services across the country, we cannot be
sure that they will sell as well in the new markets as they have in our
home base of Colorado.
Important questions also remain about the use of the Internet in the
long term for financial services, such as security, reliability, ease of
access, cost of access, quality of service and costs of service. The
answers to those questions may affect the growth of Internet use in ways
we can't predict today. As a result, we also can't accurately predict the
size of the market for Internet based financial services or the rate at
which the market will grow. If it fails to grow, or grows more slowly
than we expect, or it is becomes saturated with competitors, our business,
financial condition and operating results will be materially and adversely
affected.
Our strategy
Our goal is to become the largest Internet/intranet provider to
credit unions. We plan to achieve that goal by implementing the following
strategies:
Focus on providing a secure industry network. As the use of the
Internet grows for the delivery of timely and confidential financial
information, security issues become critical. With technological
advances, there is an increased opportunity for electronic intruders, or
"hackers", to conduct successful attacks. The increased interconnectivity
of information networks has given hackers more opportunities to invade
many companies' information systems. We believe the well publicized trend
of breaches in security will continue.
Credit unions require a secure network environment for systems that
handle their members' financial data. We believe credit unions prefer the
reliability and security a private network can offer. Our network uses
dedicated phone lines to our credit union customers, limiting access to
the network and maintaining constant control of the information being
transmitted.
When the credit union provides its members with Internet access to
account information and financial services, the concern with security
becomes more acute. The Internet side of our network uses multiple
security safeguards - firewalls, data encryption, digital certificates and
the JAVA(R) programming language.
"Firewalls" act as the gate keeper between the Internet and the
private network. They are designed to allow external access to networks
only from authorized sources, and can also block data packets from
specified addresses from entering or exiting the network. Our network uses
industry standard firewall products.
Our network also uses public key encryption whenever data is
exchanged with the Internet for Internet banking and bill pay services or
for our share draft repository system. In public key encryption,
cryptographic software is used to generate an electronic "private key" and
a mathematically related "public key". The software encrypts the data
using the public key, in a way that allows the data to be recovered only
by someone with the proper private key. This technique provides a "session
key" for each user session, assuring that the information came from a
specific source and was not altered in transit. In this way, personal
information can be sent across public networks without compromising its
confidentiality.
We use digital certificates provided by an independent certificate
authority on all of our secured web servers - internet banking, secure
forms server, and share draft repository server. Digital certificates
verify the identity of the web server being used and that the owner of
that server is authorized to allow encryption. Digital certificates are
also used to create a unique session key for each connection.
As an added layer of security for the user, we use the JAVA(R)
programming language to control Internet banking and bill pay sessions.
The JAVA(R) programs, called "applets", used in these sessions run within
the user's Internet browser, and are not allowed to access the user's hard
drive without specific authorization. Because the programmer of the applet
can't read or write to memory locations in the user's computer, this
technology minimizes the opportunity to introduce destructive coding, such
as a virus, to the user's computer.
Continued development of feature-rich applications. Our products
have been designed using "thin client architecture" which includes
complete Internet capability as well as our proprietary messaging features
and industry standard security features. With thin client architecture,
the applications being run are not permanently stored on the user's
computer. Instead, the applications reside on our server. The user logs
on to our server, and can then access and run the applications remotely to
process data. After the online connection is terminated, the applications
are erased from the user's computer memory. This enables us to maintain
control over our proprietary software since we do not provide permanent
copies to our users, and enables us to make upgrades of our software
immediately and efficiently available without having to physically
distribute individual copies. Thin client architecture also minimizes our
credit union customers' need to constantly upgrade their hardware in order
to keep up with the technology required to store and maintain our
application software. This results in cost savings to our credit unions
and minimizes the burdens associated with administering hardware and
software upgrades. Because our network uses the JAVA(R) programming
language, which is platform independent, it allows many kinds of systems
to talk to each other and share applications. Our transactional banking
products also provide scalability, distributive and centralized
implementation, and access using Web-enabled cellular devices. MoneyLine
is a related party.
Development of new products and services. Concurrently with
expanding our Internet/intranet network, we plan to expand our product
offerings for credit unions. We recently began offering our bill paying
and automated virtual loan applications services.
We believe credit unions connected to the Internet will want to
provide their membership access to a variety of products and services to
increase membership retention and build customer loyalty. To meet this
need, we are establishing a co-branded affinity program through which we
will be a reseller of various products and services provided by third
party vendors to credit union members. Our network model allows the
addition of these products as they become available.
Our first affinity agreement was executed in August of 1999 with
MoneyLine America, LLC to provide online mortgage lending services for our
credit unions and their members through our network. MoneyLine is the
exclusive cavion.com-approved online mortgage lender. The agreement calls
for minimum annual payments to us of $300,000 in the first year, beginning
in September 1999, and escalating to $1,000,000 in years six through ten,
provided that we have at least 1,500 credit unions, or 12% of U.S. credit
unions, on our network by the end of the third year. MoneyLine is a
related party to us.
In connection with our business-to-business services, we entered into
a contract with Cardinal Services Corporation, a credit union-owned
website design firm under which Cardinal Services will purchase and
license for resale our Internet transactional banking, bill pay, and kiosk
enabling software at a discount which they will then offer to their credit
union customers. We refer our credit union clients and prospects to
Cardinal Services for website design. Cardinal Services will refer its
credit union clients and future prospects to us for connectivity and
secure Internet products and services.
Other products and services we plan to offer through our affinity
program include, for example, the following:
o long-distance telephone service
o new vehicle transactions
o retail ISP
o consumer products
o insurance products
o real estate transactions
o travel/rent-a-car services
o local services, such as concert and movie tickets
Each of our credit union customers will decide which products and
services to make available to their respective members. Our credit union
customers will be provided opportunities to co-brand and endorse these
offerings to their members. We can customize a variety of options for
each credit union and interactively link the credit union's website to
cavion.com's affinity sponsors and affinity websites.
Plan of operations
Our target is to expand our network to more than 2,400 credit unions
across the United States. Through this expansion we plan to:
o provide access to Internet/intranet services to credit unions
serving 28 million members, with combined assets of over $146
billion
o offer affinity products to our credit union customers to
generate increased revenue
o develop new products based on proprietary intellectual property
To manage new customers connected to our credit union network, we are
establishing a number of local offices in key strategic locations in the
United States. Each local office will be located in a key strategic
market with an average concentration of more than 300 credit unions.
Local offices will be opened upon the hiring of sales agents to service
the territory. We have opened 14 of our sales territories and recruiting
efforts are underway for the rest of our four planned additional sales
territories.
On October 22, 1999, we entered into an agreement with Convergent
Communications Services, Inc. to establish and maintain connectivity
between our network and our customers. When our network is completed, we
expect to have excess bandwidth available to multiple data centers so that
network traffic can be rerouted between data centers when circumstances
require. This architecture is designed for redundancy and disaster
recovery, allowing us, with the cooperation of our telecommunications
provider, to pick up traffic temporarily from a nonfunctional data center.
John R. Evans, is the chief executive officer and chairman of the board of
Convergent Communications, Inc., the parent company of Convergent, serves
on our board of directors. In addition, Convergent is one of our
shareholders.
Our expanded metro Denver data center is completed and fully
operational. Our data centers in Livonia, Michigan and Memphis,
Tennessee, are currently under construction and will be fully operational
during the second quarter of 2000.
We recently entered into an agreement with Mission Critical Recovery,
Inc. under which Mission Critical will use our private CUiNET(R) business
to business communications network to offer their services, which include
secure electronic storage of critical data files, called electronic
vaulting, and data disaster recovery services. In exchange, Mission
Critical will provide us with electronic vaulting.
In order to provide our Internet based network products and services
to our customers, we must purchase a large quantity of telecommunications
services from providers of those services. Because of that, our financial
results depend greatly on the amount we pay for those services and our
efficiency in using them. We expect that Convergent will provide and
manage our entire network infrastructure, contracting with underlying
local providers as necessary. Therefore, our business will be critically
dependent on Convergent's delivery and maintenance of our network
connectivity to our customers. Additionally, we are purchasing Internet
connectivity from our national telecommunications carriers to provide
redundancy for our CUiNET(R). Although the amounts we pay for
telecommunications services are passed through to our customers, if one or
more of our telecommunications providers are unable to provide the volume
or level of service required, our ability to carry out our business plan
will be impaired and our business, our financial condition and our results
of operations will be materially and adversely affected. In addition, we
get most of our revenue from recurring sales of our products and services.
This revenue cannot be earned until the telecommunications provider
installs a dedicated telecommunications circuit for each new credit union
customer. This installation can take from one to three months, or longer
in some cases, after we sign up a new customer.
Market
We believe that the increased usage of the Internet and the
increasing demand for networking products and services will provide an
excellent opportunity for us to grow our business. Credit unions that
move rapidly to implement a full-featured, well-conceived network have an
opportunity to enhance the value of their individual client relationships.
Nationally, approximately 12,600 credit unions serve approximately 73
million customers. We have targeted the approximately 6,100 credit unions
with more than $5 million in assets each for our marketing efforts.
Marketing strategy
Our sales team uses a face-to-face sales strategy that emphasizes:
o the features and functions of the network - such as online bill
paying, connectivity to credit union vendors, Internet access and
transactional banking
o the fact that the network is host independent
o a bandwidth pricing model not directly driven by transaction
volume
We charge the credit unions connected to our network a fixed monthly
rate based on the amount of bandwidth they anticipate using. As
transactions over the network increase and as the number of members
accessing a credit union's website increases, the credit union will need
to increase the amount of bandwidth it uses. Each incremental increase in
bandwidth involves a price increase. To date, only one of our credit
union customers has increased its bandwidth requirement, but we anticipate
other customers will do so in the future.
We intend to place a direct sales force in each of our 18 planned
sales territories and to hire individuals who are familiar with the credit
union industry, are known by the credit unions in the sales territory and
have established relationships within the industry. Sales agents will
initially contact the primary decision makers, usually the president, at
the credit unions in their territories. The sales agent's job will be to
sell the idea of a secure, private network with Internet access,
emphasizing the features offered by our network, including the security
features as well as, the ability of the credit union to reduce personnel
and administrative costs even while providing 24 hour service to its
membership.
We have implemented an automated system to measure each credit
union's usage of the network. By monitoring each credit union's connect
usage, sales agents can advise existing customers of their need to
increase bandwidth. We also have established an informal
marketing/endorsement arrangement with a credit union league in Colorado
which has provided significant marketing advantages. The North Carolina
Credit Union League signed with us in March 1999 to provide secure ISP
services to their management and employees. The Missouri Credit Union
System joined our network in November 1999 to transport their check
clearing data using our e-Draft software. We plan to target credit union
associations and leagues in other markets, where serving a league is
likely to enhance our profile with credit unions in the region.
Competition
We operate in a highly competitive environment against a number of
network application developers and providers of online banking services.
Additionally, there is continuous market pressure among market
participants to offer new and innovative products and services. Moreover,
in this field, technological and new product development proceeds rapidly
and market share can be gained and lost in very short time periods.
A number of public and private companies compete with one or more of
the individual products and services offered by cavion.com. These
competitors include Digital Insight, Symitar Systems, Inc., Database
Management Services, Virtual Financial Services, Inc., CFI and Fiserv,
Inc. Any of these companies, as well as other potential competitors,
could in the future offer a combination of products and services to credit
unions similar to the combination offered by us. Presently, we believe
all these companies have greater financial, personnel and operational
resources than we have. We think that, as the Internet transaction and
network services we sell are purchased by more of our customers, other
competitors will enter the market to compete aggressively with us,
including some larger, established companies. Competition may also
increase if there is a consolidation in the software and networking
industries, particularly if one or more of our competitors is acquired by
a larger provider of products and services to the banking industry as a
means for the larger company to penetrate the credit union market.
Customers/rate of growth
We launched our credit union strategy in January 1998. In our first
three months of operations, we connected seven credit unions to the
network. We believe that we were the first Internet service provider in
the country to provide credit unions with secure transactional banking and
Internet service. By the end of August 1998, we were delivering secure
Internet access to 13 credit unions, including our first credit union
outside of Colorado, and one credit union league. Currently, our network
includes 102 credit unions and 12 credit union leagues, corporate credit
unions, vendors and other entities. Approximately 68% of these customers
are located in states other than Colorado.
Intellectual property and proprietary rights
We believe that our proprietary secure communications network, which
we brought to market before most of our competitors, gives us a
significant competitive advantage in providing Internet based network
products and services to the credit union market. We rely on copyrights,
trademarks, service marks, nondisclosure agreements, confidentiality
provisions, trade secret laws and general technical and practical security
measures to protect our intellectual property.
We have applied for federal registration of the trademark and service
mark "Cavion" and have registered the service mark "CUiNET". We also
claim a service mark in the name "cavion.com," although we have not yet
applied for a federal registration of that name.
We hold no United States or foreign patents covering our technology
and we have no pending patent applications. We have copyrights in
software and marketing materials used or related to our business, although
we have not registered any of our copyrights. While we expect to evaluate
the feasibility of making patent filings, registering our copyrights and
registering additional trademarks and service marks in the future, no
assurance can be given that any of our intellectual property will be
entitled to patent, copyright or trademark protection. We treat much of
our technology as trade secrets and take what we consider to be
appropriate measures to maintain the secrecy of our technology. Our
strategy in protecting our trade secrets includes limiting access only to
key employees who have a need to know our trade secrets in order to
perform their services, and who have signed confidentiality and
nondisclosure agreements. We further prevent unauthorized access to or
disclosure of our trade secrets by way of technical blocks built into our
technology.
Of course, despite our best efforts to protect our proprietary
software, in which we claim both copyrights and trade secret protection,
third parties may still attempt to copy or use it, and others may develop
similar technology independently. There can be no assurance that the
measures we take to protect our intellectual property rights, or the
formal applications and registrations we may undertake in the future, will
deter unauthorized use, copying, reverse engineering or destruction of our
proprietary technology and other intellectual property, or that we will
have adequate legal redress in such cases.
We currently use security technology under license from third
parties. We believe that our products and services, including our
trademarks and other intellectual property rights, do not infringe on the
proprietary rights of third parties. It is possible, however, that third
parties will assert infringement claims against us in the future with
respect to products or services we currently offer or may offer in the
future, or with respect to technology we utilize under license from
others. Any litigation resulting from assertions of infringement, even if
the claims are false, could be time consuming and expensive to defend.
Given the limited number of our key employees, any litigation could
materially disrupt our on going efforts to develop and expand our business
and technology.
Property
Our corporate headquarters are located at 6446 S. Kenton Street,
Englewood, Colorado in an office facility where we lease approximately
14,400 square feet which lease expires in February, 2006. We maintain our
local communications switch in an office facility in Colorado Springs,
Colorado which we lease on a month-to-month basis. We plan to establish
sales and engineering office space in leased facilities across the United
States. Currently, we have leased eleven such facilities in Raleigh,
North Carolina, Bloomington, Minnesota, San Diego, California, Sacramento,
California, Newark, Delaware, Portland, Oregon, Livonia, Michigan,
Bradenton, Florida, Memphis, Tennessee, St. Louis, Missouri, Dallas,
Texas, Chicago, Illinois and Braintree, Massachusetts. Although we will
continue to expand the number of facilities as we grow, none of the
individual leases are material to us.
We maintain our computer system in our corporate headquarters. We
currently maintain an insurance policy covering this equipment for full
replacement value. We also carry general liability insurance, errors and
omissions insurance and Internet security insurance policies. This
insurance may not cover all future claims. If a large claim is
successfully asserted against us, we might not be covered by insurance, or
the claim might be covered but cause us to pay much higher insurance
premiums or a large deductible or copayment. Furthermore, regardless of
the outcome, litigation involving customers, credit union members or even
insurance companies disputing coverage could divert management's attention
and energies away from operations.
Employees
We currently employ 57 full-time employees, including 8 in
development, 21 in engineering, 20 in sales, and 8 in general and
administrative, 5 of whom are in accounting. None of our employees are
represented by a labor union, and we have never experienced a work
stoppage. We consider our relationships with our employees to be good.
Government regulations
We are not required to obtain a Federal Communications Commission
license as a telecommunications carrier, but may be required to comply
with FCC regulations applicable to non-dominant telecommunications
carriers, including payment of "universal service" fees on end user
revenues not derived from Internet access services. Several
telecommunications carriers are advocating that the FCC regulate the
Internet in the same manner as other telecommunications services by
imposing access fees on Internet service providers. Any such regulation
could substantially increase the cost of communicating on the Internet
thus slowing the growth of Internet use and the demand for our products
and services. Any regulation of the Internet under new interpretation of
existing laws could materially and adversely affect our business
operations results and financial conditions.
While we are not subject to the Glass-Steagall Act of 1933, the Bank
Holding Company Act of 1956, the Competitive Equality Banking Act of 1987,
the Federal Credit Union Act of 1934, and we are not regulated by the
National Credit Union Administration or the Federal Reserve Board, we are
concerned with regulations governing financial institutions, especially
credit unions, and how those regulations will affect the market and our
ability to provide services as presently planned.
Our credit union customers are a cooperative financial institution,
owned and controlled by the members who use their services. Credit unions
are state or federally chartered non-profit organizations that are
regulated closely by the NCUA.
On August 7, 1998, the Credit Union Membership Access Act of 1998 was
signed into law. Title I of the Act permits federally chartered credit
unions to solicit credit union members from more than one occupational
group so long as each group has fewer than 3,000 members. The Act also
allows credit unions to make business loans to its members as long as the
total amount of such loans does not exceed 1.75 times the credit union's
actual net worth. This limitation does not apply to credit unions
chartered primarily to make business loans, to serve low-income members,
or as community development financial institutions. Full implementation
of the Act requires issuance of regulations by the NCUA. The Act will
potentially increase the activity of federal credit unions in the
financial marketplace as it presents new opportunities for the federal
credit unions to expand their customer base.
Legal proceedings
At LanXtra's shareholders meeting on January 15, 1999, to consider
the sale of LanXtra's assets to us, Kirk W. Dennis, a LanXtra shareholder
holding 50,000 shares, or 17.45% of its outstanding shares at the time,
voted against the transaction. Under Colorado law, a shareholder voting
against a sale-of-assets transaction has the right to dissent from the
sale and obtain payment of the fair value of the shareholder's shares.
Fair value, in general, means the value of the shares immediately before
the effective date of the corporate action to which the dissenter objects.
We have assumed the liability, if any, of LanXtra to the dissenting
shareholder. On or about March 12, 1999, Mr. Dennis demanded payment for
the value of his 50,000 shares immediately before the effective date of
the asset sale which he asserted to be $250,000. Because we could not
reach an agreement with Mr. Dennis as to the fair value of his shares, we
filed a lawsuit against him, as we were required to do under Colorado law,
on June 1, 1999 to resolve the matter. The case is titled LANXTRA, INC.
V. KIRK W. DENNIS, Case No. 99 CV 3583 in the District Court, City and
County of Denver, Colorado. While we could be required to pay him the
fair value of his shares as determined in that proceeding, we believe that
the value paid on account of these shares under the asset purchase
agreement is greater than the amount which he could recover under Colorado
law and substantially less than the current value of the shares. Because
of that, we have not reserved any funds to cover payment of the liability.
If Mr. Dennis nevertheless obtains an award of a substantial amount as
fair value, it could have a materially adverse effect on our financial
condition. Further, a payment to this dissenting shareholder could result
in the transaction in which we purchased the business of LanXtra becoming
a taxable transaction, which could expose us to significant tax liability.
Two former employees have filed claims against us with the Denver
office of the Equal Employment Opportunity Commission alleging gender
discrimination. We believe there is no factual basis for the claims and
we intend to vigorously defend them.
Company history
We were originally incorporated under the name Network Acquisitions,
Inc. in August 1998 for the purpose of acquiring the assets and business
operations of LanXtra, Inc. LanXtra was incorporated in June 1992 under
the name Sigmacom Corporation and was originally engaged in the business
of integrating computer networks and communications technologies for large
business and government clients. In 1997, LanXtra created a software
development division to develop network-based financial services software
for credit unions. In December 1997, LanXtra sold its network integration
business. Using funds received in the sale, the software development
group continued as a start-up, and began building the business we
eventually acquired in 1999. On January 27, 1998, LanXtra changed its
name from Sigmacom Corporation to Cavion Technologies, Inc., and, on
February 1, 1999, to LanXtra, Inc. The assets of LanXtra were transferred
to a newly-formed company called Zutano, LLC on July 1, 1999 and LanXtra
was dissolved on July 2, 1999.
Prior to our acquisition of substantially all of the assets and
business operations of LanXtra, including the assumption of LanXtra's
liabilities, we did not conduct any business operations except preparation
for the acquisition, including providing bridge funding to LanXtra with
funds raised through a private placement of promissory notes and related
warrants. The definitive purchase agreement between us and LanXtra was
signed on December 31, 1998, and closed on February 1, 1999. On February
1, 1999, we changed our name to Cavion Technologies, Inc. and began to
conduct some of our business under the trade name cavion.com.
Management
----------
<TABLE>
<CAPTION>
Executive officers and directors
- --------------------------------
<S> <C> <C>
Name Age Position
---- --- --------
David J. Selina 50 President,
Chief Operating Officer, Chief
Executive Officer and Director
Marshall E. Aster 46 Chief Financial Officer
Jeffrey W. Marshall 34 Vice
President of Software Development
and Director
Andrew I. Telsey 46 Director
Stephen B. Friedman 58 Director
John R. Evans 45 Director
Key employees
- -------------
Name Age Position
---- --- --------
Daniel W. Dudley 40 Vice
President of E-Commerce
Christopher Knauer 33 Vice
President of Network Services
Marvin C. Umholtz 48 Vice
President of Sales & Marketing
</TABLE>
DAVID J. SELINA. Mr. Selina has served as our president, chief
operating officer and a director since February 1, 1999. He was also
appointed as our chief executive officer and chairman of the board on
March 19, 1999. Mr. Selina was the president and chief operating officer
of LanXtra, Inc. from December 1997, and a director from January 1998,
until that company's dissolution in July, 1999. Mr. Selina is a manager
of Zutano LLC, a company formed in May 1999 to hold the assets of LanXtra,
Inc. From June 1995 to June 1997, Mr. Selina was the president and CEO of
Lasertec, Inc., a mailing and fulfillment operation in Auburn Hills,
Michigan. He was the regional manager of the Credit Union Services
Division for Electronic Data Systems from November 1993 to June 1995. At
EDS, Mr. Selina was responsible for five separate data processing products
serving credit unions. In 1993, Mr. Selina participated in the sale of
World Computer Corporation, a $23 million company, to Electronic Data
Systems. World Computer was a leading provider of data processing systems
and services to credit unions throughout the U.S. and Canada. Mr. Selina
held various management positions, including president and chief executive
officer, at World Computer, from March 1986 to November 1993. Mr. Selina
received his education at Henry Ford Community College and Oakland
University, both located in southeastern Michigan, between 1970 and 1976.
MARSHALL E. ASTER. Mr. Aster became our chief financial officer on
March 8, 1999 and our secretary on March 22, 1999. Mr. Aster was the
chief financial officer at Intertech Plastics, Inc., a plastics
manufacturer in Denver, Colorado from May 1997 to July 1998. Prior to
that time, he served in the positions of vice president of Finance and
Administration and senior vice president of Finance and Administration at
EDI, Inc., a technology based information service located in Los Angeles,
California, from October 1989 until May 1997. Mr. Aster also served in
the positions of director, vice president and senior vice president of
Corporate Financial Planning at Lorimar-Telepictures Corporation, an
entertainment company, from March 1984 to October 1989. He is a member of
AICPA and Colorado Society of CPAs. He is also a director for the
Financial Executive Institute's Rocky Mountain Chapter. He received a
Bachelor of Science in accounting in 1975 from the State University of New
York in Binghamton, New York.
JEFFREY W. MARSHALL. Mr. Marshall has served as our vice president
of Software Development since February 1, 1999. He became one of our
directors on May 27, 1999. He was the vice president of Software
Development at LanXtra, Inc. from December 1997 until he joined us. Prior
to his promotion to vice president at LanXtra, he was a software engineer
since July 1996. At LanXtra, Mr. Marshall was responsible for the design
and development of Internet software interfaces including, transactional
banking, bill paying, smart cards and multimedia kiosks. Mr. Marshall was
a programmer for Chemical Waste Management, a waste treatment concern in
Denver, Colorado from September 1994 to July 1996. At Chemical Waste
Management, he developed lab database software and technical services
billing software. From August 1993 to September 1994, Mr. Marshall
developed relational database software for Williams Thatcher Rand/Milliman
& Robertson, actuarial consultants in Denver, Colorado. He received a
degree in mathematics from Colorado State University in 1991.
ANDREW I. TELSEY. Mr. Telsey has served as one of our directors
since January 1, 1999. He also served as our president, secretary and
treasurer from January 1, 1999 to February 1, 1999. Since 1984, Mr.
Telsey has been employed by Andrew I. Telsey, P.C., a private legal
practice founded by Mr. Telsey that same year. Mr. Telsey's firm
emphasizes business law, including transactions, securities compliance
matters, and mergers and acquisitions. From January 1997 to the present,
Mr. Telsey has been the president, a director and the sole shareholder of
Venture Funding, Ltd., a privately held investment banking firm, whose
primary activities include identifying companies exiting their development
stage, providing funding for such companies and taking companies into the
public market. Venture Funding, Ltd. is our largest shareholder. Mr.
Telsey is an officer and director of one reporting company under the 1934
Act, Mully Corp., a Nevada company which has not commenced operations.
Between 1986 and 1988, Mr. Telsey served as president and director of
International Financial Consultants, Ltd., a privately held corporation
which prepared feasibility studies along international standards and
performed due diligence efforts on behalf of international entities
interested in financing commercial and residential real estate projects
and acquiring businesses in North America. Mr. Telsey received a Bachelor
of Arts degree in politics and a New York teaching certificate from Ithaca
College in 1975 and a Juris Doctorate degree from Syracuse University in
1979.
STEPHEN B. FRIEDMAN. Mr. Friedman became one of our directors on
April 1, 1999. He has been a business consultant to various companies
from January 1997 to the present. Mr. Friedman was the president of the
Asia/Pacific division of American Express Company, a travel related
service company located in Tokyo and Hong Kong from July 1993 to December
1996. Prior to that time he served in various executive positions at
American Express from October 1978 to June 1993. Mr. Friedman was the
vice president and general counsel at Carte Blanche Corporation, a credit
card company located in Los Angeles, California, from 1969 to 1978 and
corporate counsel for the Securities Division of the California Department
of Corporations from 1967 to 1969. He received A.B. in political science
from the University of California at Los Angeles in 1963 and L.L.B. degree
from the same University in 1966.
JOHN R. EVANS. Mr. Evans became one of our directors on October 25,
1999. He is one of the founders of Convergent Communications, Inc. in
Englewood, Colorado, where he has served as it chief executive officer and
chairman of the board since 1995. Prior to that time, he served as the
chief financial officer and executive vice president of ICG
Communications, Inc. in Englewood from 1991 until December 1995. Before
joining ICG, Mr. Evans was the controller of Shaw Industries for three
years. He held various senior accounting and treasury management
positions for five years with Northern Telecom Canada Ltd. in Lakewood,
Colorado, including strategic financial planning, analysis and budgeting,
and held various audit and management information systems positions during
six years with Coopers & Lybrand in Toronto, Canada. He received a
Bachelor of Commerce Degree from McMaster University in Hamilton, Ontario
in 1978 and became a Canadian chartered accountant in 1982.
DANIEL W. DUDLEY. Mr. Dudley became our vice president of Affinity
Products on June 1, 1999. From April 1997 to May, 1999, Mr. Dudley was
the senior vice president and general manager at SkyTeller, L.L.C. in
Denver, Colorado, where he was responsible for the development and
implementation of that company's Global Distribution System and Internet
foreign currency businesses. From December 1991, he was director of
Performance Consulting at The Polk Company in Denver, providing advanced
technologies consulting to direct marketing companies. In January 1995,
The Polk Company promoted him to vice president of List and Data Products,
with strategic responsibility for leading database products, and he served
in that capacity until April 1997. Mr. Dudley received his B.B.A. in
finance in 1982 and his M.S. in operations research in 1990, both from The
George Washington University in Washington, D.C.
CHRISTOPHER KNAUER. Mr. Knauer became our vice president of Network
Services on August 2, 1999. From January 1999 to July 1999, Mr. Knauer
was a senior manager of Internet Customer Implementation Management at
Level 3 Communications in Broomfield, Colorado, where he helped streamline
processes for faster flow-through provisioning and project management of
implementing Internet provider products. From November 1997 to December
1998, Mr. Knauer worked for Qwest Communications in Denver, Colorado,
where he served as a senior manager of Technical Services until he was
promoted to director of Data Center Engineering in May 1998. At Qwest he
was involved with the design of LAN and infrastructure requirements for
nationwide Internet provider center rollout. Prior to that time, from
April 1996 to November 1997, Mr. Knauer was the systems administrator at
SuperNet which was acquired by Qwest. His earlier career was involved
with broadcasting companies, the last of which was Secret Communications
in Denver, Colorado, where he was the manager of Information Services from
March 1994 until April 1996. At Secret he worked with the design and
rollout of internal network systems, implementation of one of the first
media websites in the country and managed the NT/Linux/Novell network.
Mr. Knauer received his education in communications at DePauw University
in Greencastle, Indiana.
MARVIN C. UMHOLTZ. Mr. Umholtz became our vice president of Sales &
Marketing on September 1, 1999. From April 1999 until his promotion to
vice president he served as our eastern region sales manager. From
October 1997 to April 1999, Mr. Umholtz was an independent consultant and
strategic planner serving credit unions, credit union service
organizations and credit union vendors. From April 1990 to September
1997, he worked for the Michigan Credit Union League and its subsidiary,
CUcorp, in Lansing and Plymouth, Michigan. While there he served as
senior vice president of the Government and Public Affairs Group until he
was promoted to executive vice president and chief operating officer of
Association Services in June 1992. Mr. Umholtz also served in the same
positions at CUcorp between November 1994 until September 1997. In these
positions he administered a correspondent credit and debit card program,
marketed insurance and financial products to credit unions to serve their
members and customers, launched the Michigan credit union electronic funds
transfer think tank, and represented the association and its member credit
unions with state and federal regulators, lawmakers and the media. Mr.
Umholtz received his education in communications and political science
from the University of Kansas in Lawrence, Kansas.
COMMITTEES OF BOARD OF DIRECTORS
Until December 16, 1999, the board of directors acted as our
compensation committee. On that date, Messrs. Friedman and Evans were
appointed as members of the compensation committee by the board. They are
persons who qualify to serve on the committee under the provisions of Rule
16b-3 of the Securities Exchange Act of 1934 and Treasury Regulation
Section 1.162-27(e)(3). The compensation committee evaluates our
compensation policies and administers our Equity Incentive Plan. The
audit committee will review the scope of our audit, the engagement of our
independent auditors and their audit reports. The audit committee will
also meet with the financial staff to review accounting procedures and
reports. The audit committee currently consists of Messrs. Telsey,
Friedman and Evans.
DIRECTOR COMPENSATION
While we do not pay directors cash compensation, they are reimbursed
for the expenses they incur in attending meetings of the board or board
committees. Directors may receive options to purchase common stock
awarded under our Equity Incentive Plan at the discretion of the
compensation committee. Mr. Telsey was granted a ten year option to
purchase 27,500 shares on March 19, 1999, subject to vesting of 6,875
shares at the end of each calendar quarter beginning June 30, 1999. Mr.
Friedman was granted a ten year option to purchase 27,500 shares on April
1, 1999 subject to the same vesting schedule as Mr. Telsey. All of their
options were granted at the private placement price of $3.00 per share.
Mr. Evans was granted a ten year option, at $6.50 per share, the price per
share of the shares sold in our initial public offering, to purchase
27,500 shares on October 25, 1999, subject to vesting of 6,875 shares at
the end of each calendar quarter beginning December 31, 1999.
Executive Compensation
----------------------
The following table sets forth information for the last three fiscal
years ended December 31, concerning compensation we paid to the chief
executive officer and the other two most highly compensated executive
officers we employed during such fiscal years.
Summary compensation table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
Fiscal Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ------ -------- ----- ------------
<S> <C> <C> <C> <C>
David J. Selina 1999 $120,083 -0- -0-
President, Chief Executive 1998 $105,402 -0- -0-
Officer and Chief 1997 $ 8,333 -0- -0-
Operating Officer
Jeffrey W. Marshall 1999 $113,833 -0- -0-
Vice President of 1998 $ 76,333 -0- -0-
Software Development 1997 $ 56,426 -0- -0-
Craig E. Lassen 1999 $ 37,369 -0- $35,000
Former Chairman of the Board 1998 $ 75,481 -0- -0-
and Chief Executive Officer 1997 $ 68,747 -0- -0-
</TABLE>
o The compensation paid to Mr. Selina in 1997, 1998 and the first
month of 1999 was paid by LanXtra, Inc. He became employed by
LanXtra in December 1997 and payment of the amount reported for
1997 was deferred until January 1998. Mr. Selina did not become
an officer of cavion.com until February 1, 1999.
o The compensation paid to Mr. Marshall in 1997, 1998 and the
first month of 1999 was paid by LanXtra. Mr. Marshall did not
become an officer of cavion.com until February 1, 1999.
o The compensation paid to Mr. Lassen in 1997, 1998 and the first
month of 1999 was paid by LanXtra. Mr. Lassen did not become an
officer of cavion.com until February 1, 1999. His resignation
as an officer and as a director of cavion.com was effective
March 18, 1999. The other annual compensation for Mr. Lassen
consists of payments for consulting services.
The named executive officers did not receive perquisites or other
personal benefits the aggregate annual amount of which was the lesser of
either $50,000 or 10% of the total of annual salary and bonus reported for
such executive officer.
Option/SAR grants in last fiscal year
-------------------------------------
The following table sets forth the information concerning individual
grants of stock options and appreciation rights during the last fiscal
year to each of the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of
Securities Total Options/ Exercise
Underlying SARS Granted to or Base
Options/SARs Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
<S> <C> <C> <C> <C>
David J. Selina 150,000 35% $3.00 3-19-09
Jeffrey W. Marshall 50,000 12% $3.00 3-19-09
Craig E. Lassen -0- 0% N/A N/A
</TABLE>
o Of the options granted to Mr. Selina, 66,666 were incentive
stock options and 83,334 were nonqualified stock options.
o All of Mr. Marshall's options were incentive stock options.
Aggregated option/SAR exercises in last fiscal year and
fiscal year end option/SAR values
The following table sets forth information concerning each exercise
of stock options during the last fiscal year by each of the named
executive officers and the fiscal year end value of unexercised options:
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options/SARs Options/SARs
on Value at Fiscal at Fiscal
Exercise(#) Realized Year-End(#) Year-End($)(1)
Exercisable/ Exercisable/
Unexercisable Unexercisable
<S> <C> <C> <C> <C>
D.J. Selina -0- $0 50,000/100,000 $237,500/$475,000
J.W. Marshall -0- $0 16,667/33,333 $79,168/$158,332
C.E. Lassen -0- $0 N/A N/A
</TABLE>
To determine the values of unexercised in-the-money options described
above, we used the closing price of the Class A common stock on
December 31, 1999 of $7.75 as quoted on the Nasdaq SmallCap Market,
minus the exercise price of $3.00, times the options which were
either exercisable or the unvested options which were not exercisable
on that date.
Employment agreements
- ---------------------
Under an employment agreement dated February 1, 1999, David J. Selina
agreed to serve as our president and a director. Under the agreement, Mr.
Selina receives a base salary of $125,000 per year, participation in a
cash bonus pool based upon our business goals and profitability as
determined by disinterested members of our board of directors, as well as
other employee benefits. Effective March 1, 2000, our compensation
committee increased Mr. Selina's salary to $160,000 per year.
Marshall E. Aster agreed to serve as our chief financial officer
under an employment agreement effective March 8, 1999. Under the
agreement, Mr. Aster receives a base salary of $105,000, participation in
the bonus pool described above, and other employee benefits. Effective
March 1, 2000, our compensation committee increased Mr. Aster's salary to
$120,000 per year.
Under an employment agreement dated February 1, 1999, Jeffrey W.
Marshall agreed to be our vice president of Software Development at a base
salary of $100,000 per year. Mr. Marshall is entitled to participate in
the bonus pool described above, as well as other employee benefits.
Effective May 1, 1999, our board increased Mr. Marshall's salary to
$125,000 per year, and effective March 1, 2000, his salary was increased
by our compensation committee to $131,000 per year.
Under all of these employment contracts, if any executive is
terminated, other than for dissolution of cavion.com, death, disability or
cause, or the executive resigns for good reason within three months after
a change of control of cavion.com, the executive will be entitled to
severance compensation. Severance pay is equal to twelve months of base
salary as in effect at the time of termination, except for Mr. Aster,
whose severance pay is equal to six months of base salary, increasing to
twelve months on the first anniversary of employment if cavion.com is
profitable on an after-tax basis at that time or, if it is not, on the
second anniversary of employment. Effective March 1, 2000, our
compensation committee agreed that in the case of a change of control, Mr.
Aster's severance pay would be equal to twelve months of his base salary
at the time of termination.
Craig E. Lassen agreed to serve as our chairman of the board and
chief executive officer under an employment agreement dated February 1,
1999. Under the agreement, Mr. Lassen was to receive a base salary of
$125,000, participation in the bonus pool described above, and other
employee benefits. Mr. Lassen's resignation as chairman of the board,
chief executive officer and a director was effective March 18, 1999. His
resignation as an employee was effective April 16, 1999. In June 1999 we
entered into an agreement with Mr. Lassen under which he will provide up
to 360 hours of consulting services relating to our business generally,
including telecommunications matters, until April 15, 2000. He will
receive a total of $75,000 as payment for his services.
In addition, Mr. Selina, Mr. Aster, Mr. Marshall and Mr. Lassen each
agreed under their employment contracts to protect our confidential
information, to refrain from soliciting our customers or employees for a
competing business, and to assign to us all rights in intellectual
property developed during the term of employment that relates to our
business. These obligations survive termination of employment for periods
of one to three years, and in some cases longer.
EQUITY INCENTIVE PLAN
Our board of directors adopted the Equity Incentive Plan as of March
19, 1999. The Plan provides for grants of incentive stock options,
nonqualified stock options, restricted stock and stock appreciation rights
to our designated employees, officers, directors, advisors and independent
contractors. By encouraging stock ownership, we seek to motivate such
individuals to participate in the increased value of cavion.com which
their effort, initiative, and skill have helped produce.
GENERAL. The Plan authorizes up to 995,000 shares of common stock
for issuance under the terms of the Plan. No more than 250,000 shares in
the aggregate may be granted to any individual in any three year period.
If options granted under the Plan expire or are terminated for any reason
without being exercised, or shares of restricted stock are forfeited, the
shares of common stock underlying such grant will again be available for
purposes of the Plan.
ADMINISTRATION OF THE PLAN. On December 16, 1999, the compensation
committee of the board of directors was appointed and now administers and
interprets the Plan. Prior to that date, the board of directors was
acting as our compensation committee. The compensation committee consists
of two directors, Stephen B. Friedman and John R. Evans, each of whom is a
"non-employee director" as defined by Rule 16b-3 under the Securities
Exchange Act of 1934, and an "outside director" as defined by Section
162(m) of the Internal Revenue Code of 1986 and related Treasury
regulations. The compensation committee has the sole authority to:
o determine the individuals to whom grants shall be made under the
Plan
o determine the type, size and terms of the grants to be made to
each such individual
o determine the time when the grants will be made and the duration
of any applicable exercise or restriction period, including the
criteria for vesting and the acceleration of vesting
o determine the total number of shares of common stock available
for grants
o deal with any other matters arising under the Plan
The board of directors, with members of the compensation committee
abstaining, has the authority to make grants under the Plan to members of
the committee and may also establish a formula by which grants will
automatically be made to members of the compensation committee. The
compensation committee has the authority to make grants to members of the
board of directors other than committee members and may also establish a
formula by which grants will automatically be made to board members.
GRANTS. Grants under the Plan may consist of:
o options intended to qualify as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code
o nonqualified stock options that are not intended to so qualify
o restricted stock
o stock appreciation rights
ELIGIBILITY FOR PARTICIPATION. Grants may be made to employees,
officers, directors, advisors and independent contractors of cavion.com
and its subsidiaries, including any non-employee member of the board of
directors. As of the date of this prospectus, 779,500 options were
outstanding under the Plan.
OPTIONS. Incentive stock options may be granted only to officers and
directors who are employees. Nonqualified stock options may be granted to
employees, officers, directors, advisors and independent contractors. The
exercise price of common stock underlying an option will be determined by
the compensation committee and may be equal to, greater than, or less than
the fair market value but in no event less than 50% of fair market value;
provided that:
o the exercise price of an incentive stock option shall be equal to
or greater than the fair market value of a share of common stock
on the date such incentive stock option is granted
o the exercise price of an incentive stock option granted to an
employee who owns more than 10% of the common stock must not be
less than 110% of the fair market value of the underlying shares
of common stock on the date of grant
The participant may pay the exercise price:
o in cash
o by delivering shares of common stock owned by the participant and
having a fair market value on the date of exercise equal to the
exercise price of the grant
o by such other method as the compensation committee shall approve,
including payment through a broker in accordance with procedures
permitted by Regulation T of the Federal Reserve Board
Options vest according to the terms and conditions determined by the
compensation committee.
The compensation committee determines the term of each option up to a
maximum of ten years from the date of grant except that the term of an
incentive stock option granted to an employee who owns more than 10% of
the common stock may not exceed five years from the date of grant. The
compensation committee may accelerate the exercisability of any or all
outstanding options at any time for any reason.
RESTRICTED STOCK. The compensation committee determines the number
of shares of restricted stock granted to a participant, but may not exceed
the maximum plan limit described above. Grants of restricted stock will
be conditioned on such performance requirements, vesting provisions,
transfer restrictions or other restrictions and conditions as the
compensation committee may determine in its sole discretion. The
restrictions shall remain in force during a restricted period set by the
compensation committee.
STOCK APPRECIATION RIGHTS. The compensation committee may grant a
participant the right to receive, in cash, the amount of any appreciation
in the value of our stock over the exercise price of the stock
appreciation right, which is set by the committee at the time of grant.
The compensation committee has the same discretion to determine the terms
of stock appreciation rights, including exercise price and vesting
schedule, that it has in the case of nonqualified stock options.
TERMINATION OF EMPLOYMENT. If a participant leaves our employment,
other than because of retirement, death or disability, the participant
will forfeit any stock options or stock appreciation rights that are not
yet vested, and any restricted stock for which the restrictions are still
applicable, unless the participant remains as a non-employee director,
advisor or independent contractor.
AMENDMENT AND TERMINATION OF THE PLAN. The compensation committee
may amend or terminate the plan at any time, except that it may not make
any amendment that requires shareholder approval as provided in Rule 16b-3
or Section 162(m) without shareholder approval. The Plan will terminate
on the day immediately preceding the tenth anniversary of its effective
date, unless terminated earlier by the compensation committee.
ACCELERATION OF RIGHTS AND OPTIONS. If our board of directors or
shareholders agree to dispose of all or substantially all of our assets or
stock, any right or option granted will become immediately and fully
exercisable during the period from the date of the agreement to the date
the agreement is consummated or, if earlier, the date the right or option
is terminated in accordance with the Plan. No option or right will be
accelerated if the shareholders immediately before the contemplated
transaction will own 50% or more of the total combined voting power of all
classes of voting stock of the surviving entity (whether it is us or some
other entity) immediately after the transaction.
SECTION 162(M). Under Section 162(m), we may be precluded from
claiming a federal income tax deduction for total remuneration in excess
of $1.0 million paid to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration
would include the value of stock options, restricted stock and stock
appreciation rights granted under the Plan. An exception does exist,
however, for "performance-based compensation," including amounts received
upon the exercise of stock options as provided in a plan approved by
shareholders that meets the requirements of Section 162(m). On March 8,
2000, we asked our shareholders to approve the Plan at our special meeting
of shareholders because, among other reasons, such approval will permit
the grants of options under the Plan to meet the requirements of
"performance-based compensation." Awards of restricted stock generally
will not qualify as "performance-based compensation." The shareholders
approved the Plan at that meeting.
PRINCIPAL SHAREHOLDERS
The following shareholder information about the beneficial ownership
of our common stock, as of the date of this prospectus, provides the
information for:
o each person known by cavion.com to beneficially own more than 5%
of the common stock;
o each of our directors;
o each of our executive officers; and
o our current directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of
shares of
common stock
beneficially Percent of
Name of beneficial owner owned ownership
- ------------------------ ------------ ----------
<S> <C> <C>
Venture Funding, Ltd. 898,602 18.3%
2581 S. Parker Road #720
Aurora, CO 80014
Boutine Capital, LLC 738,370 15.2%
5460 S. Quebec St. #220
Englewood, CO 80111
David J. Selina 314,361 6.4%
7475 Dakin Street #607
Denver, CO 80221
Marshall E. Aster 30,000 <1%
7475 Dakin Street #607
Denver, CO 80221
Jeffrey W. Marshall 248,898 5.0%
7475 Dakin Street #607
Denver, CO 80221
Andrew I. Telsey 940,502 19.1%
2851 S. Parker Road, #720
Aurora, CO 80014
Stephen B. Friedman 27,500 <1%
P.O. Box 8279
Beaver Creek, CO 81620
John R. Evans 29,130 <1%
4260 E. Plum Court
Greenwood Village, CO 80121
Craig E. Lassen 307,305 6.3%
245 Poplar Street
Denver, CO 80220
All directors and executive officers
as a group (6 persons) 1,590,391 30.9%
</TABLE>
In the preceding table:
o The sole shareholder of Venture Funding, Ltd. is Andrew I.
Telsey, one of our directors.
o The sole member of Boutine Capital, LLC is Julie Graham who is
the spouse of Gary Graham, the president of First Capital
Investments, Inc., the agent for our 1998 private placement of
promissory notes and warrants, and an agent for our August 1999
private placement of promissory notes and warrants. Julie Graham
is also the sole shareholder of First Capital Investments, Inc.
o The shares owned by Messrs. Selina and Marshall include 3,306 and
5,509 shares of our Class B common stock, respectively. The
Class B shares are currently convertible into the same number of
shares of Class A common stock.
o Mr. Telsey's shares include 898,602 shares owned by Venture
Funding, Ltd. of which Mr. Telsey is the sole shareholder. They
also include 14,400 shares owned by trusts for which Mr. Telsey
is the trustee. Mr. Telsey disclaims beneficial ownership of the
shares owned by each of the trusts.
o Mr. Evans' ownership does not include 67,603 shares of common
stock owned Convergent Communications Services, Inc. Convergent
is a wholly-owned subsidiary of Convergent Communications, Inc.,
of which Mr. Evans is the chief executive officer, chairman of
the board and a principal shareholder. Mr. Evans disclaims
beneficial ownership of the shares.
o The shares owned by the executive officers and directors include
or consist of the following shares acquirable upon exercise of
stock options which are exercisable within 60 days of this
prospectus: Mr. Selina 100,000, Mr. Aster 30,000, Mr. Marshall
33,334, Mr. Telsey 27,500, Mr. Friedman 27,500 and Mr. Evans
13,750.
Unless otherwise noted, we believe all persons named in the table
have sole voting and investment power with respect to all shares
beneficially owned by them.
Change in control
- -----------------
As far as is known to our board of directors or management, there are
no arrangements, including any pledge by any person of securities of
cavion.com, the operation of which might, at a subsequent date, result in
a change in control of cavion.com.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 19,970,000 shares of Class A
common stock, $.0001 par value per share; 30,000 shares of Class B common
stock, $.0001 par value per share; and 10,000,000 shares of preferred
stock, par value $.0001 per share.
Common stock
- ------------
The Class A and Class B common stock are identical in all respects
except that the Class B common stock is subject to an option, referred to
as a put, for the holder to sell the shares to us at $7.00 per share, or,
in the alternative, a parallel option, referred to as a call, for us to
buy the shares from the holder at $7.00 per share. According to the terms
of the Class B shares, the put was exercisable only during a 60-day
exercise period beginning on the date that was 30 days after the 100
Credit Union Date. The call was exercisable at any time after issuance of
the Class B common stock and prior to the end of the exercise period. If
at the end of the puts' exercise period neither the put nor the call has
been exercised for any shares of Class B common stock, then each share of
Class B common stock will automatically convert into one share of Class A
common stock, effective on the day after the last day of the exercise
period. After the closing of our initial public offering, we offered the
Class B shareholders the option to immediately redeem their Class B shares
at $7.00 per share or to convert each Class B share into one share of our
Class A common stock. On December 31, 1999, we reached our 100 Credit
Union Date and sent out exercise notices to the holders of our Class B
shares to inform them that the exercise period began on January 30, 2000.
The holders of the Class B shares can either have us redeem their shares
by March 30, 2000, or those shares will automatically be converted into
the same number of Class A shares on March 31, 2000. The authorization
for issuance of the Class B common stock was automatically terminated when
the exercise notices were issued for the Class B common stock. As of the
date of this prospectus, none of the Class B shares had been redeemed or
converted. Holders of the common stock are entitled to receive, as, when
and if declared by the board of directors from time to time, such
dividends and other distributions in cash, stock or property from our
assets or funds legally available for such purposes, subject to any
dividend preferences that may be attributable to preferred stock that is
outstanding. Holders of the common stock are entitled to one vote for
each share held of record on all matters on which shareholders may vote.
There are no preemptive, conversion, redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of
common stock are fully paid and nonassessable. In the event of our
liquidation, dissolution or winding up, holders of common stock are
entitled to share ratably in the assets available for distribution.
Preferred stock
- ---------------
Our board of directors, without further action by the shareholders,
is authorized to issue an aggregate of 10,000,000 shares of preferred
stock in one or more series. Our board of directors may, without
shareholder approval, determine the dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences. No such preferred stock may have voting
rights except as provided by Section 7-110-104 of Colorado law which
permits voting by the holders of any class of shares on amendments to
articles of incorporation that would affect the rights of holders of such
class. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control without further action of the
shareholders. The board of directors authorized the issuance of 770,000
shares of nonvoting Series A preferred stock in February 1999 of which
700,000 were issued to accredited investors in March and April 1999 in a
private offering. The other 70,000 shares were subject to preferred stock
purchase warrants issued to NTB as the placement agent for the private
placement. The preferred stock purchase warrants were terminated at NTB's
request. Each share of preferred stock was convertible at any time at the
holder's option into one share of Class A common stock. Automatic
conversion of the preferred stock occurred on November 3, 1999, the
closing of our initial public offering. Commencing on the date of
issuance of the preferred stock through the date of conversion, each
holder received, when, as and if declared by the board of directors,
cumulative preferential dividends at the rate of 5% per year. Dividends
were payable quarterly either in cash or in shares of Class A common stock
at our option. All accrued and unpaid dividends were paid upon
conversion. Upon any liquidation, dissolution or winding up of
cavion.com, whether voluntary or involuntary, the holders of the preferred
stock were entitled to receive $6.00 per share, plus accrued and unpaid
dividends on the date fixed for distribution of assets prior to and in
preference to any distribution or payment of assets to holders of our
common stock. Since the conversion of the preferred stock into common
stock occurred upon closing of our initial public offering, this right was
not effected. All of the 700,000 shares of Class A common stock into
which the outstanding shares of preferred stock were converted have been
registered in a Registration Statement on Form SB-2 which was declared
effective by the SEC on February 4, 2000. Each purchaser of our preferred
stock had to agree that their registered shares of common stock could not
be sold for nine months from the effective date of our initial public
offering prospectus, October 29, 1999, without the written consent of
Neidiger, Tucker, Bruner, Inc., the lead underwriter for that offering.
Preferred stock warrant
- -----------------------
As of June 30, 1999, we had warrants outstanding for the purchase of
70,000 shares of our preferred stock exercisable at $3.00 per share for a
period of five years. The warrants were issued to NTB in connection with
the February 1999 private placement of preferred stock described in the
preceding paragraph. The preferred stock warrants were terminated at
NTB's request.
Common stock warrants
- ---------------------
We have warrants outstanding for the purchase of 30,000 shares of our
Class A common stock. The warrants are exercisable for a five year period
beginning on November 3, 1999, the closing for our initial public
offering. The warrants are exercisable at $6.50 per share, the price per
share of the shares offered in our initial public offering. The warrants
were issued in our August 1999 private placement of notes and warrants.
We registered the 30,000 shares of common stock underlying the warrants in
a Registration Statement on Form SB-2 which was declared effective by the
SEC on February 4, 2000. The subscription agreement entered into between
us and the subscribers contains a provision under which the subscriber
must indemnify us for any material misstatement and omissions made by the
subscriber in connection with this prospectus. In the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and so
cannot be enforced. Therefore, in the event of a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person of
cavion.com in the successful defense of any action, suit or proceeding) in
connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification is against public policy as expressed in the
Securities Act and we will be governed by the final adjudication of such
issue.
We also have warrants outstanding for the purchase of 20,500 shares
of our Class A common stock. The warrants are exercisable for a five year
period beginning on February 17, 2000 at $13.20 per share. The warrants
were issued to the agent in connection with our February 2000 private
placement of 205,000 shares of common stock. We agreed to register all of
the 20,500 shares of common stock for which the warrants are exercisable
and they are being offered in this prospectus.
In connection with our initial public offering, we sold, for $100, a
representative warrant entitling NTB or its assigns to purchase 120,000
shares of our common stock. The warrant was divided at closing and
assigned to the persons designated by NTB. The representative's warrants
are exercisable for a period of four years beginning one year after
October 29, 1999. The representative's warrants contain anti-dilution
provisions and permit the cashless exercise of the warrants utilizing the
value of the warrants being surrendered. The exercise price of each of
the representative's warrants is $8.125, 125% of the initial public
offering price. The warrants are not redeemable by us. We have agreed
with NTB and certain of its assigns that there will be a net exercise by
them of 112,500 of the warrants at $19.50 per share on November 3, 2000,
which will result in the issuance by us of 65,625 shares. In exchange,
NTB gave up its right of refusal to act as our investment banker for
future offerings, which right was granted to it in connection with our
February 1999 private placement. The representative's warrants and the
underlying common shares are restricted from sale, transfer, assignment or
hypothecation for three years after October 29, 1999, except to officers
of NTB, co-underwriters, selling group members, and their officers or
partners. After the three year period, the warrants and the underlying
shares of common stock will be transferable provided such transfer is in
accordance with the provisions of the Securities Act. All of the 120,000
shares of common stock for which the warrants are exercisable are being
offered in this prospectus. We may find it more difficult to raise
additional equity capital while the representative's warrants and/or the
shares are outstanding.
Shareholder action by written consent
- -------------------------------------
Our bylaws provide that any action that may be taken at a meeting of
the shareholders may be taken without a meeting if such action is
authorized by the unanimous written consent of all shareholders entitled
to vote at a meeting for such purposes. Since cavion.com has numerous
shareholders, it is not likely that action by unanimous written consent of
the shareholders is feasible.
Special meetings
- ----------------
Our bylaws provide that special meetings of our shareholders may be
called by the board, by our president or by one or more written demands
for the meeting, stating the purposes for which it is to be held, signed
and dated by the holders of shares representing at least 10 percent of all
the votes entitled to be cast on any issue proposed to be considered at
the meeting. This provision may make it difficult for shareholders to
take action opposed by the board.
Amendments to our bylaws
- ------------------------
Our bylaws provide that they may be amended or repealed by the
shareholders or, except to the extent limited by Colorado law, by the
board of directors.
Indemnification of directors and officers
- -----------------------------------------
The Colorado Business Corporation Act provides the power to indemnify
and pay the litigation expenses of any officer, director or agent who is
made a party to any proceeding. Our articles of incorporation also
provide for indemnification of our officers and directors for liabilities
arising out of their service to us to the maximum extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling
cavion.com as provided in the foregoing provisions, we have been informed
that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and thus cannot be
enforced.
Our bylaws provide that we shall indemnify any person against all
liability and expense incurred by any reason of the person being or having
been a director or officer of cavion.com to the full extent and in any
manner that directors may be indemnified under Colorado law, our bylaws, a
resolution of the board of directors or shareholders, by contract or
otherwise so long as such provision is legally permissible. At the
discretion of the board of directors, we may also indemnify any employee,
fiduciary or agent who is not a director or officer to the same extent as
a director or officer.
Our bylaws authorize us to take steps to ensure that all persons
entitled to the indemnification are properly indemnified, including if the
board of directors so determines, purchasing and maintaining insurance.
We have also entered into indemnification agreements with our
officers and directors to indemnify them and to advance expenses to the
fullest extent permitted by law either in connection with the
investigation, defense, adjudication, settlement or appeal of a proceeding
or in connection with establishing or enforcing a right to indemnification
or advancement of expenses. In addition, the agreement provides that no
claim or cause of action may be asserted by us against such director or
officer after two years from the date of the alleged act or omission,
provided that if in fact the person has fraudulently concealed the facts,
then no claim or cause of action may be asserted after two years from the
earlier of the date we discover the facts or the date we should have
discovered such facts by the exercise of reasonable diligence. The term
of the agreement and our obligations apply while the person is our agent
and continues so long as the person is subject to any claim by reason of
the fact that he or she served as our agent.
Limitation of liability
- -----------------------
Our articles of incorporation provide that none of our directors
shall be personally liable to us or our shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty
o for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law
o for the payment of unlawful dividends and specified other acts
prohibited by Colorado corporate law
o for any transaction resulting in receipt by the director of an
improper personal benefit
We have obtained directors and officers' liability insurance to
provide directors and officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, error and other
wrongful acts. At present, there is no material pending litigation or
proceeding, and we are not aware of any material threatened litigation or
proceeding, involving any director, officer, employee or agent where
indemnification will be required or permitted under the articles of
incorporation, our bylaws or the indemnification agreements.
Transfer agent
- --------------
The transfer agent for our common stock is American Securities
Transfer & Trust, Inc. in Lakewood, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we have 4,902,326 shares of common
stock outstanding. We agreed to register the 205,000 shares of common
stock which were sold in our February 17, 2000 private placement and the
20,500 shares underlying the warrants issued to First Capital Investments,
Inc. as the selling agent in connection with that offering. In addition,
we are including the 120,000 shares underlying the representative's
warrants issued in connection with our initial public offering. Assuming
this registration statement has become effective and subject to the lock-
up for the shares underlying the representative's warrants, these holders
will be able to freely trade their shares of common stock in the public
market, unless such shares are held by "affiliates," as that term is
defined in Rule 144(a) under the Securities Act of 1933. For purposes of
Rule 144, an "affiliate" of an issuer is a person that, directly or
indirectly through one or more intermediaries, controls, or is controlled
by or is under common control with, such issuer.
We recently registered an aggregate of 831,891 shares of common stock
in a Registration Statement on Form SB-2 which was declared effective on
February 4, 2000. They included 700,000 shares of common stock into which
our Series A preferred stock were converted on November 3, 1999, the
closing date for our initial public offering; 30,000 shares of common
stock into which our August 1999 warrants are exercisable, 28,648 shares
of common stock into which our Class B shares are convertible, 5,640
shares of common stock issued to First Capital Investments, Inc., the
agent for our private placement in August 1998, and 67,603 shares of
common stock issued to Convergent Communications Services, Inc. Almost
all of those selling shareholders agreed not to sell their shares of
common stock, or the shares of common stock into which the warrants or
Class B common stock are exercisable or convertible, for a period of nine
months, or 12 months in the case of affiliates, from October 29, 1999,
without the prior consent of Neidiger, Tucker, Bruner, Inc., the lead
underwriter for our initial public offering. NTB agreed to waive the lock-
up period for the shares of common stock that are issued on conversion of
the Class B shares provided that the shares are traded through NTB at
$7.00 or more per share. Also, as of February 24, 2000, NTB waived the
lock-up for the sale of up to 25% of the shares of common stock held by
those selling shareholders who are not our affiliates. This partial
waiver aggregated approximately 185,000 shares.
We have outstanding 2,919,083 shares of common stock which are
"restricted securities" under the Securities Act. After the expiration of
the lock-up arrangements that have been agreed to by the holders of these
restricted shares, which are described in this section, the restricted
shares may be sold in the public market upon the expiration of specified
holding periods under Rule 144, subject to the volume, manner of sale and
other limitations of Rule 144.
In general, under Rule 144, a person holding restricted securities
for at least one year, may, within any three-month period, sell in
ordinary brokerage transactions, a number of shares equal to one percent
of a company's then outstanding common stock, or the average weekly
trading volume during the four calendar weeks prior to the person's sales.
Sales under Rule 144 are also subject to manner of sale provisions,
notice requirements and the availability of current public information
about us. A shareholder who is not an "affiliate" of ours and who has
held the shares for at least two years, may sell the shares without any
quantity limitations, manner of sale provisions or public information
requirements.
As of the date of this prospectus there were options to purchase
779,500 shares of common stock under our Equity Incentive Plan of which
192,129 are exercisable. An additional 215,000 shares are reserved for
issuance under the Plan. We have registered 750,000 shares issuable or
reserved for issuance under the Plan. We plan to register an additional
245,000 shares, which increase was approved by our board of directors on
February 25, 2000.
In addition, we have granted options to purchase 175,000 shares of
our common stock to Strategic Growth International, Inc. which are not
under the Plan.
Also as of the date of this prospectus there were outstanding
warrants to purchase 170,500 shares of common stock. 30,000 warrants were
issued in connection with our August 1999 private placement of notes and
warrants. 120,000 warrants were issued in connection with our initial
public offering. 20,500 warrants were issued in connection with our
February 2000 private placement of common stock.
In addition, as of the date of this prospectus, there were 28,648
outstanding shares of Class B common stock convertible into our common
stock. The Class B shares were issued in connection with loans made by
the Company in May 1998.
Lock-up arrangements
- --------------------
Along with our officers and directors, all of the holders of 5% or
more of the common stock, or securities convertible into common stock,
have agreed not to offer or sell or contract to dispose of any of their
shares of common stock without the prior written consent of NTB for a
period of 12 months from October 29, 1999. In addition, almost all of the
other shareholders who own shares, or securities convertible into common
stock, prior to our initial public offering, agreed not to offer or sell
or contract to dispose of any of their shares of common stock for a period
of 9 months from October 29, 1999 without such written consent. NTB has
agreed to waive the lock-up period for the shares of common stock that are
issued on conversion of the Class B shares provided that the shares are
traded through NTB at $7.00 or more per share. On February 24, 2000, NTB
waived the lock-up for the sale of up to 25% of the shares of common stock
held by the selling shareholders who are not our affiliates named in our
Registration Statement on Form SB-2 which declared effective by the SEC on
February 4, 2000. This partial waiver aggregated approximately 185,000
shares. Most of these shareholders have also agreed that, for a period of
18 months from October 29, 1999, any public sale of their shares, either
under Rule 144 or otherwise, will be made only in a transaction through
NTB or certain other broker-dealers, provided that NTB's compensation is
competitive with other broker-dealers. Except as provided above, NTB has
no present intention to waive or shorten the period of these lock-up
arrangements. The 205,000 shares sold in our February 2000 private
placement and the 20,500 shares issuable upon exercise of the agent's
warrants issued in connection with that offering are not subject to the
lock-up arrangements with NTB.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our founding shareholders, Venture Funding, Ltd. and Boutine Capital,
LLC acquired 1,100,000, and 900,000 shares, respectively, of our Class A
common stock on August 18, 1998 for $.0001 per share. On December 21,
1998, David Selina and Jeff Marshall, members of our management, and Craig
Lassen, a former member of our management, purchased 208,452 shares each
of Class A common stock for $.01 per share. Their share ownership
subsequently increased to 209,055 shares each as provided in the Agreement
for Post-Closing Adjustments described below.
On September 14, 1998, we entered into a Loan Agreement to loan our
predecessor, LanXtra, Inc., a Colorado corporation, formerly known as
Sigmacom Corporation and Cavion Technologies, Inc., up to $300,000. On
December 29, 1998, cavion.com agreed to lend up to an additional $55,000
under the same terms, and advanced $35,000 of this amount. The loan was
made to fund LanXtra's working capital, promotion and marketing, and
development of proprietary technology and was secured by substantially all
of the assets of LanXtra, including its technology. In connection with
the loan, LanXtra executed a promissory note requiring monthly interest
payments on the unpaid principal balance at an interest rate of 16% per
year, with the entire remaining balance due on March 14, 1999. This loan
was discharged on February 1, 1999, under the terms of the Asset Purchase
Agreement, as described more fully below.
In 1998, we conducted a private placement of securities which raised
$370,000 through the issuance of 15% secured notes due on October 19, 2000
in the aggregate principal amount of $370,000, along with warrants to
purchase 2,400 shares of our Class A common stock for every $20,000 of
note principal at an exercise price of $0.01 per share. As provided in a
security agreement dated October 20, 1998, the notes are secured by
substantially all of our assets, now owned or acquired subsequent to that
date, including cash, equipment, fixtures, general intangibles, and all
products and proceeds of the foregoing collateral, accounts receivable,
inventory, work in process and service contracts receivables. The
October 20, 1998 security agreement contains a covenant which prohibits us
from incurring any other liens on our assets. We raised an additional
$100,000 through this offering in 1999. The warrants were exercisable for
a period of one year after repayment of the Notes. On December 22, 1998,
we accelerated the warrants' exercise period to begin on December 22,
1998. All holders exercised their warrants by February 8, 1999 and all of
the shares purchased have been issued.
We engaged First Capital Investments, Inc., a broker/dealer
registered with the Securities and Exchange Commission, as our exclusive
placement agent and financial advisor for the private placement. We
agreed to pay First Capital commissions of 8% of the gross proceeds of the
offering and reimburse expenses, not to exceed 3% of the gross proceeds of
the offering, and we issued First Capital a warrant to purchase 5,640
shares of Class A common stock, which was exercised on February 8, 1999.
We granted First Capital piggyback registration rights for these shares.
First Capital agreed not to exercise these rights for inclusion of its
shares in our initial public offering. The shares are included in this
offering. First Capital waived any commissions with respect to our 1999
private placement of preferred stock and our initial public offering.
Under the terms of the engagement, for a period of two years after the
closing of our 1998 private placement, First Capital will provide us with
financial advisory services and is entitled to receive 8% of the gross
consideration and/or value attributed to any business combination between
us and a third party that is introduced to us by First Capital or involves
the work product of First Capital. First Capital and NTB agreed that we
will not be required to pay a double commission on future corporate
financing. Julie Graham, the spouse of Gary Graham, is the sole member of
Boutine Capital, LLC, one of our principal shareholders. Gary Graham is a
principal of First Capital and Julie Graham is its sole shareholder.
On December 31, 1998, we entered into an Asset Purchase Agreement to
purchase substantially all the assets and assume the liabilities of
LanXtra. The transaction closed on February 1, 1999. In exchange for the
sale of its assets, LanXtra received:
o 375,214 shares of our Class A common stock, subsequently
increased to 376,299 shares
o 28,648 shares of our Class B common stock, which were issued to
replace LanXtra's nonvoting common stock.
We assumed the following liabilities of LanXtra:
o The obligations reflected on LanXtra's balance sheet and all
accounts payable of LanXtra
o The accrued salaries and benefits of employees that accepted
employment with us
o All obligations and liabilities arising on or after the closing
with respect to LanXtra's assets or business
o The amounts due to us under the loan we made to LanXtra in 1998,
resulting in a discharge of that loan
o Any liability of LanXtra in connection with the threatened
lawsuit described in "Our Business - Legal Proceedings" and
other contingent liabilities described in the Asset Purchase
Agreement
LanXtra was incorporated on June 26, 1992. The founding shareholders
were Craig E. Lassen, Herman Axelrod, and Kirk Dennis. On August 1, 1996,
the founders entered into an Investment Agreement with four investors,
British Far East Holdings, Ltd., William M.B. Berger Living Trust, Martin
Cooper and Fairway Realty Associates, who we call the 1996 Investors, who,
in exchange for LanXtra stock, provided cash collateral in the amount of
$600,000 for LanXtra's commercial loan with US Bank, N.A. made on August
1, 1996. The loan was also secured by an additional $20,000 in cash
collateral provided by LanXtra. As a condition to providing the
collateral for the loan, the 1996 Investors were granted benefits under a
Put Agreement with LanXtra, a Share Escrow Agreement between LanXtra, the
1996 Investors and Norwest Bank Colorado, as escrow agent, a Subordination
Agreement between LanXtra and its founders, and, in the case of one 1996
Investor, an Advisor's Option Agreement, each of which was dated as of
August 1, 1996. Collectively, these agreements were intended to ensure
the reimbursement of the 1996 Investors if LanXtra defaulted on the US
Bank loan and the 1996 Investors' collateral was foreclosed. These
agreements have been terminated as provided in the Termination and
Modification Agreement of September 28, 1998 between LanXtra, its founders
and the 1996 Investors. The Termination and Modification Agreement did
include an obligation for LanXtra to reimburse the 1996 Investors in the
event of foreclosure on their collateral by US Bank.
We borrowed $600,000 from US Bank as provided in the Loan Agreement
of January 18, 1999, which was later amended on March 24, 1999. The
proceeds of the new loan were used to pay off the 1996 loan to LanXtra.
The new loan bore annual interest at the rate of 1.5% over the reference
rate payable monthly beginning on February 28, 1999. The principal of the
loan was required to be paid in a single payment on December 31, 1999.
The loan was secured by $620,000 cash collateral consisting of
certificates of deposit and letters of credit, of which $600,000 was
provided by the 1996 Investors and $20,000 was provided by us. On January
15, 1999, the Termination and Modification Agreement was amended to
provide that upon closing of the Asset Purchase Agreement, the shares of
Class A common stock received by LanXtra as consideration would not be
distributed to its shareholders until our loan with US Bank had been paid
in full or the 1996 Investors had been reimbursed for their collateral.
Upon closing of the Asset Purchase Agreement with LanXtra, we assumed
LanXtra's obligations under the amended Termination and Modification
Agreement with the 1996 Investors. On November 5, 1999, the Loan
Agreement was paid in full and all of the collateral was released.
The LanXtra obligations we assumed also included the transactions
described below. Each of the creditors of these obligations had agreed to
defer repayment until 15 days after the closing of our initial public
offering.
o On July 1 and August 1, 1992, LanXtra executed promissory notes
for $25,000 in favor of Mr. Axelrod and Mr. Lassen, respectively,
at an interest rate of 2% over prime. These notes were
originally secured by the assets of LanXtra which are now owned
by cavion.com. The original principal amounts of these notes
reflected $20,000 in cash loaned by each and $5,000 each of co-
signer liability on a $10,000 credit line at the Bank of Boulder
that LanXtra obtained at its inception. The credit line was paid
in full in August 1996, leaving an aggregate principal balance of
$40,000 on the notes. We assumed the obligation to pay Mr.
Axelrod and Mr. Lassen the principal balance of the notes
together with interest stated above which continued to be paid on
a quarterly basis until the notes were paid in full on November
5, 1999.
o Between September 8, 1997 and October 15, 1997, Herman Axelrod,
the former president and director of LanXtra, and Mr. Lassen,
also a former president and director of LanXtra, made factoring
loans to LanXtra in the amounts of $50,190 and $25,000,
respectively. These loans were secured by an account receivable
for computer network integration work LanXtra performed for
Questar Infocomm and bore interest at the rate of 3% of the loan
amount for the first 30 days, and 1% for each additional 10 days
until the loan was paid in full. Questar disputed the amount of
LanXtra's invoice, and the dispute was settled in September 1998
under which Questar paid LanXtra the sum of $61,780. This amount
was then paid against the factoring loans on September 21, 1998
as follows: $41,238 to Mr. Axelrod and $20,542 to Mr. Lassen
leaving $28,331 due to Mr. Axelrod and $13,441 due to Mr. Lassen.
We assumed these obligations, with no further interest accruing,
and final payments were made on November 5, 1999.
o We assumed the obligation to pay Mr. Lassen $12,500 for unpaid
back salary. Between the months of October 1997 and November
1997, Mr. Lassen agreed to defer payment of salary due to a
shortage of working capital during those months. No interest
accrued on this obligation and it was paid in full on November 5,
1999.
o We assumed the obligation to pay Mr. Axelrod $19,904 for unpaid
back salary. Between the months of September 1997 and December
1997, Mr. Axelrod agreed to defer payment of salary due to a
shortage of working capital during those months. No interest
accrued on this obligation and it was paid in full on November 5,
1999.
o We assumed the obligation to pay Convergent Communications, Inc.
$78,673 for equipment purchased in connection with a customer
network upgrade performed by LanXtra in December 1997, while
Convergent was completing the purchase of LanXtra's network
integration business. We paid Convergent in full for this
obligation on November 5, 1999.
o On May 28, 1998, LanXtra borrowed an aggregate of $150,000 to be
used for working capital from three of its shareholders, British
Far East Holdings, Ltd., Martin Cooper and Fairway Realty
Associates in equal amounts as provided in a Bridge Loan
Agreement. On that same date, LanXtra entered into an Additional
Bridge Loan Agreement with David Selina, Jeff Marshall and Randal
Burtis, to borrow an additional $110,000, for working capital
purposes. Of that amount, $30,000 was borrowed from Mr. Selina,
$50,000 from Mr. Marshall and $30,000 from Mr. Burtis. LanXtra
issued each of these shareholders and employees senior promissory
notes bearing interest at 42% per year, the principal and
interest of which was payable in three equal monthly installments
beginning on November 1, 1998. They also received shares of
LanXtra nonvoting common stock and put options to sell those
shares back to LanXtra at $7.00 a share beginning on January 1,
1999. We assumed LanXtra's obligations under the senior
promissory notes to pay these individuals an aggregate of
$260,000 in principal and $59,480 in interest, which did not
continue to accrue after the closing of the Asset Purchase
Agreement. The notes were paid in full on November 5, 1999. We
assumed LanXtra's obligations under the Put Agreements by issuing
to LanXtra at the closing of the Asset Purchase Agreement, 28,648
shares of our Class B common stock. The terms of our Class B
common stock contain put provisions which are identical to those
in the Put Agreements except that the exercise period for the put
would begin 30 days after our 100 Credit Union Date, and we also
have an option to purchase all or part of the Class B common
stock at a price of $7.00 per share. After completion of our
initial public offering we offered these shareholders the option
to redeem their Class B shares at $7.00 per share, or to convert
each Class B share into one share of our Class A common stock.
On December 31, 1999, we reached our 100 Credit Union Date, so we
sent out exercise notices to the holders of our Class B shares to
inform them that the exercise period began on January 30, 2000.
The holders of the Class B shares can either have us redeem their
shares by March 30, 2000, or those shares will automatically be
converted into the same number of Class A shares on March 31,
2000. As of the date of this prospectus, none of the Class B
shares had been redeemed or converted.
LanXtra conveyed the shares of our Class A and Class B common stock
it received through the Asset Purchase Agreement and the Agreement for
Post-Closing Adjustments to a newly formed limited liability company named
Zutano LLC. Zutano has the same ownership as LanXtra. It held the shares
until most of them were distributed to its members after the completion of
our initial public offering. Management of Zutano retained some shares of
Class A common stock for later distribution.
Beginning in February 1999, we conducted a private placement of our
Series A preferred stock in which we sold 700,000 shares at $3.00 per
share and raised gross proceeds of $2,100,000. In accordance with the
terms of our Series A preferred stock, these shares were automatically
converted into 700,000 shares of Class A common stock on November 3, 1999.
The holders of those converted shares of common stock are entitled to
piggyback registration rights and their shares have been included in this
offering. We engaged Neidiger, Tucker, Bruner, Inc., as our exclusive
placement agent for the offering as provided in a Placement Agent
Agreement dated March 10, 1999. NTB received a placement fee and non-
accountable expense allowance equal to 10% and 2%, respectively, of the
gross proceeds in the offering, and warrants to purchase 70,000 shares of
preferred stock exercisable at $3.00 per share for a term of five years.
The preferred stock purchase warrants were terminated at NTB's request.
NTB had a non-contingent right of first refusal to act as our investment
banker with respect to any public or private offering or sale of any of
our securities, or the securities of any subsidiary, for three years
ending December 22, 2001. In addition, in the event of a closing of any
such offering in the first 24 months in which NTB did not choose to act as
our investment banker, we were required to pay NTB a fee of $200,000 and
issue NTB a warrant in an amount equal to 3% of the securities sold,
exercisable for five years at a purchase price of 120% of the price of the
securities in that offering. We entered into an agreement with NTB and
certain of its assigns that there will be a net exercise by them of
112,500 of the warrants at $19.50 per share on November 3, 2000. In
exchange, NTB gave up its right of refusal to act as our investment banker
in future offerings.
When we closed the Asset Purchase Agreement with LanXtra, our
founding shareholders, Venture Funding, Ltd. and Boutine Capital, LLC,
agreed with LanXtra and our management shareholders, Mr. Selina, Mr.
Marshall and Mr. Lassen, that there would be a post-closing adjustment of
the shares of our Class A common stock held by these parties. Under the
Agreement for Post-Closing Adjustments, Venture Funding and Boutine agreed
to bear the equity cost of bringing us the first $1 million of new equity,
while LanXtra and the management shareholders agreed to share in the
dilution of any additional equity. This agreement was completed as of
April 16, 1999, with the transfer of an aggregate of 2,894 shares of our
Class A common stock from Venture Funding and Boutine to LanXtra and the
management shareholders.
On August 18, 1999, we entered into an agreement with MoneyLine
America, LLC to provide online mortgage lending services for our credit
unions and their members via our network. Fifty percent of MoneyLine
America is owned by Boutine Capital, LLC, a principal shareholder of
cavion.com.
On August 31, 1999, we completed a private placement of promissory
notes and warrants to purchase common stock under which we raised
$300,000. The 14% notes were due on the first to occur of the closing of
our initial public offering, or one year from their issuance. Each
$50,000 note entitled the purchaser to warrants to purchase 5,000 shares
of common stock. The promissory notes were paid in full on November 5,
1999. The warrants are exercisable for a five year period beginning
November 3, 1999. The warrants are exercisable at $6.50, the price per
share of the shares offered in our initial public offering. First Capital
and NTB acted as our placement agents and received a commission of 9%;
totaling $27,000 between them.
We have contracted with Convergent Communications Services, Inc. to
provide connectivity between our network and our customers for a monthly
fee, beginning on October 22, 1999. Under our contract, Convergent
purchased our host site equipment for $286,000. One of our directors,
John R. Evans, is the chief executive officer and chairman of the board of
Convergent Communications, Inc., the parent company of Convergent
Communications Services, Inc. As part of our purchase of LanXtra's assets
in February 1999, we assumed LanXtra's obligation to pay Convergent
Communications, Inc. $78,673 for equipment purchased in connection with a
customer network upgrade performed by LanXtra in December 1997, which
obligation was paid on November 5, 1999. Convergent Communications
Services, Inc. is an owner of Zutano LLC. LanXtra contributed to Zutano
LLC its shares of cavion.com common stock received in the asset purchase
transaction in February 1999. LanXtra also contributed to Zutano its
warrants to purchase 50,000 shares of common stock of Convergent
Communications, Inc. at $15.00 per share, which expired on December 3,
1999. Convergent Communications Services, Inc., as an owner of Zutano,
received a portion of the Class A common stock when Zutano distributed
most of its assets after the completion of our initial public offering.
NTB agreed to provide financial consulting and advisory services to
us upon completion of our initial public offering for a period of two
years for a fee of $48,000, which was paid at the closing on November 3,
1999. We have agreed to pay NTB a fee based on the consideration paid or
received by us or our shareholders or any subsidiary in any transaction,
including mergers, asset sales and acquisitions, accepted by us within 3
years from November 3, 1999, provided NTB introduced the other party to
us. Such fee is based on a sliding scale decreasing from 5% of the first
$3 million of consideration to 1% of any consideration greater than $10
million.
We have also agreed that for a period of two years from October 29,
1999, NTB shall have the right to designate one person as an advisor to
our board of directors. That person will be reimbursed for his expenses
in attending meetings of the board and will receive cash compensation
equal to that received by outside directors but will have no power to vote
as a director. We will indemnify that person against any claim arising
out of his or her participation in meetings of the board to the same
extent as directors. During such two-year period, we have agreed with NTB
to hold at least four meetings of our board each year. We maintain a
liability insurance policy with coverage for acts of our officers and
directors, and we have agreed that if possible we will include the advisor
designee as an insured under the policy. Any advisor designated by NTB
must be acceptable to us, which acceptance will not be unreasonably
withheld. NTB has not yet designated an advisor to our board.
In February 2000, we raised $2,460,000 through a private placement
of 205,000 shares of our common stock at $12.00 per share, the closing
price on February 14, the date of the offering. In connection with the
offering, First Capital Investments, Inc. acted as our placement agent and
received a commission of 8%, or $196,000, and a warrant to purchase 20,500
shares of our common stock, exercisable at 110% of the offering price,
$13.20, for a period of 5 years.
We believe that each of the related party transactions described
above were on terms at least as favorable as could be obtained from
nonaffiliated parties. All future transactions between cavion.com and an
officer, director or a principal shareholder will be on terms at least as
favorable to us as could be obtained from nonrelated parties; and, in
addition, any such transactions must be approved by a majority of the
disinterested members of the board of directors with access to counsel.
THE SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
selling shareholders and the shares offered by them in this prospectus.
None of the selling shareholders within the past three years has had any
material relationship with us or any of our affiliates except as described
below. The 345,500 shares offered in this prospectus include the
following:
o 205,000 shares of common stock issued in connection with our
private placement in February 2000;
o 20,500 shares of common stock issuable upon exercise of the
agent's warrants at $13.20 per share which were issued to the
agent in connection with the February 2000 private placement; and
o 120,000 shares of common stock issuable upon exercise of the
representative's warrants at $8.125 per share which were issued in
connection with our initial public offering.
<TABLE>
<CAPTION>
Shares to be
Beneficially
Owned on
Completion of
No. of No. of the Offering
Name Of Shares Shares -----------------
Selling Beneficially Being % of
Shareholder Owned Offered Number Class
------------ ------- ------ -----
<S> <C> <C> <C> <C>
Taghanic Holdings I LLC 195,000 195,000 -0- -0-
Taghanic Holdings II LLC 10,000 10,000 -0- -0-
First Capital Investments,
Inc. 26,040 20,500 5,640 <1%
Eugene L. Neidiger 25,500 25,500 -0- -0-
Anthony B. Petrelli 25,000 25,000 -0- -0-
Charles C. Bruner 25,000 25,000 -0- -0-
Robert L. Parrish 9,000 9,000 -0- -0-
J. Henry Morgan 8,000 8,000 -0- -0-
John J. Turk, Jr. 4,000 4,000 -0- -0-
Regina L. Neidiger 7,000 7,000 -0- -0-
Alma L. Fleutsch 2,000 2,000 -0- -0-
Tracy S. Ayala 1,400 1,400 -0- -0-
American Fronteer
Financial Corporation 3,000 3,000 -0- -0-
Robert H. Taggert, Jr. 750 750 -0- -0-
John P. Kanouff 3,750 3,750 -0- -0-
First Colonial Securities
Group, Inc. 5,600 5,600 -0- -0-
</TABLE>
In the preceding table:
o One of our principal shareholders, Boutine Capital, LLC, has as
its sole member, Julie Graham who is the spouse of Gary Graham.
Mr. Graham is the president of First Capital Investments, Inc.,
the agent for our 1998 private placement of promissory notes and
warrants and our 2000 private placement of common stock, and one
of the agents for our August 1999 private placement of promissory
notes and warrants. Julie Graham is also the sole shareholder of
First Capital Investments, Inc.
We will not receive any of the proceeds from the sale of the shares
by the selling shareholders. We have agreed to bear certain expenses in
connection with the registration of the shares being offered and sold by
the selling shareholders, estimated to be $50,000. The selling
shareholders have agreed to pay all commissions and other compensation to
any securities broker-dealers through whom they sell any of the shares.
The shares issuable upon exercise of the representative's warrants are
subject to a lock-up agreement with us for a period of three years from
the effective date of our initial public offering, October 29, 1999.
PLAN OF DISTRIBUTION
Subject to the agreements by the selling shareholders described
above, the selling shareholders may sell the shares from time to time
o at market prices prevailing on the Nasdaq SmallCap Market at the
time of offer and sale, or at prices related to such prevailing
market prices
o in negotiated transactions
o a combination of such methods of sale
The selling shareholders may effect such transactions by offering and
selling the shares directly to or through securities broker-dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions, or commissions from the selling shareholders and/or the
purchasers of the shares for whom such broker-dealers may act as agent or
to whom the selling shareholders may sell as principal, or both (which
compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling shareholders and any broker-dealers who act in connection
with the sale of their shares may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commissions
received by them and profit on any resale of the shares as principal might
be deemed to be underwriting discounts and commissions under the
Securities Act. We have agreed to indemnify the selling shareholders
against certain liabilities, including liabilities under the Securities
Act as underwriters or otherwise.
We have advised the selling shareholders that they and any securities
broker-dealers or others who may be deemed to be statutory underwriters
will be subject to the prospectus delivery requirements under the
Securities Act. Under applicable rules and regulations under the
Securities Exchange Act of 1934 any person engaged in a distribution of
any of the shares may not simultaneously engage in market activities with
respect to the common stock for the applicable period under Regulation M
prior to the commencement of such distribution. In addition and without
limiting the foregoing, the selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rules 10b-5 and Regulation M,
which provisions may limit the timing of purchases and sales of any of the
shares by the selling shareholders. All of the foregoing may affect the
marketability of the common stock.
In the absence of this Registration Statement, the selling
shareholders would be able to sell their shares only subject to the
limitations of Rule 144 promulgated under the Securities Act of 1933
("Rule 144"). In general, under Rule 144 as currently in effect, an
"affiliate" of the issuer, or a person who has beneficially owned shares
which are "restricted securities" for at least one year, is entitled to
sell within any three-month period a number of shares that does not exceed
the greater of:
o one percent (1%) of the then outstanding shares of common stock
of the issuer
o the average weekly trading volume of the common stock during the
four calendar weeks preceding a sale by such person
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the issuer. Under Rule 144, however, a person who is
not, and for the three months prior to the sale of such shares has not
been, an affiliate of the issuer is free to sell shares which are
"restricted securities" which have been held for at least two years
without regard to the limitations contained in Rule 144. None of the
selling shareholders will be subject to the foregoing restrictions when
selling their shares pursuant to this prospectus.
Under Section 16 of the Exchange Act, executive officers, directors,
and 10% or greater shareholders of cavion.com will be liable to us for any
profit realized from any purchase and sale (or any sale and purchase) of
common stock within a period of less than six months.
ADDITIONAL INFORMATION
We will file annual, quarterly, special reports, proxy statements,
and other information with the Securities and Exchange Commission.
Reports, proxy and other information can be read and copied at the SEC's
Public Reference Room, 450 Fifth Street N.W., Washington, D.C. 20549. You
may obtain information on the operation of Public Reference Room by
calling the Commission at 1-800-SEC-0330. The Commission maintains a
website at (http://www.sec.gov.) that contains all information filed
electronically by us.
This prospectus constitutes a part of a registration statement on
Form SB-2, together with amendments and exhibits, filed by us with the
Commission under the Securities Act, for the securities offered in this
prospectus. This prospectus does not contain all the information which is
in the registration statement, as allowed by the rules and regulations of
the Commission. We refer you to the registration statement and to the
exhibits for further information with respect to cavion.com and the
securities offered in this prospectus. Copies of the registration
statement and the exhibits are on file at the offices of the Commission
and may be obtained upon payment of the prescribed fee. They may be
examined without charge at the Commission's Public Reference Room or
through the Commission's website described above. Statements contained in
this prospectus concerning the provisions of documents are necessarily
summaries of the material provisions of such documents, and each statement
is qualified in its entirety by reference to the copy of the applicable
document filed with the Commission.
This prospectus includes statistical data regarding Internet usage
and the credit union industry which were obtained from industry
publications, including reports generated by Callahan, International Data
Corporation, Nielson/NetRatings, Gomez Advisors, and Online Banking
Report. These industry publications generally indicate that they have
obtained information from sources believed to be reliable, but do not
guarantee the accuracy and completeness of such information. While we
believe those industry publications to be reliable, we have not
independently verified such data. We also have not sought the consent of
any of these organizations to refer to their reports in this prospectus.
REPORTS TO SECURITY HOLDERS
We intend to distribute to our shareholders annual reports containing
audited financial statements and will make available copies of quarterly
reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
EXPERTS
The audited financial statements of cavion.com and LanXtra included
in this prospectus and registration statement to the extent and for the
periods indicated in their reports have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
Arthur Andersen LLP as experts in accounting and auditing in giving said
reports. Reference is made to the report with regard to LanXtra, which
includes an explanatory paragraph with respect to the uncertainty
regarding LanXtra's ability to continue as a going concern as discussed in
Note 1 to those financial statements.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be
passed upon for us by Gorsuch Kirgis LLP, Denver, Colorado.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Audited financial statements:
Cavion Technologies, Inc.
Report of Independent Public Accountants F-1
Balance Sheets at December 31, 1999 and 1998 F-2
Statements of Operations for the year ended F-4
December 31, 1999, and for the period from
Inception (August 18, 1998) to December 31, 1998
Statements of Stockholders' Equity for the year F-5
ended December 31, 1999 and for the period from
Inception (August 18, 1998) to December 31, 1998
Statements of Cash Flows for the year ended F-8
December 31, 1999, and for the period from
Inception (August 18, 1998) to December 31, 1998
Notes to Financial Statements F-10
LanXtra, Inc.
Report of Independent Public Accountants F-30
Balance Sheets at January 31, 1999, F-31
December 31, 1998 and 1997
Statements of Operations for the one month period F-33
ended January 31, 1999, for the years ended
December 31, 1998 and 1997
Statements of Stockholders' Deficit for the one F-34
month ended January 31, 1999 and for the years
ended December 31, 1998 and 1997
Statements of Cash Flows for the one-month period F-35
ended January 31, 1999, for the years ended
December 31, 1998 and 1997
Notes to Financial Statements F-36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Cavion Technologies, Inc.:
We have audited the accompanying balance sheets of CAVION TECHNOLOGIES,
INC. (a Colorado corporation doing business as cavion.com; formerly
Network Acquisitions, Inc.; the "Company") as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1999 and for the period from
inception (August 18, 1998) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cavion Technologies,
Inc. as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the year ended December 31, 1999 and for the period
from inception (August 18, 1998) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
Denver, Colorado,
February 4, 2000, except with respect to
certain matters discussed in Note 10, as
to which the date is February 17, 2000.
Page 1 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc.)
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------ ---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $4,346,699 $ 19,735
Accounts receivable 94,190 -
Prepaid assets 141,949 -
Other 2,558 -
---------- ----------
Total current assets 4,585,396 19,735
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 164,357 -
Furniture and fixtures 16,851 -
Network equipment and licensed software 530,466 -
---------- ----------
711,674 -
Less - accumulated depreciation (45,066) -
---------- ----------
Property and equipment, net 666,608 -
---------- ----------
DEPOSIT FOR LETTER OF CREDIT 300,000 -
DEFERRED LANXTRA ACQUISITION COSTS - 2,204,814
GOODWILL, net of accumulated amortization of
$873,632 and $0, respectively 3,891,636 -
OTHER ASSETS 159,637 49,412
---------- ----------
TOTAL ASSETS $9,603,277 $2,273,961
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
Page 2 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc.)
BALANCE SHEETS
--------------
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------ ---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 213,098 $ -
Accrued liabilities 375,524 31,185
Accrued interest - 2,116
Deferred revenue and deposits 547,639 -
Deferred revenue - license agreements 300,000 -
Current portion of capital lease obligations 137,500 -
Notes payable 470,000 -
---------- ----------
Total current liabilities 2,043,761 33,301
---------- ----------
LONG-TERM LIABILITIES:
Capital lease obligations 386,494 -
Notes payable - 252,833
---------- ----------
Total long-term liabilities 386,494 252,833
---------- ----------
PUTABLE CLASS B COMMON STOCK: 30,000 shares
authorized; 28,648, and 0 shares issued
and outstanding, respectively (stated at
redemption value) 200,537 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock; $.0001 par value,
19,970,000 shares authorized; 4,697,326 and
2,625,356 issued and outstanding, respectively 470 263
Warrants and options 507,096 13,284
Deferred compensation (107,735) -
Additional paid-in capital 11,426,314 2,010,224
Accumulated deficit (4,853,660) (35,944)
---------- ----------
Total stockholders' equity 6,972,485 1,987,827
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,603,277 $2,273,961
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
--------------------------------------------------------
FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
REVENUE:
Network access and connectivity fees $ 447,756 $ -
Installation services 157,081 -
Software licensing fees 13,668 -
----------- ----------
Total revenue 618,505 -
----------- ----------
COST OF REVENUE:
Network access and connectivity 329,359 -
Installation services 163,885 -
----------- ----------
Total cost of revenue 493,244 -
----------- ----------
Gross profit 125,261 -
----------- ----------
OPERATING EXPENSES:
Selling and marketing 1,384,946 -
General and administrative 1,547,941 6,877
Research and development 586,250 -
Amortization of goodwill and other
intangible assets 873,632 -
----------- ----------
Total operating expenses 4,392,769 6,877
----------- ----------
LOSS FROM OPERATIONS (4,267,508) (6,877)
INTEREST INCOME 30,627 -
INTEREST EXPENSE (492,306) (29,067)
LOSS ON SALE OF EQUIPMENT (24,332) -
----------- ----------
NET LOSS $(4,753,519) $ (35,944)
=========== ==========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss $(4,753,519) $ (35,944)
Dividends on preferred stock (64,197) -
----------- ----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(4,817,716) $ (35,944)
=========== ==========
BASIC AND DILUTED NET LOSS PER SHARE $ (1.56) $ (0.02)
=========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 3,081,156 2,078,170
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
Page 1 of 3
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Series A Preferred Class A Common
---------------------- ----------------
Shares Amount Shares Amount
-------- ----------- --------- ------
<S> <C> <C> <C> <C>
BALANCES, Inception
(August 18, 1998) - $ - - $ -
Issuance of common stock
for $.0001 per share - - 2,000,000 200
Issuance of common stock
for $.01 per share, recorded
at December 21, 1998
estimated fair value of $3.00
per share - - 625,356 63
Fair value of warrants issued
to note holders - - - -
Repurchase of common stock - - (44,400) (4)
Fair value of warrants issued
to Selling Agent - - - -
Exercise of warrants by note
holders - - 44,400 4
Net loss - - - -
-------- ----------- --------- ----
BALANCES, December 31, 1998 - - 2,625,356 263
-------- ----------- --------- ----
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Additional Warrants
Paid-in and Deferred
Capital Options Compensation
----------- ---------- ------------
<S> <C> <C> <C>
BALANCES, Inception (August 18,
1998) $ - $ - $ -
Issuance of common stock
for $.0001 per share - - -
Issuance of common stock
for $.01 per share, recorded
at December 21, 1998 estimated
fair value of $3.00 per share 1,876,005 - -
Fair value of warrants issued to
note holders - 133,775 -
Repurchase of common stock - - -
Fair value of warrants issued to
Selling Agent - 13,284 -
Exercise of warrants by note
holders 134,219 (133,775) -
Net loss - - -
----------- --------- ---------
BALANCES, December 31, 1998 2,010,224 13,284 -
----------- --------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- -------------
<S> <C> <C>
BALANCES, Inception (August 18, 1998) $ - $ -
Issuance of common stock
for $.0001 per share - 200
Issuance of common stock
for $.01 per share, recorded
at December 21, 1998 estimated
fair value of $3.00 per share - 1,876,068
Fair value of warrants issued to
note holders - 133,775
Repurchase of common stock - (4)
Fair value of warrants issued to
Selling Agent - 13,284
Exercise of warrants by note holders - 448
Net loss (35,944) (35,944)
----------- -----------
BALANCES, December 31, 1998 (35,944) 1,987,827
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
Page 2 of 3
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Series A Preferred Class A Common
---------------------- ----------------
Shares Amount Shares Amount
-------- ----------- --------- ------
<S> <C> <C> <C> <C>
Issuance of common stock for
LanXtra business, recorded
at February 1, 1999,
estimated fair value of
$3.00 per share - $ - 375,214 $ 38
Fair value of warrants issued
to note holders - - - -
Repurchase of common stock - - (311,884) (32)
Fair value of warrants issued
to Selling Agent - - - -
Exercise of warrants by
note holders and
Selling Agent - - 17,640 2
Issuance of Series A Preferred
Stock for $3.00 per share
and detachable warrants, net
of cash offering costs of
$252,000 700,000 1,682,800 - -
Fair value of warrants issued
in connection with 1999
Bridge Loan - - - -
Warrants canceled - 165,200 - -
Dividends on preferred stock,
paid in cash - - - -
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CATPION>
Additional Warrants
Paid-in and Deferred
Capital Options Compensation
----------- ---------- ------------
<S> <C> <C> <C>
Issuance of common stock for
LanXtra business, recorded at
February 1, 1999, estimated
fair value of $3.00 per share $1,125,604$ - $ -
Fair value of warrants issued to
note holders - 35,885 -
Repurchase of common stock - - -
Fair value of warrants issued to
Selling Agent - 3,590 -
Exercise of warrants by
note holders and Selling Agent 52,937 (52,759) -
Issuance of Series A Preferred Stock
for $3.00 per share and detachable
warrants, net of cash offering
costs of $252,000 - 165,200 -
Fair value of warrants issued in
connection with 1999 Bridge Loan - 33,127 -
Warrants canceled - (165,200) -
Dividends on preferred stock,
paid in cash - - -
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- -------------
<S> <C> <C>
Issuance of common stock for LanXtra
business, recorded at February 1,
1999, estimated fair value of $3.00
per share $ - $1,125,642
Fair value of warrants issued to
note holders - 35,885
Repurchase of common stock - (32)
Fair value of warrants issued to
Selling Agent - 3,590
Exercise of warrants by
note holders and Selling Agent - 180
Issuance of Series A Preferred
Stock for $3.00 per share and
detachable warrants, net of cash
offering costs of $252,000 - 1,848,000
Fair value of warrants issued in
connection with 1999 Bridge Loan - 33,127
Warrants canceled - -
Dividends on preferred stock, paid in cash (64,197) (64,197)
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
Page 3 of 3
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Series A Preferred Class A Common
---------------------- ----------------
Shares Amount Shares Amount
-------- ----------- --------- ------
<S> <C> <C> <C> <C>
Shares issued upon initial
public offering, net of
offering costs of $1,512,395
and related fair value of
warrants issued to
underwriters - $ - 1,200,000 $120
Conversion of Class A
Preferred Stock to
Common Stock (700,000) (1,848,000) 700,000 70
Issuance of shares upon
exercise underwriters
overallotment option,
net of offering costs
of $121,382 - - 90,500 9
Options issued to non
-employees - - - -
Shares issued upon exercise
of options - - 500 -
Net loss - - -
-------- ----------- --------- ----
BALANCES, December 31, 1999 - $ - 4,697,326 $470
======== =========== ========= ====
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Additional Warrants
Paid-in and Deferred
Capital Options Compensation
----------- ---------- ------------
<S> <C> <C> <C>
Shares issued upon initial
public offering, net of
offering costs of $1,512,395
and related fair value of
warrants issued to underwriters $5,921,251 $366,234 $ -
Conversion of Class A
Preferred Stock to
Common Stock 1,847,930 - -
Issuance of shares upon
exercise underwriters
overallotment option,
net of offering costs
of $121,382 466,868 - -
Options issued to non-
employees - 107,735 (107,735)
Shares issued upon exercise
of options 1,500 - -
Net loss - - -
----------- --------- ---------
BALANCES, December 31, 1999 $11,426,314 $507,096 $(107,735)
=========== ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR
-----------------------------------------------
ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
-----------------------------------------------
INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Stockholders'
Deficit Equity
----------- -------------
<S> <C> <C>
Shares issued upon initial
public offering, net of
offering costs of $1,512,395
and related fair value of
warrants issued to underwriters $ - $6,287,605
Conversion of Class A Preferred
Stock to Common Stock - -
Issuance of shares upon
exercise underwriters
overallotment option,
net of offering costs
of $121,382 - 466,877
Options issued to non-
employees - -
Shares issued upon
exercise of options - 1,500
Net loss (4,753,519) (4,753,519)
----------- -----------
BALANCES, December 31, 1999 $(4,853,660) $6,972,485
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
Page 1 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,753,519) $ (35,944)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 989,295 -
Accretion of debt discount 321,719 16,608
Accretion of putable stock 33,340 4,232
Loss on disposal of assets 24,332 -
Change in operating assets and liabilities-
Accounts receivable (77,732) -
Prepaids and inventories (105,555) -
Other assets (137,822) -
Accounts payable (72,486) -
Accrued liabilities 75,881 2,116
Deferred revenue 632,927 -
Addition to certificate of deposit (280,000) -
----------- -----------
Net cash used in operating
activities (3,349,620) (12,988)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (207,209) -
Proceeds from sale leasehold 285,976 -
Acquisition of LanXtra - (335,000)
----------- -----------
Net cash provided by (used in)
investing activities 78,767 (335,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 470,000 370,000
Repurchases of Common Stock (32) -
Proceeds from issuance of Common Stock 180 6,898
Proceeds from issuance of Series A
Preferred Stock 2,100,000 -
Proceeds from initial public offering 8,388,250 -
Proceeds from the exercise of
employee options 1,500 -
Proceeds from issuance of warrants 100 -
Series A Preferred Stock offering costs (252,000) -
Payment of debt issuance costs (137,612) (9,175)
Payments on line of credit (600,000) -
Payment of related party debt (313,410) -
Payment on bridge loan (300,000) -
Principal payments on capital leases (61,135) -
Common Stock offering costs (1,633,777) -
Payment of dividends on Series A
Preferred Stock (64,197) -
----------- -----------
Net cash provided by financing
activities 7,597,867 367,723
----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
Page 2 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
--------------------------------------------------------
FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS $4,326,964 $ 19,735
CASH AND CASH EQUIVALENTS,
beginning of period 19,735 -
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $4,346,699 $ 19,735
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 229,480 $ 6,111
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-
CASH FINANCING ACTIVITIES:
Property acquired with capital leases $ 528,258 $ -
Debt issuance costs included in
accrued liabilities $ - $ 31,185
Estimated value of shares issued
to LanXtra management shareholders $ - $ 1,876,068
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
NOTES TO FINANCIAL STATEMENTS
------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
----------------------------------------
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
----------------------------------------------
TO DECEMBER 31, 1998
--------------------
1. DESCRIPTION OF BUSINESS:
-----------------------
Organization
- ------------
Cavion Technologies, Inc. (the "Company") offers products and services for
business to business communications, secure Internet financial products,
such as online banking and bill paying services, and secure Internet
access and services for its customers. The Company is also building and
managing a secure private communications network exclusively for the
credit union industry. This network acts as a communications platform for
the delivery of services and information to and from credit unions and
related businesses.
The Company was incorporated in Colorado on August 18, 1998 as Network
Acquisitions, Inc. to acquire the assets of Cavion Technologies, Inc., now
known as LanXtra, Inc. ("LanXtra"), which was engaged in providing
internet, intranet, and extranet services to the credit union industry.
On February 1, 1999, the Company acquired the business of LanXtra, and the
Company changed its name to Cavion Technologies, Inc., doing business as
cavion.com.
On October 29, 1999, the Company successfully completed an Initial Public
Offering ("IPO"). The number of shares offered and sold were 1,200,000,
with an underwriter's over allotment option for an additional 180,000
shares. Total gross proceeds of $7,800,000 were raised in the offering,
and the Company, after offering expenses, netted proceeds of approximately
$6,288,000. In November 1999, the Company sold 90,500 additional shares
from the underwriters overallotment option, raising additional gross
proceeds of approximately $588,000, and net proceeds of approximately
$467,000. The total number of shares outstanding after the offering was
4,696,826, reflecting the automatic conversion of 700,000 shares of
Convertible Preferred Stock into 700,000 shares of common stock upon the
closing of the offering. In addition, at the closing of the IPO, the
Company issued warrants to purchase 120,000 shares of the Company's Common
Stock to the Representative of the underwriter at a price of 125% equal to
the IPO price, or $8.125 per share.
Prior to the IPO, the Company financed its operations through a private
placement of its 15% notes, which were offered commencing on October 20,
1998 (the "Offering"), the sale of Series A Preferred Stock and funding
through a Bridge Loan. The Company advanced a portion of the proceeds
from the Offering to LanXtra in anticipation of the acquisition of
LanXtra. Through December 31, 1998, the Company had raised $370,000 in
the private placement and had advanced LanXtra a total of $335,000 under
an agreement dated September 14, 1998.
Purchase of LanXtra's Assets, Liabilities and Operations
- --------------------------------------------------------
In August 1998, the Company signed a letter of intent to purchase
LanXtra's business. In December 1998, the Company signed an Asset
Purchase Agreement (the "Purchase Agreement") with LanXtra to purchase
substantially all the assets of LanXtra in exchange for approximately
375,214 shares and 28,648 shares of the Company's Class A and B Common
Stock, respectively, and the assumption by the Company of certain
liabilities of LanXtra. The number of Class A Common Stock shares issued
to LanXtra represented approximately 12% of the Company's equity interest
at the time of the purchase agreement. The Purchase Agreement was
consummated on February 1, 1999 and the Company assumed the operations of
LanXtra on that date. Upon consummation, significant modifications were
made to LanXtra's capital structure. On December 21, 1998, the Company
issued 625,356 shares to certain shareholders of LanXtra who could
continue as management of the Company. One of these shareholders held
directly and through irrevocable proxies sufficient voting shares to
approve the transaction. The shares are non-forfeitable and not
contingent upon the management's continued employment with the Company.
As a result, the shares have been considered additional purchase
consideration and are recorded at their estimated fair value of $3 per
share.
The estimated fair value of assets acquired, liabilities assumed, and
consideration issued in the transaction with LanXtra are as follows:
Consideration:
Class A Common Stock $3,001,710
Class B Common Stock 167,197
Cash 338,735
----------
3,507,642
Add: Net liabilities (assets) assumed:
Working capital deficit assumed 706,044
Property and equipment (331,020)
Borrowings assumed 924,417
Other assets (41,815)
----------
Goodwill $4,765,268
==========
The Company has recorded the fair value of its stock issued to LanXtra at
$3 per share based principally upon its private placement of Series A
Preferred Stock completed in February 1999. The transaction with LanXtra
resulted in approximately $4,760,000 of goodwill, and will be amortized
over five years. Because the business now operated by the Company has
never been profitable, and due to the other risks and uncertainties
discussed herein, it is reasonably possible that an analysis of these long-
lived assets in future periods could result in a conclusion that they are
impaired, and the amount of the impairment could be substantial.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
- ----------------------------
Financial instruments which subject the Company to concentrations of
credit risk are accounts receivable and cash equivalents. The Company's
receivables are concentrated among credit unions. The Company performs
ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. Additionally, the Company manages a
portion of its credit risk by billing certain services in advance. The
Company has no significant financial instruments with off-balance sheet
risk of accounting loss, such as foreign exchange contracts, option
contracts or other hedging arrangements. The Company's cash balances are
maintained in demand deposits at financial institutions that the Company
believes to be creditworthy.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist of cash, accounts receivable,
short-term trade payables, putable common stock and borrowings. The
carrying values of the instruments acquired from LanXtra approximate the
fair value placed upon them on February 1, 1999, in connection with their
assumption. Fair values were principally determined by discounting
expected future cash flows at a market cost of debt. The fair value of
the Company's other borrowings approximate their carrying values based
upon current market rates of interest.
Property and Equipment
- ----------------------
Property and equipment acquired from LanXtra was recorded at its estimated
fair value. Additions are recorded at cost. Property and equipment are
depreciated using the straight-line method over the lesser of the lease
term or their estimated lives as follows:
Furniture and fixtures 7 years
Network equipment 3 - 5 years
Licensed software 3 years
Leasehold improvements Life of the lease
The Company recorded depreciation expense of approximately $116,000 in
1999.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable from future undiscounted cash flows. Impairment
losses are recorded for the difference between the carrying value and fair
value of the long-lived assets. The acquisition of LanXtra generated
approximately $4,760,000 of intangible assets, which are continuously
reviewed by the Company for impairments.
Offering Costs
- --------------
The Company has incurred offering costs which total $1,885,777 for the
year ended December 31, 1999. Such costs represent legal and other
professional fees incurred related to the Company's IPO and issuance of
Series A Preferred Stock. Such costs were recorded as a reduction of IPO
proceeds upon the consummation of the IPO on October 29, 1999. In
addition to cash offering costs, warrants were issued to the selling agent
and underwriter valued at $366,234, which excludes $165,200 worth of
warrants issued and later canceled.
Accrued Liabilities
- -------------------
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Accrued payroll and vacation $ 53,938 $ -
Accrued professional fees 67,854 -
Accrued Telecom and Telecom termination
fees for Convergent contract 81,392 -
Other liabilities 172,340 31,185
--------- ---------
Total accrued liabilities $375,524 $ 31,185
========= =========
</TABLE>
Income Taxes
- ------------
A current provision for income taxes is recorded for actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year. Deferred income tax assets and liabilities are recorded for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of
assets and liabilities and carryforwards. The overall change in deferred
tax assets and liabilities for the period measures the deferred tax
expense for the period. Effects of changes in tax laws on deferred tax
assets and liabilities are reflected as adjustments to tax expense in the
period of enactment. Deferred tax assets are recognized for the expected
future tax effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets are
reduced, if deemed necessary, by a valuation allowance for the amount of
any tax benefits which, more likely than not based on current
circumstances, are not expected to be realized.
Net Loss Per Share
- ------------------
The Company reports net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
which requires the presentation of both basic and diluted earnings (loss)
per share. Basic net loss per common share has been computed based upon
the weighted average number of shares of common stock outstanding during
the period. Weighted average common shares excludes 28,648 shares of
putable Class B Common Stock as an assumed cash settlement is more
dilutive. Diluted net loss per share is computed by dividing the net loss
applicable to common stockholders for the period by the weighted average
number of common and potential common shares outstanding during the period
if the effect of the potential common shares is dilutive. The Company has
also excluded the weighted average effect of common stock issuable upon
exercise of all warrants and options from the computation of diluted
earnings per share as the effect of all such securities is anti-dilutive
for the periods presented. The shares excluded related to outstanding
options and warrants (without regard to the treasury stock method) at
December 31, 1999 and 1998 were 511,000 and 4,440, respectively.
Stock Based Compensation
- ------------------------
The Company accounts for its employee stock option plan and other employee
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"), and related interpretations. The Company
adopted the disclosure-only provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which allows entities to
continue to apply the provisions of APB No. 25 for transactions with
employees and provide pro forma disclosures for employee stock grants as
if the fair-value-based method of accounting in SFAS No. 123 had been
applied to these transactions. The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of
SFAS No. 123 and related interpretation.
Revenue Recognition
- -------------------
The Company generates revenue from three sources: (1) service revenue for
the installation of equipment for internet access and access to the
Company's secure financial network at customer sites, (2) software license
fees, and (3) recurring monthly network access and connectivity fees.
Service revenue is recognized as the services are performed. Software
license arrangements typically provide for enhancements over the term of
the arrangement, and software license fees are generally received in
advance, deferred and recognized ratably over the term of the arrangement.
Network access and connectivity fees are typically billed in advance and
recognized in the month that the access/connectivity is provided.
Software Development Costs
- --------------------------
The Company capitalizes software development costs when a software product
is determined to be technologically feasible. The Company's software
products are deemed to be technologically feasible at the point the
Company commences field testing of the software. The period from field
testing to general customer release of the software has been brief and the
costs incurred during this period were insignificant. Accordingly, the
Company has not capitalized any qualifying software development costs.
Advertising
- -----------
The Company expenses advertising as incurred. Advertising expense was
$141,196 and $0 for the years ended December 31, 1999 and 1998,
respectively.
Comprehensive Income
- --------------------
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in the
financial statements. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from non-owner sources.
From inception through December 31, 1999, there have been no differences
between the Company's comprehensive loss and its net loss.
Segment Information
- -------------------
In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not have separately reportable operating segments.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), and in June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB 133" ("SFAS No 137"). SFAS No. 137
requires the Company to adopt SFAS No. 133 for all quarters in the year
ended December 31, 2001. SFAS No. 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to
those instruments as well as other hedging activities. To date, the
Company has not entered into any derivative financial instruments or
hedging activities.
In December of 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB
101"). SAB 101 explains the SEC staff's general framework for revenue
recognition by stating the criteria that must be met in order to recognize
revenue. SAB 101 will be adopted by the Company in the first quarter of
fiscal year 2000. The Company has determined that the adoption of SAB 101
will not have a material impact on its financial statements.
3. BORROWINGS:
----------
The Company's borrowings at December 31, 1999 and 1998, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---------------------- --------------------
Unamortized Unamortized
Face Discount Face Discount
Value Value
<S> <C> <C> <C> <C>
Notes payable $470,000 $ - $370,000 $(117,167)
-------- -------- -------- ---------
$470,000 $ - $370,000 $(117,167)
======== ======== ======== =========
</TABLE>
Bridge Loan
- -----------
In August 1999, the Company raised $300,000 through Neidiger, Tucker,
Bruner, Inc. and First Capital Investments, Inc. ("FCI" or the "Selling
Agent"). The Bridge Loan bore interest at 14% and was to mature upon the
earlier of the closing of the Company's IPO or one year from the date of
the note. The loan was paid in full upon the closing of the IPO. FCI, is
a related party through its substantial ownership of the Company's common
stock.
Upon their issuance, the proceeds of the Bridge loan were discounted to
reflect the estimated fair value of warrants issued to the holders of the
bridge loan debt. The discount was amortized as interest expense over the
estimated term of the notes. Debt issuance costs in the amount of $31,045
were paid in conjunction with the issuance of these notes and were
amortized as interest expense over the term of the notes. The estimated
fair value of the warrants was $33,127 and was determined utilizing the
Black-Scholes option pricing model, assuming a volatility factor of .001%,
a risk free rate of 6.22% and a fair market value of the underlying stock
of $6.75 per share. The warrants are still outstanding at December 31,
1999.
Note Payable
- ------------
Beginning on October 20, 1998, the Company offered through its officers,
directors and FCI, up to $2,000,000 of 15% secured notes due October 19,
2000 (the "Notes") along with warrants to purchase Class A Common Stock
(the "Warrants"). At December 31, 1998, the Company had raised $370,000
through the Offering. The Company raised a total of $470,000, and the
Offering closed on February 8, 1999.
The Notes are secured by substantially all of the assets now owned and
hereafter acquired by the Company, including the assets acquired from
LanXtra in February 1999. There is no pre-payment penalty.
In connection with the Offering, the Company granted note holders Warrants
to purchase 1,200 shares of the Company's Class A Common Stock for every
$10,000 of Notes purchased. Accordingly, at December 31, 1998, the
Company had issued Warrants for 44,400 shares, and in February 1999,
issued Warrants for an additional 12,000 shares. Such Warrants had an
exercise price of $0.01 per share. These detachable Warrants were valued
at a total of $169,660 utilizing the Black-Scholes option pricing model,
assuming a volatility factor of 70%, a risk free interest rate of 4.31%
and a fair market value of the underlying common stock of $3 per share.
All Warrants have been exercised.
Revolving Line of Credit
- ------------------------
As part of the Purchase Agreement, a $600,000 Revolving Line of Credit was
assumed by the Company. The line of credit accrued interest at a rate
equal to the bank's reference rate plus 1.5% (9.25% at December 31, 1998).
The Revolving Line of Credit was collateralized by letters of credit
issued by the Company and certain LanXtra stockholders as well as by
agreements among certain LanXtra stockholders. The Revolving Line of
Credit was paid in full and cancelled after the IPO proceeds were
received, at which point the corresponding collateralized letters of
credit were released.
Notes Payable to Stockholders
- ------------------------------
The Company assumed notes payable to certain LanXtra stockholders as part
of the Purchase Agreement. The maturity date on these notes was extended
to the date on which the Company obtains 100 credit union customers (the
"100 Credit Union Date"). The 100 Credit Union Date was reached on
December 31, 1999. In addition, interest terms were amended such that no
interest was to accrue for the remaining term of the notes payable. At
the acquisition date, the notes were discounted to reflect their fair
value. The discount was amortized as interest expense over the remaining
estimated term of the notes. The notes payable to stockholders were
repaid in full after the IPO proceeds were received.
As additional consideration for shareholder notes with a face value of
$240,000, LanXtra issued 28,648 shares of its putable common stock. These
putable shares were exchanged for 28,648 shares of the Company's Class B
Putable Common Stock. The lenders have the right to sell these shares
back to the Company for a purchase price of $7 per share, through March
30, 2000, or can convert these shares into equivalent shares of Class A
Common Stock. If these shares are not redeemed or converted at the
request of the shareholder, they will automatically be converted on March
31, 2000. As a result of this transaction, the Class B shares were
recorded at their estimated fair value of $167,197. The difference
between this amount and the put value of $200,537 was accreted as interest
expense over the estimated term of the notes.
Related Party Collateralized Loans
- ----------------------------------
The Company also assumed certain factoring agreements (the "Agreements")
with management and a stockholder of the Company as part of the Purchase
Agreement. The interest terms were amended such that no interest would be
accrued for the remaining term of the loans and the maturity of these
loans was extended to the 100 Credit Union Date. The related party
collateralized loans were paid in full after the IPO proceeds were
received and cancelled.
Maturities of Borrowings
- ------------------------
The Company's borrowings as of December 31, 1999, totaling $470,000 mature
in year 2000.
4. RELATED PARTY TRANSACTIONS:
--------------------------
MoneyLine America, LLC
- ----------------------
In August 1999, the Company entered into an agreement with MoneyLine
America, LLC, (the "MoneyLine Agreement"), which provides that the Company
will receive payments under an agreement with MoneyLine to provide on line
mortgage lending services for credit unions and their members through the
Company's network. This agreement calls for a minimum payment of $300,000
in the first year, beginning September 1999, escalating to $1,000,000 in
years six through ten, provided the Company has at least 1,500 credit
unions, or 12% of the U.S. credit unions on its network by the end of year
three. The amounts received are reflected as deferred revenue - license
agreements in the accompanying balance sheets. Fifty percent of MoneyLine
America is owned by Boutine Capital, LLC, a principal shareholder of the
Company.
Convergent Communications
- -------------------------
Effective October 22, 1999, the Company entered into a five-year agreement
with Convergent Communications Services, Inc., ("Convergent"). This
agreement includes a sale lease back of certain network equipment.
Equipment with a net book value of $265,394 was sold for $285,976. A
corresponding deferred gain of $20,582 was recorded and will be recognized
over the life of the leases. Under this agreement, Convergent will
establish, maintain and support network connectivity between the Company's
network and its customers, including providing, equipment, maintenance and
related services for the network. One of the Company's directors is the
Chief Executive Officer and chairman of the board of Convergent
Communications, Inc. the parent company of Convergent. In addition,
Convergent owns 64,000 shares of the Company's stock at December 31, 1999.
5. CAPITAL LEASE OBLIGATIONS:
-------------------------
The Company assumed several capital lease agreements related to computers
and various office equipment in conjunction with the Purchase Agreement.
The Company has also entered into additional capital lease agreements
during the year ended December 31, 1999. The capital leases have terms
ranging from 24 to 60 months with interest rates ranging between 9% and
20.3%.
As of December 31, 1999, the present value of the future minimum lease
payments is as follows:
2000 $ 196,163
2001 184,782
2002 119,455
2003 93,065
2004 77,555
---------
671,020
Less: amounts representing interest (147,026)
---------
523,994
Less: current portion (137,500)
---------
Long-term capital lease obligation $ 386,494
=========
The net book value of assets under capital lease obligations as of
December 31,1999 was approximately $530,779.
6. STOCKHOLDERS' EQUITY:
--------------------
The Company is authorized to issue 20,000,000 shares of common stock, par
value $.0001 per share. The common stock is segregated into two classes:
Class A and Class B. Of the 20,000,000 shares of common stock, 19,970,000
are designated as Class A and 30,000 are designated as Class B.
Class A Common Stock
- --------------------
At December 31, 1999, 4,697,326 shares of Class A Common Stock were issued
and outstanding. Two million shares were issued for consideration of
$.0001 per share (par value). Certain LanXtra shareholders and management
were issued 625,356 shares for cash consideration of $.01 per share. The
estimated fair value assigned to these shares was $3 per share which is
consistent with the value assigned to the 375,214 shares issued to LanXtra
in February 1999. The holders of Class A Common Stock are entitled to one
vote for each share held on record on each matter submitted to a vote of
shareholders. Cumulative voting for election of directors is not
permitted. Holders of Class A Common Stock have no preemptive rights or
rights to convert their Class A Common Stock into any other securities.
Class B Common Stock
- --------------------
As of December 31, 1999, there were 28,648 shares of the Class B voting
Common Stock issued and outstanding. These shares were issued in exchange
for similar securities of LanXtra as partial consideration for the
purchase of LanXtra's business, and are callable by the Company at $7 per
share. The holders of Class B Common Stock have the right to sell the
Class B Common Stock to the Company at $7 per share or convert their
shares to equivalent units of Class A Common Stock on March 30, 2000. If
these shares are not redeemed or converted at the request of the
shareholder, they will automatically be converted on March 31, 2000. The
Class B Common Stock was authorized so that the Company could exchange its
Class B Common Stock for LanXtra's existing nonvoting putable common stock
with similar terms.
Preferred Stock
- ---------------
In February 1999, the Board of Directors authorized the Company, without
further action by the shareholders, to issue 10,000,000 shares of one or
more series of preferred stock at a par value of $.0001, all of which is
nonvoting. The Board of Directors may, without shareholder approval,
determine the dividend rates, redemption prices, preferences on
liquidation or dissolution, conversion rights, voting rights and any other
preferences. In addition, the Company authorized the sale of 700,000
shares of Series A Convertible Preferred Stock in conjunction with a
private placement offering of the stock. Each share of the Series A
Preferred Stock was convertible at any time at the holder's option into an
equal number of shares of Class A Common Stock of the Company at a
conversion price initially equal to the offering price, which was
established at $3 per share. Each share of the Series A Preferred Stock
was automatically convertible into an equal number of Class A shares upon
certain conditions, including an IPO.
The Company sold 700,000 shares of Series A Preferred Stock at $3 per
share, raising proceeds of $2,100,000. All Series A preferred shares were
converted to Class A Common Stock on the closing date of the IPO. The
Series A Preferred Stock bore dividends a the rate of 5% per year, payable
in cash or shares of the Company's Class A common stock. During 1999, the
Company paid $64,197 of dividends.
Warrants
- --------
As part of the underwriter's compensation for the funds raised in the
Company's IPO, the Company agreed to sell, for $100, warrants to purchase
120,000 shares of the Class A Common Stock. The warrants are exercisable
at any time during a five-year term at an exercise price equal to 125% of
the offering price, or $8.125. The warrants outstanding were valued at a
total of $366,234, utilizing the Black-Scholes option pricing model
assuming a volatility factor of 53%, a risk free interest rate of 6.22%
and a fair market value of the underlying shares of $6.50. The value of
these warrants were recorded as a reduction of additional paid in capital
received from the initial public offering.
In conjunction with the issuance of the August 1999 Bridge Loan, the
Company granted the Bridge Loan holders warrants to purchase 5,000 shares
of the Company's Class A common stock for every $50,000 of notes
purchased. The warrants are exercisable for a period of five years
beginning on the earlier to occur of (i) the closing of the IPO or (ii)
one year from the date of the warrant. These detachable warrants were
valued at a total of $33,127 utilizing the Black-Scholes option pricing
model, assuming a volatility factor of 70%, a risk free rate of 6.22% and
a fair value of the underlying common stock of $6.75 per share.
The Company issued warrants with the private placement of notes payable in
October 1998 which allow the purchase of 1,200 shares of the Company's
Class A Common Stock for every $10,000 of notes payable. The exercise
price was $0.01 per share. Originally, the warrant exercise period was
for a period of one year beginning on the maturity date of the notes
payable. On December 22, 1998, the Company accelerated the exercise
period to begin immediately and end one year after each note's issuance
date. All holders of warrants at that date elected to immediately
exercise their warrants. Warrants for 44,400 shares of Class A Common
Stock were issued and exercised at December 31, 1998. Warrants for an
additional 12,000 shares of Class A Common Stock were issued and
immediately exercised during 1999.
The Company redeemed 17,640 and 44,400 shares of Class A Common Stock from
its existing shareholders for a redemption price of $.0001 per share
during the year ended December 31, 1999 and 1998, respectively. The
redeemed shares were reissued in connection with the exercise of the
warrants issued to note holders and the Selling Agent.
As part of the Selling Agent's compensation, the Company agreed to issue
additional warrants for the Company's Class A Common Stock. The warrants
are exercisable at any time during a five-year term at 110% of the price
paid by the holders of the Notes for the Class A Common Stock. At
December 31, 1998, the Selling Agent earned the right to purchase 4,440
shares of the Company's Class A Common Stock at an exercise price of $.011
per share. At September 30, 1999, the Selling Agent earned the right to
purchase an additional 1,200 shares under the same terms. The 4,440
warrants outstanding at December 31, 1998, were valued at a total of
$13,284 and the additional 1,200 warrants were valued at $3,590, utilizing
the Black-Scholes option pricing model assuming a volatility factor of
70%, a risk free interest rate of 4.31% and a fair market value of the
underlying shares of $3 per share. The warrants were recorded as debt
issuance costs and are being amortized into interest expense over the life
of the debt. All such warrants have been exercised.
Stock Options
- -------------
Effective March 19, 1999, the Company adopted a stock option plan (the
"Plan"). The Plan provides for grants of incentive stock options,
nonqualified stock options and restricted stock to designated employees,
officers, directors, advisors and independent contractors. The Plan
authorizes the issuance of up to 750,000 shares of Class A Common Stock.
Under the Plan, the exercise price per share of a non-qualified stock
option must be equal to at least 50% of the fair market value of the
common stock at the grant date, and the exercise price per share of an
incentive stock option must equal the fair market value of the common
stock at the grant date. Through December 31, 1999, options for 505,500
shares of Class A Common Stock have been issued under the Plan. The
outstanding stock options have an average exercise price of $4.19 per
share, with a range of $3.00 to $6.25, and vest over various terms with a
maximum vesting period of 18 months and expire after the contract period
of ten years.
During the year ended December 31, 1999, the Company granted options for
20,000 shares of Class A Common Stock to non-employees in exchange for
services. The exercise price of these options range from $3.00 to $6.00
per share. The fair value of these options on the date of grant was
approximately $107,000. Expense related to such options will be recorded
over the term the services are provided. The fair value of each non-
employee option grant was estimated on the date of the grant using the
Black-Scholes option pricing model. Assumptions used to calculate the
fair value were risk free interest rates of 4.48% to 6.22%, no dividend
yields, a life of five to ten years and volatility of 53%.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Granted to Granted to
Employees Non-Employees
---------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at
January 1, 1999 - $ - - $ -
Granted 505,500 4.19 20,000 $ 4.50
Exercised (500) 3.00 - -
Canceled (14,000) 3.38 - -
------- ----- ------ ------
Outstanding at
December 31, 1999 491,000 4.41 20,000 $ 4.50
======= ===== ====== ======
Exercisable at
December 31, 1999 157,124 $3.45 - $ -
======= ===== ====== ======
Weighted average fair
value of options granted
during the year $1.64 $2.67
==== =====
</TABLE>
Under the fair value approach of SFAS 123, the total fair value of options
granted under the Plan during 1999 was $829,509. If the Company had
accounted for its stock option plan in accordance with SFAS 123, the
Company's net loss and pro forma net loss would have been reported as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C> <C>
Net loss: As reported $ (4,753,519)
===========
Pro forma $ (5,180,247)
===========
Per share data: As reported $ (1.56)
===========
Pro forma $ (1.71)
===========
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the minimum value method. Assumptions used to calculate the fair
value were risk free interest rates of 6.22% to 6.25%, no dividend yields,
an expected life of three to five years and volatility of .001% to 53%.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Legal Matters
- -------------
In connection with the Purchase Agreement transaction, a shareholder of
LanXtra exercised his rights as a dissenting shareholder. The Company
assumed LanXtra's obligation (if any) to this dissenting shareholder. If
the shareholder is permitted to pursue his claim in a legal proceeding,
LanXtra could be required to pay the shareholder the fair value of his
shares immediately before the closing date of the Purchase Agreement. The
Company's and LanXtra's management believes that the value paid on account
of these shares pursuant to the Purchase Agreement is greater than the
amount which the dissenting shareholder could recover under Colorado law.
The dissenting shareholder has asserted that the value of his 50,000
LanXtra shares immediately before the closing date of the Purchase
Agreement would be approximately $250,000. The ultimate resolution of the
matter, which is expected to occur within one year, could result in an
obligation to such shareholder. Further, should LanXtra, or the Company
as successor, be required to make a payment to this shareholder, such
payment could result in the purchase transaction being treated as a
taxable transaction which could subject the Company to a significant tax
liability.
In accordance with the Purchase Agreement, the Company may become legally
obligated to satisfy additional liabilities of LanXtra, including
liabilities arising on or after the closing date with respect to LanXtra's
assets or business. To date, no liabilities other than those identified
in the Purchase Agreement have arisen, however, other liabilities could
arise in the future.
The Company is exposed to legal claims arising in the ordinary course of
business. In management's opinion, none of the claims currently asserted
will result in a material liability or change to earnings.
8. INCOME TAXES:
------------
The Company has had losses since its Inception, and therefore has not been
subject to federal or state income taxes. As of December 31, 1999, the
Company had an accumulated net operating loss ("NOL") carryforward for
income tax purposes of approximately $5,179,000. Approximately $1,800,000
of this NOL was acquired through the purchaser of LanXtra. This acquired
NOL is subject to certain limitations and if utilized would be recorded as
a reduction of purchased goodwill. The carryforward is subject to
examination by the tax authorities and expires at various dates through
the year 2014. The Tax Reform Act of 1986 contains provisions that may
limit the NOL carryforwards available for use in any given year upon the
occurrence of certain events, including significant changes in ownership
interest. A change of ownership of a company greater than 50% within a
three-year period results in an annual limitation on the Company's ability
to utilize its NOL carryforwards from tax periods prior to the ownership
change.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current deferred tax assets
(liabilities):
Deferred revenue $ 70,637 $ -
Accrued compensation 6,134 -
Other 15,086 -
----------- ---------
91,857 -
Less valuation allowance (91,857) -
----------- ---------
Total current deferred tax
assets (liabilities) - -
Non-current deferred assets
(liabilities):
Net operating loss carryforwards $ 1,968,155 $ 13,659
Depreciation differences (12,129) -
Other 12,129 -
----------- --------
1,968,155 13,659
Less valuation allowance (1,968,155) (13,659)
----------- --------
Total non-current deferred
tax assets (liabilities) - -
----------- --------
Net deferred taxes $ - $ -
=========== =========
</TABLE>
Included in the Company's deferred tax assets is a benefit resulting from
the accumulated NOL and other previously unrecognized tax benefits.
Recognition of the NOL and these benefits requires future taxable income,
the attainment of which is uncertain, and therefore, a valuation allowance
has been established for the NOL benefit and for the deferred tax assets
in excess of deferred tax liabilities, and no benefit for income taxes has
been recognized in the accompanying statements of operations.
The Company recorded income tax expenses and benefits for the years ended
December 31 as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Current tax benefit $(1,275,298) $ (3,017)
Deferred tax benefit (61,444) (10,642)
Valuation provision 1,336,742 13,659
----------- ----------
$ - $ -
=========== ==========
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory rate to income taxes result from the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Income tax benefit using
federal statutory rate $(1,616,196) $ (12,221)
State income tax benefit, net (190,141) (1,438)
Goodwill amortization 331,981 -
Accretion of debt discount 122,253 -
Meals, entertainment and other 15,361 -
Change in valuation allowance 1,336,742 13,659
----------- ---------
$ - $ -
=========== =========
</TABLE>
9. ACQUISITION OF LANXTRA BUSINESS (UNAUDITED):
-------------------------------------------
As discussed above, the Company acquired the business of LanXtra on
February 1, 1999. The following is pro forma operating information. For
purposes of the pro forma statement of operations, the transaction was
assumed to be consummated on January 1, 1998. Pro forma earnings per
share are calculated as if the Purchase Agreement was completed on January
1, 1998 and the related 1,029,218 shares of common stock were issued on
that date.
The pro forma statement of operations for the year ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Pro Forma
LanXtra Cavion Adjustments Pro Forma
--------- -------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 215,022 $ - $ - $ 215,022
Cost of revenue 222,419 - - 222,419
----------- --------- --------- ---------
Gross profit (7,397) - - (7,397)
Operating expenses 1,117,892 6,877 914,146 (1) 2,038,915
Nonoperating expenses 845,213 29,067(584,480)(2) 289,800
----------- --------- --------- ---------
Loss from continuing
operations $(1,970,502) $ (35,944) $ (329,666) $(2,336,112)
=========== ========= ========== ===========
Unaudited pro forma net
loss from continuing
operations per basic
and diluted share $ (.77)
===========
Weighted average
shares outstanding 3,029,218
==========
</TABLE>
The pro forma statement of operations for the year ended December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Pro Forma
LanXtra Cavion Adjustments Pro Forma
--------- -------- ----------- ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 37,850 $ 618,505 $ - $ 656,355
Cost of revenue 31,898 493,244 - 525,142
--------- ---------- -------- -----------
Gross profit 5,952 125,261 - 131,213
Operating expenses 213,311 4,392,769 79,421 (1) 4,685,501
Interest expense
and other 64,069 486,011 (52,932)(2) 497,148
--------- ---------- --------- -----------
Net loss $(271,428)$(4,753,519) $(26,489) $(5,051,436)
========= ========== ======== ===========
Net loss per basic
share $ (1.06) $ (1.56) $ (1.62)
========= ========= ==========
Weighted average
shares outstanding 3,112,424
==========
</TABLE>
Adjustments
- -----------
(1) Amortization of goodwill
(2) Reduction of interest expense to reflect Cavion's capital structure
10. SUBSEQUENT EVENTS:
-----------------
On February 14, 2000, the Company entered into an agreement for investor
relations consulting services with Strategic Growth International, Inc.
("SGI"). In connection with the agreement, the Company granted SGI options
to purchase 175,000 shares of our class A common stock exercisable at
$11.1875 for a period of five years. The agreement has a term of one-year
and requires monthly payments of $8,000 to SGI for the services.
On February 17, 2000, the Company entered into an agreement to issue, for
$12.00 per share, the closing price on February 14, the date of the
offering to the investors, 205,000 shares of its Class A Common Stock in a
private transaction. Gross proceeds of $2,460,000 were raised, and the
Company, after a reduction of $196,800 for the selling agent's commission,
netted proceeds of $2,263,200. In conjunction with this private
placement, warrants to purchase 20,500 shares of the Company's Class A
Common Stock were issued to the selling agent.
LANXTRA, INC.
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation)
FINANCIAL STATEMENTS
AS OF JANUARY 31, 1999, DECEMBER 31, 1998,
AND DECEMBER 31, 1997
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LanXtra, Inc.:
We have audited the accompanying balance sheets of LANXTRA, INC. (a
Colorado corporation; formerly Cavion Technologies, Inc. and Sigmacom
Corporation) as of January 31, 1999, December 31, 1998 and 1997, and the
related statements of operations, stockholders' deficit and cash flows for
the one-month period ended January 31, 1999 and for the years ended
December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LanXtra, Inc. as of
January 31, 1999, December 31, 1998 and 1997, and the results of its
operations and its cash flows for the one-month period ended January 31,
1999 and for the years ended December 31, 1998 and 1997 all in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Effective February 1, 1999,
substantially all of the Company's assets were transferred to Cavion
Technologies, Inc. in exchange for common stock and the assumption of the
Company's liabilities. Subsequent to this transaction, the Company's
activities will be limited to holding warrants to purchase the common
stock of Convergent Communications Services, Inc. and common stock of
Cavion Technologies, Inc. In April 1999, the Board of Directors resolved
to form a limited liability company and contribute the Company's remaining
assets into such company. The ability of the Company and its successor
limited liability company to continue operations depends upon the ultimate
value, if any, of the financial instruments held and the resolution of the
matters discussed in Note 7. This raises substantial doubt about the
Company and its successor's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado,
May 18, 1999.
Page 1 of 2
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
January 31, ---------------------
ASSETS 1999 1998 1997
------ ------------ ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ - $ 52,116 $ 350,443
Accounts receivable 16,458 17,695 114,599
Prepaids 33,120 38,295 -
Inventories 5,832 5,641 -
---------- ---------- ---------
Total current assets 55,410 113,747 465,042
---------- ---------- ---------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 7,674 7,674 7,674
Furniture and fixtures 44,330 44,330 44,330
Network equipment and
licensed software 391,880 354,577 233,471
---------- ---------- ---------
443,884 406,581 285,475
Less - Accumulated depreciation (112,864) (104,712) (38,209)
---------- ---------- ---------
Property and equipment, net 331,020 301,869 247,266
---------- ---------- ---------
DEBT ISSUANCE COSTS, net of
accumulated amortization of
$67,500, $67,500 and $49,091,
respectively - - 18,409
DEPOSIT FOR LETTER OF CREDIT 20,000 20,000 20,000
OTHER ASSETS 21,815 20,179 17,313
---------- ---------- ---------
TOTAL ASSETS $ 428,245 $ 455,795 $ 768,030
========== ========== =========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
Page 2 of 2
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
LIABILITIES AND January 31, ---------------------
STOCKHOLDERS' DEFICIT 1999 1998 1997
- --------------------- ------------ ----------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 256,222 $ 118,942 $ 81,032
Bank overdraft 19,397 - -
Accrued liabilities 186,444 171,908 211,347
Accrued interest 114,322 105,401 9,095
Deferred revenue and deposits 214,712 198,884 8,695
Related party collateralized
loans 13,410 13,410 75,190
Current portion of capital
lease obligations 30,279 32,363 17,661
Notes payable to stockholders 300,000 300,000 40,000
Note payable to Cavion 335,000 335,000 -
Revolving line of credit 600,000 600,000 600,000
---------- ---------- ---------
Total current liabilities 2,069,786 1,875,908 1,043,020
---------- ---------- ---------
LONG-TERM LIABILITIES:
Capital lease obligations 32,832 32,832 20,475
PUTABLE COMMON STOCK; 58,648,
58,648 and 30,000 shares issued
and outstanding, respectively
(stated at accreted value;
total redemption value of
approximately $2.0 million) 1,700,236 1,650,236 837,500
COMMITMENTS AND CONTINGENCIES
(Notes 1 and 7)
STOCKHOLDERS' DEFICIT:
Common stock; $.01 par value,
1,000,000 shares authorized;
315,112, 315,112 and 286,464
shares issued, and outstanding
including 58,648, 58,648 and
30,000 shares, respectively,
of putable common stock 3,151 3,151 2,865
Additional paid-in capital 410,735 410,735 410,735
Accumulated deficit (3,788,495) (3,517,067) (1,546,565)
--------- --------- ---------
Total stockholders' deficit(3,374,609) (3,103,181) (1,132,965)
---------- ---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 428,245 $ 455,795 $ 768,030
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
One-Month Years Ended
Period Ended December 31,
January 31, ------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE:
Network access and
connectivity fees $ 24,381 $ 147,965 $ 24,430
Installation services 12,800 63,031 -
Software licensing fees 669 4,026 -
----------- ----------- -----------
Total revenue 37,850 215,022 24,430
----------- ----------- -----------
COST OF REVENUE:
Network access and
connectivity 15,645 136,903 51,688
Installation services 16,253 85,516 -
----------- ----------- -----------
Total cost of revenue 31,898 222,419 51,688
----------- ----------- -----------
Gross profit (loss) 5,952 (7,397) (27,258)
----------- ----------- -----------
OPERATING EXPENSES:
General and administrative 181,731 869,293 673,034
Research and development 31,580 248,599 363,741
----------- ----------- -----------
Total operating expenses 213,311 1,117,892 1,036,775
----------- ----------- -----------
LOSS FROM OPERATIONS (207,359) (1,125,289) (1,064,033)
INTEREST EXPENSE (64,069) (997,503) (808,822)
OTHER INCOME - 152,290 37,361
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (271,428) (1,970,502) (1,835,494)
DISCONTINUED OPERATION:
Gain from disposal of
discontinued operation - - 418,848
Income from operations of
discontinued operation - - 653,528
----------- ----------- -----------
- - 1,072,376
----------- ----------- -----------
NET LOSS $ (271,428) $(1,970,502) $ (763,118)
BASIC AND DILUTED NET LOSS
FROM CONTINUING OPERATIONS
PER SHARE $ (1.06)$ (7.66) $ (8.86)
=========== =========== ===========
BASIC AND DILUTED NET LOSS
PER SHARE $ (1.06)$ (7.66) $ (3.68)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 256,464 257,319 207,205
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
STATEMENTS OF STOCKHOLDERS' DEFICIT
-----------------------------------
FOR THE ONE MONTH ENDED JANUARY 31, 1999
-----------------------------------------
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
---------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Shares
(Including Shares
of Putable
Common Stock) Amount
---------------------- ---------
<S> <C> <C> <C>
BALANCES,
December 31, 1996 230,000 $ 2,300 $ 11,250
Exercise of stock options
by an employee at an
exercise price of $.01
in May 1997 5,000 50 -
Issuance of common stock
for cash at $7.77 per
share in connection
with the sale of
discontinued operation 51,464 515 399,485
Net loss - - -
--------- --------- ---------
BALANCES,
December 31, 1997 286,464 2,865 410,735
Issuance of putable
common stock 28,648 286 -
Net loss - - -
--------- --------- ---------
BALANCES,
December 31, 1998 315,112 3,151 $410,735
Net loss - - -
--------- --------- ---------
BALANCES,
January 31, 1999 315,112 $3,151 $410,735
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Shares
(Including Shares
of Putable
Common Stock) Amount
---------------------- ---------
<S> <C> <C> <C>
BALANCES,
December 31, 1996 $ (783,447) $ (783,447) $ (769,897)
Exercise of stock options
by an employee at an
exercise price of $.01
in May 1997 - - 50
Issuance of common stock
for cash at $7.77 per
share in connection
with the sale of
discontinued operation - - 400,000
Net loss (763,118) (763,118) (763,118)
--------- --------- ---------
BALANCES,
December 31, 1997 (1,546,565) (1,546,565) (1,132,965)
Issuance of putable
common stock - - 286
Net loss (1,970,502) (1,970,502) (1,970,502)
--------- --------- ---------
BALANCES,
December 31, 1998 $(3,517,067) $(3,517,067) $(3,103,181)
Net loss (271,428) (271,428) (271,428)
--------- --------- ---------
BALANCES,
January 31, 1999 $(3,788,495) $(3,788,495) $(3,374,609)
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
STATEMENTS OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
One-Month Years Ended
Period Ended December 31,
January 31, ------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(271,428) $(1,970,502) $(763,118)
Adjustments to reconcile net
loss to net cash used in
operating activities-
Depreciation and amortization 8,152 84,912 58,284
Gain from disposal of
discontinued operations - - (418,848)
Provision for doubtful
accounts - - 20,923
Accretion of putable stock 50,000 612,200 577,500
Accretion of discount on
bridge loan - 200,536 -
Change in operating assets and
liabilities-
Accounts receivable 1,237 96,904 (135,522)
Prepaids and inventories 4,984 (43,936) -
Other assets (1,636) (2,866) (7,970)
Accounts payable 137,280 37,910 69,186
Accrued liabilities 23,457 56,867 184,169
Deferred revenue 15,828 190,189 8,695
Decrease in net assets of
discontinued operations - - 64,884
---------- ---------- ----------
Net cash used in
operating activities (32,126) (737,786) (341,817)
---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (37,303) (71,154) (181,422)
Proceeds from disposal of
discontinued operations - - 475,000
---------- ---------- ----------
Net cash (used in) provided
by investing activities (37,303) (71,154) 293,578
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Cash overdraft 19,397 - -
Proceeds from notes payable - - -
Proceeds from issuance of common
stock - 286 400,050
Repayments of related party
loans - (61,780) (50,000)
Cash received on related party
loans - - 75,190
Repayments of stockholder notes - - (28,721)
Cash received from stockholder
notes - 260,000 -
Cash received from Cavion - 335,000 -
Payment on capital lease
obligations (2,084) (22,893) (6,625)
---------- ---------- ----------
Net cash provided by
financing activities 17,313 510,613 389,894
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (52,116) (298,327) 341,655
CASH AND CASH EQUIVALENTS,
beginning of period 52,116 350,443 8,788
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of period $ - $ 52,116 $ 350,443
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property acquired with
capital leases $ - $ 49,952 $ 44,761
========== ========== ==========
Putable common stock
issued in conjunction
with stockholder notes $ - $ 200,536 $ -
========== ========== ==========
Cash paid for interest $ 5,148 $ 88,461 $ 66,496
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE PERIOD ENDED JANUARY 31, 1999 AND
------------------------------------------
FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
------------------------------------------
(1) DESCRIPTION OF BUSINESS
-----------------------
Organization
------------
Sigmacom Corporation ("Sigmacom") was incorporated under the laws of the
state of Colorado on June 26, 1992. In 1998 Sigmacom changed its name to
Cavion Technologies, Inc. Effective January 1999, Cavion Technologies,
Inc. changed its name to LanXtra, Inc. ("LanXtra" or the "Company").
Before 1998, the Company was engaged in integrating computer networks and
communications technologies for financial institutions, Fortune 1000
companies and government agencies. On December 3, 1997, the Company
entered into an asset purchase agreement with Convergent Communications
Services, Inc. ("Convergent") for the sale of certain assets of the
Company, including all assets related to the Company's network integrator
business, including, without limitation, the name, "Sigmacom".
Since January 1, 1998, the Company has been engaged in developing and
marketing a suite of network products and services for the credit union
industry that includes: (1) a secure network that enables access via the
internet or an intranet; (2) secure internet financial products such as
internet banking software; and (3) secure internet access services for
credit unions.
Subsequent to the transaction discussed below, the Company's activities
will be limited to holding warrants for the purchase of Convergent common
stock and common stock of the new Cavion Technologies, Inc. Further, in
April 1999, the Board of Directors resolved to form a limited liability
company and contribute the Company's remaining assets into such company.
The ability of the Company and its successor limited liability company to
continue operations depends upon the ultimate value, if any, of the
financial instruments held and the resolution of the matters discussed in
Note 7. This raises substantial doubt about the Company and its
successor's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern.
Transfer of the Company's Assets, Liabilities and Operations
------------------------------------------------------------
In August 1998, the Company signed a letter of intent to transfer its
assets and operations to a company to be renamed Cavion Technologies, Inc.
("Cavion"). In December 1998, the Company signed an Asset Purchase
Agreement (the "Purchase Agreement") with Cavion for the transfer of
substantially all the assets of the Company in exchange for 375,214 shares
and 28,648 shares of Cavion's Class A and B common stock, respectively,
and the assumption of liabilities. Also in December 1998, management
shareholders of LanXtra received 625,356 shares of Class A common stock
directly from Cavion. These management shareholders held sufficient
voting shares, directly and indirectly through irrevocable proxies, to
approve the transaction with Cavion.
The Class A common stock and Class B common stock of Cavion are alike in
all respects, except that the Class B common shareholders have the option
to put those shares to Cavion for $7 per share and a parallel call option
is held by Cavion. The Class A common stock issued to the Company
represents approximately 12% of the common equity of Cavion. The Purchase
Agreement was consummated on February 1, 1999 and Cavion has subsequently
assumed the operations of the Company. During the period from August 1998
through February 1, 1999, Cavion provided loans to the Company totaling
$335,000 at January 31, 1999. Such loans were forgiven as part of the
transaction. In management's opinion, the purchase of the Company's
assets and assumption of its liabilities by Cavion will qualify under
Internal Revenue Code regulations as a tax free reorganization.
Upon consummation of the Purchase Agreement, several of the Company's
contractual arrangements were significantly modified. The Company's
Investment Agreement, warrant and option agreements were cancelled and
certain debt maturities were rescheduled by the creditors (see Notes 3 and
5).
Cavion is an entity formed by various third parties to acquire the
business conducted by the Company. Through January 31, 1999, Cavion had
raised $370,000 through debt offerings, $335,000 of which was advanced to
the Company as of January 31, 1999. In February 1999, Cavion conducted a
private placement of its Series A preferred stock, raising approximately
$2 million.
The business now conducted by Cavion has never been profitable, and there
is substantial risk associated with the Company's investment in Cavion
common stock. It is probable that the value of this common stock will be
highly volatile and it is reasonably possible that the ultimate value
realized from the stock could be zero.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------
Basis of Presentation
---------------------
Accounting for transactions during the one-month period ending January 31,
1999, is on the same basis of accounting as for the years ended December
31, 1998 and 1997. The Company has presented information as of and for
the one-month period ended January 31, 1999, as this represents the final
period in which the business transferred to Cavion was conducted by the
Company.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considered all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Fair Value of Financial Instruments
-----------------------------------
The fair value of the Company's cash and cash equivalents, trade
receivables and payables approximated their carrying amounts due to their
short-term nature. The fair value of the Company's other financial
instruments are as follows:
<TABLE>
<CAPTION>
January 31, 1999 and
December 31, 1998
---------------------------
Approximate
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Related party collateralized loans $ 13,410 $ 11,000
Notes payable to stockholders 300,000 260,000
Revolving line of credit 600,000 600,000
Putable stock 1,700,236/1,650,236 175,000
December 31, 1997
---------------------------
Approximate
Carrying Fair
Amount Value
------------ ------------
Related party collateralized notes $ 75,190 $ 6,000
Notes payable to stockholders 40,000 3,000
Revolving line of credit 600,000 600,000
Putable stock 837,500 15,000
</TABLE>
Fair values at January 31, 1999 and December 31, 1998 have been estimated
using the values placed on them by the buyer in the transaction described
above. Fair values at December 31, 1997, have been estimated based upon
the terms of subsequent financings.
Concentration of Credit Risk
----------------------------
Financial instruments which potentially subjected the Company to
concentrations of credit risk were accounts receivable, which were
concentrated among credit union customers. The Company performed ongoing
credit evaluations of its customers' financial condition and generally
required no collateral. Additionally, the Company managed a portion of
its credit risk by billing certain services in advance. The Company had
no significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option contracts or
other hedging arrangements.
Property and Equipment
----------------------
Property and equipment were recorded at cost and depreciated using the
straight-line method over the lesser of the lease term or their estimated
lives as follows:
Furniture and fixtures 7 years
Computer equipment 3 - 5 years
Licensed software 3 years
Leasehold improvements Life of the lease
Impairment of Long-Lived Assets
-------------------------------
The Company reviewed its long-lived assets for impairment whenever events
or changes in circumstances indicated that the carrying amount of an asset
may not be recoverable from future undiscounted cash flows. During 1997
and 1998 and in January 1999, no impairment losses were recorded.
Accrued Liabilities
-------------------
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
January 31, December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Wages payable and accrued vacation $ 48,545 $ 44,661 $ 30,924
Accrued vendor payable 78,673 78,673 78,673
Accrued professional fees 41,257 27,500 9,657
Other liabilities 17,969 21,074 92,093
-------- -------- --------
Total accrued liabilities $186,444 $171,908 $211,347
======== ======== ========
</TABLE>
Income Taxes
------------
A current provision for income taxes was recorded for actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year. Deferred income tax assets and liabilities were recorded for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of
assets and liabilities and carryforwards. The overall change in deferred
tax assets and liabilities for the period measured the deferred tax
expense for the period. Effects of changes in tax laws on deferred tax
assets and liabilities were reflected as adjustments to tax expense in the
period of enactment. Deferred tax assets were recognized for the expected
future tax effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets were then
reduced, if deemed necessary, by a valuation allowance for the amount of
any tax benefits which, more likely than not based on current
circumstances, were not expected to be realized.
Net Loss Per Share
------------------
The Company reports net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
which requires the presentation of both basic and diluted earnings (loss)
per share. Basic net loss per common share has been computed based upon
the weighted average number of shares of common stock outstanding during
the period, excluding putable common stock as an assumed cash settlement
is more dilutive than a share settlement. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average
number of common and potential common shares outstanding during the period
if the effect of the potential common shares is dilutive. The Company has
excluded the weighted average effect of common stock issuable upon
exercise of all warrants and options for common stock from the computation
of diluted earnings per share as the effect of all such securities is anti-
dilutive for all periods presented. The shares excluded (without regard
to the treasury stock method) are as follows:
For the year ended December 31:
1998 531,978
1997 307,113
There are no such shares excluded for the month ended January 31, 1999,
due to the cancellation of options and warrants at December 31, 1998.
Basic and diluted net loss per share is computed using the following
average shares outstanding:
<TABLE>
<CAPTION>
Month Ended Years Ended December 31,
January 31, ------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares
outstanding 315,112 304,130 237,205
Less: Weighted average
shares of putable stock (58,648) (46,811) (30,000)
-------- -------- --------
Net weighted average shares
outstanding 256,464 257,319 207,205
</TABLE>
Stock Based Compensation
------------------------
The Company accounted for its employee stock option plans and other
employee stock-based compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations. The
Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), which allows entities to
continue to apply the provisions of APB 25 for transactions with employees
and provide pro forma disclosures for employee stock grants made in 1997
and future years as if the fair-value-based method of accounting in SFAS
No. 123 had been applied to these transactions. The Company accounted for
equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123.
Revenue Recognition
-------------------
The Company generated revenue from three sources: (1) service revenue for
the installation of internet access equipment at customer sites, (2)
software license fees, and (3) recurring monthly network access and
connectivity fees. Service revenue was recognized as the services were
performed. Software license arrangements typically provided for
enhancements over the term of the arrangement, and software license fees
were generally received in advance, deferred and recognized ratably over
the term of the arrangement. Network access and connectivity fees were
typically billed in advance and recognized in the month that the
access/connectivity was provided.
Software Development Costs
--------------------------
Capitalization of software development costs commenced upon the
establishment of technological feasibility of the software product. The
Company's software products were deemed to be technologically feasible at
the point the Company commenced field testing of the software. The period
from field testing to general customer release of the software was brief
and the costs incurred during this period were insignificant.
Accordingly, the Company did not capitalize any qualifying software
development costs.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. From its inception through January 31, 1999, there were no
differences between comprehensive loss and net loss.
Segment Information
-------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. In
accordance with the provisions of SFAS No. 131, the Company has determined
that it had one reportable operating segment at December 31, 1998 and
January 31, 1999.
Recently Issued Accounting Pronouncement
----------------------------------------
Statement of Financial Accounting Standards No. 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is
required to adopt SFAS No. 133 in the year ended December 31, 2000. SFAS
No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities. The Company's derivative financial instruments
include a written put on the Company's common stock and the Convergent
warrants (Note 8).
Reclassifications
-----------------
Certain amounts in the 1997 financial statements have been reclassified to
conform to the current year presentation.
(3) DEBT
----
Revolving Line of Credit
------------------------
In 1996, the Company entered into a two-year revolving line of credit (the
"Revolving Line of Credit") with a bank which allows for borrowings up to
$600,000. Interest accrues at a rate equal to the Bank's reference rate
plus 1.5% (9.25%, 9.25% and 10% at January 31, 1999, December 31, 1998 and
1997, respectively). The Revolving Line of Credit is collateralized by
letters of credit issued by the Company and certain stockholders as well
as by agreements among certain stockholders (see Note 5). In 1998, the
Revolving Line of Credit was extended and all amounts outstanding were due
on January 31, 1999. As part of the Purchase Agreement, the Revolving
Line of Credit was assumed by Cavion and the maturity date of the loan was
extended to December 31, 1999.
As part of the 1997 asset sale agreement with Convergent, it was agreed
that the Company would be reimbursed for interest expense incurred on the
Revolving Line of Credit if certain revenue targets were achieved on the
line of business sold. In 1998, Convergent reimbursed the Company for
interest expense totaling $30,334 until June 30, 1998, when such
reimbursements were discontinued because the revenue targets were not met.
Notes Payable to Stockholders
-----------------------------
The notes payable to stockholders consist of eight notes totaling $300,000
at January 31, 1999, and December 31, 1998. Two of the notes have an
aggregate principal balance of $40,000 and accrue interest at a rate of
prime plus 2% (9.75%, 9.75% and 10.5% as of January 31, 1999, December 31,
1998 and 1997, respectively). During 1999, 1998 and 1997, the Company
continued to accrue interest in accordance with the terms of the notes.
The notes are unsecured.
Effective May 28, 1998, the Company entered into six note payable
agreements (the "Bridge Loans") with certain stockholders and management
(the "Lenders"), whereby the Company borrowed $260,000. Interest on the
Bridge Loans was payable at the rate of 42% per year. Under the original
terms of the Bridge Loans, the principal was payable in monthly
installments and the balance, including accrued interest, was due on
January 1, 1999. In connection with the Purchase Agreement, the maturity
was extended to the date on which Cavion obtains 100 credit union
customers (the "100 Credit Union Date"). In addition, interest terms were
amended such that no interest will accrue after December 31, 1998. The
Bridge Loans are unsecured.
As additional consideration for the Bridge Loans, the Lenders were issued
28,648 shares of the Company's nonvoting common stock for $.01 per share.
The Lenders had the right to sell these shares back to the Company for a
purchase price of $7 per share, during a 60-day period beginning January
1, 1999. As a result of this transaction, $200,536 was recorded as a debt
discount and accreted as interest expense in 1998. The common stock was
accreted to its redemption value at December 31, 1998. The right to sell
shares back to the Company was canceled in conjunction with the Purchase
Agreement, in exchange for the stockholders being granted the same rights
in 28,648 shares of Cavion's Class B common stock.
Note Payable
------------
On September 14, 1998, the Company entered into a loan agreement with
Cavion to borrow up to $300,000, at an interest rate of 16% and a maturity
date of March 14, 1999. The note was secured by substantially all of the
tangible and intangible assets of the Company (including its technology).
On December 29, 1998, Cavion agreed to lend up to an additional $55,000
under the same terms, and advanced $35,000 of this amount. As part of the
Purchase Agreement, this loan was forgiven.
Related Party Collateralized Loans
----------------------------------
The Company entered into factoring agreements (the "Agreements") with
management and a stockholder of the Company. Accrued interest as of
January 31, 1999, December 31, 1998 and 1997, under the Agreements was
$27,952, $27,952 and $6,905, respectively, and is included in accrued
interest in the accompanying financial statements. Under the terms of the
Agreements, interest accrued on the outstanding balances at a rate of 3%
for the first 30 days and 1% for each additional 10 days until the
outstanding balances were paid in full. In connection with the Purchase
Agreement, the maturity of these loans was extended to the 100 Credit
Union Date. In addition, interest terms were amended such that no
interest will accrue after February 1, 1999.
(4) CAPITAL LEASE OBLIGATIONS
-------------------------
The Company entered into various capital lease agreements related to
computers and various office equipment. The capital leases have terms
ranging from 24 to 36 months with interest rates ranging between 11.4% and
20.3%.
As of December 31, 1998, the present value of future minimum lease
payments are as follows:
Year Ending December 31,
1999 $ 39,509
2000 21,513
2001 15,578
---------
76,600
Less: amounts representing interest (11,405)
---------
65,195
Less: current portion (32,363)
---------
Long-term capital lease obligation $ 32,832
=========
The net book value of assets under capital lease obligations as of January
31, 1999 was $65,069.
(5) STOCKHOLDERS' DEFICIT
---------------------
Investment Agreement
--------------------
In August 1996, the Company entered into an investment agreement (the
"Investment Agreement") under which the Company sold 30,000 shares of
common stock to an investor group at par value, subject to a put option
agreement (the "Put Options"). The investor group provided letters of
credit for $600,000 to secure the Company's Revolving Line of Credit. The
Put Options were exercisable for a 60-day period beginning August 1, 1999.
The original terms of the Put Options provided that they would be canceled
if the Company completes a public stock offering and repaid the Revolving
Line of Credit. The amounts to be redeemed under the Put Options were
being accreted over the period to their exercise date using the straight
line method, and has been included in interest expense in the accompanying
statements of operations. Contingent upon consummation of the Purchase
Agreement with Cavion, the investor group, under a separate agreement, has
agreed to cancel the Put Options. The letters of credit provided by the
investor group continue to secure the Company's Revolving Line of Credit
until it is repaid by Cavion. However, LanXtra is obligated to reimburse
the investor group in the event of foreclosure on their collateral.
If Cavion defaults on the Revolving Line of Credit, 171,000 shares of the
Company's outstanding common stock held by certain members of the
Company's investor group are to be forfeited and transferred back to the
Company.
Warrants
--------
The Investment Agreement required that if the Company repaid its Revolving
Line of Credit but failed to complete a qualified initial public offering
by January 31, 2000, the investor group would be issued warrants to
purchase 30,000 shares of common stock. The warrants will have an
exercise price equal to the book value per share on December 31, 1999, and
are exercisable anytime within three years from the date of issuance. As
part of the Purchase Agreement, such warrants were canceled.
The Company also issued a stockholder warrants to purchase 7,113 shares of
common stock in consideration for services performed in connection with
the Investment Agreement. The warrants had an exercise price of $ 7.70
and are exercisable upon the expiration or the exercise of the Put Option.
No value was attributed to these warrants as it was unlikely these
warrants would be exercised prior to the exercise date. As part of the
Purchase Agreement, such warrants were canceled.
Stock Options
-------------
In 1997, the Company adopted a stock option plan. Stock options to
employees were granted at various exercise prices and vested between one
and five years.
The following table summarizes stock option activity for the plan:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 270,000 $ 7.50 5,000 $0.01
Granted 196,217 4.60 292,105 $6.94
Cancelled (466,217) (5.93) (22,105) $0.01
Exercised - - (5,000) $0.01
--------- --------- --------- ---------
Outstanding at end
of year - $ - 270,000 $7.50
========= ========= ========= =========
Weighted average fair
value of options
granted during the year $1.79 $1.63
========= =========
</TABLE>
As of December 31, 1998, all outstanding options for common stock were
canceled.
Under the fair value approach of SFAS 123, the total fair value of options
granted under the Plan during 1997 was approximately $478,000. If the
Company had accounted for its stock option plan in accordance with SFAS
123, the Company's net loss and pro forma net loss would have been
reported as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C> <C>
Net loss: As reported $(1,970,502) $(763,118)
=========== =========
Pro forma $(2,321,196) $(819,242)
=========== =========
Per share data: As reported $(7.66) $(3.68)
=========== =========
Pro forma $(9.02) $(3.95)
=========== =========
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the minimum value method. Assumptions used to calculate the fair
value were risk free interest rates of 6.22% to 6.25%, no dividend yields,
an expected life of three to five years and volatility of .001%.
(6) INCOME TAXES
------------
From inception, the Company has generated losses for both financial
reporting and tax purposes. At January 31, 1999, December 31, 1998 and
1997, the Company had a net operating loss carryforward for income tax
purposes of approximately $1,550,000, $1,328,000 and $530,000,
respectively. These would expire beginning in 2011 through 2018, if not
utilized. The net loss carryforwards resulted in a deferred tax asset of
approximately $613,000, $530,000 and $199,000 at January 31, 1999,
December 31, 1998 and 1997, respectively. Due to the uncertainty relating
to the realization of the benefit of the net operating loss carryforward,
a valuation allowance has been recorded for the full amount.
The Company paid no federal or state income taxes in 1998 or 1997.
The effective tax rate differs from the statutory tax rate applied to the
loss from continuing operations for the following reasons:
<TABLE>
<CAPTION>
January
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Expected federal benefit $(92,285) $(669,971) $(624,067)
Expected state benefit, net of federal (8,957) (65,027) (60,571)
Non-deductible accretion 18,650 403,998 229,039
Increase in valuation allowance 82,592 331,000 455,599
--------- -------- --------
Provision/benefit for income
taxes related to loss from
continuing operations $ - $ - $ -
========= ======== ========
</TABLE>
No taxes were provided against the gain and results from discontinued
operations as no incremental taxes were due.
(7) COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases
- ------
The Company had operating lease agreements relating to office facilities
and equipment which expire through 2000. Future minimum lease payments
under these agreements were as follows:
Year Ended December 31,
1999 $60,049
2000 2,298
--------
$62,347
========
Rent expense for the years ended December 31, 1998 and 1997 was
approximately $60,621 and $73,000, respectively, and approximately $5,000
for January 1999. Obligations for payments under these leases were
assumed by Cavion.
Legal Matters
-------------
In the normal course of business, the Company is subject to, and may
become a party to, litigation arising out of its operations. In
management's opinion, none of the matters currently in actual or
threatened litigation will have a material impact on the Company's
financial position or results of operations.
In connection with the Purchase Agreement transaction, a shareholder of
the Company exercised his rights as a dissenting shareholder. If the
shareholder is permitted to pursue this claim in a legal proceeding, the
Company could be required to pay the shareholder the fair value of his
shares immediately before the closing date of the Purchase Agreement.
Management believes that the value paid on account of these shares
pursuant to the Purchase Agreement is greater than the amount which the
dissenting shareholder could recover under Colorado law. The dissenting
shareholder has asserted, however, that the value of his 50,000 LanXtra
shares immediately before the closing date of the Purchase Agreement is
approximately $250,000. The ultimate resolution of the matter, which is
expected to occur within one year, could result in an obligation to the
shareholder. Further, should the Company, or Cavion as successor, be
required to make a payment to this shareholder, such payment could result
in the Cavion purchase transaction being treated as a taxable transaction
which could subject the Company to a significant tax liability.
(8) DISCONTINUED OPERATION
----------------------
On December 3, 1997, the Company sold the network integrator operations
(the "Discontinued Operation") of the Company for cash of $475,000. This
transaction resulted in a gain of $418,848. The Company also received
$30,334 in 1998 from Convergent related to this transaction and has
included this amount in other income for 1998.
In conjunction with the sale, the Company also issued Convergent 51,464
shares of common stock in exchange for $400,000.
The Company also received a warrant to purchase 50,000 shares of
Convergent's common stock at an exercise price of $7.50 per share. The
warrant was exercisable immediately and expires on December 3, 1999. As
of January 31, 1999, the Company had not exercised the warrant. No value
has been attributed to this warrant in the accompanying financial
statements as management believes the value of this warrant is nominal.
Convergent is not a publicly traded company, and based on information
available to the Company, the exercise price is significantly in excess of
the estimated market value of Convergent's common stock.
Summarized results of operations financial position and earnings per share
data of the discontinued operations were as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997
------------------
<S> <C>
Results of operations:
Revenue $3,723,130
Net income from discontinued operation 653,528
Basic and diluted per share information:
Basic and diluted net income from discontinued
operation $3.15
Basic and diluted gain on sale of
discontinued operation $2.02
======
</TABLE>
(9) CONDENSED FINANCIAL STATEMENTS, AFTER CONSUMMATION
--------------------------------------------------
OF PURCHASE AGREEMENT (UNAUDITED)
---------------------------------
The following unaudited balance sheet reflects the Company's balance sheet
following the transfer of the Company's assets to and assumption of its
liabilities by Cavion which was completed February 1, 1999 (see Note 1).
The investment in Cavion stock has been recorded at the net book value of
the assets transferred to and liabilities assumed by Cavion. Because the
liabilities assumed by Cavion exceeded the value of the assets transferred
and the Company was relieved from its obligations for those transferred
liabilities, the investment in Cavion was recorded at zero. As discussed
in Note 8, management believes that the fair value of the Convergent
warrants was zero.
Investment in Cavion common stock $ -
Investment in Convergent warrants -
--------------
$ -
==============
Stockholders' equity (deficit) $ -
==============
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure during the period of this
report.
[Outside Back Cover]
TABLE OF CONTENTS
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 9
Market for Common Stock, Dividend Policy and Related Shareholder
Matters 10
Capitalization 10
Selected Financial Information 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Our Business 23
Management 35
Executive Compensation 40
Equity Incentive Plan 43
Principal Shareholders 46
Description of Capital Stock 48
Shares Eligible for Future Sale 53
Certain Relationships and Related Transactions 55
The Selling Shareholders 62
Plan of Distribution 64
Additional Information 65
Reports to Security Holders 66
Experts 66
Legal Matters 66
Index to Financial Statements F-1
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different
from that contained in this prospectus. We are offering to sell, and
seeking offers to buy, shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of common stock.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, bylaw, contract or arrangement under which any
controlling person, director or officer of cavion.com is insured or
indemnified in any matter against liability which he may incur in his
capacity as such, are as follows:
Article VIII of the Amended and Restated Articles of Incorporation of
cavion.com include the following provisions:
Indemnification
(a) The Corporation shall indemnify, to the fullest extent permitted
by applicable law in effect from time to time, any person, and the estate
and personal representative of any such person, against all liability and
expense (including attorneys' fees) incurred by reason of the fact that
such person is or was a director or officer of the Corporation or, while
serving as a director or officer of the Corporation, such person is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee, fiduciary or agent of, or in any similar managerial or
fiduciary position of, another domestic or foreign corporation or other
individual or entity or of an employee benefit plan. The Corporation
shall also indemnify any person who is serving or has served the
Corporation as director, officer, employee, fiduciary, or agent, and that
person's estate and personal representative, to the extent and in the
manner provided in any bylaw, resolution of the shareholders or directors,
contract, or otherwise, so long as such provision is legally permissible.
(b) The Corporation shall pay for or reimburse the reasonable
expenses incurred by a director or officer who is a party to a proceeding
in advance of final disposition of the preceding if:
(i) the director or officer furnishes to the Corporation a
written affirmation of his or her good faith belief that he or she has met
the standard of conduct described in Section 7-109-102 of the Colorado
Business Corporation Act;
(ii) the director or officer furnishes to the Corporation a
written undertaking, executed personally or on the director's or officer's
behalf, to repay the advance if it is ultimately determined that he or she
did not meet the standard of conduct; and
(iii) a determination is made that the facts known to those
making the determination would not preclude indemnification under Article
109 of the Colorado Business Corporation Act.
Article V of the Bylaws of cavion.com includes the following
provisions:
1. INDEMNIFICATION. The Corporation shall indemnify any person
against all liability and expense incurred by reason of the person being
or having been a director or officer of the Corporation to the full extent
and in any manner that directors may be indemnified under the Colorado
Business Corporation Act, as in effect at any time. The Corporation shall
also indemnify any person who is serving or has served the Corporation as
director or officer to the extent and in any manner provided in any bylaw,
resolution of the directors or shareholders, contract or otherwise, so
long as such provision is legally permissible. In the discretion of the
board of directors, the Corporation may indemnify an employee, fiduciary
or agent who is not a director or officer to the same extent as a director
or officer.
2. INSURANCE. The Corporation may purchase and maintain insurance
on behalf of an individual who is or was a director, officer, employee,
fiduciary, or agent of this Corporation or who, while a director, officer,
employee, fiduciary, or agent of this Corporation, is or was serving at
the request of this Corporation as a director, officer, partner, trustee,
employee, fiduciary, or agent of any other entity (including without
limitation an employee benefit plan), against any liability asserted
against or incurred by the person in that capacity or arising from his or
her status as a director, officer, employee, fiduciary, or agent, whether
or not the Corporation would have power to indemnify the person against
the same liability under this Article. Any such insurance may be procured
from any insurance company designated by the board of directors, whether
such insurance company is formed under this state or any other
jurisdiction of the United States or elsewhere, including any insurance
company in which the Corporation has equity or any other interest through
stock ownership or otherwise.
3. NOTICE TO SHAREHOLDERS OF INDEMNIFICATION OF DIRECTOR. If the
Corporation indemnifies or advances expenses to a director in connection
with a proceeding by or in the right of the Corporation, the Corporation
shall give written notice of the indemnification or advance to the
shareholders with or before the notice of the next shareholders' meeting.
If the next shareholder action is taken without a meeting at the
instigation of the board of directors, such notice shall be given to the
shareholders at or before the time the first shareholder signs a writing
consenting to such action.
4. INDEMNIFICATION NONEXCLUSIVE; INUREMENT. The indemnification
provided by this Article shall not be deemed exclusive of any other rights
and procedures to which the indemnified party may be entitled under the
articles of incorporation, any bylaw, agreement, vote of the shareholders
or directors, contract or otherwise. Such indemnification shall continue
as to a person who has ceased to be a director, officer, employee,
fiduciary or agent and shall inure to the benefit of such person's heirs,
personal representatives and administrators.
The provisions of Article 109 of the Colorado Revised Statutes on
indemnification are as follows:
Section 7-109-101. Definitions. As used in this article:
(1) "Corporation" includes any domestic or foreign entity that is a
predecessor of a corporation by reason of a merger or other transaction in
which the predecessor's existence ceased upon consummation of the
transaction.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is or
was serving at the corporation's request as a director, an officer, an
agent, an associate, an employee, a fiduciary, a manager, a member, a
partner, a promoter, or a trustee of, or to hold any similar position
with, another domestic or foreign corporation or other person or of an
employee benefit plan. A director is considered to be serving an employee
benefit plan at the corporation's request if the director's duties to the
corporation also impose duties on, or otherwise involve services by, the
director to the plan or to participants in or beneficiaries of the plan.
"Director" includes, unless the context requires otherwise, the estate or
personal representative of a director.
(3) "Expenses" includes counsel fees.
(4) "Liability" means the obligation incurred with respect to a
proceeding to pay a judgment, settlement, penalty, fine, including an
excise tax assessed with respect to an employee benefit plan, or
reasonable expenses.
(5) "Official capacity," means, when used with respect to a
director, the office of director in a corporation and, when used with
respect to a person other than a director as contemplated by Section 7-109-
107, the office in a corporation held by the officer or the employment,
fiduciary, or agency relationship undertaken by the employee, fiduciary,
or agent on behalf of the corporation. "Official capacity" does not
include service for any other domestic or foreign corporation or other
person or employee benefit plan.
(6) "Party" includes a person who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal.
Section 7-109-102 . Authority to indemnify directors. (1) Except
as provided in subsection (4) of this section, a corporation may indemnify
a person made a party to a proceeding because the person is or was a
director against liability incurred in the proceeding if:
(a) The person conducted himself or herself in good faith; and
(b) He reasonably believed:
(I) In the case of conduct in an official capacity with
the corporation, that his or her conduct was in the corporation's best
interests; and
(II) In all other cases, that his or her conduct was at
least not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful.
(2) A director's conduct with respect to an employee benefit plan
for a purpose the director reasonably believed to be in the interests of
the participants in or beneficiaries of the plan is conduct that satisfies
the requirements of subparagraph (II) of paragraph (b) of section (1) of
this section. A director's conduct with respect to an employee benefit
plan for a purpose that the director did not reasonably believe to be in
the interests of the participants in or beneficiaries of the plan shall
not be deemed not to satisfy the requirements of paragraph (a) of
subsection (1) of this section.
(3) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of
conduct described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with any proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation;
or
(b) In connection with any proceeding charging that the
director derived an improper personal benefit, whether or not involving
action in an official capacity, in which proceeding the director was
adjudged liable on the basis that he or she derived an improper personal
benefit.
(5) Indemnification permitted under this section in connection with
a proceeding by or in the right of the corporation is limited to
reasonable expenses incurred in connection with the proceeding.
Section 7-109-103. Mandatory indemnification of directors. Unless
limited by its articles of incorporation, a corporation shall indemnify a
person who was wholly successful, on the merits or otherwise, in defense
of any proceeding to which the person was a party because the person is or
was a director, against reasonable expenses incurred by him or her in
connection with the proceeding.
Section 7-107-104. Advance of expenses to directors. (1) A
corporation may pay for or reimburse the reasonable expenses incurred by a
director who is a party to a proceeding in advance of the final
disposition of the proceeding if:
(a) The director furnishes to the corporation a written
affirmation of the director's good faith belief that he or she has met the
standard of conduct described in section 7-109-102;
(b) The director furnishes to the corporation a written
undertaking, executed personally or on the director's behalf, to repay the
advance if it is ultimately determined that he or she did not meet the
standard of conduct; and
(c) A determination is made that the facts then known to those
making the determination would not preclude indemnification under this
article.
(2) The undertaking required by paragraph (b) of subsection (1) of
this section shall be an unlimited general obligation of the director but
need not be secured and may be accepted without reference to financial
ability to make repayment.
(3) Determinations and authorizations of payments under this section
shall be made in the manner specified in section 7-109-106.
Section 7-109-105. Court ordered indemnification of directors. (1)
Unless otherwise provided in the articles of incorporation, a director who
is or was a party to a proceeding may apply for indemnification to the
court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court, after giving any
notice the court considers necessary, may order indemnification in the
following manner:
(a) If it determines that the director is entitled to mandatory
indemnification under section 7-109-103, the court shall order
indemnification, in which case the court shall also order the corporation
to pay the director's reasonable expenses incurred to obtain court-ordered
indemnification.
(b) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances,
whether or not the director met the standard of conduct set forth in
section 7-109-102(1) or was adjudged liable in the circumstances described
in section 7-109-102(4), the court may order such indemnification as the
court deems proper; except that the indemnification with respect to any
proceeding in which liability shall have been adjudged in the
circumstances described in section 7-109-102(4) is limited to reasonable
expenses incurred in connection with the proceeding and reasonable
expenses incurred to obtain court-ordered indemnification.
Section 7-109-106. Determination and authorization of
indemnification of directors.
(1) A corporation may not indemnify a director under section 7-109-
102 unless authorized in the specific case after a determination has been
made that indemnification of the director is permissible in the
circumstances because the director has met the standard of conduct set
forth in section 7-109-102. A corporation shall not advance expenses to a
director under section 7-109-104 unless authorized in the specific case
after the written affirmation and undertaking required by section 7-109-
104(1)(a) and (1)(b) are received and the determination required by
section 7-109-104(1)(c) has been made.
(2) The determinations required by subsection (1) of this section
shall be made:
(a) By the board of directors by a majority vote of those
present at a meeting at which a quorum is present, and only those
directors not parties to the proceeding shall be counted in satisfying the
quorum; or
(b) If a quorum cannot be obtained, by a majority vote of a
committee of the board of directors designated by the board or directors,
which committee shall consist of two or more directors not parties to the
proceeding; except that directors who are parties to the proceeding may
participate in the designation of directors for the committee.
(3) If a quorum cannot be obtained as contemplated in paragraph (a)
of subsection (2) of this section, and a committee cannot be established
under paragraph (b) of subsection (2) of this section, or, even if a
quorum is obtained or a committee is designated, if a majority of the
directors constituting such quorum or such committee so directs, the
determination required to be made by subsection (1) of this section shall
be made:
(a) By independent legal counsel selected by a vote of the
board of directors or the committee in the manner specified in paragraph
(a) or (b) of subsection (2) of this section or, if a quorum of the full
board cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full board of
directors; or
(b) By the shareholders.
(4) Authorization of indemnification and advance of expenses shall
be made in the same manner as the determination that indemnification or
advance of expenses is permissible; except that, if the determination that
indemnification or advance of expenses is permissible is made by
independent legal counsel, authorization of indemnification and advance of
expenses shall be made by the body that selected said counsel.
Section 7-109-107. Indemnification of officers, employees,
fiduciaries, and agents. (1) Unless otherwise provided in the articles
of incorporation:
(a) An officer is entitled to mandatory indemnification under
section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the same extent
as a director;
(b) A corporation may indemnify and advance expenses to an
officer, fiduciary, employee, or agent of the corporation to the same
extent as a director; and
(c) A corporation may also indemnify and advance expenses to an
officer, employee, fiduciaries, or agent who is not a director to a
greater extent, if not inconsistent with public policy, and if provided
for by its bylaws, general or specific action of its board of directors or
shareholders, or a contract.
Section 7-109-108. Insurance. A corporation may purchase and
maintain insurance on behalf of a person who is or was a director,
officer, employee, fiduciary, or agent of the corporation, or who, while a
director, officer, employee, fiduciary, or agent of the corporation, is or
was serving at the request of the corporation as a director, officer,
partner, trustee, employee, fiduciary, or agent of any other domestic or
foreign corporation or other person, or of an employee benefit plan,
against liability asserted against or incurred by the person in that
capacity or arising from his or her status as a director, officer,
employee, fiduciary, or agent, whether or not the corporation would have
the power to indemnify the person against the same liability under section
7-109-102, 7-109-103, or 7-109-107. Any such insurance may be procured
from any insurance company designated by the board of directors, whether
such insurance company is formed under the laws of this state or any other
jurisdiction of the United States or elsewhere, including any insurance
company in which the corporation has equity or any other interest through
stock ownership or otherwise.
Section 7-109-109. Limitation of indemnification of directors. (1)
A provision treating a corporation's indemnification of, or advance of
expenses to, directors that is contained in its articles of incorporation
or bylaws, in a resolution of its shareholders or board of directors, or
in a contract, except an insurance policy, or otherwise, is valid only to
the extent the provision is not consistent with sections 7-109-101 to 7-
109-108. If the articles of incorporation limit indemnification or
advances of expenses, indemnification and advance of expenses are valid
only to the extent not inconsistent with the articles of incorporation.
(a) Sections 7-109-101 to 7-109-108 do not limit a
corporation's power to pay or reimburse expenses incurred by a director in
connection with an appearance as a witness in a proceeding at a time when
he or she has not been made a named defendant or respondent in the
proceeding.
Section 7-109-110. Notice to shareholders of indemnification of
director. If a corporation indemnifies or advances expenses to a director
under this article in connection with a proceeding by or in the right of
the corporation, the corporation shall give written notice of the
indemnification or advance to the shareholders with or before the notice
of the next shareholders' meeting. If the next shareholder action is
taken without a meeting at the instigation of the board of directors, such
notice shall be given to the shareholders at or before the time the first
shareholder signs a writing consenting to such action.
Section 7-108-402(2) of the Colorado Revised Statutes states as
follows:
No director or officer shall be personally liable for any injury to
person or property arising out of a tort committed by an employee unless
such director or officer was personally involved in the situation giving
rise to the litigation or unless such director or director committed a
criminal offense in connection with such situation. The protection
afforded in this subsection (2) shall not restrict other common-law
protections and rights that an director or officer may have. This
subsection (2) shall not restrict the corporation's right to eliminate or
limit the personal liability of a director to the corporation or to its
shareholders for monetary damages for breach of fiduciary duty as a
director as provided in subsection (1) of this section.
Article VII of the Amended and Restated Articles of Incorporation of
cavion.com includes the following provision:
A director of the Corporation shall not be personally liable to the
Corporation or to its shareholders for monetary damages for breach of
fiduciary duty as a director; except that this provision shall not
eliminate or limit the liability of the director to the Corporation or to
its shareholders for monetary damages otherwise existing for (i) any
breach of the director's duty of loyalty to the Corporation or to its
shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) acts specified
in Section 7-108-403 of the Colorado Business Corporation Act; or (iv) any
transaction from which the director derived an improper personal benefit.
If the Colorado Business Corporation Act is later amended to eliminate or
limit further the liability of a director, then, in addition to the
elimination and limitation of liability provided by the preceding
sentence, the liability of each director shall be eliminated or limited to
the fullest extent permitted by the Colorado Business Corporation Act as
so amended. Any repeal or modification of this Article VII shall not
adversely affect any right or protection of a director of the Corporation
under this Article VII, as in effect immediately prior to such repeal or
modification, with respect to any liability that would have accrued, but
for this Article VII, prior to such repeal or modification.
Also, cavion.com has entered into indemnification agreements with the
officers and directors to indemnify them and to advance expenses to the
fullest extent permitted by law either in connection with the
investigation, defense, adjudication, settlement or appeal of a proceeding
or in connection with establishing or enforcing a right to indemnification
or advancement of expenses. In addition, the agreements provide that no
claim or cause of action may be asserted by cavion.com against any
director or officer after two years from the date of the alleged act or
omission, provided that if in fact the person has fraudulently concealed
the facts, then no claim or cause of action may be asserted after two
years from the earlier of the date cavion.com discovers the facts or the
date cavion.com should have discovered such facts by the exercise of
reasonable diligence. The term of the agreement and cavion.com's
obligations apply while the person is an agent of cavion.com and continues
so long as the person is subject to any claim by reason of the fact that
he or she served as an agent of cavion.com.
In addition, the Underwriting Agreement for our initial public
offering provides for indemnification by the representative of the
underwriters for that offering of cavion.com, its directors and officers
against certain liabilities, including liabilities under the Securities
Act of 1933.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling cavion.com as provided in the foregoing provisions, cavion.com
has been informed that, in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Securities Act of 1933 and thus cannot be enforced.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimates of fees and expenses incurred or to be incurred in
connection with the issuance and distribution of securities being
registered, other than underwriting discounts and commissions are as
follows:
SEC Registration Fees $ 1,765*
Printing and Mailing Fees and Costs 10,000*
Transfer Agent Fees and Costs 300*
Legal Fees and Costs 25,000*
Accounting Fees and Costs 10,000*
Miscellaneous Expenses 2,935*
---------
TOTAL $50,000*
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
FOUNDERS SHARES. In August 1998, we issued 2,000,000 shares of
$.0001 common stock to our two founding shareholders at $.0001 per share.
These issuances to the two accredited investors were effected without
registration under the Securities Act of 1933 in reliance upon the
exemption from registration contained in Section 4(2) of the Act. As
founding shareholders, they had access to complete information regarding
our business at the time of issuance.
1998-1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS. Between
October 27, 1998 and February 8, 1999, we issued $470,000 in 15% secured
promissory notes due October 19, 2000 and a total of 56,400 warrants to
purchase shares of Class A common stock at an exercise price of $.01 per
share in a private placement. We relied on the exemption from
registration provided by Section 4(2) of the Act and Rule 505 of
Regulation D adopted under the Act, as well as exemptions under various
state securities laws. The securities were sold to 13 private investors.
One was an accredited investor and 12 were sophisticated investors.
Investors received a private placement memorandum as well as copies of the
documents relating to the sale of the assets of LanXtra to cavion.com
which closed in February 1999 and the loan from cavion.com to LanXtra
which has since been extinguished. Between December 28, 1998 and February
8, 1999, all of the warrants were exercised. In connection with the
offering, the agent for the offering, First Capital Investments, Inc. was
issued an agent's warrant to purchase 5,640 shares of Class A common stock
at $.01 per share, which warrant was exercised on February 8, 1999. In
addition, First Capital received a total offering commission of $37,600.
MANAGEMENT SHARES. In December 1998, we issued 625,356 shares of
Class A common stock to our management shareholders at $.01 per share.
These issuances to the three sophisticated investors were effected without
registration under the Act in reliance upon the exemption from
registration contained in Section 4(2) of the Act, relating to the sale of
securities by an issuer not involving a public offering. As these
individuals were part of management at the time the shares were issued,
they had access to complete information regarding our business at the time
of issuance.
LANXTRA ASSET PURCHASE. In February 1999, we issued 375,214 shares
of Class A common stock and 28,648 shares of Class B common stock to
LanXtra, Inc. in exchange for the assets and liabilities of LanXtra. This
issuance was effected without registration under the Act in reliance upon
the exemption from registration contained in Section 4(2) of the Act.
Since cavion.com was formed to purchase the assets and liabilities of
LanXtra, the management and shareholders of LanXtra had access to complete
information regarding our business at the time of issuance.
On July 1, 1999, LanXtra transferred its 376,299 shares of cavion.com
Class A common stock and 28,648 shares of Class B common stock to Zutano
LLC, a limited liability company formed to hold the assets of LanXtra and
which has the same ownership as that of LanXtra before its dissolution.
This transfer was made without registration under the Act in reliance on
the exemption from registration contained in Section 4(1) of the Act and
the "Section 4(1-1/2)" exemptive doctrine on the grounds that LanXtra is
not a dealer and was not an issuer or underwriter of the stock.
After the completion of our initial public offering, Zutano
transferred 310,619 shares of Class A common stock and 28,648 shares of
Class B common stock to its owners. The shares transferred to the owners
of Zutano included but were not limited to, Herman D. Axelrod (98,520
shares), Craig E. Lassen (98,520 shares) and Convergent Communications
Services, Inc. (67,603 shares). This transfer was made without
registration under the Act in reliance on the exemption from registration
contained in Section 4(1) of the Act and the "Section 4(1-1/2)" exemptive
doctrine on the grounds that Zutano is not a dealer and was not an issuer
or underwriter of the stock.
cavion.com agreed with the owners of the Class B common stock that
their "put" rights would mature upon completion of our initial public
offering. To implement that agreement, after completion of that offering
we offered these owners the option to redeem their Class B shares for
$7.00 per share in cash, or to convert each Class B share into one share
of our Class A common stock. On December 31, 1999, in accordance with the
terms of the Class B shares, the Company's "100 Credit Union Date"
triggered the exercise period for the Class B shares so that, the
acceptance of the offer to redeem the Class B shares at $7.00 per share
must occur by March 30, 2000, or the Class B shares will automatically be
converted into the same number of Class A shares on March 31, 2000. These
conversions, if effected, will be made without registration under the Act
in reliance on the exemption from registration contained in Section 4(2)
of the Act. The voting rights of holders of the Class B common stock are
fully described in "Description of Capital Stock" in the registration
statement for our initial public offering.
1999 PRIVATE PLACEMENT OF PREFERRED STOCK. In March and April 1999,
we issued 700,000 shares of convertible preferred stock, Series A,
convertible into Class A common stock, for an aggregate of $2,100,000,
prior to expenses and commissions. The initial conversion price was $3.00
per share of Class A common stock, but the conversion price was subject to
adjustment upon certain events affecting cavion.com's capitalization. The
shares of preferred stock were automatically converted into Class A common
stock on November 3, 1999, when we closed our initial public offering.
The convertible preferred stock was sold in reliance on the exemption from
registration provided by Section 4(2) of the Act and Rule 506 of
Regulation D adopted thereunder, as well as exemptions under various state
securities laws. The offering was sold to accredited investors only.
Investors received a private placement memorandum including financial
statements. In connection with the offering, the agent for the offering,
NTB was issued a five year agent warrant to purchase 70,000 shares of
preferred stock at an exercise price of $3.00 per share. Those warrants
were subsequently terminated at NTB's request. In addition, NTB received
a commission of $210,000 and a non-accountable expense allowance of
$42,000.
AUGUST 1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS. In August 1999
we raised $300,000 through the issuance of 14% promissory notes along with
warrants to purchase 30,000 shares of common stock. Each $50,000 note
entitled the subscriber to warrants to purchase 5,000 shares of Class A
common stock. The notes were due on the closing of our initial public
offering or one year from the date of their issuance. The notes were paid
in full on November 5, 1999. The warrants are exercisable for period of
five years from November 3, 1999. The warrant exercise price is $6.50,
the price at which common stock was offered in our initial public
offering. The notes and warrants were sold to 4 accredited investors. We
relied on the exemption from registration provided by Sections 4(2) and
4(6) of the Act and Rule 506 of Regulation D adopted under the Act, as
well as exemptions under various state securities laws.
FEBRUARY 2000 PRIVATE PLACEMENT. On February 17, 2000, we raised
$2,460,000 through a private placement of 205,000 shares of Class A common
stock at $12.00 per share, the closing price on February 14, the date of
the offering to the investors. The securities were sold in reliance on
the exemption from registration provided by Section 4(2) and 4(6) of the
Act and Rule 506 of Regulation D adopted under the Act, as well as
exemptions under various state securities laws. The offering was sold to
two accredited investors who received a copy of our most recent
registration statement on Form SB-2 (No. 333-93929) which was declared
effective by the SEC on February 4, 2000. In connection with the
offering, First Capital Investments, Inc. acted as our placement agent and
received a commission of 8%, or $196,000, and a warrant to purchase 20,500
shares of our Class A common stock, exercisable at 110% of the offering
price, $13.20, for a period of 5 years from February 17, 2000. We also
agreed to register the shares issued to the investors and the shares for
which the warrants are exercisable as soon as practicable.
With respect to all of the foregoing offerings, the securities were
offered for investment only and not for the purposes of resale or
distribution, and the transfer thereof was appropriately restricted by us.
Each certificate representing the above shares contains a legend
indicating that such shares are restricted and may not be sold without
registration under the Securities Act of 1933 or pursuant to an available
exemption from such registration. The notes and the warrants, before the
exercise of warrants for shares of Class A common stock, contain a similar
legend. In addition, all of the shares of common stock are subject to
lock-up arrangements with NTB, the representative of the underwriters for
our initial public offering, except for 5,000 shares issuable on exercise
of the warrants issued to one new shareholder in our August 1999 private
placement of notes and warrants, and the 205,000 shares issued in our
February 2000 private placement of common stock.
As provided in agreements with our founding shareholders, Venture
Funding, Ltd. and Boutine Capital, LLC, out of their initial purchases of
Class A common stock in August 1998, we redeemed 56,400 of their shares
for the exercise of the warrants in the October 1998 private placement,
603 shares were transferred by them to each of our management
shareholders, Craig Lassen, David J. Selina, and Jeffrey W. Marshall,
1,085 shares were transferred by them to LanXtra, Inc. and we redeemed an
additional 299,884 shares which were returned to authorized, but unissued
shares of our Class A common stock.
We filed a Registration Statement on Form SB-2 (No. 333-93929) to
register 831,891 shares of our common stock for the selling shareholders
named in the filing. The Registration Statement was declared effective on
February 4, 2000. The shares registered included the following:
o 700,000 shares of common stock which were automatically
converted from Series A preferred stock on November 3, 1999;
o 30,000 shares of common stock into which 30,000 common stock
purchase warrants are exercisable at $6.50 per share;
o 28,648 shares of common stock into which 28,648 shares of Class
B common stock are convertible;
o 5,640 shares of common stock issued to First Capital
Investments, Inc.; and
o 67,603 shares of common stock transferred to Convergent
Communications Services, Inc. from Zutano LLC as a distribution
to one of its members.
All of the shares included in the Registration Statement are subject
to the lock-up arrangements with NTB, except for approximately 185,000
shares that were released from lock-up on February 25, 2000 and 5,000
shares of common stock underlying 5,000 common stock purchase warrants
held by one warrant holder. NTB has agreed to waive the lock-up period
for the Class A shares that are issued on conversion of the Class B shares
provided that the shares are traded through NTB at $7.00 or more per
share.
The following sets forth the owner, amount of notes, warrants,
shares of Class A common stock, Class B common stock, preferred stock, as
well as the price paid by the purchasers in our private placements of
notes, warrants, Class A common stock, Class B common stock and preferred
stock:
<TABLE>
<CAPTION>
Nature and
Title and Name of person aggregate
amount of or class to amount
Date of securities whom securities of
sale sold were sold consideration
-------- ---------- --------------- -------------
FOUNDERS SHARES:
<S> <C> <C> <C>
8-14-98 1,100,000 Venture Funding, Ltd. $110.00
Class A Common Cash
8-14-98 900,000 Boutine, LLC $90.00
Class A Common Cash
1998-1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS:
12-2-98 $50,000 Lorene Allison Trust $50,000.00
Note Cash
12-2-98 6,000 Lorene Allison Trust $60.00
Class A Common Cash
12-2-98 $50,000 Newpax Venture Corp.$50,000.00
Note Cash
12-2-98 6,000 Newpax Venture Corp. $60.00
Class A Common Cash
12-2-98 $10,000 MN Trust $10,000.00
Note Cash
12-2-98 1,200 MN Trust $12.00
Class A Common Cash
12-2-98 $10,000 MLN Trust $10,000.00
Note Cash
12-2-98 1,200 MLN Trust $12.00
Class A Common Cash
12-2-98 $50,000 Arthur Harrison $50,000.00
Note Trust Cash
12-2-98 6,000 Arthur Harrison $60.00
Class A Common Trust Cash
12-2-98 $50,000 Ilse Diamant $50,000.00
Note Cash
12-2-98 6,000 Ilse Diamant $60.00
Class A Common Cash
12-2-98 $20,000 Matt Eccles $20,000.00
Note Cash
12-2-98 2,400 Matt Eccles $24.00
Class A Common Cash
12-2-98 $30,000 J. Kipp Monroe $30,000.00
Note Cash
12-2-98 3,600 J. Kipp Monroe $36.00
Class A Common Cash
12-2-98 $20,000 Peter Prato $20,000.00
Note Cash
12-2-98 2,400 Peter Prato $24.00
Class A Common Cash
12-2-98 $10,000 Wesley Zepelin & $10,000.00
Note Susan Elliott JT Cash
12-2-98 1,200 Wesley Zepelin & $12.00
Class A Common Susan Elliott JT Cash
12-2-98 $20,000 Go East, LLC $20,000.00
Note Cash
12-2-98 2,400 Go East, LLC $24.00
Class A Common Cash
12-2-98 $25,000 Gale Daniel $25,000.00
Note Cash
12-2-98 3,000 Gale Daniel $30.00
Class A Common Cash
12-2-98 $25,000 Rike Wootten $25,000.00
Note Cash
12-2-98 3,000 Rike Wootten $30.00
Class A Common Cash
2-1-99 $50,000 Gail Daniel $50,000.00
Note Cash
2-1-99 6,000 Gail Daniel $60.00
Class A Common Cash
2-1-99 $50,000 Arthur Harrison $50,000.00
Note Trust Cash
2-1-99 6,000 Arthur Harrison $60.00
Class A Common Trust Cash
2-8-99 5,640 First Capital $62.04
Class A Common Investment, Inc. Cash
MANAGEMENT SHARES:
12-21-98 208,452 Craig Lassen $2,084.52
Class A Common Cash
12-21-98 208,452 David J. Selina $2,084.52
Class A Common Cash
12-21-98 208,452 Jeffrey W. Marshall $2,084.52
Class A Common Cash
LANXTRA ASSET PURCHASE:
2-1-99 375,214 LanXtra, Inc. $1,125,604.00
Class A Common Assets
2-1-99 28,648 LanXtra, Inc. $172,816.00
Class B Common Assets
1999 PRIVATE PLACEMENT OF PREFERRED STOCK:
3-10-99 10,000 Anne D. Dyde Trustee $30,000.00
Preferred Anne D. Dyde Trust Cash
3-10-99 10,000 James F. Dyde Trustee$30,000.00
Preferred James F. Dyde Insurance Cash
Trust
3-10-99 10,000 Jon D. Kostival $30,000.00
Preferred Cash
3-10-99 10,000 James F. Seifert & $30,000.00
PreferredNancy L. Seifert Cash
As Trustees or Successor
Trustees of James F. Seifert
Management Trust
3-10-99 10,000 Dianne M. Giambusso $30,000.00
Preferred Cash
3-10-99 20,000 Carol Nixon $60,000.00
Preferred Cash
3-10-99 10,000 Adam Glickman $30,000.00
Preferred Cash
3-10-99 10,000 Leland E. Tate $30,000.00
Preferred Cash
3-10-99 16,000 William Ettenger $48,000.00
Preferred Cash
3-10-99 10,000 Jeffrey Telsey $30,000.00
Preferred Trustee Alex M. Cash
Telsey Special
Needs Trust
3-10-99 10,000 Lincoln Trust $30,000.00
Preferred Company Custodian for Cash
Jerry Schnepp
3-10-99 20,000 MBM Young $60,000.00
Preferred Cash
3-10-99 80,000 Jeff Kavy $240,000.00
Preferred Cash
3-10-99 10,000 William J. Nooney $30,000.00
Preferred Cash
3-10-99 10,000 Robert C. Tucker Jr.$30,000.00
Preferred & Karen D. Tucker JT Cash
3-10-99 20,000 William Oyen & $60,000.00
Preferred Carolyn S. Oyen JT Cash
3-10-99 10,000 Michael Mara $30,000.00
Preferred Cash
3-10-99 20,000 John E. Tarrillion $60,000.00
Preferred Cash
3-10-99 10,000 Daniel A. Dupre $30,000.00
Preferred Cash
3-10-99 10,000 Carla G. Stewart $30,000.00
Preferred Cash
3-10-99 14,000 Martin J. Sherlock $42,000.00
Preferred Trustee Marion A. Cash
Sherlock Trust
3-10-99 10,000 Jerry Schempp & $30,000.00
Preferred Bruce E. Kobey TEN COM Cash
3-10-99 10,000 Janet M. Searl & $30,000.00
Preferred Kent E. Searl JT TEN Cash
3-10-99 10,000 Gregory Werts $30,000.00
Preferred Cash
3-10-99 10,000 Julie A. Hackett $30,000.00
Preferred Cash
3-10-99 10,000 Tyrone M. Clark $30,000.00
Preferred Cash
3-10-99 10,000 Lisa H. Robb & $30,000.00
Preferred Michael B. Robb JT TEN Cash
3-10-99 10,000 Jack C. Moore $30,000.00
Preferred Cash
3-10-99 10,000 Robert C. Werts & $30,000.00
Preferred Patricia Cash
Schulte-Werts
JT TEN
3-10-99 17,000 Michael K. Carney $51,000.00
Preferred Cash
3-10-99 10,000 Joseph Reinke $30,000.00
Preferred Cash
3-10-99 10,000 Alan L. Talesnick & $30,000.00
Preferred Robert M. Bearman Cash
TEN COM
3-31-99 10,000 Roswell S. Monroe & $30,000.00
Preferred Wanda V. Monroe Trustees Cash
of the Roswell & Wanda
Monroe Family Trust
U/D/T DTD 1-31-90
3-31-99 10,000 Walter J. $30,000.00
Preferred Schoefberger Cash
3-31-99 10,000 William Kilzer $30,000.00
Preferred Cash
3-31-99 10,000 Robert L. Young & $30,000.00
Preferred Anna M. Young JT TEN Cash
3-31-99 10,000 Karl D. Smith $30,000.00
Preferred Cash
3-31-99 10,000 Schield Management $30,000.00
Preferred Company Cash
3-31-99 10,000 John R. McKowen $30,000.00
Preferred Cash
3-31-99 10,000 John Metzger $30,000.00
Preferred Cash
3-31-99 10,000 Trans-L A $30,000.00
Preferred Partnership Cash
3-31-99 10,000 Lucas Liakos $30,000.00
Preferred Cash
3-31-99 10,000 Carl Brad Linder & $30,000.00
Preferred Cathy Linder JT TEN Cash
3-31-99 10,000 Thomas J. Obradovich$30,000.00
Preferred Cash
4-30-99 10,000 Thomas R. Ashford $30,000.00
Preferred Cash
4-30-99 10,000 Stanley Ranch $30,000.00
Preferred Cash
4-30-99 10,000 Denora Corporation $30,000.00
Preferred Cash
4-30-99 10,000 Ronald D. Devoe $30,000.00
Preferred Cash
4-30-99 10,000 William Daniel $30,000.00
Preferred Carter TTEE of Cash
the William Daniel
Carter Trust
4-30-99 10,000 Third Millenium $30,000.00
Preferred Trading LLP Cash
4-30-99 10,000 Advent Fund LLC $30,000.00
Preferred Cash
4-30-99 10,000 Mariusz Witek $30,000.00
Preferred Cash
4-30-99 10,000 Randal A. Alford $30,000.00
Preferred Cash
4-30-99 10,000 Farhad Ghaffarour $30,000.00
Preferred Cash
4-30-99 10,000 Erven J. Nelson $30,000.00
Preferred TTEE for the Erven J. Cash
Nelson Ltd Psp
4-30-99 10,000 Leonard B. Zelin $30,000.00
Preferred Cash
4-30-99 13,000 Fiscal Dynamics $39,000.00
Preferred corporation Cash
AUGUST 1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS:
8-20-99 $50,000 Arthur D. Harrison $50,000.00
Note Cash
8-20-99 5,000 Arthur D. Harrison 0
Warrants Cash
8-24-99 $50,000 R. Gale Daniel $50,000.00
Note Cash
8-24-99 5,000 R. Gale Daniel 0
Warrants Cash
8-30-99 $50,000 Jackson IV, LLC $50,000.00
Note Cash
8-30-99 5,000 Jackson IV, LLC 0
Warrants Cash
8-31-99 $100,000 Jeff Kavy $100,000.00
Note Cash
8-31-99 10,000 Jeff Kavy 0
Warrants Cash
8-31-99 $50,000 Arthur D. Harrison $50,000.00
Note Cash
8-31-99 5,000 Arthur D. Harrison 0
Warrants Cash
FEBRUARY 2000 PRIVATE PLACEMENT:
2-17-00 195,000 Taghanic Holdings I $2,340,000
Class A Common LLC Cash
2-17-00 10,000 Taghanic Holdings II $120,000
Class A Common LLC Cash
</TABLE>
ITEM 27. EXHIBITS.
Exhibit No. Description
- ----------- -----------
2 Asset Purchase Agreement with Cavion Technologies, Inc.
dated December 31, 1998 (incorporated by reference from
Exhibit 2 of the Company's Registration Statement on Form SB-
2 (No. 333-80421))
3.1a Amended and Restated Articles of Incorporation as filed
with the Colorado Secretary of State on February 1, 1999
(incorporated by reference from Exhibit 3.1a of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
3.1b Articles of Amendment to the Amended and Restated
Articles of Incorporation setting forth Statement of
Designation of Series and Determination of Rights and
Preferences of convertible preferred stock, Series A, as
filed with the Colorado Secretary of State on February 26,
1999 (incorporated by reference from Exhibit 3.1b of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
3.2 Amended and Restated Bylaws of the Company as adopted
by its Board of Directors on March 22, 1999 (incorporated by
reference from Exhibit 3.2 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
4.1 Specimen Certificate for $.0001 par value Class A
common stock of the Company (incorporated by reference from
Exhibit 4.1 of the Company's Registration Statement on Form
SB-2 (No. 333-80421))
4.2 Specimen Certificate for $.0001 par value Class B
common stock of the Company (incorporated by reference from
Exhibit 4.2 of the Company's Registration Statement on Form
SB-2 (No. 333-80421))
4.3 Specimen Certificate for $.0001 par value Series A
preferred stock of the Company (incorporated by reference
from Exhibit 4.3 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
4.4 Form of Subscription Agreement in the Offering of
convertible preferred stock of the Company (incorporated by
reference from Exhibit 4.4 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
4.5 Form of Preferred Stock Warrant issued to Neidiger,
Tucker, Bruner, Inc. (incorporated by reference from Exhibit
4.5 of the Company's Registration Statement on Form SB-2
(No. 333-80421))
4.6 Form of Subscription Agreement in the 1999 offering of
Promissory Notes and Warrants (incorporated by reference
from Exhibit 4.6 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
4.7 Form of Warrant in the 1999 offering (incorporated by
reference from Exhibit 4.7 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
5 Opinion of Gorsuch Kirgis LLP
10.1 Promissory Note to Herman D. Axelrod dated July 1, 1992
(incorporated by reference from Exhibit 10.1 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.2 Promissory Note to Craig E. Lassen dated August 1, 1992
(incorporated by reference from Exhibit 10.2 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.3 Factoring Agreements to Herman D. Axelrod dated
September 8, 1997 and September 15, 1997 (incorporated by
reference from Exhibit 10.3 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.4 Factoring Agreement to Craig E. Lassen dated October
15, 1997 (incorporated by reference from Exhibit 10.4 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.5 Bridge Loan Agreement, Promissory Notes and Put
Agreement with Far East Holdings, Ltd., Martin Cooper and
Fairway Realty Associates with Sigmacom Corporation dated
May 28, 1998 (incorporated by reference from Exhibit 10.5 of
the Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.6 Additional Bridge Loan Agreement, Promissory Notes and
Put Agreement with Jeff Marshall, David Selina and Randal
Burtis dated May 28, 1998 (incorporated by reference from
Exhibit 10.6 of the Company's Registration Statement on Form
SB-2 (No. 333-80421))
10.7 Termination and Modification Agreement dated September
28, 1998, and Amendment to Termination and Modification
Agreement dated January 15, 1999, with British Far East
Holdings, Ltd., William M.B. Berger Living Trust, Martin
Cooper, Fairway Realty Associates, Craig Lassen, Herman
Axelrod and David Selina (incorporated by reference from
Exhibit 10.7 of the Company's Registration Statement on Form
SB-2 (No. 333-80421))
10.8 Engagement Letter with First Capital Investments, Inc.
dated September 20, 1998 (incorporated by reference from
Exhibit 10.8 of the Company's Registration Statement on Form
SB-2 (No. 333-80421))
10.9 Form of 15% Secured Promissory Notes due October 19,
2000 (incorporated by reference from Exhibit 10.9 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.10 Agreement for Post-Closing Adjustments by and
among Venture Funding, Ltd., Boutine Capital, LLC, Network
Acquisitions, Inc., Cavion Technologies, Inc., Craig E.
Lassen, David J. Selina and Jeff Marshall dated February 1,
1999 (incorporated by reference from Exhibit 10.10 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.11 Share Allocation Agreement by and among Venture
Funding Ltd., Boutine Capital, LLC, Cavion Technologies,
Inc., LanXtra, Inc., Craig E. Lassen, David J. Selina and
Jeff Marshall, dated April 16, 1999 (incorporated by
reference from Exhibit 10.11 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.12 Office Lease Agreement with TTD Associates dated
December 4, 1996 for the corporate offices located at 7475
Dakin Street, Denver, Colorado (incorporated by reference
from Exhibit 10.12 of the Company's Registration Statement
on Form SB-2 (No. 333-80421))
10.13 Business Loan Agreement and Promissory Note with
US Bank dated January 18, 1999, and First Amendment to
Business Loan Agreement with US Bank dated March 24, 1999
(incorporated by reference from Exhibit 10.13 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.14 Executive Employment Agreement with David J.
Selina effective February 1. 1999 (incorporated by reference
from Exhibit 10.14 of the Company's Registration Statement
on Form SB-2 (No. 333-80421))
10.15 Executive Employment Agreement with Marshall E.
Aster effective March 8, 1999 (incorporated by reference
from Exhibit 10.15 of the Company's Registration Statement
on Form SB-2 (No. 333-80421))
10.16 Executive Employment Agreement with Jeff Marshall
effective February 1, 1999 (incorporated by reference from
Exhibit 10.16 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.17 Executive Employment Agreement with Craig E.
Lassen effective February 1, 1999 (incorporated by reference
from Exhibit 10.17 of the Company's Registration Statement
on Form SB-2 (No. 333-80421))
10.18 Equity Incentive Plan dated March 19, 1999
(incorporated by reference from Exhibit 10.18 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.19 Form of Indemnification Agreement with officers
and directors (incorporated by reference from Exhibit 10.19
of the Company's Registration Statement on Form SB-2 (No.
333-80421))
10.20 Agreement to Modify Deferred Obligations dated May
28, 1999 with British Far East Holdings, Ltd., William M.B.
Berger Living Trust, Martin Cooper, Fairway Realty
Associates, David J. Selina, Jeff Marshall, Randal W.
Burtis, Convergent Communications, Inc., Craig E. Lassen and
Herman D. Axelrod (incorporated by reference from Exhibit
10.20 of the Company's Registration Statement on Form SB-2
(No. 333-80421))
10.21 Form of Secure Network Services Agreement
(incorporated by reference from Exhibit 10.21 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.22 Forms of Lock-Up Agreements among the officers and
directors of the Company, 5% or more shareholders and the
other shareholders and the Representative (incorporated by
reference from Exhibit 10.22 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.23 Settlement Agreement and Mutual General Release
with Craig E. Lassen dated June 8, 1999 (incorporated by
reference from Exhibit 10.23 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.24 Form of Promissory Note in the 1999 offering
(incorporated by reference from Exhibit 10.24 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.25 License Agreement with MoneyLine America, LLC
dated August 18, 1999 (incorporated by reference from
Exhibit 10.25 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.26 Network Service Master Agreement with Convergent
Communications Services, Inc., dated October 22, 1999
(incorporated by reference from Exhibit 10.26 of the
Company's Registration Statement on Form SB-2 (No. 333-
80421))
10.27 License and Referral Agreement with Cardinal
Services Corporation dated September 27, 1999 (incorporated
by reference from Exhibit 10.27 of the Company's
Registration Statement on Form SB-2 (No. 333-80421))
10.28 Office Lease with NY/BDP Flex I., LLC dated
October 29, 1999 (incorporated by reference from Exhibit 10
of the Company's Form 10-QSB for the quarter ended September
30, 1999)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Gorsuch Kirgis LLP contained in its opinion
filed as Exhibit 5
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of cavion.com according to the foregoing provisions,
or otherwise, cavion.com has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and so it cannot be enforced. In the event
that a claim for indemnification against such liabilities, other than the
payment by us of expenses incurred or paid by a director, officer or
controlling person of cavion.com 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, cavion.com
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
(1) To treat the information omitted from this form of prospectus
filed as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by us under Rule 424(b)(1), or
(4) or 497(h) under the Act as part of this registration statement as of
the time the Securities and Exchange Commission declared it effective.
(2) To treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
We undertake with respect to the securities being offered and
sold in this offering:
(1) To file, during any period in which offers or sales are being
made, a post- effective amendment to this registration statement:
(a) to include any prospectus required by Section 10(a)(3) of
the Act;
(b) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement, or the most recent
post-effective amendment thereof, which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(c) to include any additional or changed material information
on the plan of distribution.
(2) That, for the purpose of determining liability under the Act,
each such post- effective amendment shall be deemed to be a new
registration statement of the securities offered in the registration
statement, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering.
(3) To remove from registration by means of a post-effective
amendment any of the securities which remain unsold at the end of the
offering.
SIGNATURES
In accordance with the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in the City and
County of Denver, State of Colorado, on March 9, 2000.
CAVION TECHNOLOGIES, INC.
By:/s/David J. Selina
David J. Selina, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/David J. Selina Date: March 9, 2000
- ------------------------------
David J. Selina,
Director, President, Chief Executive Officer,
Principal Executive Officer and Chief
Operating Officer
/s/Marshall E. Aster Date: March 9, 2000
- ------------------------------
Marshall E. Aster, Chief Financial Officer
and Principal Financial and Accounting
Officer
/s/Andrew I. Telsey Date: March 9, 2000
- ------------------------------
Andrew I. Telsey, Director
/s/Stephen B. Friedman Date: March 9, 2000
- ------------------------------
Stephen B. Friedman, Director
/s/Jeffrey W. Marshall Date: March 9, 2000
- ------------------------------
Jeffrey W. Marshall, Director
/s/John R. Evans Date: March 9, 2000
- ------------------------------
John R. Evans, Director
EXHIBIT INDEX
The following exhibits are filed herewith electronically.
No. Description
- --- -----------
5 Opinion of Gorsuch Kirgis LLP
23.1 Consent of Arthur Andersen LLP
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this Registration Statement.
/s/ Arthur Andersen LLP
Denver, Colorado,
March 9, 2000.
GORSUCH KIRGIS LLP
Attorneys at Law
Tower I Suite 1000 1515 Arapahoe Street Denver, Colorado 80202
Telephone (303) 376-5000 Facsimile (303) 376-5001
March 10, 2000
Cavion Technologies, Inc.
6445 S. Kenton Street
Denver, Colorado 80111
Re: Cavion Technologies, Inc.
Registration Statement on Form SB-2
Gentlemen:
We are acting as counsel to Cavion Technologies, Inc., a
Colorado corporation (the "Company"), in connection with the
preparation of a Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission (the "Registration
Statement"), relating to a proposed offering by the Selling
Shareholders named therein to the public of a maximum of 345,500
shares of the Company's Class A Common Stock, $.0001 par value
(the "Common Stock"), which consists of 205,000 outstanding
shares of Common Stock, 20,500 shares of Common Stock issuable
upon exercise of agent's warrants to purchase Common Stock (the
"Agent's Warrants"), and 120,000 shares of Common Stock issuable
upon exercise of representative's warrants to purchase Common
Stock (the "Representative's Warrants").
In this connection, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of such
corporate records, certificates and written and oral statements
of officers, legal counsel and accountants of the Company and of
public officials, and other documents that we have considered
necessary and appropriate for this opinion, and, based thereon,
we advise you that, in our opinion:
1. The Company is a corporation duly organized and validly
existing under the laws of the State of Colorado;
2. The Common Stock is validly issued, fully paid and
nonassessable;
3. The shares of Common Stock, when issued upon exercise
of the Agent's Warrants in accordance with the terms thereof,
will be validly issued, fully paid and nonassessable; and
4. The shares of Common Stock, when issued upon exercise
of the Representative's Warrants in accordance with the terms
thereof, will be validly issued, fully paid and nonassessable.
We hereby consent to the use of our name beneath the caption
"Legal Matters" in the Prospectus forming a part of the
Registration Statement and to the filing of this opinion as
Exhibit 5 thereto.
Very truly yours,
GORSUCH KIRGIS LLP
/s/Gorsuch Kirgis LLP
