As filed with the Securities and Exchange Commission on June 10, 1999
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)
7475 Dakin Street, Suite 607
Denver, Colorado 80221
(303) 657-8212
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
DAVID J. SELINA
President and Chief Executive Officer
Cavion Technologies, Inc.
7475 Dakin Street, Suite 607
Denver, Colorado 80221
(303) 657-8212
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
----------------
Copies to:
S. LEE TERRY, JR., ESQ. JOHN G. HERBERT, ESQ.
CYNTHIA R. CAIN, ESQ. John G. Herbert P.C.
Gorsuch Kirgis LLP 1675 Larimer Street, Suite 310
Tower I, Suite 1000 Denver, Colorado 80202
1515 Arapahoe Street (303) 534-0522
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 HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum Amount
Title of Each Class Amount to Offering Aggregate of
of Securities to be be Price Per Offering Registration
Registered Registered Share(1) Price(1) Fee
1,380,000 $0.0008 $10,497,254 $2,918.26
---------- --------- ----------- ------------
Class A common stock,
$.0001 par value
per share ("common
stock")(2) 1,380,000 $6.75 $9,315,000 $2,589.57
Representative's
Warrants(3) 120,000 $0.0008 $100 $0.03
Common stock issuable
upon exercise of
Representative's
Warrant(4) 120,000 $8.10 $972,000 $270.22
Convertible preferred
stock, Series A,
convertible into
one share of common
stock ("preferred
stock")(5) 700,000 $0.0001 $70 $0.02
Common stock issuable
upon conversion of
the preferred
stock(6) 700,000 $0.0001 $70 $0.02
Agent's Warrant(7) 70,000 $0.0001 $7 $0.01
Preferred stock issuable
upon exercise of
the Agent's Warrant(8) 70,000 $3.00 $210,000 $58.38
Common stock issuable
upon conversion of
preferred stock issued
upon exercise of
Agent's Warrants(9) 70,000 $0.0001 $7 $0.01
Total -- -- $10,497,254 $2,918.26
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) Includes 180,000 shares of common stock which the underwriters have
the option to purchase to cover over- allotments, if any.
(3) Representative's warrants to be sold to the representative.
(4) Underlying shares of common stock issuable upon exercise of
representative's warrants. This Registration Statement also covers
such additional number of warrants as may become issuable upon
exercise of the representative's option by reason of anti-dilution
provisions pursuant to Rule 416.
(5) Each share of preferred stock is convertible into one share of common
stock.
(6) Underlying shares of common stock issuable upon exercise of preferred
stock.
(7) Agent's warrant issued to the agent for the Company's February 8,
1999 private placement of preferred stock convertible into common
stock.
(8) Underlying shares of preferred stock issuable upon exercise of
agent's warrant.
(9) Underlying shares of common stock issuable upon exercise of preferred
stock underlying agent's warrant.
Subject to completion, dated June 10, 1999
PROSPECTUS
1,200,000 Shares
cavion.com
Common Stock, $.0001 Par Value
- -------------------------------------------------------------------------
This is our initial public offering of shares of common stock. Of the
shares of common stock being offered, 1,200,000 are being offered by us
and 700,000 shares will be offered no earlier than nine months after the
date of this prospectus by those shareholders named under "Selling
Shareholders" after conversion of their shares of preferred stock. We
will not receive any of the proceeds from the sale of shares by the
Selling Shareholders.
No public market currently exists for our common stock.
We will list the shares on the Nasdaq SmallCap Market under the symbol
"CAVN."
Anticipated Price Range is $6.00 to $7.50 per share.
Investing in shares of our stock involves risks.
Risk Factors begin on page 5.
Per Share Total
----------- --------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to cavion.com $ $
Proceeds to Selling Shareholders $ $
We have granted the underwriters a 45-day option to purchase up to 180,000
additional shares of common stock on the same terms and conditions to
cover over-allotments, if any.
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.
Neidiger, Tucker, Bruner, Inc., as representative of the underwriters,
expects to deliver the shares against payment on or about ,
1999.
- -------------------------------------------------------------------------
NEIDIGER/TUCKER/BRUNER
Incorporated
, 1999
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 Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
[INSIDE COVER OF PROSPECTUS]
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TABLE OF CONTENTS
PROSPECTUS SUMMARY 1
RISK FACTORS 5
USE OF PROCEEDS 17
DIVIDENDS 17
CAPITALIZATION 18
DILUTION 21
SELECTED FINANCIAL INFORMATION 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 26
OUR BUSINESS 34
MANAGEMENT 44
EXECUTIVE COMPENSATION 48
EQUITY INCENTIVE PLAN 50
PRINCIPAL SHAREHOLDERS 53
DESCRIPTION OF CAPITAL STOCK 55
SHARES ELIGIBLE FOR FUTURE SALE 59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 60
THE SELLING SHAREHOLDERS 66
PLAN OF DISTRIBUTION 70
UNDERWRITING 71
ADDITIONAL INFORMATION 75
REPORTS TO SECURITY HOLDERS 76
EXPERTS 76
LEGAL MATTERS 76
INDEX TO FINANCIAL STATEMENTS 77
ABOUT THIS PROSPECTUS
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.
This preliminary prospectus is subject to completion prior to this
offering. Among other things, this preliminary prospectus describes our
company as we currently expect it to exist at the time of this offering
and changes may occur that we don't presently expect.
See the section of this prospectus entitled "Risk Factors" for a
discussion of certain factors that you should consider before investing in
the common stock offered in this prospectus.
Until , 1999, all dealers selling shares of the
common stock, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the obligation
of dealers to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the
rest of this prospectus. The summary does not contain all the information
you should consider before buying shares in this offering. You should
read the entire prospectus carefully.
Our Company
-----------
cavion.com is the trade name for our company, Cavion Technologies,
Inc. We are an Internet service provider specializing in Internet-related
products and services for the credit union industry. Our products and
services, which utilize our proprietary software, include a secure credit
union network, secure Internet financial products and secure Internet
access. As of the date of the prospectus, 35 entities in the credit union
industry have subscribed to our network. Through our affinity program, we
plan to offer additional goods and services to credit union members via
our credit union customers' websites, including long distance telephone
services, new vehicle transactions, retail internet service provider
services, consumer products and insurance products, among others. We
market our products and services to credit unions located in key
geographic areas across the United States that we have selected due to
their high concentration of credit unions. On February 1, 1999, we
purchased the business of a company called LanXtra, Inc., a Colorado
corporation ("LanXtra"), which began this business on January 1, 1998. In
this prospectus, when we refer to our company or our business, we are
referring to it as it has been conducted by us and, before us, by LanXtra.
(See "Our Business - Company History.")
Our principal executive offices are located at 7475 Dakin Street,
Suite 607, Denver, Colorado 80221. Our telephone number is 303-657-8212.
We were incorporated in Colorado in 1998.
The Offering
------------
Common stock offered by cavion.com 1,200,000 shares
Common stock to be outstanding after
this offering 4,606,326 shares
Use of proceeds We estimate that we will receive
proceeds from this offering of
approximately $6.8 million or $7.9
million if the underwriter
exercises its over-allotment
option in full. We expect to use
the proceeds to purchase equipment
and infrastructure, to establish
new points of presence, for sales
and marketing activities, to pay
certain debts and accounts
payable, for working capital and
possibly to pay for the put or
call of shares of our Class B
common stock. (See "Use of
Proceeds.")
Proposed Nasdaq Small Cap Market Symbol CAVN
The calculation of common stock to be outstanding after this offering
is based on shares outstanding on June 9, 1999 and includes the automatic
conversion of 700,000 shares of our Series A preferred stock upon
consummation of this offering. It excludes:
o 403,500 shares of common stock issuable upon exercise of options
outstanding under our Equity Incentive Plan, none of which are
exercisable today. (See "Equity Incentive Plan").
o An additional 346,500 shares available for issuance under our
Equity Incentive Plan. (See "Equity Incentive Plan").
o 28,648 shares of Class B common stock which will be converted
into Class A common stock 30 days after we have 100 credit union
industry customers on our network if neither the put or the call
have been exercised prior to that date. (See "Description of
Capital Stock").
o 70,000 shares of Series A preferred stock issuable upon exercise
of the placement agent's warrant issued in our 1999 private
placement, which preferred shares are convertible into common
stock. (See "Description of Capital Stock").
o 180,000 shares of Class A common stock issuable upon exercise of
the underwriter's over-allotment option. (See "Underwriting").
o 120,000 shares of Class A common stock issuable upon exercise of
the representative's warrant. (See "Underwriting").
Summary Financial Information
-----------------------------
The following tables contain our summary financial data. These
tables do not present all of our financial information. You should read
this information together with our financial statements and the financial
statements of LanXtra and the notes to those statements beginning on page
F-1 of this prospectus and the information under "Selected Financial
Data," "Pro Forma Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
cavion.com
Period from Pro Forma
August 18, Combined
LanXtra 1998 Year Ended
Year Ended (Inception) to Pro Forma December 31,
December 31, December 31, Adjustments 1998
1998 1998 (Unaudited) (Unaudited)
------------ -------------- ----------- ------------
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 from
continuing
operations per
share $(7.66) $(.02) $(.77)
===== ==== ====
Weighted average
common shares
outstanding -
basic and
diluted 257,319 2,078,170 3,029,218
=========== ========== ===========
Pro Forma
Combined
cavion.com Three
LanXtra Three Months
One Month Months Ended
Ended Ended Pro Forma March 31,
January 31, March 31, Adjustments 1999
1999 1999 (Unaudited) (Unaudited)
------------ -------------- ----------- ------------
Statement of
- ------------
Operations
- ----------
Data:
- -----
Revenue $ 37,850 $ 66,539 $ -- $ 104,389
Cost of Revenue 31,898 41,443 $ -- 73,341
Operating Expenses 213,311 609,609 79,388 902,308
Operating Loss (207,359) (584,513) (79,388) (871,260)
Interest expense,
and other 64,069 73,656 (52,932) 84,793
--------- ---------- -------- ----------
Net Loss $(271,428) $ (658,169) $(26,456) $ (956,053)
========= ========== ======== ==========
Basic and diluted
net per share $(1.06) $(.23) $(.32)
Weighted average
common shares
outstanding -
basic and
diluted 256,464 2,875,879 3,032,978
========= ========== ==========
The following table is a summary of our balance sheet data. The pro forma
as adjusted column reflects our receipt of the estimated net proceeds of
the shares of common stock we are selling in this offering at an assumed
initial public offering price of $6.75 per share, after deducting
estimated underwriting discounts and expenses.
Pro Forma
Pro Forma As Adjusted
cavion.com Adjustments March 31, 1999
March 31, 1999 (Unaudited) (Unaudited)
-------------- ----------- --------------
Balance Sheet Data:
- -------------------
Current Assets $1,241,069 $6,825,000 $8,066,069
Total Assets $6,353,661 $6,825,000 $13,178,661
========== ========== ===========
Current Liabilities $1,788,418 $ -- $1,788,418
Long-term Borrowings 400,593 -- 400,593
Putable Stock 172,816 -- 172,816
Stockholders' Equity 3,991,834 6,825,000 10,816,834
---------- ---------- -----------
Total Liabilities and
Stockholders' Equity $6,353,661 $6,825,000 $13,178,661
========== ========== ===========
RISK FACTORS
You should carefully consider the following factors and other
information in this prospectus before deciding to invest in shares of our
common stock. An investment in this offering involves a high degree of
risk. The risks identified below are not the only risks we face.
We have a short operating history
- ---------------------------------
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. Today, we receive our revenue from
the license and sale of products and services to our credit union
customers. We may not be able to continue to generate revenue at the
current level, or increase that level. If we don't, our business,
financial condition and operating results will be materially and adversely
affected.
We have incurred losses
- -----------------------
To date, 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 $2,006,446 for the year ended December 31, 1998,
comprised of a $35,944 net loss for Cavion and a net loss of $1,970,502
for LanXtra. We reported additional combined losses of $956,053 for the
three months ended March 31, 1999. We expect to continue to report losses
for the foreseeable future. Our short operating history makes it
difficult to predict our future operating results, including our operating
expenses. Our revenues have grown since the start of our business but it
may not continue to grow or even continue at their current level. Because
some of our expenses are fixed, including equipment leases and real estate
leases, if our revenues do not increase, we may not be able to compensate
by reducing our expenses as much or as quickly as we need to do. In
addition, we plan to significantly increase our spending by:
o purchasing infrastructure and equipment
o expanding our sales and marketing operations
o broadening the geographic scope of our operations
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 match our revenue levels, which we might not be able to do. (See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Our Business").
Our quarterly and annual results may vary
- -----------------------------------------
Our quarterly and annual operating results may vary over time due to
many factors including:
o our plan to increase operating expenses to expand our product
development, our sales and marketing activities and the
geographic scope of our operations
o the timing and extent of market acceptance of our products and
services
o general market conditions
o competition
o system downtime or technical difficulties that affect our
operations or the Internet in general
You should not rely on quarter-to-quarter comparisons of our operating
results as an indication of future performance. It is possible that, in
some future periods, our actual results may be lower than the expectations
of public market investors and analysts. If this did occur, the price of
our common stock would probably go down.
We are counting on continued market acceptance of our products and
services
- ------------------------------------------------------------------
The market for Internet-based network financial services is new and
uncertain. To date, our products and services have been sold to credit
unions located in Colorado and nine other states. While we are now
marketing our products and services across the country, no one can be
certain that they will sell as well in the new markets as they have in
Colorado. The market for Internet-based financial services has only
recently begun to develop, so market demand for our products and services
is uncertain. Important questions remain about the use of the Internet
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 that
market will grow. If it fails to grow or grows more slowly than we
expected, or if it becomes saturated with competitors, our business,
financial condition and operating results will be materially and adversely
affected. Our future success depends on our ability to design, develop,
test, sell and support improved versions of our current products and new
software products in time to respond to changing customer needs. We will
also need to respond to actions taken by our competitors, to technological
developments and to emerging industry standards. (See "Our Business -
Products and Services").
We face risks associated with Internet communications and system security
- -------------------------------------------------------------------------
Our business requires us to transmit confidential information over
public networks in a secure manner. People may attempt to breach our
security to steal confidential information or to damage our operations.
Security breaches could damage our reputation and expose us to liability.
Like all networked computers, our servers may be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. These
problems could lead to interruptions, delays or loss of data. We believe
that our network security measures provide a level of protection which is
reasonable and appropriate for the risks of our business, but the risk of
security breaches can never be totally eliminated. We expend significant
capital and other resources to protect against security breaches. If such
a breach occurs, significant additional resources may be required to
respond to it. A failure to prevent security breaches may have a material
adverse effect on our business, our operating results, and our financial
condition.
Our market is highly competitive
- --------------------------------
The market for Internet-based financial services is very competitive
and can be affected by rapid technological changes. New competitors can
be expected to enter our market, the credit union network and Internet
service market, and increase competition. We already face competition
from a number of companies which offer software and networking products
and services to the credit union market. We think that, as the Internet
transaction and network services we sell are purchased by more of our
targeted customers, other competitors will enter the market to compete
aggressively with us, including some larger, established companies.
Competition may also increase if there is 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. We expect the credit union software and network services market
to continue to attract new technologies and new competitors. It is
possible that some of these new competitors will be able to respond more
quickly to new technologies or changes in customer demands than we can.
They might also be able to put more money, time or effort into the
development, promotion and sale of their products and services than we
can. You cannot be sure that we will be able to compete successfully
against present or future competitors. If we don't, it will materially
and adversely affect our business, our financial condition and our results
of operations. (See "Our Business - Competition").
We are counting on expanding our business
- -----------------------------------------
To date, substantially all our revenues have 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 18 months, after which we expect to receive revenues from
our affinity program. 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 32 credit unions, two credit
union leagues (one of which provides check clearing services to credit
unions) and one corporate credit union (which provides liquidity services
to credit unions). Our future growth depends on our ability to provide
more services and different kinds of services to our existing and to 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. If we don't broaden our services to
existing customers or if we fail to expand our customer base, or if it
takes too long to do so, it will have a materially adverse effect on our
business, our financial condition and our results of operations.
A small number of customers have accounted for our revenues
- -----------------------------------------------------------
Because of our short operating history, a small number of credit
unions accounted for all of our early revenues. Although we expect that
we will not be reliant on a few customers as our customer base expands, if
we fail to attract a significant number of new customers, it will have a
materially adverse effect on our business, our financial condition and our
results of operations.
Managing our growth may be difficult
- ------------------------------------
We have grown quickly in the past and we expect to continue to grow
rapidly by attracting new customers, adding new products and hiring new
employees. This growth will probably put a significant strain on our
business. To manage our growth, we will have to put new financial and
operating systems in place, and attract, hire and train new employees. We
cannot assure you that our management will be able to effectively or
successfully manage our growth.
We are dependent on telecommunications service providers
- --------------------------------------------------------
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. Our financial results
therefore depend greatly on the amount we pay for those services and our
efficiency in using them. In order to obtain the volume we need at a good
price, we may enter into exclusive or semi-exclusive contracts with one or
more telecommunications providers, which would then make us even more
dependent on that provider. 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 revenues from recurring sales of our products and
services. These revenues cannot be earned until the telecommunications
provider installs a dedicated telecommunications circuit for our 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.
As we grow, the risk of failure of our system increases until we put a
backup system in place
- -----------------------------------------------------------------------
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 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. 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. Despite our implementation of
network security measures, our computer servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays, or loss of stored
information. The occurrence of any of the foregoing risks could have a
materially adverse effect on our business, prospects, financial condition
and results of operations.
The capacity limits of our network are difficult to predict
- -----------------------------------------------------------
As user traffic on our network increases, we will have to expand and
upgrade our technology, our systems and our network infrastructure. We
may not always accurately predict the rate or the timing of the traffic
increases or the customer demands. If we don't upgrade our network
hardware and software when it is necessary to do so, our business, our
financial condition and our operating results will be materially and
adversely affected.
Our success is dependent on our key people
- ------------------------------------------
We believe that our success will depend on continued employment of
our senior management team, our sales force and our software
professionals, especially our project managers, software engineers and
other senior technical personnel. If one or more members of our senior
management team did not continue in their present positions, our business,
financial condition and operating results could be materially adversely
affected. While we recently lost the services of our former Chief
Executive Officer, Craig Lassen, who resigned in March of 1999 to pursue
other interests, we believe that the current management team is highly
qualified to carry out our business expansion plans. We recently entered
into an agreement with Mr. Lassen under which he will provide consulting
services to cavion.com. We have employment contracts with three key
executive officers, David Selina, Jeff Marshall and Marshall Aster.
Pursuant to the Underwriting Agreement, we have agreed to purchase
$1,000,000 of key man insurance on certain key employees. To date, we
have relied on our direct sales force for sales of our products and
services. We will need to hire more people in sales, customer service and
other areas in 1999 and beyond if we grow as we expect to do. 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. Any difficulty or delay in hiring the
people we need will have a material adverse effect on our business, our
financial condition and our results of operations.
We may not be able to protect our intellectual property rights and we may
infringe the intellectual property rights of others
- -------------------------------------------------------------------------
We believe that our proprietary secure communications network, which
we have 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, non-disclosure agreements, confidentiality
provisions, trade secret laws, and general technical and practical
security measures to protect our rights in our intellectual property. We
can't assure you that these protections will prevent other persons from
using, copying, damaging, or reverse-engineering our products without our
authorization. It is also possible that our competitors will
independently develop their own technologies that are similar to or even
better than ours. We don't have any patents or any patent applications
pending. We expect that trade secret laws will provide some protection
to our intellectual property, but these laws are much less effective in
preventing our competitors from developing their own "copy-cat" versions
of our products. Despite our efforts, there is no guarantee that our
intellectual property rights will be fully shielded against unauthorized
use, copying, or destruction. We have not been involved in a material
intellectual property dispute. Still, we may not be able to prevent or
disprove all claims which might be made in the future to the effect that
our technology infringes or violates someone else's intellectual property
rights. If these kinds of claims are made, even if they are false, they
can be time-consuming and expensive to defend. Also, there is some risk
that future events may cause our intellectual property or that which we
license from others to infringe on the intellectual property rights of
others. Besides the cost of litigation resulting from these kinds of
claims, because we only have a few key employees, it could materially
disrupt our ongoing efforts to grow our business and improve our
technology.
We could be liable for defects in our products or failures in our services
- -----------------------------------------------------------------
We represent to our credit union customers that our Internet-based
network and transactional banking software are secured and protected by
multiple network "firewalls", 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. Such an intruder, or "hacker", could also disrupt our systems
and cause interruptions to our operations. Any such 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.
We may face increased government regulation and legal uncertainties
- -------------------------------------------------------------------
Any regulation of the Internet (under new legislation or under new
interpretations of existing laws), could materially and adversely affect
our business, our operating results and our financial condition. There
are an increasing number of laws and regulations pertaining to the
Internet. Legislation in these areas could impair the growth of the
Internet and decrease the acceptance of the Internet as a communications
and commercial medium. This could decrease the demand for our services or
increase our cost of doing business.
We face risks from potential telecommunications regulations. Several
telecommunications carriers are advocating that the Federal Communications
Commission regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. Any such regulations could substantially increase the costs of
communicating on the Internet. This, in turn, could slow the growth of
Internet use and thereby decrease the demand for our products and
services. Further, changes in government regulation of credit unions
could adversely affect our business.
We bear many of the business risks common to new companies
- ----------------------------------------------------------
Historically, we have not used bilateral service contracts with our credit
union customers, but have 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 carry
general liability insurance. We have applied for errors and omissions
insurance and Internet security insurance policies. Even if we do obtain
this insurance at reasonable cost, it may not cover all future claims. If
a large claim is successfully asserted against us, we might not be covered
by insurance, or it might be covered but cause us to pay much higher
insurance premiums or a large deductible or co-payment. 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. Any such
litigation could have a materially adverse effect on our business, our
financial condition and our results of operations.
Our business depends on the growth of the Internet
- --------------------------------------------------
The market for our products and services is new and rapidly evolving.
Our business would be adversely affected if Internet usage does not
continue to grow. Internet usage may be inhibited for a number of
reasons, such as:
o infrastructure
o security concerns
o inconsistent quality of service
o lack of availability of cost-effective, high-speed service
If Internet usage grows, the Internet infrastructure may not be able
to support the demands placed on it by this growth, or its performance or
reliability may decline. In addition, websites may from time to time
experience interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Internet usage, as well
as usage of our services, could be adversely affected. Also, cavion.com
must obtain Internet Protocol addresses from our Internet service
providers. The availability of these numbers may be limited.
Certain existing shareholders own a large percentage of our voting stock
- ------------------------------------------------------------------------
Upon completion of the offering, on a fully-diluted basis, our
directors, executive officers and certain principal shareholders will
beneficially own approximately 53.2% of our outstanding Class A common
stock. If some or all of these various shareholders act together, they
might be able to elect our directors or even determine the outcome of
corporate actions requiring shareholder approval, no matter how other
shareholders vote. This concentration of ownership may have the effect of
delaying or preventing a change in control of our company. (See
"Principal Shareholders").
Year 2000 issues could adversely affect us
- ------------------------------------------
Many uncertainties exist within the computer hardware and software
and electronic networking industries about the changeover from the 1999 to
2000 calendar years. While we believe that our products and services will
comply with Year 2000 ("Y2K") requirements on or before July 1, 1999,
there is still some risk that credit unions will encounter difficulties
with one or more of our products or services because of Y2K issues. The
National Credit Union Administration ("NCUA"), the national regulatory
body for credit unions, has required member credit unions to put a plan in
place to ensure their compliance with Y2K requirements on or before July
1, 1999. There is still risk, however, that Y2K issues will adversely
affect third-party network or application software that is integrated with
our products or even the functioning of the Internet itself. There are
also similar risks of failure from the telecommunications networks, the
electric power grid, and the other systems on which the operation of our
products and the delivery of our services depend. The disruption of these
broader services would have an adverse effect on our ability to provide
our products and services to our credit union customers, and could then
have a material adverse effect on our business, our financial condition
and our results of operations. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations").
You will bear immediate and substantial dilution
- ------------------------------------------------
Purchasers of shares in the offering will suffer an immediate and
substantial dilution in the net tangible book value of the shares from the
offering price. As a result, our current shareholders will gain an
immediate increase in the net tangible book value of their shares of
common stock in the amount of $6,825,000 or $1.50 per share. Conversely,
as a purchaser in this offering, you will suffer an immediate dilution of
the net tangible value of your shares in the amount of $5.33 per share as
soon as you make your purchase, depending on whether the over allotment
option is exercised. (See "Dilution").
We do not intend to pay dividends
- ---------------------------------
We do not intend to pay dividends on our common stock in the
foreseeable future. Dividends are payable quarterly on the preferred
stock at a rate of 5% per annum payable in cash or in Class A common stock
at the discretion of our board of directors. Dividends for the first
quarter ended March 31, 1999, (totaling $3,858), were paid in cash. All
preferred stock will be converted into Class A common stock upon the
consummation of this offering. Holders of the preferred stock will be
entitled to receive their dividends until the date of conversion. Should
our board of directors decide to pay dividends on the preferred stock in
shares of Class A common stock, the number of shares of our common stock
to be issued upon consummation of the offering will increase accordingly.
(See "Description of Capital Stock").
Shares that can be sold in the future by our current shareholders could
lower our stock price
- ------------------------------------------------------------------------
If our shareholders sell large amounts of our common stock in the
public market following the offering, then the market price of our common
stock could fall. Restrictions under the securities laws and certain lock-
up agreements limit the number of shares of common stock which can be sold
in the public market. Affiliates of cavion.com have agreed not to sell
their shares for a period of twelve months after this offering without the
prior written consent of Neidiger, Tucker, Bruner, Inc. ("NTB"). In
addition, all of the other shareholders who own shares (including the
holders of the 700,000 shares of Series A preferred stock that will
automatically convert into the same number of shares of common stock when
this offering closes) have agreed not to sell their shares for nine months
after the effective date of this offering. NTB may, in its sole
discretion, release some or all of the shares subject to the lock-up
agreements before their scheduled expiration. Such an early release could
adversely affect the market price of our common stock. We also plan to
file a registration statement to register all shares of common stock under
our Equity Incentive Plan. After that registration statement is
effective, shares issued upon exercise of stock options will be eligible
for resale in the public market without restriction.
We may be liable to a dissenting shareholder of LanXtra
- -------------------------------------------------------
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 on June 1, 1999 titled LANXTRA, INC. V. KIRK
W. DENNIS, Case No. 99 CV 3583 in the District Court, City and County of
Denver, Colorado to resolve the matter. While we could be required to
purchase his shares from him at the fair value determined in the
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 value of
the shares upon consummation of this offering. Therefore, 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.
(See "Risk Factors - Dissenting LanXtra Shareholder").
We might have to pay some of the liabilities of LanXtra that we didn't
assume
- ------------------------------------------------------------------------
According to our agreement with LanXtra we acquired substantially all
of LanXtra's assets (including all of its contracts with credit unions and
its business goodwill) and assumed the known liabilities of that company.
We recognize, however, that we might still become legally obligated to
satisfy some unknown liabilities we didn't assume. We also don't really
know what types of liabilities they are or their amount. To date, no
liabilities other than those identified in the Asset Purchase Agreement
have arisen. However, other liabilities could arise in the future. If we
become obligated to satisfy material LanXtra liabilities beyond those we
know of today, our business and financial condition be materially and
adversely affected.
Our common stock has never been publicly traded
- -----------------------------------------------
There has not been a public market for our common stock. We cannot
predict the extent to which a trading market will develop or how liquid
that market might become. The initial public offering price will be
determined by negotiations between the representative of the underwriters
and us and may not be indicative of prices that will prevail in the
trading market.
Our common stock price is likely to be highly volatile
- ------------------------------------------------------
The market price of our common stock is likely to be highly volatile
since the stock market in general, and the market for Internet-related and
technology companies in particular, has been highly volatile. Investors
may not be able to resell their shares of our common stock following
periods of volatility because of the market's adverse reaction to such
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks
and have reflected relative valuations substantially above historical
levels. During the same period, such companies' stocks have also been
highly volatile and have recorded lows well below their historical highs.
We cannot assure you that our stock will trade at the same levels as other
Internet stocks or that Internet stocks in general will sustain their
current market prices.
Factors that could cause volatility in our stock price may include,
among other things:
o actual or anticipated variations in quarterly operating results
o announcements of technological innovations
o new sales formats or new products or services
o changes in financial estimates by securities analysts
o conditions or trends in the Internet industry
o changes in the market valuations of other Internet companies
o announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures
o capital commitments
o additions or departures of key personnel
o sales of common stock
You should not unduly rely on forward looking statements
- --------------------------------------------------------
This prospectus contains forward looking statements that involve
risks and uncertainties. We use words such as "anticipate", "believe",
"expect", "future" and "intend", and similar expressions to identify
forward looking statements. You should not place undue reliance on these
forward looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those
anticipated in these forward looking statements for many reasons,
including the risks described above and elsewhere in this prospectus.
Many of these factors are beyond our control. These factors may
materially adversely affect the market price of our common stock,
regardless of our operating performance.
USE OF PROCEEDS
We estimate the net proceeds from the offering to be approximately
$6.8 million, or $7.9 million if the underwriters exercise their over-
allotment option in full, assuming an initial public offering price of
$6.75 per share and after deducting estimated underwriting discounts and
commissions and expenses of the offering.
We expect to use the net proceeds from the offering
o to purchase the equipment required for expansion of our
telecommunications and secure network infrastructure
o to establish new points of presence (physical locations housing
a switch that permits access by local credit unions to our
national network)
o for sales and marketing
o to satisfy certain liabilities assumed in connection with the
purchase of LanXtra's assets. (See "Certain Relationships and
Related Transactions")
o possibly to pay for the put or call of shares of our Class B
common stock. (See "Description of Capital Stock")
o for working capital
In addition to our need for funds to finance our operations, payment
of approximately $1.4 million of existing obligations will become due upon
completion of this offering. (See "Our Business - Company History" and
"Certain Relationships and Related Transactions").
While we currently expect that the proceeds of the offering will be
sufficient to satisfy our cash needs for the foreseeable future, we may
decide to seek or obtain additional debt or equity financing in the
future.
As of the date of this prospectus, we cannot state with certainty all
of the particular uses for the remaining net proceeds we will have upon
completion of the offering. Accordingly, our management will have broad
discretion in the application of the net proceeds.
Net proceeds not immediately required for the purposes described
above will be principally invested in United States government securities,
A-1 rated commercial paper with maturities of 30 days or less, short-term
certificates of deposit, money market funds or other short-term interest-
bearing investments with qualifying banks or institutions.
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 in the foreseeable
future. Holders of shares of Series A preferred stock are entitled to
receive 5% per annum cumulative preferred dividends payable quarterly in
cash or in shares of Class A common stock at the discretion of our board
of directors. Dividends for the first quarter ended March 31, 1999 of
$3,858 were paid in cash. All preferred stock will be converted into
common stock upon the consummation of this offering. Holders of the
preferred stock will be entitled to receive their dividends until the date
of conversion. Should our board of directors decide to pay dividends on
the preferred stock in shares of common stock, the number of shares of our
common stock to be issued upon consummation of the offering will increase
accordingly. 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.
CAPITALIZATION
The following table sets forth our capitalization as of March 31,
1999. You should also read our Financial Statements and the notes to
those Financial Statements, beginning on page F-1 of this prospectus. Our
capitalization is presented:
o on an actual basis
o on an unaudited pro forma basis to give effect to:
o the re-purchase of 299,884 shares of Class A common stock
held by our founders in April, 1999 for $.0001 per share
o the proceeds of Series A preferred stock offering received
in April, 1999
o on an unaudited pro forma basis as adjusted to reflect:
o our receipt of the estimated net proceeds from the sale of
1,200,000 shares of common stock offered in the offering at
an assumed initial public offering price of $6.75 per
share, after deducting underwriting discounts and
commissions and estimated offering expenses, and
o the automatic conversion of all outstanding shares of
preferred stock into common stock upon the consummation of
the offering
As of March 31, 1999
---------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
Notes and capital leases payable $1,317,950 $1,317,950 $ 1,317,950
Putable Class B common stock,
$.0001 par value; 30,000
shares authorized; 28,648,
28,648 and 28,648 shares
issued and outstanding actual,
pro forma and pro forma as
adjusted, respectively 172,816 172,816 172,816
Stockholders' equity
Series A Convertible preferred
stock, $.0001 par value;
10,000,000 shares authorized;
567,000, 700,000 and 0 shares
issued and outstanding actual,
pro forma and pro forma, as
adjusted, respectively 1,496,880 1,848,000 --
Class A common stock, $.0001
par value; 19,970,000 shares
authorized; 3,006,210,
2,706,326 and 4,606,326
shares issued and outstanding
actual pro forma and pro forma
as adjusted respectively 302 272 462
Additional paid-in capital 3,188,765 3,188,765 11,861,575
Accumulated (deficit) (694,113) (694,113) (694,113)
---------- ---------- -----------
Total stockholders' equity $3,991,834 $4,342,924 $11,167,924
========== ========== ===========
Total capitalization $5,482,600 $5,833,690 $12,658,690
========== ========== ===========
We expect there to be 4,606,326 shares of common stock outstanding
after the offering which includes shares issuable upon the conversion of
all outstanding shares of preferred stock. In addition to the shares of
common stock to be outstanding after the offering, we may issue additional
shares of common stock under the following:
o 403,500 shares of common stock issuable upon exercise of options
outstanding under our Equity Incentive Plan, none of which are
exercisable today. (See "Equity Incentive Plan")
o An additional 346,500 shares available for issuance under our
Equity Incentive Plan. (See "Equity Incentive Plan")
o 28,648 shares of Class B common stock which are convertible into
Class A common stock 30 days after the date when we have 100
credit union industry customers on our network if neither the
put or the call have been exercised prior to that date. (See
"Description of Capital Stock")
o 70,000 shares of Series A preferred stock issuable upon exercise
of the placement agent's warrant issued in our 1999 private
placement offering, which preferred shares are convertible into
common stock. (See "Description of Capital Stock")
o 180,000 shares of Class A common stock issuable upon exercise of
the underwriter's over-allotment option. (See "Underwriting")
o 120,000 shares of Class A common stock issuable upon exercise of
the representative's warrant. (See "Underwriting")
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements included in this prospectus.
DILUTION
As of March 31, 1999, our net tangible book value (deficit) on a pro
forma basis based upon an assumed public offering price of $6.75 per share
and giving effect to the re-purchase of 299,884 of Class A common stock by
the Company in April, 1999 and the April, 1999 issuance and assumed
conversion of all of the outstanding shares of preferred stock into shares
of common stock upon the consummation of this offering was approximately
($261,568) or ($.08) per share of common stock. "Net tangible book value"
(deficit) per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities, divided by pro forma the
number of shares of common stock outstanding. As of March 31, 1999, our
net tangible book value, on a pro forma basis adjusted for the sale of
1,200,000 shares offered in the offering and the application of the net
proceeds from such sale of approximately $6.8 million (based on an assumed
initial public offering price of $6.75 per share and after deducting the
underwriting discounts and commissions and other estimated offering
expenses), would have been approximately $1.42 per share. This represents
an immediate increase of $1.50 per share to existing shareholders and an
immediate dilution of $5.33 per share to you. The following table
illustrates this per share dilution:
Assumed initial public offering price per share $6.75
Pro forma net tangible book value per share
as of March 31, 1999 $0.08
Increase per share attributable to you $1.50
Net tangible book value per share after the offering $1.42
Dilution per share to you $5.33
The following table summarizes on a pro forma basis as of June 9,
1999 by the differences between the total consideration paid and the
average price per share paid to the existing shareholders, including the
shares of preferred stock convertible into common stock upon the
consummation of the offering, and the new investors with respect to the
number of shares of common stock purchased from us on an assumed initial
offering price of $6.75 per share:
Shares Purchased Total Consideration
Average
Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- ---------
Existing Shareholders 3,406,326 74.0% $ 5,289,037 39.5% $ 1.55
New Investors 1,200,000 26.0% 8,100,000 60.5% $ 6.75
TOTAL 4,606,326 100.0% $13,389,037 100.0%
We expect there to be 4,606,326 shares of common stock outstanding
after the offering. In addition to the shares outstanding after the
offering, we may issue additional shares of common stock under the
following:
o 403,500 shares of common stock issuable upon exercise of options
outstanding under our Equity Incentive Plan, none of which are
exercisable today. (See "Equity Incentive Plan")
o An additional 346,500 shares available for issuance under our
Equity Incentive Plan. (See "Equity Incentive Plan")
o 28,648 shares of Class B common stock which are convertible into
Class A common stock 30 days after the date when we have 100
credit union industry customers on our network if neither the
put or the call have been exercised prior to that date. (See
"Description of Capital Stock")
o 70,000 shares of Series A preferred stock issuable upon exercise
of the placement agent's warrant issued in our 1999 private
placement offering, which preferred shares are convertible into
common stock. (See "Description of Capital Stock")
o 180,000 shares of Class A common stock issuable upon exercise of
the underwriter's over-allotment option. (See "Underwriting")
o 120,000 shares of Class A common stock issuable upon exercise of
the representative's warrant. (See "Underwriting")
Options available for issuance under the 1999 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 at the initial
public offering price.
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
statement of operations adjustments reflect:
o our actual expenses for 1998 and the three months ended March
31, 1999
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 our historical and
pro forma financial statements and the section of the prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results
of Operations".
Following are the historical balance sheet at March 31, 1999, and the pro
forma statement of operations for the year ended December 31, 1998 and the
three months ended March 31, 1999 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.
Balance Sheet
=============
cavion.com
----------
Assets:
- -------
Current assets $1,241,069
Property & equipment, net 413,103
Goodwill and other assets 4,699,489
----------
Total Assets $6,353,661
Liabilities:
- ------------
Current liabilities $1,788,418
Long-term borrowings 400,593
Putable stock 172,816
Stockholders' equity
Preferred Stock 1,496,880
Common stock 302
Additional paid-in capital 3,188,765
Accumulated deficit (694,113)
----------
Total liabilities and Stockholders' equity $6,353,661
==========
Statement of Operations for Year Ended December 31, 1998
========================================================
Pro Forma Pro Forma
Adjustments Company
LanXtra cavion.com (unaudited) (unaudited)
------------ ---------- ----------- -----------
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
other, net 845,213 29,067 (612,200) 289,800
27,720
Loss from continuing
operations $(1,970,502) $ (35,944) $(329,666) $(2,336,112)
=========== ========== ========= ===========
Net loss per share $ (7.66) $ (.02) $ (.77)
=========== ========== ===========
Weighted average
common shares
outstanding 257,319 2,078,170 3,029,218
=========== ========== ===========
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:
Income Statement Item Amount Explanation
- --------------------- ------ -----------
Amortization of goodwill $(914,146) To record amortization expense for
and other intangible the developed technologies, goodwill
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.
Statement of Operations for Three Months Ended March 31, 1999
=============================================================
Pro Forma
LanXtra cavion.com Combined
One Three Three
Month Months Months
Ended Ended Pro Forma Ended
January 31, March 31, Adjustments March 31,
1999 1999 (Unaudited) (Unaudited)
---------- ---------- ----------- -----------
Revenue $ 7,850 $ 66,539 $ -- $ 104,389
Cost of revenue 31,898 41,443 -- 73,341
--------- --------- -------- ---------
Gross profit 5,952 25,096 -- 31,048
--------- --------- -------- ---------
Total operating
expenses 213,311 609,609 79,388 902,308
--------- --------- -------- ---------
Loss from operations (207,359) (584,513) (79,388) (871,260)
--------- --------- -------- ---------
Interest expense and
other, net 64,069 73,656 (52,932) 84,793
--------- --------- -------- ---------
Net Loss $(271,428) $(658,169) $(26,456) $(956,053)
Net loss per share $(1.06) $(.23) ($.32)
========= ========= =========
Weighted average
common shares
outstanding 256,464 2,875,879 3,032,978
========= ========= =========
Pro forma adjustments to the unaudited condensed pro forma statement of
operations for the three months ended March 31, 1999 are as follows:
Income Statement Item Amount Explanation
- --------------------- ------ -----------
Amortization of goodwill $79,388 To record amortization for
goodwill for January, 1999
Interest expense: $(52,932) To eliminate the accretion
expense for the terminated putable
stock
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 certain factors, including but not limited to the risk factors
listed elsewhere in this prospectus.
We completed our acquisition of the assets of LanXtra on February 1,
1999 pursuant to the Asset Purchase Agreement. (See "Certain
Relationships and Related Transactions"). 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 operations since January 1, 1998 (the date
on which LanXtra commenced the business we acquired), and to our plan of
operation following the offering.
Since January 1, 1998, we have been engaged in building a suite of
network products and services for the credit union industry that includes:
(1) a secure network that enables access to our credit union customers'
products and services via the Internet or an intranet; (2) secure Internet
financial products, including Internet banking software; and (3) secure
Internet access services for credit unions. These products and services
utilize our proprietary software. We are in the start-up phase of our
operations and generated a net loss of $2,006,446 for the year ended
December 31, 1998, 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 for the foreseeable future.
Since January 1, 1998, our revenue has been derived from recurring
monthly connectivity fees, installation services and monthly recurring
revenues associated with our secure Internet access services and secure
Internet financial products. To date, 32 credit unions, two credit union
leagues (one of which provides check clearing services to credit unions)
and one corporate credit union (which provides liquidity services to
credit unions) have subscribed to our products and services. The majority
of these entities are located in Colorado, except nine which are located
in nine different states.
We have financed the development of our products and services with
capital provided by the sale of LanXtra's unrelated business, a bank loan,
loans from certain shareholders and employees of LanXtra, a private
placement of promissory notes and related warrants and a private placement
of preferred stock.
Results of Operations for the Year Ended December 31, 1998
- ----------------------------------------------------------
The following discussion relates to LanXtra's operations for the
fiscal year ended December 31, 1998. While LanXtra generated nominal
revenues and incurred general and administrative and research and
development costs prior to commencement of the 1998 fiscal year,
management believes that a comparison of the 1998 operations to those
operations conducted in fiscal year 1997 would provide little benefit
since our current business was launched in January 1998 (with 1997
activity limited to general and corporate activities and research and
development activities) and LanXtra's prior business was sold.
During the fiscal year ending December 31, 1998, we generated
$215,022 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 this period were $222,419 (103%). These
costs include Internet access fees, telephone company charges for frame
relay lines, equipment purchased for resale, service personnel and
occupancy costs, hardware repair and maintenance expenses. Our margins
will significantly improve in the future as sales discounts for
installations diminish for our customers.
General and administrative expenses for the period were $869,293 or
404% of revenue. Of these expenses, $566,380 was attributable to salaries
and wages (263% of gross revenues). Additionally, we incurred $248,599 in
research and development costs during this period, which represented a
percentage of programmers' and engineers' salaries applicable to the
amount of time they devoted to development activities. We anticipate that
our general and administrative expenses will increase as we hire
additional employees to handle the expected growth of our business.
In May 1998, LanXtra issued common stock which the holders can
require LanXtra to repurchase on certain terms. For financial accounting
purposes, the cost of this "putable" common stock from its issuance price
to its redemption value is treated as interest expense. During 1998, such
interest expense totaled $612,200.
Results of Operations for the Three Months Ended March 31, 1999
- ---------------------------------------------------------------
The following discussion relates to our operations for the three
months ended March 31, 1999. LanXtra had no significant revenues during
the three months ended March 31, 1998. It used the capital on hand to
develop its clients and continue research and development. Management
therefore believes that a comparison of operations for the three months
ended March 31, 1998 of Lanxtra and our three months ended March 31, 1999
would provide little benefit. Our current business was not launched until
January 1998 and LanXtra had no revenues during the same period for
comparison.
During the period ended March 31, 1999, we recognized $66,539 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 this period were $41,443 (62%). These costs include Internet
access fees, telephone company charges for frame relay lines, equipment
purchased for resale, service personnel and occupancy costs, hardware
repair and maintenance expenses.
General and administrative expenses for the period were $404,249 or
608% of revenue. Of these expenses, $166,219 was attributable to salaries
and wages (250% of gross revenues). Additionally, we incurred $46,584 in
research and development costs during this period, which represented a
percentage of programmers' and engineers' salaries applicable to the
amount of time they devoted to development activities. We anticipate that
our general and administrative expenses will continue to increase as we
hire additional employees to handle the expected growth of our business.
As we expand our operations nationwide our depreciation expense will
increase because we will be purchasing additional equipment and
infrastructure. After this offering is funded certain of our debts will
be paid off and therefore interest expense will be reduced.
We expect to invest at least an additional $200,000 in research and
development during 1999. We are currently developing software for an
Internet-enabled automated loan application and approval system, and we
are in the early stages of designing stored value or "smart card"
capabilities for our network. We expect in the near future to begin
development of two or more additional interfaces for credit union host
data processing systems not yet supported by our network as well as an
additional Internet bill pay vendor interface. We are continuously
evaluating possible enhancements to the security and functionality of our
existing products and services. In addition, we expect to incur
development costs in launching our affinity program, through which we plan
to offer products and services to credit union members via our credit
unions' websites. We expect our product development focus to evolve
continuously in the future based on guidance from our customers.
The transaction with LanXtra resulted in approximately $4,760,000 of
intangible assets (primarily technology, customer lists and goodwill.)
These intangible assets will be amortized over five years. The purchase
price allocation is subject to adjustment based on the final determination
of the fair value of the assets and liabilities assumed, which could take
as long as one year from February 1, 1999. Because the business now
operated by cavion.com 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.
Liquidity and Capital Resources
- -------------------------------
To date, we have funded our cash requirements primarily through the
sale of equity, debt, cash flow from operations and the proceeds from the
sale of LanXtra's prior business. On March 31, 1999, cavion.com had
$1,055,230 in cash, current assets of $1,241,069, and current liabilities
of $1,788,418.
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. We anticipate that the proceeds of the offering will be
sufficient to satisfy our cash requirements for the foreseeable future.
Our March 31, 1999 balance sheet shows approximately $2.2 million in
liabilities and approximately $4.0 million of stockholders equity.
Approximately $1.2 million of our liabilities represent obligations to
shareholders, as described in the following section.
SHAREHOLDER OBLIGATIONS. 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 Class A 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 hereafter
acquired, 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 have been
exercised for 56,400 shares, as of February 1999.
In connection with our acquisition of LanXtra's assets, we assumed
approximately $1.6 million in existing liabilities of LanXtra (not
including the bridge funding described in the preceding paragraph).
Approximately $1.4 million of these amounts will become payable upon
completion of this offering. These obligations are described below. We
expect to use a portion of the proceeds of this offering to pay these
obligations.
In August 1996, LanXtra had obtained a $600,000 line of credit from
US Bank, Denver, Colorado in connection with its previous business.
Certain LanXtra shareholders 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 this offering. All amounts
available under this line of credit have been utilized. Interest accrues
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
tracks the prevailing prime rate.
On May 28, 1998, LanXtra entered into a Bridge Loan Agreement with
three of LanXtra's shareholders to borrow an aggregate of $150,000 for
working capital purposes. Under the terms of the Bridge Loan Agreement,
LanXtra issued to each shareholder (i) a promissory note bearing interest
at the rate of 42% per annum, the principal and interest of which was
payable in three equal monthly installments beginning on November 1, 1998;
(ii) shares of LanXtra's non-voting common stock; and (iii) put agreements
to sell the shares of non-voting common stock back to LanXtra at $7.00 per
share beginning on January 1, 1999. On that same date, LanXtra also
entered into an Additional Bridge Loan Agreement with three of our
employees - David J. Selina, Jeff Marshall and Randal Burtis-to borrow an
additional $110,000 ($30,000 from Mr. Selina, $50,000 from Mr. Marshall
and $30,000 from Mr. Burtis), also for working capital purposes. The
terms of the Additional Bridge Loan Agreement are identical to the terms
of the Bridge Loan Agreement with the shareholders. In the aggregate, we
owe these shareholders, directors and managers $260,000 in principal and
$59,480 in interest; however, an agreement has been reached to defer
payment of these amounts, without the accrual of further interest, until
the completion of this offering. We agreed to assume LanXtra's
obligations with respect to the put agreements by issuing to LanXtra at
the closing under 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
becomes exercisable 30 days after the date when we have 100 credit union
industry customers on our network (the "100 Credit Union Date"). We have
agreed with the LanXtra shareholders who have rights to the Class B stock
that their put rights will mature upon completion of this offering. To
implement this agreement, after completion of this offering we expect to
offer 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.
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 ("Questar") and bear 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 is 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 have agreed that the remaining balance of these
loans will be deferred until the completion of this offering and will not
accrue additional interest.
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 reflect $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 have agreed that the remaining balance of these loans will
be deferred until the completion of this offering. Interest will continue
to be paid on a quarterly basis until the notes are paid in full.
We owe Convergent Communications $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 has agreed that payment of this
amount will be deferred until the completion of this offering.
As to all of the obligations described above that will be deferred
until the completion of this offering, there is no current understanding
between the parties as to any repayment obligations in the event we do not
complete the offering.
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. (See "Our Business - Litigation").
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, 1998, nor do we expect that inflation will have a material
effect on the results of our operations in the foreseeable future.
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. These funds are being used primarily to fund expansion of our
credit union industry network to key markets across the United States. We
estimate the net proceeds from this offering to be approximately $6.8
million, or $7.9 million if the underwriters exercise their over allotment
option in full, and we expect to use these proceeds primarily for the same
purpose. We expect the proceeds of this offering to satisfy our cash
needs for more than 12 months.
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 in the foreseeable future. We cannot give you any
assurance, however, that actual operating results will be as we predict
today.
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 future growth in our credit union customer
base we anticipate today. 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 in the foreseeable future as a result
of a variety of factors, some of which are outside our control.
Therefore, 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.
The risks posed to us by possible Y2K related problems could be
significant. Our operations rely on continuous Internet connectivity,
availability of power and communications systems, computer systems in use
by our credit union customers and their members and, in some cases,
computer systems in use by vendors to credit unions, as well as on our own
internal computer systems. Any extended damage to any of the foregoing
could have a material adverse effect on our business and operations. We
are confident in the operability of our products, services, and our own
internal systems after the year 2000 date change. However, we cannot
accurately predict the effect of the Y2K problem on our business due to
our interdependence with numerous other systems.
In assessing the Y2K compliance of our products, services and
systems, we have identified the following seven distinct areas of focus:
o Products and Services: We completed testing of all products and
services by May 1, 1999 and to our knowledge, these systems are
Y2K compliant.
o Business Computer Systems: This category includes computer
systems and applications relating to operations such as
financial reporting, human resources, marketing and sales,
product engineering and design, phone systems, and purchasing.
We have completed testing of these systems and believe them to
be Y2K compliant with the exception of and the network server
that we use for sales demonstrations of our Internet banking and
bill payment products. We expect to have completed the
remediation process for these systems by the end of June 1999.
o Suppliers: We rely on approximately 12 critical suppliers,
including computer hardware and software vendors and
telecommunications providers. We have contacted our critical
suppliers to determine whether plans are in place to achieve
timely Y2K compliance. To date, none of our suppliers have
informed us of any Y2K related problems which are expected to
have an adverse effect on our operations.
o Business Affiliates: M&I Data Services (formerly Travelers
Express) provides our customers' members with bill payment data.
We have received documentation from M&I stating that they are
Y2K compliant.
o Product Development Test Equipment: This category includes
equipment and systems for testing software and hardware. All of
our product development equipment has been tested and, to our
knowledge, is Y2K compliant.
o End-User Computing: We use desktop and laptop computers
throughout our operations. Our plans to make these computers
Y2K compliant include the replacement or repair of all non-
compliant computers and related software. As of June 1, 1999,
96% of mission critical end-user programs were Y2K compliant. We
expect to complete this remediation process by the end of June
1999.
o Physical Properties and Infrastructure: We are assessing the
impact of Y2K on all building systems. Included in our
assessment are fire and security systems in our facilities. To
our knowledge, these systems are Y2K compliant.
We estimate future expenditures to complete our compliance efforts at
less than $50,000, and we expect this process to be complete by the end of
June 1999 for existing systems. Newly acquired facilities and equipment
will require evaluation and possibly remediation through the end of the
year, and we anticipate a need to support credit union testing and
remediation efforts through the first quarter of 2000 or beyond.
Our most likely worst case scenario with respect to the Y2K problem
is the failure of a supplier, including an energy supplier, to be Y2K
compliant so that its supply of needed products or services to one of our
facilities is interrupted. As a result, we could be unable to service our
customers for a period of time, which could then cause us to lose
customers, revenues and profits. While we are monitoring the preparedness
plans of our utility suppliers and other critical vendors, in many cases
we have little leverage or bargaining power to ensure their Y2K readiness.
We are establishing a Y2K contingency plan to evaluate business
disruption scenarios, coordinate responses to such scenarios, and identify
and implement preemptive strategies. We have established detailed
contingency plans for critical business processes.
The National Credit Union Administration ("NCUA"), which insures the
deposits of most credit unions in the United States, has established
detailed requirements with regard to the Y2K compliance of member credit
unions. Under the NCUA requirements, credit unions must roll forward the
clocks on their critical systems past the year 2000 and apply real-time
dynamic testing. We are prepared to participate in our clients' Y2K
testing upon request.
OUR BUSINESS
cavion.com is an Internet service provider specializing in Internet-
related products and services for the credit union industry. Our products
and services utilize our proprietary software. Among the numerous
products and services we offer are a secure, private network, that
facilitates business-to-business communication, secure Internet financial
products such as on-line banking and bill paying services, and secure
Internet access. To date, 32 credit unions, two credit union leagues (one
of which provides check clearing services to credit unions) and one
corporate credit union (which provides liquidity services to credit
unions) have subscribed to our products and services. Through our
affinity program, we plan to offer additional services to credit union
members via our credit unions' websites, including long distance telephone
services, new vehicle transactions, retail ISP services, consumer products
and insurance products, among others. 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 intend
to 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 numerous 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.
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 on line.
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.
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 the
number of online computer users in the United States by the end of March
1999 to have exceeded 95 million; nearly 40% of the U.S. population.
(Internet Usage Statistics for the Month of March 1999, http://www.
netratings.co, Nielsen Media, August 25, 1998.)
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. According to a report by
International Data Corporation, 77% of U.S. companies already have an
intranet. ("133 Million Intranet Users by 2001," International Data
Corporation, October 22, 1997.) Financial institutions rapidly are
adopting network communications to conduct electronic banking and provide
customers with access to their account information. A report released by
Ernst & Young predicts that by the year 2000, banks will be spending the
same amount of money on Internet applications to develop their online
presence as they currently do on branch networks. ("Banks are in the
Dark," News.com, September 9, 1998.) It has been estimated that banks
will spend $326 million on Internet banking technology in 1999 alone, more
than double the amount spent in 1998, to accommodate the expected sharp
increases in online banking. ("Online Banking Application Market to
Boom," IDC Research, February 4, 1997.)
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. It took nearly a decade and a
half for online banking to achieve a 1% penetration rate of U.S.
households in early 1996. By 1997, it is estimated that approximately
4.5% of U.S. households have at least tried on-line banking. ("Banking by
PC Jumps," American Banker, December 29, 1997.) As of the first quarter
of 1999, nearly 40% of the top 100 banks in the United States are offering
online services. ("Increase in US Banks Offering Online Services," PC
World, 3/24/99.) Online Banking Report estimates that by the end of 2000,
17.5 million households will be using online banking and/or a bill payment
application. ("Strategic Online Banking Momentum Builds," Online Banking
Report, January 1999.)
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 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 certain 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 on-line 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. Our network uses the JAVA(R) programming
language, which is platform independent and 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.
DEVELOPMENT OF NEW PRODUCTS AND SERVICES. Concurrently with
expanding our Internet/intranet network, we plan to expand our product
offerings for credit unions. We are currently testing 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 an affinity program through which we will be a
reseller of various products and services provided by third party vendors.
Our network model allows the addition of these products as they become
available. The 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. We can customize
a menu for each credit union and post that menu on the credit union's
website.
Plan of Operations
------------------
We target expansion of our network to over 2,400 credit unions across
the United States. Through this expansion our goal is 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 revenues
o develop new products based on proprietary intellectual property
To manage new customers connected to our credit union network, we
plan to establish a number of points of presence ("POPs") in key strategic
locations in the United States. A POP is a physical location housing a
switch that permits access by local credit unions to the industry network.
We expect to establish both manned and unmanned POPs. Each manned POP
will be located in a key strategic market with an average concentration of
more than 300 credit unions. Manned POPs will be opened upon the hiring
of sales agents to service the territory.
When our network of POPs is completed, we expect to have excess
server capacity available at multiple POPs so that network traffic can be
rerouted between POPs when circumstances require. We plan for all POPs to
be connected with all other POPs, either by point-to-point connection, by
private frame relay circuit, or by "virtual private network" technology
now available from third party vendors. 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 POP.
Our manned POP in Denver and our unmanned POP in Colorado Springs,
Colorado are completed and fully operational. We have hired sales
personnel for some sales territories. Recruiting efforts are underway to
staff a number of additional sales territories.
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 19 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. We plan to target
credit union associations and leagues in other markets, such as North
Carolina, where serving a league is likely to enhance our profile with
credit unions in the region. The North Carolina Credit Union League
signed with us in March 1999 to provide secure ISP services to their
management and employees.
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.
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. To date, our network
includes 32 credit unions, two credit union leagues and one corporate
credit union. Nine of these customers are located out of state.
Intellectual Property and Proprietary Rights
--------------------------------------------
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. Despite our 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 attempt to 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
completely deter unauthorized use, copying, or destruction of our
proprietary technology, 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 could be
costly to us, and given the limited number of our key employees, may
disrupt our on-going efforts to develop and expand our business and
technology.
Property
--------
Our corporate headquarters are located at 7475 Dakin Street, Suite
607, Denver, Colorado 80221 in an office facility where we lease
approximately 4,600 square feet under a lease that expires on December 31,
1999. We maintain a sales and engineering office and point of presence
("POP") for the network in an office facility in Colorado Springs,
Colorado which we lease on a month-to-month basis. We plan to establish
sales and engineering offices, manned POPs and unmanned POPs in leased
facilities across the United States. To date, we have leased four such
facilities. We have entered into a lease for office space in Raleigh,
North Carolina consisting of 879 square feet expiring February 28, 2002; a
lease in Bloomington, Minnesota for office space consisting of 1,098
square feet expiring March 14, 2002; a lease in San Diego, California for
1,162 square feet of office space expiring February 28, 2002; and a lease
in Newark, Delaware for 1,047 square feet, expiring May 1, 2004. We are
currently negotiating leases for facilities in Portland, Oregon and
Livonia, Michigan.
We maintain our computer system in our Denver, Colorado
facility. We currently maintain an insurance policy covering this
equipment for full replacement value.
Employees
---------
We currently employ 26 full-time employees. 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.
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, nor are we regulated by the National
Credit Union Administration ("NCUA") 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.
A credit union is a cooperative financial institution, owned and
controlled by the members who use its services. Credit unions are non-
profit organizations that are state or federally chartered. Credit unions
are regulated closely by the NCUA.
On August 7, 1998, the Credit Union Membership Access Act of 1998
(the "Act") 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 implementing 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 on June 1, 1999 titled LanXtra, Inc. v. Kirk
W. Dennis, Case No. 99 CV 3583 in the District Court, City and County of
Denver, Colorado to resolve the matter. While we could be required to
purchase his shares from him at the fair value determined in the
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 value of
the shares upon consummation of this offering. Therefore, 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.
(See "Risk Factors - Dissenting LanXtra Shareholder").
Company History
---------------
We were originally incorporated under the name Network Acquisitions,
Inc. ("NAI") in August 1998 for the purpose of acquiring the assets and
business operations of LanXtra, Inc. ("LanXtra"). 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.
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. (See "Capitalization" and "Certain Relationships and Related
Transactions"). 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
Executive Officers and Directors
- --------------------------------
Name Age Position
---- --- --------
David J. Selina 49 President,
Chief Operating Officer, Chief
Executive Officer and Director
Marshall E. Aster 45 Chief Financial Officer
Jeffrey W. Marshall 33 Vice
President of Software Development
and Director
Andrew I. Telsey 46 Director
Stephen B. Friedman 57 Director
Key Employees
- -------------
Name Age Position
---- --- --------
Daniel W. Dudley 39 Vice
President of Affinity Products
William Ed Davis 49 Vice
President of Network Services
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 has been the President and Chief Operating
Officer of LanXtra, Inc. since December 1997 and a director since January
1998. LanXtra has no current operations. 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
("EDS") 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 Corporate Financial Planning, Vice President
Corporate Financial Planning 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 the company's 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 company's 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.
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 the company's Global Distribution System and Internet
foreign currency businesses. From December 1991, he was Director -
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 - List and Data Products,
with strategic responsibility for the company's 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.
WILLIAM ED DAVIS. Mr. Davis became our Vice President of Network
Services on June 1, 1999. As National Director of IP Operations (Acting)
at Qwest Communications in Denver, Colorado from April 1999 until he
joined us, Mr. Davis was responsible for staffing the company's west and
east coast hosting centers. Prior to that, Mr. Davis was Director of IP
Operations Engineering at Qwest from January 1999 to April 1999, with
responsibility for team leadership in the design of Qwest IP Data Centers
and other aspects of the company's national network, and was Senior
Manager of Internet Collocation Services at Qwest from June 1998 to
January 1999, with team leader responsibility in the operations of the
Denver Data Center. He served as Manager of Network Systems from January
1993 to June 1998, and as Supervisor of Telecommunications/PC Support from
November 1991 to January 1993 at Western Gas Resources Inc. in Denver.
His responsibilities included strategic and management responsibility for
telecommunications and supervision of support for desktop and network
systems. Mr. Davis received his education from the State Technical
Institute in Memphis, Tennessee.
Committees Of Board Of Directors
- --------------------------------
The board of directors is currently acting as our compensation
committee. The members of the compensation committee, when appointed by
the board, will be 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 and Friedman. We intend to appoint another board member to the
audit committee.
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. (See "Equity Incentive Plan"). 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 the director options were granted at the
private placement price of $3.00 per share.
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
--------------------------
Annual Compensation
------------------------------------
Fiscal Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ------ -------- ----- ------------
David J. Selina(1) 1998 $105,402 -0- -0-
President, Chief Executive 1997 $ 8,333 -0- -0-
Officer and Chief 1996 $ 0 -0- -0-
Operating Officer
Jeffrey W. Marshall(2) 1998 $ 76,333 -0- -0-
Vice President of 1997 $ 56,426 -0- -0-
Software Development 1996 $ 20,484 -0- -0-
Craig E. Lassen(3) 1998 $ 75,481 -0- -0-
Former Chairman of the Board 1997 $ 68,747 -0- -0-
and Chief Executive Officer 1996 $ 48,000 -0- -0-
(1) The compensation paid to Mr. Selina in 1997 and 1998 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 our company until February 1, 1999.
(2) The compensation paid to Mr. Marshall in 1996, 1997 and 1998 was paid
by LanXtra, Inc. Mr. Marshall did not become an officer of our company
until February 1, 1999.
(3) The compensation paid to Mr. Lassen in 1996, 1997 and 1998 was paid
by LanXtra, Inc. Mr. Lassen did not become an officer of our company
until February 1, 1999. His resignation as an officer and as a director
of our company was effective March 18, 1999.
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.
None of our executive officers received options to purchase our
common stock in 1998. After we adopted the Equity Incentive Plan, in
March of 1999 Mr. Selina was granted 150,000 options, Mr. Aster was
granted 40,000 options, and Mr. Marshall was granted 50,000 options, all
of which they may exercise for a period of ten years at $3.00 per share.
Mr. Aster's options vest over a fifteen month period from his start date
of March 8, 1999, one quarter after 6 months, and another quarter every
three months thereafter. Mr. Selina's and Mr. Marshall's options vest
over an eighteen month period, with one third vesting every six months.
(See "Equity Incentive Plan").
In August 1998, Mr. Selina was granted a five-year option to purchase
42,970 shares of LanXtra common stock at $2.75 per share, and a five year
option to purchase 74,761 shares of LanXtra common stock at $7.50 per
share. At the same time, Mr. Marshall was granted a five-year option to
purchase 28,646 shares of LanXtra common stock at $2.75 per share, and a
five year option to purchase 49,840 shares of LanXtra common stock at
$7.50 per share. In November 1997, Mr. Lassen was granted a five-year
option to purchase 270,000 shares of LanXtra common stock at $7.50 per
share. All of the LanXtra options were cancelled as of December 31, 1998
pursuant to an agreement between LanXtra and each of the optionees.
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 our board of directors, as well as other employee benefits.
On March 19, 1999, our board named Mr. Selina as our Chief Executive
Officer and Chairman of the Board.
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.
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.
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. We recently
entered into an agreement with Mr. Lassen under which he will provide
consulting services to cavion.com until April 15, 2000 and will receive a
total of $75,000 as payment for his services.
Under all of the employment contracts, if any executive is terminated
other than for dissolution of the company, death, disability or cause, or
the executive is terminated or resigns for good reason within three months
after a change of control of our company, 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 the Company is
profitable on an after-tax basis at that time or, if it is not, on the
second anniversary of employment.
In addition, each of Mr. Selina, Mr. Aster, Mr. Marshall and Mr.
Lassen agreed under the 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 (the "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
our company which their effort, initiative, and skill have helped produce.
GENERAL. The Plan authorizes up to 750,000 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. After we become a public company, the
compensation committee of the board of directors will administer and
interpret the Plan. Currently, the board of directors is acting as our
compensation committee. The compensation committee, when appointed by the
board, will consist of two or more directors, each of whom must be 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 our company
and its subsidiaries, including any non-employee member of the board of
directors. As of June 1, 1999, 403,500 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 will determine 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 will determine 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 pursuant to Rule 16b-3 of
the Securities Exchange Act of 1934 or Section 162(m) of the Internal
Revenue Code 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) of the Internal Revenue Code,
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 pursuant to
a plan approved by shareholders that meets certain requirements. We will
ask the shareholders to approve the Plan at the next annual or special
meeting of shareholders so that grants of options under the Plan meet the
requirements of "performance-based compensation." Awards of restricted
stock generally will not qualify as "performance-based compensation."
PRINCIPAL SHAREHOLDERS
The following table sets forth the number and percentage of shares of
our stock owned as of June 9, 1999 by any person we know to be the owner
of 5% or more. In addition, we have included what is owned by each
director of our company, by the officers we consider as executive officers
under federal securities laws, and by all of our directors and executive
officers as a group. The information we have provided as to beneficial
ownership is based upon statements furnished to us by such persons. For
purposes of this chart, the amount of our common stock beneficially owned
is the aggregate number of shares of the common stock outstanding on June
9, 1999, plus an amount equal to the aggregate amount of common stock
which could be issued upon the exercise of stock options within 60 days of
June 9, 1999.
Number of
Shares of Percent of Ownership
Common Stock ---------------------
Name of Beneficially Before After
Beneficial Owner Owned Offering(1) Offering
- ---------------- ------------ ----------- --------
Venture Funding, Ltd.(2) 902,452 33.3% 19.6%
2581 S. Parker Road #720
Aurora, CO 80014
Boutine, LLC(3) 738,370 27.3% 16.0%
5460 S. Quebec St. #220
Englewood, CO 80111
David J. Selina 209,055 7.7% 4.5%
7475 Dakin Street #607
Denver, CO 80221
Marshall E. Aster 0 * *
7475 Dakin Street #607
Denver, CO 80221
Jeff Marshall 209,055 7.7% 4.5%
7475 Dakin Street #607
Denver, CO 80221
Andrew I. Telsey(4) 917,727 33.8% 19.9%
2851 S. Parker Road, #720
Aurora, CO 80014
Stephen B. Friedman(5) 6,875 * *
P.O. Box 8279
Beaver Creek, CO 81620
LanXtra, Inc.(6) 376,299 13.9% 8.2%
7475 Dakin Street #607
Denver, Colorado 80221
Craig E. Lassen(7) 209,055 7.7% 4.5%
245 Poplar Street
Denver, CO 80220
All directors and
executive officers as
a group (4 persons)(8) 1,342,712 49.4% 29.1%
*Less than one percent
(1) Does not include the 1,200,000 shares of common stock to be issued in
this offering, the 180,000 over-allotment shares, or the 700,000 shares of
common stock into which the preferred stock will be converted upon
consummation of the offering.
(2) The sole shareholder of Venture Funding, Ltd. is Andrew I. Telsey,
one of our directors.
(3) The sole member of Boutine, LLC is Julie Graham who is the spouse of
Gary Graham, the President of First Capital Investments, Inc., the agent
for our private placement of promissory notes and warrants in October
1998. (See "Certain Relationships and Related Transactions").
(4) Includes 902,452 shares owned by Venture Funding. Ltd. of which Mr.
Telsey is the sole shareholder. Includes 8,400 shares owned by certain
trusts for which Mr. Telsey is the trustee, but for which he disclaims any
beneficial ownership to the shares owned by each of them. Also includes
options to purchase 6,875 shares.
(5) Consists of options to purchase 6,875 shares.
(6) Consists of shares of common stock distributed to LanXtra, Inc. for
the assets of that company. These shares will continue to be voted by the
management of LanXtra, Inc. (or its successor company) until they are
distributed to LanXtra shareholders after the completion of this offering.
(See "Certain Relationships and Related Transactions").
(7) Does not include 98,520 shares of common stock that Mr. Lassen will
receive when a distribution is made by LanXtra, Inc. (or its successor
company) of the shares of common stock it received for the sale of its
assets to cavion.com. (See "Certain Relationships and Related
Transactions"
(8) Includes options to purchase 13,750 shares.
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 the company.
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 (put) for the
holder to sell the shares to us at $7.00 per share, and a parallel option
(call) for us to buy the shares from the holder at $7.00 per share. The
put is exercisable only during a 60-day exercise period beginning on the
date that is 30 days after the 100 Credit Union Date. The call is
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 exercise
period neither the put or 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. The authorization for
issuance of the Class B common stock will automatically terminate on the
earlier of the date on which the exercise notices for either the put or
call have been issued for the Class B common stock, or the date of
automatic conversion of all outstanding shares of Class B common stock
described above. 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 are subject to a preferred
stock purchase warrant issued to NTB as the placement agent for the
private placement. Each share of preferred stock is convertible at any
time at the holder's option into one share of Class A common stock.
Automatic conversion of the preferred stock will occur upon the earlier to
occur of the consummation of the public offering of Class A common stock
in this prospectus or the date specified in a notice delivered by us any
time after January 1, 2004. Commencing on the date of issuance of the
preferred stock through the date of conversion, each holder will receive,
when, as and if declared by the board of directors, cumulative
preferential dividends at the rate of 5% per annum. Dividends are payable
quarterly either in cash or in shares of Class A common stock at our
option. All accrued and unpaid dividends will be paid upon conversion of
the preferred stock. Upon any liquidation, dissolution or winding up of
the company, whether voluntary or involuntary, the holders of the
preferred stock will be 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 is expected to occur upon consummation of the public offering, it is
not expected that this right will be effected. In the 1999 private
placement memorandum, we agreed to include in this offering all of the
shares of common stock into which the preferred stock sold in the private
placement is convertible. However, 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 this prospectus without
the written consent of our underwriter. See "Lock-Up Arrangements" and
"Plan of Distribution".
PREFERRED STOCK WARRANT
We have warrants outstanding for the purchase of 70,000 shares of our
preferred stock. The warrants are exercisable at $3.00 per share for a
period of five years. Shares of our preferred stock are automatically
converted into Class A common stock upon consummation of the offering. If
Neidiger, Tucker, Bruner, Inc. ("NTB") exercises its warrants after the
consummation of the offering, the shares of preferred stock issuable upon
exercise of the warrants will be convertible into shares of Class A common
stock at the option of NTB. The warrants were issued to NTB in connection
with the February 1999 private placement of preferred stock described in
the preceding paragraph.
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 at this time and will have a much greater number after this
offering, 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 pursuant to 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 is, therefore,
unenforceable.
Our bylaws provide that the company 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 the company 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, the company 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 thereafter 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 certain other
acts prohibited by Colorado corporate law
o for any transaction resulting in receipt by the director of
an improper personal benefit
We intend to obtain 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 pending litigation or proceeding,
and we are not aware of any 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 Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market
following the offering could adversely affect the market price of the
common stock and adversely affect our ability to raise capital at a time
and on terms favorable to us.
After the offering, there will be 4,606,326 shares outstanding,
including the automatic conversion of 700,000 shares of Series A preferred
stock into Class A common stock and including 1,200,000 shares of common
stock offered hereby (assuming that the underwriters do not exercise their
over-allotment option). We have agreed to register in this prospectus the
shares of Class A common stock that will be issued upon the automatic
conversion of the Series A preferred stock upon the consummation of the
offering. However, the holders of the preferred stock have agreed not to
sell their shares of preferred stock, or the shares of common stock into
which the preferred shares will be converted, for a period of nine months
after the date of the prospectus. See "Lock-Up Arrangements" below.
After the nine month period has expired, these holders will be able to
freely trade their shares of Class A 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. The remaining shares of common
stock to be outstanding after the offering are "restricted securities"
under the Securities Act of 1933 and may be sold in the public market upon
the expiration of certain holding periods under Rule 144, subject to the
volume, manner of sale and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate,"
as that term is defined in the Securities Act, is entitled to sell, within
any three-month period, a number of shares that does not exceed the
greater of:
o one percent of the then outstanding shares of our common
stock (approximately 46,063 shares immediately following the
offering)
o the average weekly trading volume during the four calendar
weeks preceding filing of notice of such sale
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us. A shareholder who is deemed not to have been an
"affiliate" of ours at any time during the 90 days preceding a sale, and
who has beneficially owned restricted shares for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations, manner of sale provisions or public information
requirements.
As of June 9, 1999 there were options to purchase 403,500 shares of
common stock under our Equity Incentive Plan of which 13,750 will become
exercisable on June 30, 1999. An additional 346,500 shares are reserved
for issuance under our Equity Incentive Plan. We intend to register the
shares of common stock issued, issuable or reserved for issuance under the
Equity Incentive Plan as soon as practicable following the date of this
prospectus.
As of June 9, 1999, there were outstanding warrants to purchase
70,000 shares of Series A preferred stock held by Neidiger, Tucker,
Bruner, Inc. ("NTB"). Shares of our preferred stock will be automatically
converted into Class A common stock upon consummation of the offering. If
NTB exercises its warrant after the consummation of the offering, the
shares of preferred stock issuable upon exercise of the warrants will be
convertible into shares of Class A common stock at the option of NTB. NTB
is entitled to demand and piggyback registration rights with respect to
such Class A common stock. Exercise of such registration rights could
cause a large number of shares to be registered and sold in the public
market and such sales could have an adverse effect on the market price for
the Class A common stock. The warrants were issued to NTB in connection
with our February 1999 private placement of preferred stock. See
"Description of Capital Stock - Preferred Stock."
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 any of their shares of common stock
without the prior written consent of NTB for a period of 12 months from
the effective date of this prospectus. In addition, all of the other
shareholders who own shares (or securities convertible into common stock)
prior to this public offering have 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 the date of this prospectus without such written consent. All of
these shareholders have also agreed that, for a period of 18 months from
the date of this prospectus, any public sale of their shares, either under
Rule 144 or otherwise, will be made only in a transaction through NTB,
provided that NTB's compensation is competitive with other broker-dealers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our founding shareholders, Venture Funding, Ltd. ("Venture") and
Boutine, LLC ("Boutine") acquired 1,100,000, and 900,000 shares,
respectively, of our Class A common stock on August 18, 1998 for $0.0001
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
pursuant to the Agreement for Post-Closing Adjustments described below.
On September 14, 1998, we entered into an agreement to loan our
predecessor, LanXtra, Inc., a Colorado corporation (formerly known as
Sigmacom Corporation, then Cavion Technologies, Inc., now LanXtra, Inc.
and referred to herein as "LanXtra"), up to $300,000 (the "Loan
Agreement"). 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 annum, 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
(the "Notes") 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 (the
"Warrants"). Pursuant to a security agreement dated October 20, 1998, the
notes are secured by substantially all of our assets, now owned or
hereafter acquired, 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 pursuant to the exercise
of the Warrants have been issued.
First Capital Investments, Inc. ("First Capital"), a broker/dealer
registered with the Securities and Exchange Commission, was engaged as our
exclusive placement agent and financial advisor for the private placement
pursuant to an Engagement Letter dated September 20, 1998 under which 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.
First Capital was granted piggyback registration rights for these shares
in the Engagement Letter but will not exercise these rights for inclusion
of its shares in this offering. First Capital has agreed to forego any
commissions with respect to our 1999 private placement and this offering.
Under the terms of the Engagement Letter, 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. First Capital and our underwriter, NTB,
have 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, LLC, one of our principal shareholders. Gary
Graham is a principal of First Capital.
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 (i) 375,214 shares of our Class A
common stock (subsequently increased to 376,299 shares pursuant to the
Agreement for Post-Closing Adjustments described below), and (ii) 28,648
shares of our Class B common stock, which was 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. Burger Living Trust, Martin
Cooper and Fairway Realty Associates (the "1996 Investors") who received
stock in LanXtra and provided cash collateral in the amount of $600,000 as
security for LanXtra's loan with US Bank, N.A. in the same amount. The
loan from US Bank was made pursuant to a commercial loan agreement dated
August 1, 1996 and secured by $620,000 in cash collateral consisting of
letters of credit and certificates of deposit, of which $600,000 was
provided by the 1996 Investors and $20,000 was provided by LanXtra. As a
condition to providing the collateral for the loan, the 1996 Investors
were also granted certain 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 pursuant to the Termination and Modification Agreement of
September 28, 1998 between LanXtra, its founders and the 1996 Investors.
However, the Termination and Modification Agreement does 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 pursuant to the Loan Agreement of
January 18, 1999, as amended March 24, 1999. The proceeds of the new loan
were used to pay off the 1996 loan to LanXtra. The new loan bears annual
interest at the rate of 1.5% over the reference rate payable monthly
beginning on February 28, 1999. The principal of the loan must be paid in
a single payment on December 31, 1999. The loan is secured by $620,000
cash collateral consisting of certificates of deposit and letter 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 will not be distributed to its shareholders until our loan
with US Bank has been paid in full or the 1996 Investors have been
reimbursed for their collateral. Upon closing of the Asset Purchase
Agreement with LanXtra, we assumed LanXtra's obligations under the
Termination and Modification Agreement with the 1996 Investors, as
amended.
The LanXtra obligations we assumed also include the transactions
described below. Each of the creditors of these obligations has agreed to
defer repayment until the completion of this 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 reflects $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 will continue to
be paid on a quarterly basis until the notes are paid in full.
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 ("Questar") and bear 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 is 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, but no further interest will accrue on them.
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 will accrue on this obligation.
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 will accrue on this obligation.
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.
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) pursuant to 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
($30,000 from Mr. Selina, $50,000 from Mr. Marshall and $30,000
from Mr. Burtis), for working capital purposes. LanXtra issued
each of these shareholders and employees (1) a senior promissory
note bearing interest at a rate of 42% per annum, the principal
and interest of which was payable in three equal monthly
installments beginning on November 1, 1998; (2) shares of
LanXtra nonvoting common stock and; (3) put options to sell the
shares of the LanXtra nonvoting common stock 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 does not continue to accrue after the
closing of the Asset Purchase Agreement. 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 the cavion.com Class B
common stock contain put provisions which are identical to those
in the put agreements except that the exercise period for the
put begins 30 days after the 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. We have agreed with the LanXtra
shareholders who have rights to the Class B stock that their put
rights will mature upon completion of this offering. To
implement this agreement, after completion of this offering we
expect to offer 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.
LanXtra intends to convey 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 will have the same ownership as LanXtra,
and will hold the shares until they are distributed to LanXtra's
shareholders after the completion of this offering.
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 will automatically
convert into 700,000 shares of Class A common stock upon the closing of
this offering. The holders of the converted shares of common stock are
entitled to certain registration rights. See "Description of Capital
Stock." We engaged Neidiger, Tucker, Bruner, Inc., a registered broker
dealer ("NTB"), as our exclusive placement agent for the offering pursuant
to a Placement Agent Agreement dated March 10, 1999. NTB received (i) a
placement fee and non-accountable expense allowance equal to 10% and 2%,
respectively, of the gross proceeds in the offering, and (ii) warrants to
purchase 70,000 shares of preferred stock (10% of the shares sold in the
offering) exercisable at $3.00 per share for a term of five years. The
warrants provide NTB with piggyback and demand registration rights at our
expense. NTB has the right to demand up to two registrations at any time
before April 30, 2004. NTB has a right to exchange all or part of its
warrants for preferred stock in a cashless transaction which would result
in fewer shares being issued to NTB by us, but no cash would be paid to us
for the exercise. NTB has 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, or until December 22, 2001. In addition,
in the event of a closing of any such offering in the first 24 months in
which NTB does not act as our investment advisor, we must 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.
When we closed the Asset Purchase Agreement with LanXtra, our
founding shareholders (Venture Funding, Ltd. and Boutine, 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 bear the equity cost of
bringing us the first $1 million of new equity, while LanXtra and the
management shareholders share in the dilution of any additional equity.
This agreement was consummated 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.
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.
Name of No. of Shares No. of Shares Shares to be Beneficially
Selling Beneficially Being Owned on Completion
Shareholder Owned(1) Offered(1) of the Offering
------------------------
Number % of Class
----------- -------------- ------------- ---------- ----------
Anne D. Dyde
Trustee, Anne
D. Dyde Trust
of 1976 10,000 10,000 -0- -0-
James F. Dyde
Trustee for
James F. Dyde
Insurance Trust 10,000 10,000 -0- -0-
Jon D. Kostival 10,000 10,000 -0- -0-
James F. Seifert
& Nancy L. Seifert
as Trustees or the
Successor Trustees of
the James F. Seifert
Management Trust
dated October 8,
1992 10,000 10,000 -0- -0-
Dianne M. Giambusso 10,000 10,000 -0- -0-
Carol Nixon 20,000 20,000 -0- -0-
Adam Glickman 10,000 10,000 -0- -0-
Leland E. Tate 10,000 10,000 -0- -0-
William Ettenger 16,000 16,000 -0- -0-
Jeffrey Telsey
Trustee Alex M.
Telsey Special
Needs Trust 10,000 10,000 -0- -0-
Lincoln Trust
Company Custodian
FBO Jerry Schempp 10,000 10,000 -0- -0-
MBM Young 20,000 20,000 -0- -0-
Jeff Kavy 80,000 80,000 -0- -0-
William J. Nooney 10,000 10,000 -0- -0-
Robert C. Tucker &
Karen D. Tucker JT 10,000 10,000 -0- -0-
William Oyen &
Carolyn S. Oyen JT 20,000 20,000 -0- -0-
Michael Mara 10,000 10,000 -0- -0-
John E. Tarrillion 20,000 20,000 -0- -0-
Daniel E. Depre 10,000 10,000 -0- -0-
Carla G. Stewart 10,000 10,000 -0- -0-
Martin J. Sherlock
Trustee, Marion A.
Sherlock Trust 14,000 14,000 -0- -0-
Jerry Schempp &
Bruce E. Kobey
TENCOM 10,000 10,000 -0- -0-
Janet M. Searl &
Kent E. Searl JT 10,000 10,000 -0- -0-
Gregory Werts 10,000 10,000 -0- -0-
Julie A. Hackett 10,000 10,000 -0- -0-
Tyrone M. Clark 10,000 10,000 -0- -0-
Lisa H. Robb &
Michael B. Robb JT 10,000 10,000 -0- -0-
Jack C. Moore 10,000 10,000 -0- -0-
Robert C. Werts &
Patricia Schulte-
Werts JT 10,000 10,000 -0- -0-
Michael K. Carney 17,000 17,000 -0- -0-
Joseph Reinke 10,000 10,000 -0- -0-
Alan L. Talesnick &
Robert M. Bearman
TENCOM 10,000 10,000 -0- -0-
Roswell S. Monroe &
Wanda V. Monroe
Trustees of the
Roswell & Wanda
Monroe Family Trust
u/d/t dtd 1/31/90 10,000 10,000 -0- -0-
Walter J.
Schoefberger 10,000 10,000 -0- -0-
William Kilzer 10,000 10,000 -0- -0-
Robert L. Young &
Anna M. Young JT 10,000 10,000 -0- -0-
Karl D. Smith 10,000 10,000 -0- -0-
Schield Management
Company 10,000 10,000 -0- -0-
John R. McKowen 10,000 10,000 -0- -0-
John Metzger 10,000 10,000 -0- -0-
Trans-L A
Partnership 10,000 10,000 -0- -0-
Lucas Liakos 10,000 10,000 -0- -0-
Carl Brad Linder &
Cathy Linder JT 10,000 10,000 -0- -0-
Thomas J.
Obradovich 10,000 10,000 -0- -0-
Thomas R. Ashford 10,000 10,000 -0- -0-
Stanley Ranch 10,000 10,000 -0- -0-
Denora Corporation 10,000 10,000 -0- -0-
Ronald D. Devoe 10,000 10,000 -0- -0-
William Daniel
Carter TTEE of the
William Daniel
Carter Trust 10,000 10,000 -0- -0-
Third Millenium
Trading LLP 10,000 10,000 -0- -0-
Advent Fund LLC 10,000 10,000 -0- -0-
Mariusz Witek 10,000 10,000 -0- -0-
Randal A. Alford 10,000 10,000 -0- -0-
Farhad Ghaffarour 10,000 10,000 -0- -0-
Erven J. Nelson TTEE
for the Erven J.
Nelson Ltd. PSP 10,000 10,000 -0- -0-
Leonard B. Zelin 10,000 10,000 -0- -0-
Fiscal Dynamics
Corporation 13,000 13,000 -0- -0-
(1) Represents shares of common stock issuable to shareholders who own
700,000 shares of our preferred stock. The preferred stock will
automatically convert into shares of Class A common stock upon the
consummation of the public offering in this prospectus.
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 $5,000. 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 selling shareholders have agreed that they would not sell the shares
of common stock they receive when they convert the preferred stock for a
period of nine months from the date this prospectus. They also agreed
that, for a period of 18 months from the date of this prospectus, any
public sale of their shares pursuant to Rule 144 of the rules and
regulations of the Securities and Exchange Commission or otherwise will be
made only in a transaction through NTB, provided that NTB's compensation
is competitive with other broker-dealers.
PLAN OF DISTRIBUTION
After conversion of shares of Series A preferred stock into Class A
common stock upon consummation of the offering, and 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:
oone percent (1%) of the then outstanding shares of common stock of
the issuer
othe 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.
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement,
the underwriters named below, for whom Neidiger, Tucker, Bruner, Inc.
("NTB") is acting as representative, have agreed to purchase from us the
respective number of shares of common stock shown opposite its name below.
Number of Shares
Underwriter To Be Purchased
----------- ----------------
Neidiger, Tucker, Bruner, Inc.
---------
TOTAL 1,200,000
=========
In the underwriting agreement, the underwriters have agreed, to
purchase all shares offered hereby (other than the shares covered by the
underwriters' over-allotment option described below). In the event of a
default by any underwriter, the underwriting agreement provides that, in
certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the underwriting agreement may be
terminated.
The representative has advised us that the underwriters propose to
offer the shares to the public at the initial public offering price set
forth on the cover page of this prospectus, and to selected dealers at
such price less a concession not in excess of $ per share and
that the representative and such dealers may reallow a discount of not in
excess of $ per share to other dealers. The offering price and
the concession and discount to dealers may be changed by the
representative after the initial public distribution of the shares is
completed. The representative also has advised us that the underwriters
do not intend to confirm sales to any accounts over which any of them
exercise discretionary authority.
We have granted the underwriters an option, expiring at the close of
business 45 days after the date of this prospectus, to purchase up to
180,000 additional shares at the offering price less the 10% underwriting
discount and a 2% non-accountable expense allowance. The underwriters may
exercise this option only to satisfy over-allotments in the sale of the
shares. We will be obligated to sell these shares to the underwriters to
the extent the option is exercised.
We have agreed to pay the representative a non-accountable expense
allowance of 2% of the total proceeds of the offering of which we have
already paid $45,000. We have also agreed to pay all expenses in
connection with qualifying the shares for sale in the states selected by
the representative. The representative's expenses in excess of the non-
accountable expense allowance, including its legal expenses, will be borne
by the representative. To the extent that the expenses of the
representative are less than the non-accountable expense allowance, the
excess may be deemed additional underwriting compensation.
Until the distribution of the shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the
underwriters and certain selling group members to bid for and purchase our
common stock. As exceptions to these rules, the underwriters are
permitted to engage in certain transactions that stabilize the price of
the common stock. Such transactions may consist of over-allotment,
stabilizing transactions, syndicate covering transactions and penalty bids
in accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size,
which create a syndicate short position. Stabilizing transactions permit
bids to purchase the common stock so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve
purchases of the common stock in the open market after the distribution
has been completed in order to cover syndicate short positions. Penalty
bids permit the underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate
member are purchased in a syndicate covering transaction. Such
transactions, or any of them, may cause the price of the common stock to
be higher than it would otherwise be in the absence of such transactions.
Neither cavion.com nor the underwriters may make any representation
or prediction as to the direction or magnitude of any effect to that the
transactions described above may have on the price of the common stock.
If these activities are commenced, they may be discontinued by the
underwriters at any time without notice.
Our directors, officers and each holder of 5% or more of our common
stock have agreed not to sell their shares of cavion.com common stock
without the representative's prior written consent for a period of 12
months after the date of this prospectus. Each holder who owns less than
5% of our common stock (or securities convertible into common stock) prior
to the public offering has agreed not to offer or sell or contract to
dispose of any of their shares for a period of 9 months from the date of
this prospectus without prior written consent of the representative. All
of these shareholders have also agreed that, for a period of 18 months
from the date of this prospectus, any public sales of their shares, either
under Rule 144 or otherwise, will be made through the representative on an
exclusive basis, provided that the representative's compensation is
competitive with other broker-dealers. See "Shares Eligible for Future
Sale."
We have agreed to sell the representative on completion of the
offering, for $100, a warrant entitling the representative or its assigns
to purchase 120,000 shares of our common stock. The representative's
warrant will be exercisable for a period of four years beginning one year
from the date of this prospectus. The representative's warrant will
contain certain anti-dilution provisions and provide for the cashless
exercise of the warrant utilizing the value of the warrants being
surrendered. The exercise price of the representative's warrant is 120%
of the public offering price. The warrant is not redeemable by the
Company. The representative's warrant and the underlying common shares
will be restricted from sale and assignment for one year after the date of
this Prospectus, except to officers of the representative. Thereafter,
the representative's warrant and the underlying common shares will be
transferable provided such transfer is in accordance with the provisions
of the Securities Act of 1933. Subject to certain limitations, we have
agreed, at the representative's request, to register the common stock
underlying the representative's warrant issuable upon exercise of the
warrants. See "Description of Capital Stock - Preferred Stock Warrant"
and "Shares Eligible for Future Sale." We may find it more difficult to
raise additional equity capital while the representative's warrant is
outstanding.
The representative has agreed to provide investment banking services
to us upon completion of the offering for a period of two years for a fee
of $48,000, payable at the closing of the offering. The agreement also
provides for a fee ranging up to 5% of the consideration involved in any
transaction (including mergers and acquisitions) consummated by us in
which the representative introduced the other party to the company during
the term of the agreement provided the transaction is completed within 36
months from the close of the offering.
We have also agreed that for a period of two years from the date of
this offering, the representative 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 the representative to hold at least four meetings of
our board each year. In the event that we maintain a liability insurance
policy with coverage for acts of our officers and directors, we have
agreed that if possible we will include the advisor designee as an insured
under the policy. Any advisor designated by the representative must be
acceptable to us, which acceptance will not be unreasonably withheld.
The representative received a $210,000 commission and warrants to
purchase up to 70,000 shares of our preferred stock at $3.00 per share in
connection with our private offering of preferred stock completed in April
1999. See "Certain Relationships and Related Transactions."
In connection with this offering, cavion.com and the underwriters
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act of 1933 and if such indemnification
is unavailable or insufficient, cavion.com and the underwriters have
agreed to damage contribution arrangements based upon relative benefits
received from this offering and relative fault resulting from such damage.
Prior to the offering, there has been no public market for our
securities. The initial public offering price of the shares of common
stock has been determined by negotiation between us and the
representative. Among the factors considered in determining the initial
public offering price of the shares of common stock were:
o our earnings and certain other financial and operating
information in recent periods
o our future prospects and our industry in general
o the general condition of the securities markets at the time
of this offering
o the market prices of securities and certain financial and
operating information of companies engaged in activities similar
to ours
There can be no assurance, however, that the prices at which the
common stock will sell in the public market after this offering will not
be lower than the price at which it is sold by the underwriters.
Application will be made to have the common stock approved for quotation
on the NASDAQ system upon completion of this offering.
The foregoing does not purport to be a complete statement of the
terms and conditions of the underwriting agreement, copies of which are on
file at the offices of cavion.com, the representative and the Securities
and Exchange Commission.
ADDITIONAL INFORMATION
We will file annual, quarterly, special reports, proxy statements,
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and other information can be inspected
and copied at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C.
20549, and at the following regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
Our common stock will be quoted on The Nasdaq SmallCap Market.
Reports, proxy statements and other information concerning cavion.com can
be inspected at the National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006. The Commission maintains a
Website that contains all information filed electronically by us. The
address of the Commission's Website is (http://www.sec.gov.).
This prospectus constitutes a part of a registration statement on
Form SB-2 (herein, together with all amendments and exhibits thereto,
referred to as the "Registration Statement") filed by us with the
Commission under the Securities Act, with respect to the securities
offered in this prospectus. This prospectus does not contain all the
information which is in the Registration Statement. Certain portions of
the Registration Statement are omitted as allowed by the rules and
regulations of the Commission. We refer to the Registration Statement and
to the exhibits to such Registration Statement for further information
with respect to cavion.com and the securities offered in this prospectus.
Copies of the Registration Statement and the exhibits to such Registration
Statement are on file at the offices of the Commission and may be obtained
upon payment of the prescribed fee or may be examined without charge at
the public reference facilities of the Commission 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.
The prospectus includes statistical data regarding Internet usage and
the credit union industry which were obtained from industry publications,
including reports generated by Callhan, International Data Corporation,
News.com, IDC Research, American Banker, PC World, 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 financial statements of cavion.com and LanXtra in this prospectus
and registration statement 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 said
firm as experts in accounting and auditing in giving said reports.
Reference is made to said reports, which include explanatory paragraphs
with respect to the uncertainty regarding cavion.com's and LanXtra's
ability to continue as going concerns as discussed in Note 1 to each
financial statement.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be
passed upon for us by Gorsuch Kirgis LLP, Denver, Colorado. Certain legal
matters in connection with the offering will be passed upon for the
underwriters by John G. Herbert, P.C., Denver, Colorado.
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Financial Statements:
LanXtra, Inc.
Report of Independent Public Accountants
Balance Sheets at January 31, 1999, December 31, 1998 and 1997
Statements of Operations for the one-month period ended January
31, 1999 and for the years ended December 31, 1998 and 1997
Statements of Stockholders' Deficit for the period ended January
31, 1999 and for the years ended December 31, 1998 and 1997
Statements of Cash Flows for the one-month period ended January
31, 1999 and for the years ended December 31, 1998 and 1997
Notes to Financial Statements
Cavion Technologies, Inc.
Report of Independent Public Accountants
Balance Sheets at March 31, 1999, December 31, 1998 and 1997
Statements of Operations for the three-month period ended March
31, 1999 and for the period from Inception (August 8, 1998) to
December 31, 1998 and 1997
Statements of Stockholders' Equity for the three months ended
March 31, 1999 and for the period from Inception (August 18,
1998) to December 31, 1998
Statements of Cash Flows for the three months ended March 31,
1999 and for the period from Inception (August 18, 1998) to
December 31, 1998
Notes to Financial Statements
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 has
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.
/s/ARTHUR ANDERSEN LLP
Denver, Colorado,
May 18, 1999.
Page 1 of 2
LANXTRA, INC.
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation)
BALANCE SHEETS
--------------
January 31, December 31,
-----------------
ASSETS 1999 1998 1997
------ ---------- ----- -----
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
========= ========= =========
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
--------------
January 31, December 31,
-----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT 1999 1998 1997
- ------------------------------------- ---------- ---- ----
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
========= ========= =========
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
------------------------
One-Month
Period Ended Years Ended
January 31, December 31,
-----------------
1999 1998 1997
------------ ---- ----
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
========= ========= =========
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 PERIOD ENDED JANUARY 31, 1999 AND FOR THE YEARS ENDED
--------------------------------------------------------------
DECEMBER 31, 1998 AND 1997
--------------------------
Common Stock
Shares
(Including Shares of
Putable Common Stock) Amount
---------------------- ------
BALANCES, December 31, 1996 230,000 $ 2,300
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
Net loss - -
-------- --------
BALANCES, December 31, 1997 286,464 2,865
Issuance of putable common stock 28,648 286
Net loss - -
--------- ---------
BALANCES, December 31, 1998 315,112 3,151
Net loss - -
--------- ---------
BALANCES, January 31, 1999 315,112 $3,151
========= =========
Additional
Paid-In Accumulated
Capital Deficit
------------- -----------
BALANCES, December 31, 1996 $ 11,250 $ (783,447)
Exercise of stock options by an
employee at an exercise price
of $.01 in May 1997 - -
Issuance of common stock for cash at $7.77
per share in connection with the sale of
discontinued operation 399,485 -
Net loss - (763,118)
--------- ---------
BALANCES, December 31, 1997 410,735 (1,546,565)
Issuance of putable common stock - -
Net loss - (1,970,502)
---------- ----------
BALANCES, December 31, 1998 410,735 (3,517,067)
Net loss - (271,428)
---------- ----------
BALANCES, January 31, 1999 $410,735 $(3,788,495)
========= ===========
Total
Stockholders'
Deficit
-------------
BALANCES, December 31, 1996 $ (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)
----------
BALANCES, December 31, 1997 (1,132,965)
Issuance of putable common stock 286
Net loss (1,970,502)
-----------
BALANCES, December 31, 1998 (3,103,181)
Net loss (271,428)
-----------
BALANCES, January 31, 1999 $(3,374,609)
===========
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
------------------------
One-Month
Period Ended Years Ended
January 31, December 31,
-----------------
1999 1998 1997
------------ ---- ----
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 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
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 ENDING JANUARY 31, 1999 AND FOR THE 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 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:
December 31, 1998
-------------------
Approximate
Carrying Fair
Amount Value
---------- ---------
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 1,650,236 175,000
December 31, 1998
-------------------
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
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:
January 31, December 31,
------------
1999 1998 1997
---------- ---- ----
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
======== ======== ========
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:
Month Ended Years Ended
January 31, December 31,
------------
1999 1998 1997
---------- ---- ----
Weighted average shares outstanding 315,112 304,130 237,205
Less: Weighted average shares
of able stock (58,648) (46,811) (30,000)
-------- -------- -------
Net weighted average shares
outstanding 256,464 257,319 207,205
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. 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 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:
1998 1997
---------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ------- ------ -------
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
==== =====
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:
1998 1997
------ ------
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)
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 and
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:
January
1999 1998 1997
-------- ------- -------
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 $ - $ - $ -
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 Cavion or 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:
For the Year Ended
December 31,1997
------------------
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
=====
(9) PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------
The following presents balance sheet information of Cavion as of March 31,
1999 and pro forma statements of operations data for the year ended
December 31, 1998, and the three month period ended March 31, 1999 for the
Company and Cavion. For purposes of the pro forma statements of
operations, the transfer of the Company's assets and assumption of its
liabilities 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.
Cavion
March 31,1999
--------------
Current assets $1,241,069
Noncurrent assets 5,112,592
----------
Total assets $6,353,661
Current liabilities $1,788,418
Noncurrent liabilities 573,409
Stockholders' equity 3,991,834
----------
$6,353,661
==========
The pro forma statement of operations for the year ended December 31, 1998
is as follows:
Pro Forma
LanXtra Cavion Adjustments Pro Forma
-------- ------- ------------ ----------
(unaudited) (unaudited)
Revenue $ 215,022 $ - $ - $ 215,022
Cost of revenue 222,419 - - 222,419
--------- ------- ------- --------
Gross margin (loss) (7,397) - - (7,397)
Operating expenses 1,117,892 6,877914,146 (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)
=========== ======= ========= ==========
Net loss from continuing
operations per basic
share $(7.66) $ (.02) $ (.77)
===== ====== ======
Weighted average shares
outstanding 3,029,218
=========
(1) Amortization of goodwill
(2) Reduction of interest expense to reflect Cavion's capital
structure.
The pro forma statement of operations for the three month period ending
March 31, 1999 is as follows:
Pro Forma
LanXtra Cavion Adjustments Pro Forma
-------- ------- ------------ ----------
(unaudited) (unaudited)
Revenue $ 37,850 $ 66,539 $ - $ 104,389
Cost of revenue 31,898 41,443 - 73,341
-------- -------- -------- ---------
Gross profit 5,952 25,096 - 31,048
Operating expenses 213,311 609,60979,388 (1) 902,308
Nonoperating expenses 64,069 73,656(52,932) (2) 84,793
-------- -------- -------- ---------
Net Loss $(271,428)$(658,169) $(26,456) $(956,053)
======== ======== ======== =========
Net loss per basic share $(1.06) $(.23) $(.32)
====== ===== =====
Weighted average shares outstanding 3,032,978
=========
Adjustments
-----------
(1) Amortization of goodwill
(2) Reduction of interest expense to reflect Cavion's capital
structure
(10) CONDENSED FINANCIAL STATEMENTS, AFTER CONSUMMATION
--------------------------------------------------
OF PURCHASE AGREEMENT (UNAUDITED)
---------------------------------
The following unaudited balance sheet reflects the Company's balance sheet
at March 31, 1999 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 warrant is zero.
Investment in Cavion common stock $ -
Investment in Convergent warrants -
------------------
$ -
==================
Stockholders' equity (deficit) $ -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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 March 31, 1999 and
December 31, 1998, and the related statements of operations, stockholders'
equity and cash flows for the three months ended March 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 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 Cavion Technologies,
Inc. as of March 31, 1999 and December 31, 1998, and the results of its
operations and its cash flows for the three months ended March 31, 1999
and for the period from inception (August 18, 1998) to December 31, 1998,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has acquired the business of an entity
that has suffered recurring and substantial operating losses. The Company
also assumed substantial liabilities, and its operating plans call for the
expenditure of significant amounts to support its anticipated growth. A
substantial portion of the equity of the Company has been derived from the
issuance of stock for non-cash consideration and is based upon estimates
of fair value which may or may not be substantiated by subsequent cash
offerings. These issues raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to
these matters are described in Note 1. 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.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
May 18, 1999.
Page 1 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
BALANCE SHEETS
--------------
March 31, December 31,
1999 1998
----------- -----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,055,230 $ 19,735
Accounts receivable 9,393 -
Prepaid assets 50,841 -
Inventories 5,832 -
Deferred offering costs 119,773 -
----------- ----------
Total current assets 1,241,069 19,735
----------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 17,809 -
Furniture and fixtures 27,157 -
Network equipment and licensed software 385,668 -
----------- ----------
430,634 -
Less - Accumulated depreciation (17,531) -
----------- ----------
Property and equipment, net 413,103 -
----------- -----------
DEBT ISSUANCE COSTS, net of accumulated
amortization of $12,103 and $4,232,
respectively 50,515 49,412
DEPOSIT FOR LETTER OF CREDIT 20,000 -
DEFERRED LANXTRA ACQUISITION COSTS - 2,204,814
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$158,776 as of March 31, 1999 4,604,492 -
OTHER ASSETS 24,482 -
----------- ----------
TOTAL ASSETS $ 6,353,661 $ 2,273,961
=========== ===========
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
--------------
March 31, December 31,
1999 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 201,928 $ -
Accrued liabilities 286,657 31,185
Accrued interest 146,613 2,116
Deferred revenue and deposits 235,863 -
Related party collateralized loans 11,586 -
Current portion of capital lease obligations 52,378 -
Notes payable to stockholders 253,393 -
Revolving line of credit 600,000 -
----------- ----------
Total current liabilities 1,788,418 33,301
----------- ----------
LONG-TERM LIABILITIES:
Capital lease obligations 62,438 -
Notes payable 338,155 252,833
----------- ----------
Total long-term liabilities 400,593 252,833
----------- ----------
PUTABLE CLASS B COMMON STOCK; 30,000
shares authorized; 28,648, and 0 shares
issued and outstanding, respectively
(stated at accreted value; total redemption
value of $200,536) 172,816 -
COMMITMENTS AND CONTINGENCIES (Notes 1 and 7)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock;
$.0001 par value, 10,000,000 shares
authorized; 567,000 and 0 issued and
outstanding, respectively (liquidation
value of $3,402,000) 1,496,880 -
Class A Common stock; $.0001 par value,
19,970,000 shares authorized;
3,006,210 and 2,625,356 issued and
outstanding, respectively 302 263
Warrants for common stock - 13,284
Additional paid-in capital 3,188,765 2,010,224
Accumulated deficit (694,113) (35,944)
----------- ----------
Total stockholders' equity 3,991,834 1,987,827
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,353,661 $ 2,273,961
=========== ===========
The accompanying notes to financial statements
are an integral part of these balance sheets.
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc. )
STATEMENTS OF OPERATIONS
------------------------
Three- Period from
Months Inception
Period (August 8,
Ended 1998) to
March 31, December 31,
1999 1998
----------- -----------
REVENUE:
Network access and connectivity fees $ 55,578 $ -
Installation services 9,623 -
Software licensing fees 1,338 -
----------- ----------
Total revenue 66,539 -
----------- ----------
COST OF REVENUE:
Network access and connectivity 34,749 -
Installation services 6,694 -
----------- ----------
Total cost of revenue 41,443 -
----------- ----------
Gross profit 25,096 -
----------- ----------
OPERATING EXPENSES:
General and administrative 404,249 6,877
Research and development 46,584 -
Amortization of goodwill 158,776 -
----------- ----------
Total operating expenses 609,609 6,877
----------- ----------
LOSS FROM OPERATIONS (584,513) (6,877)
INTEREST EXPENSE (73,656) (29,067)
----------- ----------
NET LOSS $ (658,169) $ (35,944)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.23) $ (0.02)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 2,875,879 2,078,170
=========== ===========
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 THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------
AND FOR THE PERIOD FROM INCEPTION (AUGUST 18,1998)
--------------------------------------------------
TO DECEMBER 31, 1998
--------------------
Series A
Convertible
Preferred Stock Common Stock
------------------- ----------------
Shares Amount Shares Amount
------- ------------------- ------
BALANCES, 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
Issuance of warrants to note
holders - - - -
Repurchase of common stock - - (44,400) (4)
Issuance of warrants to Selling
Agent - - - -
Exercise of warrants by note
holders - - 44,400 4
Net loss - - - -
------- ---------- --------- ----
BALANCES, December 31, 1998 - - 2,625,356 263
Issuance of common stock for
LanXtra business, recorded at
February 1, 1999, estimated
fair value of $3.00 per share - - 375,214 38
Issuance of warrants to note
holders - - - -
Repurchase of common stock - - (12,000) (1)
Issuance of warrants 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,
net of offering costs of
$204,120 567,000 1,496,880 - -
Net loss - - - -
------- ---------- --------- ----
BALANCES, March 31, 1999 567,000 $1,496,880 3,006,210 $302
======= ========== ========= ====
Addi- Warrants Total
tional for Accumu- Stock-
Paid-In Common lated holders'
Capital Stock Deficit Equity
---------- ---------- --------------------
BALANCES, 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 1,876,005 - - 1,876,068
Issuance of warrants to
note holders - 133,775 - 133,775
Repurchase of common stock - - - (4)
Issuance of warrants to
Selling Agent - 13,284 - 13,284
Exercise of warrants by
note holders 134,219 (133,775) - 448
Net loss - - (35,944) (35,944)
---------- -------- --------- ----------
BALANCES, December 31, 1998 2,010,224 13,284 (35,944) 1,987,827
Issuance of common stock
for LanXtra business,
recorded at February 1,
1999, estimated fair
value of $3.00 per share 1,125,604 - - 1,125,642
Issuance of warrants to
note holders - 35,885 - 35,885
Repurchase of common stock - - - (1)
Issuance of warrants to
Selling Agent - 3,590 - 3,590
Exercise of warrants by
note holders and Selling
Agent 52,937 (52,759) - 180
Issuance of Series A
Preferred Stock for $3.00
per share, net of offering
costs of $204,120 - - - 1,496,880
Net loss - - (658,169) (658,169)
---------- -------- --------- ----------
BALANCES, March 31, 1999 $3,188,765 $ - $(694,113) $3,991,834
========== ======== ========= ==========
The accompanying notes to financial statements
are an integral part of these statements.
CAVION TECHNOLOGIES, INC.
-------------------------
(formerly Network Acquisitions, Inc.)
STATEMENTS OF CASH FLOWS
------------------------
Period from
Three Inception
Months (August 18,
Ended 1998) to
March 31, December 31,
1999 1998
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (658,169) $ (35,944)
Adjustments to reconcile net loss to
net cash used in operating
activities-
Depreciation and amortization 184,178 -
Accretion of debt discount 24,880 16,608
Accretion of putable stock 5,619 4,232
Change in operating assets and
liabilities- 2,116
Accounts receivable 7,065 -
Prepaids and inventories (17,721) -
Other assets (2,667) -
Accounts payable (83,681) -
Accrued liabilities 162,031 -
Deferred revenue 21,151 -
Net cash used in operating
activities (357,314) (12,988)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (35,810) -
Acquisition of LanXtra - (335,000)
----------- -----------
Net cash used in investing
activities (35,810) (335,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 100,000 370,000
Proceeds from issuance of Common
Stock 178 6,898
Proceeds from issuance of Series A
Preferred Stock 1,701,000 -
Series A Preferred Stock offering
costs (204,120) -
Payment of debt issuance costs (36,567) (9,175)
Principal payments on capital leases (12,099) -
Deferred offering costs (119,773) -
----------- -----------
Net cash provided by financing
activities 1,428,619 367,723
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,035,495 19,735
CASH AND CASH EQUIVALENTS, beginning of period 19,735 -
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,055,230 $ 19,735
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 16,679 $ 6,111
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Property acquired with capital leases $ 63,804 $ -
Value of warrants to purchase common
stock issued to note holders $ 35,885 $ 133,775
Value of warrants to purchase common
stock issued to Selling Agent $ 3,590 $ 13,284
Debt issuance costs included in accrued
liabilities $ - $ 31,185
Estimated value of shares issued to
LanXtra management shareholders $ - $ 1,876,068
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 THREE MONTHS ENDED MARCH 31, 1999 AND
---------------------------------------------
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
-----------------------------------------------
TO DECEMBER 31, 1998
--------------------
(1) DESCRIPTION OF BUSINESS
-----------------------
Organization
------------
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.
The Company has devoted substantially all of its efforts since inception
to the acquisition of LanXtra's assets and to raising capital and other
organizational activities. The Company financed its operations through a
private placement of its 15% notes, which were offered commencing on
October 20, 1998 (the "Offering") and the sale of Series A Preferred
Stock. 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. As of March 31, 1999, an additional $100,000
was raised from the Offering (see Note 3).
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 represents approximately 12% of the Company's equity interest.
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 704,044
Property and equipment (331,020)
Borrowings assumed 924,417
Other assets (41,815)
----------
Goodwill and other intangible assets $4,763,268
==========
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 intangible assets (primarily
technology, customer lists and goodwill). These intangible assets will be
amortized over five years. The purchase price allocation is subject to
adjustment based on the final determination of the fair value of the
assets and liabilities assumed, which could take as long as one year from
February 1, 1999. 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.
The Company's operations, as assumed from LanXtra, are subject to various
risks and uncertainties frequently encountered by companies in the early
stages of development, particularly companies in the new and rapidly
evolving market of internet-based products and services. Such risks and
uncertainties include, but are not limited to, its limited operating
history, evolving technology, and the management of rapid growth. To
address these risks, the Company must, among other things, maintain and
increase its customer base, implement and successfully execute its
business and marketing strategy, continue to develop and upgrade its
technology, provide superior customer service and attract, retain and
motivate qualified personnel. There can be no guarantee that the Company
will be successful in addressing such risks.
The business purchased from LanXtra has never achieved profitability and
the Company expects to incur net losses for the foreseeable future. This
business has never generated sufficient revenue to cover the substantial
amounts spent to create, launch and enhance its services. Even if the
Company's operations do achieve profitability in the future, it may not
sustain or increase its profitability. LanXtra historically funded its
operations through borrowings and sales of equity.
The Company has expended, and will continue to expend, significant
resources marketing its products and establishing a customer base.
Management believes, but cannot guarantee, that such products will be
accepted by the marketplace in sufficient quantities to provide for
profitable operations at some future date. The Company's ability to
achieve and attain profitable operations and positive cash flow from
operations depends upon various factors including, among others, the costs
of and resources for developing and marketing its products, the extent and
timing of market acceptance of the Company's products, competitive factors
and other factors, certain of which may be beyond the Company's control.
In order to execute its business plan, the Company will require additional
public or private debt or equity financing. There can be no guarantees
that such financing will be available in the future.
As a result of these factors, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying
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.
Management intends to seek additional equity financing, and to continue to
aggressively market the Company's products to its identified market, in
response to these factors. Subsequent to March 31, 1999, the Company sold
an additional 133,000 shares of Series A Preferred Sock for gross proceeds
of $399,000. The Company believes that the proceeds of this offering and
the cash on hand at March 31, 1999 will be sufficient to fund the
Company's operations through September 1999 (see Note 9).
(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.
As of March 31, 1999, the Company has recorded capital contributions of
$4,890,066, of which only $1,708,076 was issued for cash consideration.
The Company based the estimated fair value of its stock issued to LanXtra
management shareholders in December 1998, and the stock issued to LanXtra
in February 1999, upon its private placement of preferred shares in
February 1999. The Company believes its estimate of fair value is
reasonable, however, there can be no assurance that future cash offerings
will substantiate the estimated per share value of the Company's stock.
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.
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
Computer equipment 3 - 5 years
Licensed software 3 years
Leasehold improvements Life of the lease
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. Because the Company is the
successor to a business which has not demonstrated the ability to achieve
profitable operations, it is reasonably possible that these intangibles
will be written down in the near future.
Deferred Offering Costs
-----------------------
The Company has recorded deferred offering costs totaling $119,773 at
March 31, 1999. Such costs represent legal and other professional fees
incurred related to the Company's proposed initial public offering. Such
costs will be offset against the initial public offering proceeds upon the
consummation of such offering. There can be no guarantee that the
offering will be consummated, and if the offering is unsuccessful, such
deferred offering costs would be expensed.
Accrued Liabilities
-------------------
Accrued liabilities consist of the following:
March 31, December 31,
1999 1998
--------- ------------
Accrued payroll and vacation $ 52,882 $ -
Accrued vendor payable 78,673 -
Accrued professional fees 133,657 -
Other liabilities 21,445 31,185
-------- -------
Total accrued liabilities $286,657 $31,185
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
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
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 (without regard to the treasury stock method) at March 31, 1999
and December 31, 1998 were 345,000 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 Opinion 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.
Revenue Recognition
-------------------
The Company generates 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 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
--------------------------
Capitalization of software development costs commences upon the
establishment of technological feasibility of the software product. 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.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use
("SOP 98-1")". In general, SOP 98-1 requires that certain costs to
develop software for internal use be capitalized effective for fiscal
years beginning after December 15, 1998. The adoption of this Statement
of Position has no impact on the Company's financial statements.
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 March 31, 1999, there have been no differences
between the Company's comprehensive loss and its net loss.
Segment Information
-------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information"
("SFAS No. 131"). This statement 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. The Company
believes it has one reportable segment at March 31, 1999.
Recently Issued Accounting Pronouncements
-----------------------------------------
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. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
Statement of Position 98-5
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities ("SOP 98-5")". SOP 98-5 provides
guidance on the financial reporting of start-up and organization costs and
requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998, and was adopted by the Company on January 1,
1999. The adoption of SOP 98-5 had no impact on the Company's financial
statements as the Company had not capitalized any such costs.
(3) BORROWINGS
----------
The Company's borrowings at March 31, 1999 and December 31, 1998,
consisted of the following:
March 31, 1999 December 31, 1998
------------------------ ----------------------
Unamortized Unamortized
Face Value Discount Face Value Discount
---------- ----------- ---------------------
Notes payable $ 470,000 $(131,845) $370,000 $(117,167)
Revolving line of
credit 600,000 - - -
Notes payable to
stockholders 300,000 (46,607) - -
Related party
collateralized loans 13,410 (1,824) - -
---------- --------- -------- ---------
$1,383,410 $(180,276) $370,000 $(117,167)
========== ========= ======== =========
Note Payable
------------
Beginning on October 20, 1998, the Company offered through its officers,
directors and First Capital Investments, Inc. (the "Selling Agent"), 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 as of March 31, 1999 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 Payable 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 were exercised prior to March 31, 1999.
Revolving Line of Credit
------------------------
As part of the Purchase Agreement, a $600,000 Revolving Line of Credit was
assumed by the Company. The maturity date of the line of credit was
extended to December 31, 1999 and interest accrues at a rate equal to the
Bank's reference rate plus 1.5% (9.25% at March 31, 1999 and December 31,
1998). The Revolving Line of Credit is collateralized by letters of
credit issued by the Company and certain LanXtra stockholders as well as
by agreements among certain LanXtra stockholders. No additional amounts
may be drawn upon the line of credit.
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 Cavion obtains 100 credit union customers (the "100
Credit Union Date"). Management believes the 100 Credit Union Date will
be reached on or before December 31, 1999. In addition, interest terms
were amended such that no interest will accrue for the remaining term of
the notes payable. At the acquisition date, the notes were discounted to
reflect their fair value. The discount is being amortized as interest
expense over the remaining estimated term of the notes.
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, 30 days after
the 100 Credit Union Date is reached, or can convert these shares into
equivalent shares of Class A common stock. As a result of this
transaction, the Class B shares have been recorded at their estimated fair
value of $167,197. The difference between this amount and the put value
is being 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 will be
accrued for the remaining term of the loans and the maturity of these
loans was extended to the 100 Credit Union Date.
Maturities of Borrowings
------------------------
The maturities of the Company's borrowings are as follows:
1999 $ 913,410
2000 470,000
----------
1,383,410
Less-debt discounts (180,276)
----------
$1,203,134
==========
(4) 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 period ending March 31, 1999. The capital leases have terms
ranging from 24 to 36 months with interest rates ranging between 11.4% and
20.3%.
As of March 31, 1999, the present value of future minimum lease payments
are as follows:
Period ending March 31,
2000 $ 56,889
2001 43,339
2002 31,920
--------
132,148
Less: amounts representing interest (17,332)
--------
114,816
Less: current portion (52,378)
--------
Long-term capital lease obligation $ 62,438
========
The net book value of assets under capital lease obligations as of March
31,1999 was approximately $120,000.
(5) 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 March 31, 1999, 3,006,210 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 March 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 at the 100 Credit Union
Date. 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 770,000
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 is 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
is automatically convertible into an equal number of Class A shares, if
the Company completes a qualified initial public offering, which
Management believes will occur in 1999 (see Note 9). In addition, each
share of the Series A Preferred Stock is convertible into Class A shares
at the option of the Company beginning on January 1, 2004. The Series A
Preferred Stock will entitle each holder to receive cumulative
preferential dividends at the rate of 5% per year, payable in cash or in
shares of the Company's Class A common stock quarterly. The Series A
preferred stock also entitles the holder to a liquidation preference at a
liquidation value which is initially equal to two times the offering
price.
As of March 31, 1999, the Company sold 567,000 shares of Series A
Preferred Stock at $3 per share, raising proceeds of $1,701,000 before
offering costs. Subsequent to March 31, 1999, an additional 133,000
shares were sold, also at $3 per share.
Warrants
--------
In conjunction with the Series A Preferred Stock offering, the Placement
Agent received warrants to purchase shares of the Company's Series A
Preferred Stock as compensation. As of March 31, 1999, 56,700 warrants
were issued to the Placement Agent. The warrants can be exercised over a
five year period at an exercise price of $3.
The Company issued warrants with the private placement of notes payable
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. In the three months ended March 31, 1999, warrants for
an additional 12,000 shares of Class A common stock were issued and
immediately exercised.
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 periods ended March 31, 1999 and December 31, 1998,
respectively. The redeemed shares were reissued in connection with the
exercise of the warrants issued to note holders and the Selling Agent
(discussed below).
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 March 31, 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 were exercised prior to March 31, 1999.
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 March 31, 1999, options for 345,000
shares of Class A common stock have been issued under the Plan. The
outstanding stock options have an exercise price of $3.00 per share and
vest over various terms with a maximum vesting period of 18 months and
expire after a maximum of 10 years.
The following table summarizes stock option activity under the Plan:
Granted to Granted to
Employees Non-Employees
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Outstanding at December 31, 1998 - $ - - $ -
Granted 280,000 $3.00 65,000 $3.00
------- ----- ------ -----
Outstanding at March 31, 1999 280,000 $3.00 65,000 $3.00
======= ===== ====== =====
Exercisable at March 31, 1999 - $ - - $ -
======= ===== ====== =====
Weighted average fair value of options
granted during the year $ .41 $ .72
===== =====
Under the fair value approach of SFAS 123, the total fair value of options
granted to employees under the Plan during 1999 was approximately
$113,646. 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:
Three-Months
Ending
March 31, 1999
--------------
Net loss: As reported $(664,567)
Pro forma $(670,433)
Per share data: As reported $ (.23)
Pro forma $ (.23)
The fair value of each 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
4.99%, no dividend yields, volatility of 0.001% and an expected life of
five years.
In March 1999, the Company granted options for 65,000 shares of Class A
common stock to non-employees in exchange for services. The fair value of
these options on the date of grant was approximately $47,000. 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 4.99%, no dividend yields, an expected life of five years and
volatility of 100%.
(6) INCOME TAXES
------------
From its inception, the Company has generated losses for both financial
reporting and tax purposes. In conjunction with the Purchase Agreement,
the Company obtained the right to LanXtra's net operating loss ("NOL")
carryforward, which was fully offset by a valuation allowance. At March
31, 1999 and December 31, 1998, the Company had a NOL carryforward for
income tax purposes of $2,001,000 and $12,459, respectively. The NOL is
subject to examination by the tax authorities and expire in various years
through 2019. A portion of the NOL is subject to limitations on use as
determined by the Internal Revenue Code. The NOL, as well as expenses
not yet deductible for tax purposes, resulted in a deferred tax asset of
approximately $770,000 and $7,000 at March 31, 1999 and December 31, 1998,
respectively. Due to the uncertainty relating to the realization of the
benefit of the deferred tax asset, a valuation allowance has been recorded
for the full amount. The difference between the statutory tax rate and
the effective tax rate is due to the following:
Three
Months Inception
Ended Through
March 31, December 31,
1999 1998
---------- ------------
Provision (benefit) at statutory rate $(225,953) $(12,221)
State tax benefit, net (21,931) (1,258)
Valuation allowance 247,884 13,479
--------- --------
Provision (benefit) $ - $ -
The Company has acquired a net operating loss carryforward of
approximately $1.4 million from LanXtra. If the Company generates
sufficient taxable income to allow it to utilize this NOL, such
utilization will reduce cash tax payments due by the Company as well as
the amount of goodwill carried by the Company.
(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 Cavion 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 Cavion 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. Any such liabilities would be evaluated in the
Company's determination of the fair value of liabilities assumed from
LanXtra.
(8) ACQUISITION OF LANXTRA BUSINESS
-------------------------------
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:
Pro Forma
LanXtra Cavion Adjustments Pro Forma
(Unaudited) (Unaudited)
----------- --------- -------------------------
Revenue $ 215,022 $ - $ - $ 215,022
Cost of revenue 222,419 - - 222,419
----------- --------- --------- -----------
Gross loss (7,397) - - (7,397)
Operating expenses 1,117,892 6,877914,146 (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 $(7.66) $(.02) $(.77)
====== ===== =====
Weighted average
shares
outstanding 3,029,218
=========
The pro forma statement of operations for the three month period ending
March 31, 1999 is as follows:
Pro Forma
LanXtra Cavion Adjustments Pro Forma
(Unaudited) (Unaudited)
----------- --------- -------------------------
Revenue $ 37,850 $ 66,539 $ - $ 104,389
Cost of revenue 31,898 41,443 - 73,341
----------- --------- --------- -----------
Gross profit 5,952 25,096 - 31,048
Operating expenses 213,311 609,609 79,388 (1) 902,308
Nonoperating
expenses 64,069 73,656(52,932) (2) 84,793
----------- --------- --------- -----------
Net Loss $ (271,428) $(658,169) $ (26,456) $(956,053)
=========== ======== ========= ===========
Net loss per
basic share $(1.06) $(.23) $(.32)
====== ===== =====
Weighted average
shares
outstanding 3,032,978
=========
Adjustments
-----------
(3) Amortization of goodwill
(4) Reduction of interest expense to reflect Cavion's capital structure
(9) SUBSEQUENT EVENTS
-----------------
The Company intends to file an initial public offering with the Securities
and Exchange Commission to sell 1,200,000 shares of it's common stock in
the second quarter of 1999. There can be no guarantee that such offering
will be completed.
In April 1999, the Company repurchased 299,884 shares of Class A common
stock issued to its majority shareholders for a price of $.0001 per share
in satisfaction of an agreement to adjust share ownership following the
closing of the Purchase Agreement and the final determination of certain
factors in April 1999.
Change in Repayment Date (Unaudited)
The Company has obligations, discussed above, which had repayment terms
based upon the Company's achievement of the 100 Credit Union Date. On May
28, 1999, such repayment terms were modified such that these obligations
must be repaid on the date that the initial public offering discussed
above is completed.
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 the company 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
the company 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 the Company 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
the company 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 hereafter 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, the Company 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 the Company 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 the Company discovers the facts or the
date the Company should have discovered such facts by the exercise of
reasonable diligence. The term of the agreement and the Company's
obligations apply while the person is an agent of the Company and
continues thereafter so long as the person is subject to any claim by
reason of the fact that he or she served as an agent of the Company.
In addition, the Underwriting Agreement for the company's initial
public offering provides for indemnification by the Representative of the
company, 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 the company pursuant to the foregoing provisions, the company
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 is therefore unenforceable.
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 $ 2,918*
Printing and Mailing Fees and Costs 50,000*
Transfer Agent Fees and Costs 2,150*
Legal Fees and Costs 120,000*
Accounting Fees and Costs 80,000*
Nasdaq Listing Fees 13,635*
Director & Officers Insurance Premium 15,000*
Miscellaneous Expenses 19,297*
---------
TOTAL $303,000*
* Estimated.
We have agreed to bear certain expenses in connection with the
registration of the shares of our Class A common stock into which our
Series A preferred stock is convertible, which are offered and sold by the
Selling Shareholders, estimated to be $5,000. 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 of
common stock.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In August 1998, we issued 2,000,000 shares of $.0001 common stock to
our two founding shareholders at $.0001 per share. On October 20, 1998,
we began conducting a private placement pursuant to which, between October
27, 1998 and February 8, 1999, we issued $470,000 in 15% secured
promissory notes due October 19, 2000 (the "notes") and a total of 56,400
warrants to purchase shares of Class A common stock at an exercise price
of $.01 per share (the "Warrants"). 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 warrant to purchase 5,640 shares of Class A common
stock at $.01 per share which was exercised on February 8, 1999. In
December 1998, we issued 625,356 shares of Class A common stock to our
management shareholders at $.01 per share. 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. In March and April 1999, we issued 700,000 shares of
convertible preferred stock, Series A, convertible into Class A common
stock (the "preferred 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 will automatically convert into Class A common
stock upon the earlier to occur of (i) consummation of a public offering
of common stock registered under the Securities Act of 1933, as amended or
(ii) the date specified in a notice thereof delivered by cavion.com on any
date after January 1, 2000. 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.
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:
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
-------- ---------- --------------- -------------
8-14-98 1,100,000(1) VENTURE FUNDING, LTD. $110.00
Class A Common CASH
8-14-98 900,000(1) BOUTINE, LLC $90.00
CLASS A COMMON CASH
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 WOOTEN $25,000.00
NOTE CASH
12-2-98 3,000 RIKE WOOTEN $30.00
CLASS A COMMON CASH
12-21-98 208,452(1) CRAIG LASSEN $2,084.52
CLASS A COMMON CASH
12-21-98 208,452(1) DAVID J. SELINA $2,084.52
CLASS A COMMON CASH
12-21-98 208,452(1) JEFFREY W. MARSHALL $2,084.52
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
2-1-99 375,214(1) LANXTRA, INC. $1,125,642
CLASS A COMMON ASSETS
2-1-99 28,648 LANXTRA, INC. $172,816
CLASS B COMMON ASSETS
2-8-99 5,640 FIRST CAPITAL $62.04
CLASS A COMMON INVESTMENT, INC. CASH
3-10-99 10,000 ANNE D. DYDE TRUSTEE $30,000
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
PREFERRED NANCY 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 SPECIAL NEEDS TRUST CASH
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 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 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
(1) Pursuant to certain agreements with our founding shareholders,
Venture Funding, Ltd. and Boutine, 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.
With respect to the offering of promissory notes and warrants
described above, First Capital Investments was paid a total offering
commission of $37,600. With respect to the offering of preferred stock
described above, the total offering commission was $80,000 which was paid
to NTB. The company relied on Sections 3(b),4(2) and 4(6) of the
Securities Act of 1993, as amended, and Rules 504, 505 and 506 of
Regulation D promulgated thereunder for both of the offerings. Each
investor was given access to complete information concerning the company.
The securities were offered for investment only and not for the purposes
of resale or distribution, and the transfer thereof was appropriately
restricted by the company. With respect to the shares of Class A common
stock purchased from the company in August and December 1998 and the
shares of Class A and Class B common stock transferred to LanXtra, Inc. in
February 1999, the company relied on Sections 3(b), 4(2) and 4(6) of the
Securities Act of 1993, as amended. The securities were offered for
investment only and not for the purposes of resale or distribution, and
the transfer thereof was appropriately restricted by the company.
ITEM 27. EXHIBITS.
Exhibit No. Description
- ---------- -----------
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters
1.3 Representative's Warrant Agreement
2 Asset Purchase Agreement with Cavion Technologies, Inc.
dated December 31, 1998
3.1a Amended and Restated Articles of Incorporation as filed
with the Colorado Secretary of State on February 1, 1999
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
3.2 Amended and Restated Bylaws of the Company as adopted
by its Board of Directors on March 22, 1999
4.1 Specimen Certificate for $.0001 par value Class A
common stock of the Company
4.2 Specimen Certificate for $.0001 par value Class B
common stock of the Company
4.3 Specimen Certificate for $.0001 par value Series A
preferred stock of the Company
4.4 Form of Subscription Agreement in the Offering of
Convertible preferred stock of the Company
4.5 Form of Preferred Stock Warrant issued to Neidiger,
Tucker, Bruner, Inc.
*5 Opinion of Gorsuch Kirgis LLP
10.1 Promissory Note to Herman D. Axelrod dated July 1, 1992
10.2 Promissory Note to Craig E. Lassen dated August 1, 1992
10.3 Factoring Agreements to Herman D. Axelrod dated
September 8, 1997 and September 15, 1997
10.4 Factoring Agreement to Craig E. Lassen dated October
15, 1997
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
10.6 Additional Bridge Loan Agreement, Promissory Notes and
Put Agreement with Jeff Marshall, David Selina and Randal
Burtis dated May 28, 1998
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
10.8 Engagement Letter with First Capital Investments, Inc.
dated September 20, 1998
10.9 Form of 15% Secured Promissory Notes due October 19,
2000
10.10 Agreement for Post-Closing Adjustments by and
among Venture Funding, Ltd., Boutine, LLC, Network
Acquisitions, Inc., Cavion Technologies, Inc., Craig E.
Lassen, David J. Selina and Jeff Marshall dated February 1,
1999
10.11 Share Allocation Agreement by and among Venture
Funding Ltd., Boutine, LLC, Cavion Technologies, Inc.,
LanXtra, Inc., Craig E. Lassen, David J. Selina and Jeff
Marshall, dated April 16, 1999
10.12 Office Lease Agreement with TTD Associates dated
December 4, 1996 for the corporate offices located at 7475
Dakin Street, Denver, Colorado
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
10.14 Executive Employment Agreement with David J.
Selina effective February 1. 1999
10.15 Executive Employment Agreement with Marshall E.
Aster effective March 8, 1999
10.16 Executive Employment Agreement with Jeff Marshall
effective February 1, 1999
10.17 Executive Employment Agreement with Craig E.
Lassen effective February 1, 1999
10.18 Equity Incentive Plan dated March 19, 1999
10.19 Form of Indemnification Agreement with officers
and directors
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
10.21 Form of Secure Network Services Agreement
*10.22 Form of Lock-up Agreements among the officers and
directors of the Company, the 5% or more shareholders and
other shareholders and the Representative
23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Gorsuch Kirgis LLP contained in its opinion
filed as Exhibit 5
27 Financial Data Schedule
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the 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 the Company 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.
The undersigned Company hereby undertakes 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 therein, 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 June 10, 1999.
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: June 10, 1999
David J. Selina,
Director, President, Chief Executive Officer,
Principal Executive Officer and Chief
Operating Officer
/s/Marshall E. Aster Date: June 10, 1999
Marshall E. Aster, Chief Financial Officer
and Principal Financial and Accounting
Officer
/s/Andrew I. Telsey Date: June 10, 1999
Andrew I. Telsey, Director
/s/Stephen B. Friedman Date: June 10, 1999
Stephen B. Friedman, Director
/s/Jeffrey W. Marshall Date: June 10, 1999
Jeffrey W. Marshall, Director
EXHIBIT INDEX
All of the following exhibits were filed herewith electronically:
Exhibit No. Description
- ---------- -----------
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters
1.3 Representative's Warrant Agreement
2 Asset Purchase Agreement with Cavion Technologies, Inc.
dated December 31, 1998
3.1a Amended and Restated Articles of Incorporation as filed
with the Colorado Secretary of State on February 1, 1999
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
3.2 Amended and Restated Bylaws of the Company as adopted
by its Board of Directors on March 22, 1999
4.1 Specimen Certificate for $.0001 par value Class A
common stock of the Company
4.2 Specimen Certificate for $.0001 par value Class B
common stock of the Company
4.3 Specimen Certificate for $.0001 par value Series A
preferred stock of the Company
4.4 Form of Subscription Agreement in the Offering of
Convertible preferred stock of the Company
4.5 Form of Preferred Stock Warrant issued to Neidiger,
Tucker, Bruner, Inc.
10.1 Promissory Note to Herman D. Axelrod dated July 1, 1992
10.2 Promissory Note to Craig E. Lassen dated August 1, 1992
10.3 Factoring Agreements to Herman D. Axelrod dated
September 8, 1997 and September 15, 1997
10.4 Factoring Agreement to Craig E. Lassen dated October
15, 1997
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
10.6 Additional Bridge Loan Agreement, Promissory Notes and
Put Agreement with Jeff Marshall, David Selina and Randal
Burtis dated May 28, 1998
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
10.8 Engagement Letter with First Capital Investments, Inc.
dated September 20, 1998
10.9 Form of 15% Secured Promissory Notes due October 19,
2000
10.10 Agreement for Post-Closing Adjustments by and
among Venture Funding, Ltd., Boutine, LLC, Network
Acquisitions, Inc., Cavion Technologies, Inc., Craig E.
Lassen, David J. Selina and Jeff Marshall dated February 1,
1999
10.11 Share Allocation Agreement by and among Venture
Funding Ltd., Boutine, LLC, Cavion Technologies, Inc.,
LanXtra, Inc., Craig E. Lassen, David J. Selina and Jeff
Marshall, dated April 16, 1999
10.12 Office Lease Agreement with TTD Associates dated
December 4, 1996 for the corporate offices located at 7475
Dakin Street, Denver, Colorado
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
10.14 Executive Employment Agreement with David J.
Selina effective February 1. 1999
10.15 Executive Employment Agreement with Marshall E.
Aster effective March 8, 1999
10.16 Executive Employment Agreement with Jeff Marshall
effective February 1, 1999
10.17 Executive Employment Agreement with Craig E.
Lassen effective February 1, 1999
10.18 Equity Incentive Plan dated March 19, 1999
10.19 Form of Indemnification Agreement with officers
and directors
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
10.21 Form of Secure Network Services Agreement
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule