SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-23866
September 30, 1999
CAVION TECHNOLOGIES, INC.
(Exact name of Small Business Issuer as specified in its charter.)
Colorado 84-1472763
-------- -----------
(State of Incorporation) (I.R.S. Employer Identification No.)
7475 Dakin Street, Suite 607
Denver, Colorado 80221
-----------------------
(Address of Principal Executive Offices)
(303) 657-8212
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the issuer was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
The number of shares outstanding of each of the issuer's classes
of common stock, as of December 9, 1999:
Class of Securities Outstanding Securities
------------------ ----------------------
$.0001 par value 4,696,826 shares
Class A Common Stock
$.0001 par value 28,648 shares
Class B Common Stock
CAVION TECHNOLOGIES, INC.
(d/b/a cavion.com)
INDEX
-----
Page
----
Part I. Financial Information
Item 1. Unaudited Financial Statements:
Cavion Technologies, Inc. (Formerly Network
Acquisitions, Inc.)
Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Statements of Operations for the three months and nine
months ended September 30, 1999 and the period from
inception (August 18, 1998) to September 30, 1998 5
Statements of Cash Flows for the nine months ended
September 30, 1999 and the period from inception
(August 18, 1998) to September 30, 1998 6
LanXtra, Inc. (Formerly Cavion Technologies, Inc. and
Sigmacom Corporation)
Statements of Operations for the three months and nine
months ended September 30, 1998 (Unaudited) 8
Statements of Cash Flows for the nine months ended
September 30, 1998 9
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 21
Part II. Other Information
Item 1 Legal Proceedings 31
Item 2 Changes in Securities and Use of Proceeds 31
Item 3 Defaults Upon Senior Securities 31
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 31
Signatures
-------------------------------
This report contains forward-looking statements within the meaning of
Section 221E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities of the Securities Act of 1933, as amended,
and is subject to the safe harbors created by those sections. These
forward-looking statements are subject to significant risks and
uncertainties, including those identified in the section of this form 10-
QSB entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Operating
Results," which my cause actual results to differ materially from those
discussed in such forward-looking statements. The forward-looking
statements within this Form 10-QSB are identified by words such as
"believes," "anticipates," "expects," "intends," "may," "will" and other
similar expressions. However, these words are not the exclusive means of
identifying such statements. In addition, any statements which refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-QSB with
the Securities and Exchange Commission ("SEC"). Readers are urged to
carefully review and consider the various disclosures made by the Company
in this report and in the Company's other reports filed with the SEC that
attempt to advise interested parties of the risks and factors that may
affect the Company's business.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page 1 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc.)
BALANCE SHEETS
--------------
(UNAUDITED)
ASSETS September 30, December 31,
------ 1999 1998
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 249,217 $ 19,735
Accounts receivable 43,709 -
Prepaid assets 80,529 -
Inventories 5,832 -
Deferred offering costs 458,883 -
---------- ----------
Total current assets 838,170 19,735
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 19,634 -
Furniture and fixtures 42,970 -
Network equipment and licensed
software 465,440 -
---------- ----------
528,044 -
Less - Accumulated depreciation (79,282) -
---------- ----------
Property and equipment, net 448,762 -
---------- ----------
DEBT ISSUANCE COSTS, net of
accumulated amortization of
$76,761, and $4,232, respectively 16,902 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 $635,369 and $0, respectively 4,129,899 -
OTHER ASSETS 51,599 -
---------- ----------
TOTAL ASSETS $5,505,332 $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
--------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31,
------------------------------------ 1999 1998
------------- ------------
CURRENT LIABILITIES:
Accounts payable $ 571,981 $ -
Accrued liabilities 351,928 31,185
Accrued interest 92,148 2,116
Deferred revenue and deposits 363,532 -
Deferred revenue - license agreements 300,000 -
Related party collateralized loans 13,152 -
Current portion of capital lease
obligations 44,824 -
Notes payable to stockholders 300,000 -
Bridge loan 283,437 -
Revolving line of credit 600,000 -
---------- ----------
Total current liabilities 2,921,002 33,301
---------- ----------
LONG-TERM LIABILITIES:
Capital lease obligations 51,513 -
Notes payable 451,165 252,833
---------- ----------
Total long-term liabilities 502,678 252,833
---------- ----------
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) 196,577 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred
Stock; $.0001 par value, 10,000,000
shares authorized; 700,000 and 0
issued and outstanding,
respectively (liquidation value of
$4,200,000 and $0) 1,848,000 -
Class A Common Stock; $.0001 par
value, 19,970,000 shares authorized;
2,706,326 and 2,625,356 issued and
outstanding, respectively 271 263
Warrants 33,127 13,284
Additional paid-in capital 3,188,765 2,010,224
Accumulated deficit (3,185,088) (35,944)
---------- ----------
Total stockholders' equity 1,885,075 1,987,827
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,505,332 $ 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
------------------------
(UNAUDITED)
Period from
Inception
Three Months Nine Months (August 18,
Ended Ended 1998) to
September 30, September 30, December 31,
1999 1999 1998
------------- ------------- ------------
REVENUE:
Network access and
connectivity fees $ 123,128 $ 273,335 $ -
Installation services 52,256 103,481 -
Software licensing fees 4,092 7,993 -
------------ ------------ ----------
Total revenue 179,476 384,809 -
------------ ------------ ----------
COST OF REVENUE:
Network access and
connectivity 79,369 179,303 -
Installation services 70,481 104,164 -
------------ ------------ ----------
Total cost of revenue 149,850 283,467 -
------------ ------------ ----------
Gross profit 29,626 101,342 -
------------ ------------ ----------
OPERATING EXPENSES:
Selling and marketing 544,270 957,590 -
General and administrative 237,137 886,896 6,877
Research and development 161,872 323,960 -
Amortization of goodwill 240,860 635,370 -
------------ ------------ ----------
Total operating
expenses 1,184,139 2,803,816 6,877
------------ ------------ ----------
LOSS FROM OPERATIONS (1,154,513) (2,702,474) (6,877)
INTEREST EXPENSE (167,835) (391,966) (29,067)
------------ ------------ ----------
NET LOSS $(1,322,348) $(3,094,440) $ (35,944)
============ ============ ==========
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS:
Net loss $(1,322,348) $(3,094,440) $ (35,944)
Dividends, convertible
preferred stock (26,250) (54,704) -
------------ ------------ ----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS (1,348,598) (3,149,144) $ (35,944)
============ ============= ==========
BASIC AND DILUTED NET LOSS
PER SHARE $ (.50) $ (1.12) $ (0.02)
============ ============= ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING -
BASIC AND DILUTED 2,706,326 2,806,287 2,078,170
============ ============ ==========
The accompanying notes to financial statements
are an integral part of these statements.
Page 1 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc.)
STATEMENTS OF CASH FLOWS
------------------------
(UNAUDITED)
Period from
Inception
Three Months Nine Months (August 18,
Ended Ended 1998) to
September 30, September 30, December 31,
1999 1999 1998
------------- ------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(1,322,348) $(3,094,440) $ (35,944)
Adjustments to reconcile
net loss to net cash used
in operating activities-
Depreciation and
amortization 276,945 722,522 -
Accretion of debt
discount 140,260 267,162 16,608
Accretion of putable
stock 11,880 29,380 4,232
Change in operating assets
and liabilities-
Accounts receivable (17,507) (27,251) -
Prepaids and inventories (17,480) (47,409) -
Other assets (40,301) (29,784) -
Accounts payable 186,252 286,372 -
Accrued liabilities 52,220 144,382 2,116
Deferred revenue 420,567 448,820 -
------------ ------------ ----------
Net cash used in
operating
activities (309,512) (1,300,246) (12,988)
------------ ------------ ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property
and equipment (46,205) (133,220) -
Acquisition of LanXtra - - (335,000)
------------ ------------ ----------
Net cash used in
investing
activities (46,205) (133,220) (335,000)
------------ ------------ ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes
payable 300,000 400,000 370,000
Repurchases of common
stock - (31) -
Proceeds from issuance
of Common Stock - 178 6,898
Proceeds from issuance of
Series A Preferred Stock - 2,100,000 -
Series A Preferred Stock
offering costs - (252,000) -
Payment of debt issuance
costs (31,045) (67,612) (9,175)
Principal payments on
capital leases (10,067) (32,454) -
Deferred offering costs (86,585) (458,883) -
Payment of dividends (26,250) (26,250) -
------------ ------------ ----------
Net cash provided
by financing
activities 146,053 1,662,948 367,723
------------ ------------ ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (209,664) 229,482 19,735
CASH AND CASH EQUIVALENTS,
beginning of period 458,881 19,735 -
------------ ------------ ----------
CASH AND CASH EQUIVALENTS,
end of period $ 249,217 $ 249,217 $ 19,735
============ ============ ==========
The accompanying notes to financial statements
are an integral part of these statements.
Page 2 of 2
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc.)
STATEMENTS OF CASH FLOWS
------------------------
Period from
Inception
Three Months Nine Months (August 18,
Ended Ended 1998) to
September 30, September 30, December 31,
1999 1999 1998
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 34,814 $ 98,992 $ 6,111
============ ============ ==========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCING
ACTIVITIES:
Value of warrants to purchase
common stock issued to
placement agent in
conjunction with bridge
loan $ 33,127 $ 33,127 $ -
============ ============ ==========
Accrued dividends $ 26,250 $ 26,250 $ -
============ ============ ==========
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.
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
STATEMENTS OF OPERATIONS
------------------------
(UNAUDITED)
-----------
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1998
------------- -------------
REVENUE:
Network access and connectivity fees $ 30,513 $ 102,970
Installation services 19,468 38,695
Software licensing fees 1,060 2,297
---------- -----------
Total revenue 51,041 143,962
---------- -----------
COST OF REVENUE:
Network access and connectivity 28,334 94,732
Installation services 16,523 34,522
---------- -----------
Total cost of revenue 44,857 129,254
---------- -----------
Gross profit 6,184 14,708
---------- -----------
OPERATING EXPENSES:
General and administrative 206,456 555,415
Research and development 72,343 192,520
---------- -----------
Total operating expenses 278,799 747,935
---------- -----------
LOSS FROM OPERATIONS (272,615) (733,227)
INTEREST EXPENSE (245,161) (628,734)
OTHER INCOME (LOSS) (20,986) -
---------- -----------
NET LOSS $(538,762) $(1,361,961)
========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (2.00) $ (5.40)
========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 256,464 256,464
========== ==========
LANXTRA, INC.
-------------
(Formerly Cavion Technologies, Inc. and Sigmacom Corporation )
STATEMENT OF CASH FLOWS
-----------------------
(UNAUDITED)
----------
Nine Months Ended
September 30,
1998
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,386,961)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 46,501
Accretion of putable stock 577,500
Accretion of loan discounts 133,067
Change in operating assets and liabilities-
Accounts receivable 76,911
Prepaids and inventories (41,182)
Other assets (1,169)
Accounts payable 43,161
Accrued liabilities 32,589
Deferred revenue 48,094
------------
Net cash used in operating activities (471,489)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (56,071)
------------
Net cash used in investing activities (56,071)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 286
Proceeds from related party loans 260,000
Proceeds from notes payable 35,000
Payments on related party loans (61,780)
Payment on capital lease obligations (20,584)
------------
Net cash provided by financing activities 212,922
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (314,638)
CASH AND CASH EQUIVALENTS, beginning of period 350,443
------------
CASH AND CASH EQUIVALENTS, end of period $ 35,805
============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES: $ 16,881
============
Property acquired with capital leases
Putable common stock issued in
conjunction with stockholder notes $ 200,536
============
Cash paid for interest $ 66,703
============
CAVION TECHNOLOGIES, INC.
-------------------------
(Formerly Network Acquisitions, Inc.)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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.
Prior to funds raised in an Initial Public Offering, effective October 29,
1999, the Company financed its operations through a private placement of
its 15% notes, which were offered commencing on October 20, 1998 (the
"Offering"), the sale of Series A Preferred Stock and funding through a
Bridge Loan. The Company advanced a portion of the proceeds from the
Offering to LanXtra in anticipation of the acquisition of LanXtra.
Through December 31, 1998, the Company had raised $370,000 in the private
placement and had advanced LanXtra a total of $335,000 under an agreement
dated September 14, 1998. In the Initial Public Offering, the Company
issued 1,200,000 shares of Class A common stock for $6.50 per share
raising net proceeds, after offering costs, of $6,279,000. In addition,
in November 1999, the representative of the underwriters exercised a
portion of their overallotments option, resulting in additional gross
proceeds of approximately $588,000 (See note 9).
Purchase of LanXtra's Assets, Liabilities and Operations
--------------------------------------------------------
In August 1998, the Company signed a letter of intent to purchase
LanXtra's business. In December 1998, the Company signed an Asset
Purchase Agreement (the "Purchase Agreement") with LanXtra to purchase
substantially all the assets of LanXtra in exchange for approximately
375,214 shares and 28,648 shares of the Company's Class A and B common
stock, respectively, and the assumption by the Company of certain
liabilities of LanXtra. The number of Class A common stock shares issued
to LanXtra represented approximately 12% of the Company's equity interest
at the time of the purchase agreement. The Purchase Agreement was
consummated on February 1, 1999 and the Company assumed the operations of
LanXtra on that date. Upon consummation, significant modifications were
made to LanXtra's capital structure. On December 21, 1998, the Company
issued 625,356 shares to certain shareholders of LanXtra who could
continue as management of the Company. One of these shareholders held
directly and through irrevocable proxies sufficient voting shares to
approve the transaction. The shares are non-forfeitable and not
contingent upon the management's continued employment with the Company.
As a result, the shares have been considered additional purchase
consideration and are recorded at their estimated fair value of $3 per
share.
The estimated fair value of assets acquired, liabilities assumed, and
consideration issued in the transaction with LanXtra are as follows:
Consideration:
Class A common stock $3,001,710
Class B common stock 167,197
Cash 338,735
----------
3,507,642
Add: Net liabilities (assets) assumed:
Working capital deficit assumed 706,044
Property and equipment (331,020)
Borrowings assumed 924,417
Other assets (41,815)
----------
Goodwill and other intangible assets $4,765,268
==========
The Company has recorded the fair value of its stock issued to LanXtra at
$3 per share based principally upon its private placement of Series A
Preferred Stock completed in February 1999. The transaction with LanXtra
resulted in approximately $4,760,000 of 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Interim Financial Statements (Unaudited)
----------------------------------------
The interim financial statements of the Company as of and for the nine
months ended September 30, 1999, and the financial statements of LanXtra
for the three and nine months ended September 30, 1999 are unaudited and
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation. The results of operations for the
interim period is not necessarily indicative of the results of the entire
year.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
----------------------------
Financial instruments which subject the Company to concentrations of
credit risk are accounts receivable and cash equivalents. The Company's
receivables are concentrated among credit unions. The Company performs
ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. Additionally, the Company manages a
portion of its credit risk by billing certain services in advance. The
Company has no significant financial instruments with off-balance sheet
risk of accounting loss, such as foreign exchange contracts, option
contracts or other hedging arrangements. The Company's cash balances are
maintained in demand deposits at financial institutions that the Company
believes to be creditworthy.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash, accounts receivable,
short-term trade payables, putable common stock and borrowings. The
carrying values of the instruments acquired from LanXtra approximate the
fair value placed upon them on February 1, 1999, in connection with their
assumption. Fair values were principally determined by discounting
expected future cash flows at a market cost of debt. The fair value of
the Company's other borrowings approximates 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 which are continuously
reviewed by the Company for impairments.
Deferred Offering Costs
-----------------------
The Company has recorded deferred offering costs totaling $458,883 at
September 30, 1999. Such costs represent legal and other professional
fees incurred related to the Company's proposed initial public offering.
Such costs were offset against the initial public offering proceeds upon
the consummation of the offering on October 29, 1999 (see Note 9).
Accrued Liabilities
-------------------
Accrued liabilities consist of the following:
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
Accrued vendor payable $ 78,673 $ -
Accrued professional fees 172,620 -
Accrued wages and other liabilities 100,635 31,185
---------- ----------
Total accrued liabilities $ 351,928 $ 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 also excluded the weighted
average effect of common stock issuable upon exercise of all warrants,
options and convertible preferred stock from the computation of diluted
earnings per share as the effect of all such securities is anti-dilutive
for the periods presented. The shares excluded related to outstanding
options, warrants and convertible preferred stock (without regard to the
treasury stock method) at December 31, 1998 were 1,075,000 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
--------------------------
The Company capitalizes software development costs when a software product
is determined to be technologically feasible. The Company's software
products are deemed to be technologically feasible at the point the
Company commences field testing of the software. The period from field
testing to general customer release of the software has been brief and the
costs incurred during this period were insignificant. Accordingly, the
Company has not capitalized any qualifying software development costs.
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 September 30, 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.
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"), and in June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB 133" ("SFAS No
134"). SFAS No. 134 requires the Company to adopt SFAS No. 133 for all
quarters in the year ended December 31, 2001. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative
financial instruments or hedging activities.
(3) BORROWINGS
----------
The Company's borrowings at September 30, 1999 and December 31, 1998,
consisted of the following:
September 30, 1999 December 31, 1998
---------------------- ----------------------
Unamortized Unamortized
Face Value Discount Face Value Discount
---------- ----------- ---------- -----------
*Bridge Loan $ 300,000 $ - $ - $ -
Notes payable 470,000 (18,835) 370,000 (117,167)
*Revolving line of
credit 600,000 - - -
*Notes payable to
stockholders 300,000 - - -
*Related party
collateralized loans 13,410 (258) - -
---------- -------- -------- ----------
$1,683,410 $(19,093) $370,000 $(117,167)
========== ======== ======== ==========
*The entire amount of borrowings that mature in 1999 were paid in full
after the Initial Public Offering.
Bridge Loan
-----------
In August 1999, the Company raised $300,000 through Neidiger, Tucker,
Bruner, Inc. and First Capital Investments, Inc. (the "Placement Agents").
The bridge loan bears interest at 14% and matures upon the earlier of the
closing of Company's Initial Public Offering or one year from the date of
the note. The loan was paid in full upon closing of the Initial Public
Offering (see Note 9). First Capital Investment, Inc., ("FCI"), is a
related party through its substantial ownership of the Company's common
stock.
At the closing date, the notes were discounted to reflect their fair value
net of the value of the warrants issued to the note holders. The discount
is being amortized as interest expense over the estimated term of the
notes. Debt issuance costs in the amount of $31,045 were paid in
conjunction with the Initial Public Offering and are also being amortized
as interest expense over the estimated term of the notes.
Note Payable
- ------------
Beginning on October 20, 1998, the Company offered through its officers,
directors and FCI (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 in early 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% (9.75% and 9.25% at September 30, 1999 and
December 31, 1998, respectively). 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.
The Line of Credit was paid in full and cancelled after the Initial Public
Offering proceeds were received (see Note 9), and the corresponding
collateralized letters of credit were released.
Notes Payable to Stockholders
-----------------------------
The Company assumed notes payable to certain LanXtra stockholders as part
of the Purchase Agreement. The maturity date on these notes was extended
to the date on which 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. The notes payable
to stockholders were repaid in full after the Initial Public Offering
proceeds were received (see Note 9).
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. The related party
collateralized loans were paid in full after the Initial Public Offering
proceeds were received (see Note 9) and cancelled.
Maturities of Borrowings
- ------------------------
The maturities of the Company's borrowings as of September 31, 1999 are as
follows:
1999 $1,213,410*
2000 470,000
----------
1,683,410
Less-debt discounts (18,577)
----------
$1,664,833
==========
*The entire amount of borrowing that mature in 1999 were paid in full
after the Initial Public Offering.
(4) RELATED PARTY TRANSACTIONS
--------------------------
MoneyLine America, LLC
----------------------
In August 1999, the Company entered into an agreement with MoneyLine
America, LLC, ("MoneyLine Agreement"), which provides that the Company
will receive payments under an agreement with MoneyLine to provide on-line
mortgage lending services for credit unions and their members through the
Company's network. This agreement calls for a minimum annual payments to
us of $300,000 in the first year, beginning September 1999, escalating to
$1,000,000 in years six through ten, provided the Company has at least
1,500 credit unions, or 12% of the U.S. credit unions on our network by
the end of year three. The amounts received are reflected as deferred
revenue - license agreements in the accompanying balance sheets. Fifty
percent of MoneyLine America is owned by Boutine Capital, LLC, a principal
shareholder of the Company.
(5) CAPITAL LEASE OBLIGATIONS
-------------------------
The Company assumed several capital lease agreements related to computers
and various office equipment in conjunction with the Purchase Agreement.
The Company has also entered into additional capital lease agreements
during the nine months ended September 30, 1999. The capital leases have
terms ranging from 24 to 36 months with interest rates ranging between 9%
and 20.3%.
As of September 30, 1999, the present value of future minimum lease
payments are as follows:
Period ending September 30,
2000 $ 44,824
2001 51,100
2002 11,060
--------
106,984
Less: amounts representing interest (10,647)
--------
96,337
Less: current portion (44,824)
--------
Long-term capital lease obligation $ 51,513
========
The net book value of assets under capital lease obligations as of
September 30,1999 was approximately $92,000.
(6) STOCKHOLDERS' EQUITY
--------------------
The Company is authorized to issue 20,000,000 shares of common stock, par
value $.0001 per share. The common stock is segregated into two classes;
Class A and Class B. Of the 20,000,000 shares of common stock, 19,970,000
are designated as Class A and 30,000 are designated as Class B.
Class A Common Stock
--------------------
At September 30, 1999, 2,706,326 shares of Class A common stock were
issued and outstanding. Two million shares were issued for consideration
of $.0001 per share (par value). Certain LanXtra shareholders and
management were issued 625,356 shares for cash consideration of $.01 per
share. The estimated fair value assigned to these shares was $3 per share
which is consistent with the value assigned to the 375,214 shares issued
to LanXtra in February 1999. The holders of Class A common stock are
entitled to one vote for each share held on record on each matter
submitted to a vote of shareholders. Cumulative voting for election of
directors is not permitted. Holders of Class A common stock have no
preemptive rights or rights to convert their Class A common stock into any
other securities.
Class B Common Stock
--------------------
As of September 30, 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 700,000
shares of Series A convertible preferred stock in conjunction with a
private placement offering of the stock. Each share of the Series A
preferred stock 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. 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.
The Company sold 700,000 shares of Series A preferred stock at $3 per
share, raising proceeds of $2,100,000. All Series A preferred shares were
converted to Class A common stock on the effective date of the Initial
Public Offering.
Warrants
--------
In conjunction with the issuance of the August 1999 Bridge Loan, the
Company granted the Bridge Loan holders warrants to purchase 5,000 shares
of the Company's Class A common stock for every $50,000 of notes
purchased. The warrants are exercisable for a period of five years
beginning on the earlier to occur of (i) the closing of the Initial Public
Offering or (ii) one year form the date of the warrant. These detachable
warrants were valued at a total of $33,127 utilizing the Black-Scholes
option pricing model, assuming a volatility factor of 70%, a risk free
rate of 6.22% and a fair value of the underlying common stock of $6.75 per
share.
The Company issued warrants with the private placements of notes payable
in October 1998 which allow the purchase of 1,200 shares of the Company's
Class A common stock for every $10,000 of notes payable. The exercise
price was $0.01 per share. Originally, the warrant exercise period was
for a period of one year beginning on the maturity date of the notes
payable. On December 22, 1998, the Company accelerated the exercise
period to begin immediately and end one year after each note's issuance
date. All holders of warrants at that date elected to immediately
exercise their warrants. Warrants for 44,400 shares of Class A common
stock were issued and exercised at December 31, 1998. In the nine months
ended September 30, 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 nine-months ended September 30, 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 September 30, 1999, the Selling Agent earned the right to
purchase an additional 1,200 shares under the same terms. The 4,440
warrants outstanding at December 31, 1998, were valued at a total of
$13,284 and the additional 1,200 warrants were valued at $3,590, utilizing
the Black-Scholes option pricing model assuming a volatility factor of
70%, a risk free interest rate of 4.31% and a fair market value of the
underlying shares of $3 per share. The warrants were recorded as debt
issuance costs and are being amortized into interest expense over the life
of the debt. All such warrants have been exercised.
Stock Options
-------------
Effective March 19, 1999, the Company adopted a stock option plan (the
"Plan"). The Plan provides for grants of incentive stock options,
nonqualified stock options and restricted stock to designated employees,
officers, directors, advisors and independent contractors. The Plan
authorizes the issuance of up to 750,000 shares of Class A common stock.
Under the Plan, the exercise price per share of a non-qualified stock
option must be equal to at least 50% of the fair market value of the
common stock at the grant date, and the exercise price per share of an
incentive stock option must equal the fair market value of the common
stock at the grant date. Through September 30, 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.
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%.
(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.
The Company is exposed to legal claims arising in the ordinary course of
business. In management's opinion, none of the claims currently asserted
will result in a material liability or change to earnings.
(8) 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 nine months ended September
30, 1998 is as follows:
Pro Forma
LanXtra Cavion Adjustments Pro Forma
------------ ------------ ----------- -----------
Revenue $ 143,962 $ - $ - $ 143,962
Cost of revenue 129,254 - - 129,254
------------ ------------ --------- -----------
Gross profit 14,708 - - 14,708
Operating
expenses 747,935 - 714,790 (1) 1,433,545
Nonoperating
expenses 653,734 - (438,360)(2) 215,374
------------ ------------ --------- -----------
Loss from
continuing
operations $(1,386,961) $ - $(276,430) $(1,634,211)
============ ============ ========= ===========
Unaudited pro
forma net
loss from
continuing
operations
per basic
and diluted
share $(.54)
=====
Weighted
average
shares
outstanding 3,029,218
=========
The pro forma statement of operations for the nine months ended September
30, 1999 is as follows:
Pro Forma
LanXtra Cavion Adjustments Pro Forma
------------ ------------ ----------- -----------
Revenue $ 37,850 $ 384,809 $ - $ 422,659
Cost of revenue 31,898 283,467 - 315,365
------------ ------------ --------- -----------
Gross profit 5,952 101,342 - 107,294
Operating
expenses 213,311 2,803,816 79,421 (1) 3,096,548
Interest expense
and other 64,069 391,966 (52,932)(2) 403,103
------------ ------------ --------- ------------
Net loss $ (271,428) $(3,094,440) $(26,489) $(3,392,357)
============ ============ ========= ============
Net loss per
basic share $(1.22)
======
Weighted
average
shares
outstanding 2,830,600
=========
Adjustments
-----------
(1) Amortization of goodwill
(2) Reduction of interest expense to reflect Cavion's capital structure
(9) SUBSEQUENT EVENTS
-----------------
Initial Public Offering
-----------------------
On October 29, 1999, the Company's public offering became effective. The
number of shares offered and sold were 1,200,000, with an underwriter's
over allotment option for an additional 180,000 shares. Total gross
proceeds of $7,800,000 were raised in the offering and the Company, after
offering expenses, netted $6,279,000. In addition, in November 1999, the
Company sold additional shares, ("Firm Shares"), to the Representative of
the underwriter of 90,500 raising an additional gross proceeds of
$approximately $588,000, and netting approximately $513,000. The total
number of shares outstanding after the offering was 4,696,826, including
the conversion of the 700,000 convertible preferred stock upon the closing
of the offering and the additional shares issued to the Representative of
the underwriter subsequent to the original offering. In addition, at the
closing of the Initial Public Offering, the Company sold warrants to
purchase 120,000 shares of the Company's Common Stock to the
Representative at the price of 125% of the Initial Public Offering price,
or $8.125 per share.
Convergent Communications Services, Inc.
----------------------------------------
Effective October 22, 1999, the Company entered into a five-year agreement
with Convergent Communications Services, Inc., ("Convergent"). Under this
agreement, Convergent will establish, maintain and support network
connectivity between our network and our customers, including providing,
equipment, maintenance and related services for the network.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Cavion.com offers products and services for business to business
communications, secure Internet financial products such as online banking
and bill paying services, and secure Internet access and services for our
customers. We are also building and managing a secure private
communications network exclusively for the credit union industry. Our
network acts as a communication platform for the delivery of services and
information to and from credit unions and related businesses. Our
products and services utilize our proprietary software. As of September
30, 1999, 61 credit unions and two credit union leagues had contracted for
our services. As of the date of this filing, 80 credit unions, three
credit union leagues, one corporate credit union, and two credit union
vendors have subscribed to our products and services. Through our e-
commerce program, we are planning to launch during the first quarter of
2000 our affinity marketing plan to market third-party products and
services to credit union members.
We market our products and services to credit unions and related
entities, such as credit union leagues, that are located in key geographic
areas across the United States which have been selected due to their high
concentration of credit unions. We 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 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 online.
o Secure Internet access for credit unions, with multiple
layers of security features and dedicated connections
designed to satisfy credit unions' need for confidential
communications and secure transactional processing with one
connection.
o Secure consumer loan application and approval products,
with the required secure data feeds for multiple credit
bureau.
o E-commerce services to credit union members, including our
Preferred Merchant Programs (i.e. mortgage loan services
and retail ISP services), Co-branded Portals (i.e. personal
start pages, shopping and travel online) and Web Site
Promotion and Traffic Control Tools for vendors (i.e. ad
serving, search engine placement, and visitor analysis).
Our products are priced in a way that permits our credit union
customers to offer Internet banking services to their members at a flat
monthly rate.
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 a
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
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. In March, 1999 Nielsen/NetRatings estimated that the
number of online computer users in the United States by the end of March
1999 to have exceeded 95 million or nearly 40% of the U.S. population.
In recent years, the development of the Internet, intranets and
extranets has enabled users of personal computers to access and interact
with a broad range of information sources. Financial institutions are
rapidly adopting network communications to conduct electronic banking and
provide customers with access to their account information. According to
International Data Corporation estimates of February, 1999, U.S. 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.
THE INTERNET AND CREDIT UNIONS
We believe financial institution customers will increasingly demand
more convenient and interactive access to financial information and
services. Competitive pressures are driving banks and credit unions to
increase the quality and cost-effectiveness of such services. New
opportunities exist to employ available and emerging technologies to
automate and enhance a credit union's interactions with its members.
Traditionally, credit unions have used trained service
representatives to serve as the link between their customers and the
information systems that stored and processed the customers' account
information. Reliance on people alone to perform service functions is
expensive and limits growth. Labor costs tend to grow proportionately
with increased demands for service. In addition, the time required to
hire and train service personnel limits the speed with which credit unions
can respond to customer demand or new competitive service offerings. Our
solution is to provide credit unions with network-based technologies that
enable their members to serve themselves through automated, interactive
access to financial information and services.
As technologies continue to advance for network-based solutions,
financial institutions will be able to deploy increasingly sophisticated
network applications. Given its relatively late arrival, online banking
is just now beginning to build momentum. A study conducted by Gomez
Advisors found that as of the first quarter of 1999, nearly 40% of the top
100 banks in the United States are offering online services. Online
Banking Report of January, 1998 estimates that by the end of 2000, 17.5
million households will be using online banking and/or a bill payment
application.
Despite this momentum, the market for Internet based network
financial services is new and uncertain. Currently, our products and
services have been sold to credit unions located in Colorado and 18 other
states. While we are marketing our products and services across the
country, we cannot be sure that they will sell as well in the new markets
as they have in Colorado.
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 not accurately predict the size of the
market for Internet based financial services or the rate at which the
market will grow. If it fails to grow, or grows more slowly than we
expect, or it is becomes saturated with competitors, our business,
financial condition and operating results will be materially and adversely
affected.
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 report. 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.
We completed our acquisition of the assets of LanXtra on February 1,
1999 as described in the Asset Purchase Agreement. Prior to the
acquisition, we did not conduct any operations except financing activities
and other preparations for the acquisition. The following discussion
relates to LanXtra's historical results of operations since January 1,
1998, the date on which LanXtra commenced the business we acquired, our
operations of the business that we acquired and our plan of operation
following our initial public offering, which was declared effective on
October 29,1999. In the following discussion, "we" refers both to our
business as operated by LanXtra prior to February 1, 1999, and to our
business as operated by us after February 1, 1999.
Since January 1, 1998, we have been engaged in building a suite of
network products and services for the credit union industry that includes:
o a secure network that enables access to our credit union customers'
products and services via the Internet or an intranet
o secure Internet financial products, including Internet banking
software
o secure Internet access services for credit unions
o secure Internet automated loan application and approval
o E-commerce services
We are in the start-up phase of our operations and generated a net
loss of $3,094,440 for the nine-months ended September 30, 1999
($3,130,384 combined). For the year ended December 31, 1998, we generated
a net loss of $2,006,446, comprised of a $35,944 net loss for Cavion and a
net loss of $1,970,502 for LanXtra. We expect to incur substantial
monthly operating losses through most of the year 2000.
Since January 1, 1998, our revenues have been derived from recurring
monthly connectivity fees, installation services and monthly recurring
revenue associated with our secure Internet access services and secure
Internet financial products. As of November 30, 1999, 80 credit unions,
three credit union leagues, two of which provides check clearing services
to credit unions, one corporate credit union, which provides liquidity
services to credit unions, and two credit union vendors of which one is a
provider of website design, development and hosting services to credit
unions and the other provides electronic archiving service to credit
unions, have subscribed to our products and services. Approximately 40%
of these customers are located in Colorado, and the other 60% are located
in 18 other states.
Prior to our initial public offering, we financed the development of
our products and services with:
o capital provided by the sale of LanXtra's unrelated business
o a bank loan
o loans from shareholders and employees of LanXtra
o two private placements of promissory notes and related warrants
o private placement of preferred stock
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1999
During the three and nine months ended September 30, 1999, we
generated $179,476 and $384,809, respectively, in revenue. This revenue
was derived from a variety of Internet/intranet activities, including
secure Internet access for credit unions utilizing dedicated lines, secure
credit union network services, secure Internet financial products such as
Internet banking software, sales of related equipment, and installation
fees charged for these services. Cost of sales during these periods were
$149,850 and $283,467, or 84% and 74%, respectively, of revenue. 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. We believe
that our margins will improve in the future as sales discounts for
installations diminish for our customers and our connectivity costs
diminish due to the agreement with Convergent Communications Services,
Inc.
Selling and marketing expenses for these periods were $544,270 and
$957,590 or 303% and 249%, respectively, of revenue. Of these expenses,
$198,760 or 111% of revenue was attributable to salaries and wages for the
three months ended, and $418,347 or 109% of revenue of the nine months
ended. In addition, of these expenses, $21,919 or 12% of revenue was
attributable to rent payments for our sales offices around the country for
the three months ended and $39,742 or 10% of revenue was attributable to
rent payments for the nine months ended.
General and administrative expenses for these periods were $237,137
and $886,896 or 132% and 230%, respectively, of revenue. Of these
expenses, $91,793 or 51% of revenue was attributable to salaries for the
three months ended, and $253,846 or 66% of revenue of the nine months
ended. Additionally, we incurred $161,872 and $323,960, respectively, in
research and development costs during this period, which represented an
allocation of programmers' and engineers' salaries applicable to the
amount of time they devoted to development activities. We anticipate that
our salaries and wages expense will increase as we hire additional
employees to handle the expected growth of our business.
In May 1998, LanXtra issued Class B common stock which the holders
can require cavion.com to repurchase at $7.00 per share during a 60-day
exercise period beginning on the date that is 30 days after the date we
have 100 Credit Union customers on our network. For financial accounting
purposes, the cost of this "putable" common stock from its issuance price
to its redemption value is treated as interest expense. After the closing
of our initial public offering, we offered the former LanXtra
shareholders, who have rights to our Class B common stock the option to
redeem their Class B shares at $7.00 per share, or to convert each Class B
share into one share of our Class A common stock. To date, no Class B
shares have been redeemed or converted by the former LanXtra shareholders.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
COMPARISONS TO NINE MONTHS ENDED SEPTEMBER 30, 1998
The following discussion relates to our operations for the nine
months ended September 30, 1999. In 1998, LanXtra operated the business
since acquired by us, and LanXtra's operations during the nine months
ended September 30, 1998 were substantially limited due to an ongoing
liquidity shortage. Further, cavion.com was formed as Network
Acquisitions, Inc. on August 18, 1998, and our activities from that date
through September 30, 1998 consisted entirely of organizational and
initial capital formation activities, and have not been included herein as
such information is not considered meaningful for comparative purposes.
During the nine months ended September 30, 1999, we recognized
$384,809 ($422,659 when combined with LanXtra) in revenue, as compared to
$143,962 during the nine months ended September 30, 1998. Our 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. The increase in revenue was primarily
due to additional credit union customers, and increases in our marketing
activity made possible by the funds provided by recent offerings of equity
and issuances of debt. Cost of sales during the nine months ended
September 30, 1999 was $283,467 ($315,365 combined), or 74%, compared to
$129,254, or 90%, for the nine months ended September 30, 1998. 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. The increase
in revenue is due to the increase in the number of credit unions using our
network and products. The decrease in the cost of sales as a percentage
of sales is due to economies of scale in delivering our services to a
larger number of installed customers.
Selling and marketing expenses for the nine months ended September
30, 1999 were $957,590 ($1,030,090 combined) or 249% of revenue, compared
to $194,300 or 135 % of revenue for the nine months ended September 30,
1998. Of these 1999 expenses, $418,347 or 109% of gross revenue was
attributable to salaries and wages. We believe that selling and marketing
expenses will continue to increase, although their percentage of revenue
will decrease based on our expected revenue growth.
General and administrative expenses for the nine months ended
September 30, 1999 were $886,896 ($996,127 combined) or 230% of revenue,
compared to $361,115 or 251% of revenue for the nine months ended
September 30, 1998. Of these 1999 expenses, $253,846 or 66% of gross
revenue was attributable to salaries and wages. Additionally, we incurred
$323,960 ($355,540 combined) in research and development costs during the
nine months ended September 30, 1999, which represented an allocation of
programmers' and engineers' salaries applicable to the amount of time they
devoted to development activities. During the nine months ended September
30, 1998, we incurred $192,520 of research and development costs.
We anticipate that our salaries and wages 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.
With the proceeds from our initial public offering, our revolving
line of credit, notes payable to former shareholders of LanXtra, back pay
to former employees and equipment purchases were paid off and, because of
that, interest expense will be reduced. As compared to the nine months
ended September 30, 1998, where interest expense was $628,734, our
interest expense was $456,035 combined, for the nine months ended
September 30, 1999. We were also required to pay dividends on our Series
A preferred stock, which totaled $54,704 for the nine months ended
September 30, 1999. These dividends were paid in cash. Our Series A
preferred stock converted to Class A common stock upon the completion date
of our initial public offering on November 3, 1999. The final dividend
payment of $9,195 was made on November 3, 1999 and was also paid in cash.
We expect to invest at least an additional $150,000 in research and
development during the fourth quarter of 1999. We have just completed
developing software for an Internet-enabled automated loan application and
approval system. 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 marketing 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 $4,763,000 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. The realization of these
intangible assets is dependent upon the attainment of positive cash flows
from such assets. The business now operated by us has never generated
positive cash flows, and it is reasonably possible that our future
assessments of such cash flows could indicate that such assets are
impaired, with a resulting write-down.
LIQUIDITY AND CAPITAL RESOURCES
As of the nine-month period ended September 30, 1999, 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 September 30, 1999, cavion.com had $249,217 in cash, current
assets of $838,170, and current liabilities of $2,921,002. We raised
$300,000 in a private offering of 14% notes and warrants to purchase
common stock which ended on August 31, 1999. The effective interest rate
of the notes was 36% because of the warrants and the expense of the
offering. Each $50,000 note entitled the purchaser to a warrant to
purchase 5,000 shares of common stock. The warrants are exercisable for a
period of five years which commenced on November 3, 1999. The warrants
are exercisable at $6.50, the price per share of the shares of common
stock offered in our initial public offering. These notes were repaid and
retired with the proceeds from that offering.
We have received payments under an agreement with MoneyLine America,
LLC to provide online mortgage lending services for our credit unions and
their members through our network. This agreement calls for minimum
annual payments to us of $300,000 in the first year, which began in
September 1999, escalating to $1,000,000 in years six through ten,
provided we have at least 1,500 credit unions, or 12% of the U.S. credit
unions on our network by the end of year three. Fifty percent of
MoneyLine America is owned by Boutine Capital, LLC, a principal
shareholder of cavion.com.
In October 1999, we entered into a five-year agreement with
Convergent Communications Services, Inc. under which Convergent will
establish, maintain and support network connectivity between our network
and our customers, including providing equipment, maintenance and related
services for the network. We will pay Convergent a monthly service fee
for these services, which began at approximately $28,000 per month and
increasing as new credit unions are added to the network. The portion of
this fee relating to each credit union telecommunications circuit will be
passed through to the customer. On October 22, 1999, the effective date
of the agreement, Convergent purchased our network equipment from us for
$286,000.
We 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 plan to seek additional bank financing. If we are
successful in obtaining such financing, we expect our cash needs will be
satisfied for at least the next two years.
Our September 30, 1999 balance sheet shows approximately $3.4 million
in liabilities and approximately $1.9 million of stockholders' equity.
Approximately $1.2 million of our liabilities represent obligations to
shareholders, as described in the following section.
SECURED NOTES PAYABLE. Prior to our acquisition of LanXtra's assets,
we agreed to provide bridge funding to LanXtra for its business operations
pending the raising of equity financing. In order to provide the bridge
funding, we raised $370,000 in 1998 through the issuance of 15% secured
notes due on October 19, 2000, along with warrants to purchase 2,400
shares of our 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 acquired after October 19,
1998, including, cash, equipment, fixtures, general intangibles, and all
products and proceeds of the foregoing collateral, accounts receivable,
inventory, work in process and service contracts receivables. The October
20, 1998 security agreement contains a covenant which prevents us from
incurring any other liens on our assets. We raised an additional $100,000
through this offering in 1999. The warrants were originally exercisable
only after payment of the notes. However, we subsequently agreed to
permit early exercise, and all of the warrants had been exercised for
56,400 shares, as of February 1999.
In connection with our acquisition of LanXtra's assets, we assumed
approximately $1.8 million in existing liabilities of LanXtra, not
including the bridge funding described in the preceding paragraph.
Approximately $1.1 million of these amounts became payable 15 days after
the closing of our initial public offering and have been repaid. These
obligations are described below.
In August 1996, LanXtra had obtained a $600,000 line of credit from
US Bank, Denver, Colorado in connection with its previous business.
LanXtra shareholders British Far East Holdings, Ltd., William M.B. Berger
Living Trust, Martin Cooper, and Fairway Realty Associates, provided cash
collateral for the loan. In May 1998, this line of credit was extended to
January 31, 1999. At the February 1, 1999 closing of the Asset Purchase
Agreement between us and LanXtra, we effectively assumed the loan by
entering into a loan agreement with US Bank on the same terms as the loan
from US Bank to LanXtra, with a maturity date of December 31, 1999, using
the proceeds of our loan to pay off the US Bank loan to LanXtra. The
LanXtra shareholders who provided cash collateral for the US Bank loan
agreed, however, to keep their collateral in place until the completion of
our initial public offering. All amounts available under this line of
credit were utilized. Interest accrued on all outstanding balances at the
rate of 1.5% over the reference rate, as established by US Bank, from time
to time. The reference rate closely tracked the prevailing prime rate.
On November 5, 1999, the loan agreement was repaid in full and all of the
collateral was released.
On May 28, 1998, LanXtra borrowed $260,000 from three of its
shareholders and three of our employees - David J. Selina, Jeff Marshall
and Randal Burtis - for working capital purposes. In the aggregate, we
owed these shareholders, directors and managers $260,000 in principal and
$59,480 in interest. However, an agreement was reached to defer payment
of these amounts, without the accrual of further interest, until the
completion of our initial public offering. LanXtra also issued putable
stock in connection with this debt offering. We agreed to assume
LanXtra's obligations with respect to the put agreements by issuing to
LanXtra at the closing of the Asset Purchase Agreement 28,648 shares of
our Class B common stock, which are subject to economically equivalent put
provisions. By its terms, the put feature of our Class B common stock
becomes exercisable 30 days after the date when we have 100 credit union
industry customers on our network, the 100 Credit Union Date. We had
agreed with the former LanXtra shareholders who have rights to the Class B
stock that their put rights would mature upon completion of our initial
public offering. After completion of that offering we have offered these
shareholders the option to redeem their Class B shares at $7.00 per share,
or to convert each Class B share into one share of our Class A common
stock.
Between September 8 and October 15, 1997, Herman Axelrod, a former
president and director of LanXtra, and Mr. Lassen, also a former president
and director of LanXtra, made various factoring loans to LanXtra in the
amounts of $50,190 and $25,000, respectively. Such loans were secured by
an account receivable for computer network integration work LanXtra
performed for Questar Infocomm and bore interest at the rate of 3% of the
factoring loan amount for the first 30 days and 1% for each additional 10
days until the factoring loan was paid in full. Questar disputed
LanXtra's invoice and the dispute was settled in September of 1998 for a
payment of $61,780. This amount was paid against the factoring loans on
September 21, 1998 as follows: $41,238 to Mr. Axelrod and $20,542 to Mr.
Lassen. Accordingly, as of February 1, 1999, LanXtra owed Mr. Axelrod
$28,331 and Mr. Lassen $13,441, and we assumed such obligations. Mr.
Axelrod and Mr. Lassen had agreed that the remaining balance of these
loans would be deferred until the completion of our initial public
offering and would not accrue additional interest in the interim. The
final payments were made on November 5, 1999.
On July 1 and August 1, 1992, LanXtra executed promissory notes for
$25,000 in favor of Mr. Axelrod and Mr. Lassen, respectively, each bearing
interest at the rate of 2% over prime. The principal amounts of these
notes reflected $20,000 in cash loaned by each and $5,000 each of co-
signer liability on a $10,000 credit line at the Bank of Boulder that
LanXtra took out at its inception. The credit line was paid off in August
1996, leaving an aggregate principal balance of $40,000 on the notes. We
assumed the obligation to pay Mr. Axelrod and Mr. Lassen the principal
balance of the notes together with interest as stated above. Mr. Axelrod
and Mr. Lassen, agreed that the remaining balance of these loans would be
deferred until the completion of our initial public offering, and interest
would continue to be paid on a quarterly basis until the notes were paid
in full. The notes were paid on November 5, 1999.
We owed Convergent Communications, Inc. $78,673 for equipment
purchased in connection with a customer network upgrade performed by
LanXtra in December 1997, while Convergent was completing the purchase of
LanXtra's network integration business. Convergent agreed that payment of
this amount would be deferred until the completion of our initial public
offering. We paid Convergent in full on November 5, 1999.
In addition to the obligations described above, upon the closing of
the Asset Purchase Agreement, we assumed any potential liability under a
lawsuit threatened against LanXtra by a dissenting shareholder. Although
we believe the claim in this lawsuit does not have a substantial basis in
fact, we cannot assure you that we will not be required to make a payment
to the dissenter. We have not reserved any funds to cover payment of this
liability or of the potential tax liability if such a payment is
necessary. If we are required to make such a payment, it could result in
significant adverse tax consequences to the original shareholders.
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, or on the nine-month period ended September 30, 1999,
nor do we expect that inflation will have a material effect on the results
of our future operations.
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 were used primarily to fund expansion of our credit
union industry network to key markets across the United States. The net
proceeds from our initial public offering was $6,279,000, or approximately
$6,792,000 with the proceeds from the partial over-allotment option
exercised by our underwriters, and we expect to use these proceeds
primarily for the same purpose.
TRENDS
Management expects that we will continue to operate at a loss as
additional credit unions are solicited and enter into contracts with us.
We are optimistic about our ability to add to the number of credit unions
under contract. We cannot give you any assurance, however, that actual
operating results will be as we 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 anticipated future growth in our credit
union customer base. Expenses will increase because of the need to
increase staffing in all categories, acquire additional equipment, and
provide for additional telephone connections. We believe our operating
results may fluctuate significantly as a result of a variety of factors,
some of which are outside of our control. Because of that, we cannot
assure you that we will achieve profitable operations even with a
significant increase in our credit union customer base.
YEAR 2000 DISCLOSURE
Many uncertainties exist within the computer hardware and software
and electronic networking industries about the changeover from the 1999 to
2000 calendar years. In 1998, we initiated a comprehensive program to
assess, plan and manage our Y2K compliance effort.
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.
While we are confident in the operability of our products, services, and
our own internal systems after the year 2000 date change, there is still
some risk that credit unions will encounter difficulties with one or more
of our products and services because of Y2K issues. Further, we cannot
accurately predict the effect of the Y2K problem on our business due to
our interdependence with numerous other systems.
In 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.
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. As of the date of this report, 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. These computers have been tested
and, to our knowledge, are Y2K compliant.
o Physical properties and infrastructure: We have assessed the
impact of Y2K on all building systems. Included in our
assessment were fire and security systems in our facilities. To
our knowledge, these systems are Y2K compliant.
We have completed our compliance efforts 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. We estimate these future expenditures to be
less than $50,000.
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, revenue 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. cavion.com's critical
business processes rely on Sun Microsystems, Cisco Systems and Motorola to
provide both Internet banking and ISP. Should any of these hardware
manufacturers experience an inability to supply product, this may have an
adverse effect on our business. Under normal situations cavion.com would
order hardware from Cisco Systems, Sun Microsystems and Motorola 30 days
or more after the credit union customer places their order for ISP or
Internet banking. As the turn of the century approaches, cavion.com will
order immediately on receipt of a customer order. This will ensure at
least 30 days of critical hardware and software in the supply line.
In addition, we have evaluated the impact of Y2K issues on our
customers. Based on our evaluations, we do not expect our current or
potential customers to reduce their capital expenditures budgets or to
defer the purchase of cavion.com products and services because of concern
about potential Y2K issues. The National Credit Union Association, which
insures the deposits of most credit unions in the United States, has
established detailed requirements with regard to Y2K compliance of its
member credit unions. NCUA requires its members to roll forward the
clocks on their critical systems past the year 2000 and to conduct real-
time dynamic testing prior to January 1, 2000. We are prepared to
participate in our clients' Y2K testing upon request.
We have tested all critical third party elements used in delivering
our products and services and are satisfied they are Y2K compliant. We
are, of course, reliant on infrastructure-level suppliers such as utility
companies and telecommunications carriers. We have not been able to test
the Y2K readiness of these entities nor do we have a contingency plan in
the event of a catastrophic failure of the power and/or telecommunication
infrastructure.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Office Lease with NY/BDP Flex I.,LLC. dated October 29, 1999.
27. Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the
quarter ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAVION TECHNOLOGIES, INC.
Date: December 13, 1999 By:/s/Marshall E. Aster
Marshall E. Aster, Chief Financial
Officer and Principal Financial
and Accounting Officer