AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CAVION TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 514191 84-1472763
(State of other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification No.)
6446 SOUTH KENTON STREET
ENGLEWOOD, COLORADO 80111
(720) 875-1900
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
DAVID J. SELINA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAVION TECHNOLOGIES, INC.
6446 SOUTH KENTON STREET
ENGLEWOOD, COLORADO 80111
(720) 875-1900
(Name, address, including zip code, and telephone number,
including area code, of agent of service)
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COPIES TO:
S. LEE TERRY, JR., ESQ. MARLON F. STARR, ESQ.
Gorsuch Kirgis LLP Smith, Gambrell & Russell, LLP
Tower I, Suite 1000 Suite 3100, Promenade II
1515 Arapahoe Street 1230 Peachtree Street, N.E.
Denver, Colorado 80202 Atlanta, Georgia 30309
(303) 376-5010 (404) 815-3500
(303) 376-5001 (fax) (404) 815-3509 (fax)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEN BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
Common Stock, par value $.0001 per share 2,645,000 $14.50 $38,352,500 $10,125
(1) Includes 345,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion, dated April 14, 2000
PRELIMINARY PROSPECTUS
2,300,000 SHARES
[LOGO]
COMMON STOCK
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We are offering for sale 1,800,000 shares of our common stock, and certain
of our shareholders are offering for sale an additional 500,000 shares of our
common stock. Our common stock currently is traded on the Nasdaq SmallCap Market
under the trading symbol "CAVN." We have applied to list our common stock on the
Nasdaq National Market upon completion of this offering. On April 13, 2000, the
last reported sale price of our common stock was $15.31 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to cavion.com...................................... $ $
Proceeds to the selling shareholders........................ $ $
We have granted the underwriters a 30-day option to purchase up to 345,000
additional shares of common stock to cover over-allotments.
The underwriters are offering the shares on a firm commitment basis. The
underwriters expect to deliver the shares on or about , 2000.
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The Robinson-Humphrey Company
SunTrust Equitable Securities
This prospectus is dated , 2000
[INSIDE COVER OF PROSPECTUS]
Inside front cover at the top of the page appears the text:
"CUINET-Registered Trademark-." Below this text is the cavion.com logo which is
shown as the center of a circle surrounded by icons representing various
products and services offered by the company including Internet banking, secure
Internet access services, online bill payment and online loan approval. In
addition, there is a graphical depiction of company's e-commerce products and
services shown with the name "Member Emporium-TM-".
TABLE OF CONTENTS
PAGE
--------
Summary..................................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Price Range of Our Common Stock............................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Unaudited Pro Forma Financial Statements.................... 16
Selected Financial and Other Information.................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 25
Management.................................................. 39
Related Party Transactions.................................. 45
Principal and Selling Shareholders.......................... 47
Description of Capital Stock................................ 49
Shares Eligible for Future Sale............................. 52
Experts..................................................... 56
Legal Matters............................................... 56
Where You Can Find More Information......................... 56
Index to Financial Statements............................... F-1
i
SUMMARY
THIS SECTION SUMMARIZES INFORMATION CONTAINED IN OTHER PARTS OF THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
UNLESS WE STATE OTHERWISE, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
cavion.com
OUR BUSINESS
We are a leading provider of secure private network connectivity and
Internet solutions that connect credit unions to their business partners and
members. Through CUINET-Registered Trademark- (Credit Union INTERACTIVE
Network), our secure private communications network, individual credit unions
can offer Internet banking products and e-commerce services to their members via
the Internet and they can engage in business-to-business communications and
e-commerce with other credit unions, credit union leagues, trade associations,
corporate credit unions and third party vendors. We also offer secure Internet
access for credit unions' personnel with multiple layers of security and
dedicated connections designed to satisfy credit unions' need for confidential
communications and secure transaction processing through one digital connection
to our private network. As of March 31, 2000, we had contractual arrangements to
connect 130 entities to CUINET-Registered Trademark-, 92 of which had been
connected.
Our Internet banking products provide a cost-effective, outsourced, secure
and scalable solution that enables credit unions to offer their members a wide
array of financial products and services over the Internet. Our product offering
includes account management, funds transfer, bill payment, online loan
application with access to third party approval products, and share draft
imaging services over a secure Internet connection. These products and services
are branded with the credit union's own name and logo and other distinctive
branding characteristics. This branded solution enables credit unions to provide
their members with the convenience of banking on the Internet without losing the
personal relationship and service associated with the credit union. In addition,
our Internet banking products make credit unions more accessible to their
members without the expense of building additional facilities.
Through our recently introduced e-commerce solution, Member Emporium-TM-, we
identify, develop and implement e-commerce relationships with third party
merchants and suppliers and, in turn, offer their products and services to
credit union members. Member Emporium-TM- is designed to enable a credit union
to provide its members with access to products and services such as mortgage
lending, insurance, online stock trading, tax preparation, retail Internet
access services and retail merchandise at a discount to regular retail or
Internet-based prices. Member Emporium-TM- is co-branded with each individual
credit union's own name and logo. We anticipate that creating such e-commerce
opportunities for credit union members will increase lending opportunities for
credit unions, generate significant transaction fees and commissions for us and
increase member retention for the credit union.
We currently earn the majority of our revenue from recurring flat monthly
fees for a connection to CUINET-Registered Trademark- and for our Internet
banking products and ancillary services. We also generate monthly recurring
revenue from third party vendors for providing them with a connection to
CUINET-Registered Trademark- and additional fees based upon the number of credit
unions to which such vendors provide services. We do not charge our credit union
customers software licensing, implementation or per user fees. In the future, we
expect to earn a substantial portion of our revenue from commissions and fees on
transactions conducted over Member Emporium-TM-.
HOW TO REACH US
Our legal name is Cavion Technologies, Inc. and we conduct business under
the registered trade name cavion.com. Our principal executive offices are
located at 6446 South Kenton Street, Englewood, Colorado 80111, and our
telephone number is (720) 875-1900. Our website is located at WWW.CAVION.COM.
Information on our website is not, however, part of this prospectus, and you
should rely only on the information contained in this prospectus in deciding
whether to invest in our common stock.
1
THIS OFFERING
Common stock we are offering................. 1,800,000 shares
Common stock the selling shareholders are
offering................................... 500,000 shares
Common stock to be outstanding immediately
after this offering........................ 6,735,308 shares (1)
Use of proceeds.............................. Repayment of indebtedness, expansion of sales
and marketing efforts, product development
and general corporate purposes, including
working capital and potential acquisitions.
Nasdaq symbol................................ "CAVN"
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(1) Excludes 1,183,000 shares issuable upon the exercise of outstanding options
and warrants.
2
SUMMARY FINANCIAL AND OTHER INFORMATION
You should read the following summary financial and operating information in
conjunction with "Use of Proceeds," our financial statements and related notes
as well as those of LanXtra, Inc., our predecessor, and other financial
information which appear in this prospectus. Our company was incorporated on
August 18, 1998, to acquire the business of LanXtra. On February 1, 1999, we
purchased the LanXtra business. Prior to our purchase of the LanXtra business,
our operating results consisted entirely of administrative expenses with no
revenue. The purchase method of accounting was used to record our purchase of
the LanXtra business and the related assets acquired and liabilities assumed by
us. This accounting method reflects the assets acquired and the liabilities
assumed at their estimated fair market value, and resulted in the recording of
intangible assets, including goodwill. Goodwill represents the excess of
purchase price over the net fair market value of tangible and other assets
acquired. This goodwill will be amortized in future periods. The accompanying
historical financial information of LanXtra on and before January 31, 1999, is
not comparable in all material respects with our financial information
subsequent to February 1, 1999, since that financial information reports
financial position and results of operations on a different basis of accounting.
Historical earnings per share information for LanXtra has been omitted because
it is not meaningful given the significant differences in our capital structure
compared to LanXtra's capital structure.
The business that we purchased from LanXtra was started by LanXtra during
1997. In December 1997, LanXtra sold all operations that were not related to the
business later acquired by us, and the results of the operations that were sold
have been reported as discontinued operations. Accordingly, the accompanying
financial information of our predecessor for the years ended December 31, 1995
and 1996 do not include the results of operations of the LanXtra business that
we acquired.
The pro forma statement of operations for the year ended December 31, 1999
reflects the acquisition of LanXtra as if it had occurred on January 1, 1999.
Pro forma basic and diluted net income (loss) per share is calculated as if the
purchase was completed on January 1, 1999, and the related 1,029,218 shares of
common stock issued to acquire the LanXtra business were issued on that date.
The pro forma financial information for the year ended December 31, 1999 does
not represent what our results of operations would have been if the acquisition
had actually occurred on January 1, 1999, nor is it indicative of our future
results of operations.
3
PREDECESSOR CAVION.COM
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FROM
FOR THE INCEPTION
FOR THE YEAR ENDED DECEMBER 31, MONTH (AUGUST 18,
ENDED 1998) TO
----------------------------------------------------- JANUARY 31, DECEMBER 31,
1995 1996 1997 1998 1999 1998
--------- --------- --------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenue....................... $ -- $ -- $ 24 $ 215 $ 38 $ --
Gross profit (loss)........... -- -- (27) (7) 6 --
Operating income (loss)....... -- -- (1,064) (1,125) (207) (7)
Net income (loss) from
continuing operations....... -- -- (1,835) (1,971) (271) (36)
Basic and diluted net income
(loss) per share............ $ (0.02)
=========
Weighted average common shares
outstanding................. 2,078,170
=========
Pro forma basic and diluted
net income (loss) per
share.......................
Pro forma weighted average
common shares outstanding...
Pro forma EBITDA(1)...........
OTHER OPERATING DATA
(at end of period):
Customers under contract...... 26
Customers connected........... 16
PRO FORMA
------------
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FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1999
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(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenue....................... $ 618 $ 656
Gross profit (loss)........... 125 131
Operating income (loss)....... (4,268) (4,554)
Net income (loss) from
continuing operations....... (4,754) (5,051)
Basic and diluted net income
(loss) per share............ $ (1.56)
=========
Weighted average common shares
outstanding................. 3,081,156
=========
Pro forma basic and diluted
net income (loss) per
share....................... $ (1.64)
=========
Pro forma weighted average
common shares outstanding... 3,112,424
=========
Pro forma EBITDA(1)........... $ (3,566)
OTHER OPERATING DATA
(at end of period):
Customers under contract...... 100
Customers connected........... 56
DECEMBER 31, 1999
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AS FURTHER
ACTUAL AS ADJUSTED(2) ADJUSTED(3)
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BALANCE SHEET DATA:
Cash........................................................ $4,347 $6,573 $31,175
Working capital............................................. 2,542 4,768 29,840
Total assets................................................ 9,603 11,829 36,431
Long-term debt, net of current maturities................... 386 386 386
Putable common stock........................................ 201 -- --
Total shareholders' equity.................................. 6,972 9,399 34,471
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(1) Pro forma earnings before interest, taxes, depreciation and amortization, or
pro forma EBITDA, represents the sum of net loss before income taxes plus
net interest expense, depreciation and amortization. Pro forma EBITDA is
presented here to provide additional information about our ability to meet
our obligations. Pro forma EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
as an alternative either to net loss as an indicator of our operating
performance, or to cash flow as a measure of our liquidity.
(2) As adjusted to reflect: (i) our receipt of net proceeds of approximately
$2.2 million from the sale of 205,000 shares of common stock in a February
2000 private placement; (ii) the recent conversion of all of the 28,648
issued and outstanding shares of Class B common stock into 28,648 shares of
common stock; and (iii) the exercise of options to purchase 4,334 shares of
common stock.
(3) As further adjusted to reflect the issuance and sale by cavion.com of
1,800,000 shares of common stock in this offering and application of the
estimated net proceeds.
4
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION
PRESENTED IN THIS PROSPECTUS, IN DECIDING WHETHER OR NOT TO INVEST IN OUR COMMON
STOCK. EACH OF THESE FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
BECAUSE WE HAVE A SHORT OPERATING HISTORY, YOU WILL HAVE LIMITED HISTORICAL
INFORMATION ABOUT US ON WHICH TO BASE YOUR INVESTMENT DECISION.
Our business plan was developed in January 1998. Our short operating history
makes it difficult to evaluate us and to predict our future financial results.
An investor in our common stock must consider the risks we will face as an early
stage company in the new and rapidly evolving Internet banking and e-commerce
markets. These risks include our potential inability to:
- attract credit unions to use CUINET-Registered Trademark-;
- gain acceptance of Member Emporium-TM- by credit unions and their members;
- develop, test, market and sell new and enhanced products and services;
- expand successfully our sales and marketing efforts;
- maintain our current, and develop new, strategic partners;
- promote acceptance of our Internet banking products and related services
to credit unions and their members;
- respond effectively to competitors providing alternative products to
credit unions and their members; and
- continue to develop and upgrade our technology.
We may not succeed in achieving all or any of these goals and challenges,
and current evaluations of us and our prospects may prove to be inaccurate.
WE HAVE A HISTORY OF LOSSES AND CANNOT GUARANTEE THAT WE WILL BECOME PROFITABLE.
Neither cavion.com nor its predecessor has ever earned a profit. As of
December 31, 1999, our accumulated deficit was $4.9 million. We expect to lose
money in fiscal 2000 and there can be no assurance that we will ever achieve
profitable operations. Even if we do become profitable, we may not be able to
continue to be profitable.
Today, we receive the majority of our revenue from the sale of products and
services to our credit union customers. We plan to increase our spending in
sales and marketing, research and development, and administrative areas for the
foreseeable future. If our revenue does not grow as rapidly as we anticipate or
if we are unable to control our expenses, our operating performance would be
adversely affected and we will be unable to achieve profitability.
WE ARE CURRENTLY EXPERIENCING A PERIOD OF SIGNIFICANT GROWTH THAT MAY PLACE A
STRAIN ON OUR RESOURCES.
We are experiencing and expect to continue to experience significant growth
in our operations. This expansion will place additional demands on our
management, operational capacity and financial resources. Our management, sales,
technical and accounting resources may not be adequate to support our recent
expansion and anticipated future growth. In order to manage our expected growth,
we will be required to hire additional personnel and devote significant
resources to improving or replacing existing operational, accounting and
informational systems, procedures and controls. Our future
5
operating results will substantially depend on the ability of our management to
manage our growth effectively by, among other things:
- predicting accurately the growth in the demand for our Internet banking
products and related services by our customers;
- attracting, training, motivating, managing and retaining key employees;
- expanding and improving our operating and financial systems, procedures
and controls;
- acquiring and installing new equipment and facilities; and
- responding quickly and effectively to unanticipated changes in the
industry.
If we are unable to manage our growth effectively, our business may be adversely
affected.
WE CURRENTLY RELY ON CONVERGENT COMMUNICATIONS SERVICES, INC. TO ESTABLISH AND
MAINTAIN THE CONNECTION BETWEEN OUR CUSTOMERS AND CUINET-REGISTERED TRADEMARK-.
In order to provide our Internet-based products to our customers, we must
purchase a large quantity of telecommunications services from providers of these
services. We have entered into a non-exclusive agreement with Convergent
Communications Services, Inc. to establish and maintain connectivity between our
network and substantially all our customers. Our business depends upon the
ability of Convergent, or some other telecommunications service provider, to
establish and maintain connectivity with CUINET-Registered Trademark-. If
Convergent is unable to provide connectivity in a timely manner to our new
customers or experiences problems in delivering services to our existing
customers, our business could be adversely affected. If we are unable to
continue to obtain services from Convergent or some other provider on
economically favorable terms, our business and financial performance may be
adversely affected.
OUR BUSINESS AND PROSPECTS WILL SUFFER IF CREDIT UNIONS AND THEIR MEMBERS DO NOT
ACCEPT AND USE MEMBER EMPORIUM-TM-, OUR E-COMMERCE SOLUTION.
We expect to derive a substantial portion of our revenue in the future from
our e-commerce product, Member Emporium-TM-. This product is a network of
portals which is designed to aggregate credit union members and offer them a
variety of products and services from third party vendors, such as insurance
policies, home mortgages, Internet access, online brokerage, and consumer
merchandise, often at a discount to retail or Internet-based prices. The success
of Member Emporium-TM- is dependent on, among other things, our ability to:
- convince credit unions to allow us to link their websites to the Member
Emporium-TM- website and network of portals;
- persuade businesses to advertise their products and services on the Member
Emporium-TM- website and portal network, and to offer those products and
services at a meaningful discount;
- entice credit union members to visit the Member Emporium-TM- website and
portal network, and purchase the products and services advertised; and
- to earn commissions on these transactions.
If Member Emporium-TM- is unable to produce the revenue we presently expect,
there could be a material adverse effect on our business, financial condition
and results of operations.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MARKET OUR PRODUCTS TO CREDIT UNIONS,
WHICH HISTORICALLY HAVE BEEN SLOW TO ADOPT NEW TECHNOLOGIES.
Our revenue depends upon information technology spending by credit unions.
We cannot be sure that this type of spending will increase or even continue at
today's levels. Credit unions tend to be
6
cautious in making purchase decisions regarding new technologies for their
financial applications. As a result, we must provide a significant level of
education to prospective customers regarding the use and benefits of our
products and services prior to their purchase. Furthermore, credit unions are
frequently slow to approve capital expenditures, especially for new technologies
that affect key operations. All of this could have the effect of significantly
lengthening our sales cycle, thereby delaying revenue growth and adversely
affecting operating results.
OUR BUSINESS COULD SUFFER IF THE CREDIT UNION MEMBERSHIP ACCESS ACT OF 1998 IS
REPEALED OR LIMITED IN ITS SCOPE BY REGULATIONS IMPOSED BY THE NATIONAL CREDIT
UNION ADMINISTRATION.
Our primary customers are credit unions which are regulated by the National
Credit Union Administration (NCUA). In 1998, the U.S. Congress passed the Credit
Union Membership Access Act of 1998 which allows federally chartered credit
unions to solicit credit union members from more than one occupational group, as
well as make certain business loans to their members. The Credit Union
Membership Act has the potential to increase the activity of federal credit
unions in the financial marketplace as it presents new opportunities for federal
credit unions to expand their member base. A repeal of the Act would eliminate
the new opportunities allowed by the Act.
Title IV of the Act requires the U.S. Treasury Department to study the
regulatory, tax and other differences between credit unions and other federally
insured financial institutions, including a review of the potential effect of
applying federal tax laws to credit unions. The Treasury Department's study will
consider whether the competitive advantage produced by credit unions' tax
exemption may endanger the viability of smaller banks. The Treasury Department
may ultimately recommend imposing taxation on credit unions or enacting
legislative or administrative measures to cut taxes for smaller depository
institutions which compete with credit unions. Any such new laws or regulations
which subject credit unions to taxation or reduce the tax liability of competing
financial institutions could adversely affect credit unions and the size of our
potential market. Similarly, the adoption of amendments to the Act or the
issuance of NCUA regulations under the Act which impair credit unions' ability
to expand or serve their member base could hinder our growth and have a material
adverse effect on our business, financial condition and operating results.
OUR BUSINESS AND FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED IF THERE IS A
DECLINE IN DEMAND FOR OUR PRODUCTS AND SERVICES OR IN THE USE OF THE INTERNET.
We expect to derive substantially all of our revenues from products and
services provided to credit unions, their members and other participants in the
financial services industry. Our future success depends significantly upon the
willingness of credit unions to utilize our services and offer technological
innovations such as Internet banking, bill payment and online shopping to their
members, and upon their members' demand for and acceptance of these
technological innovations. If credit unions and their members do not readily
accept these technological innovations, the demand for our products and services
will be materially and adversely affected.
There can be no assurance that we will continue to be successful in
marketing these products and services or other integrated products and services.
In addition, changes in economic conditions and unforeseen events, including
recession, inflation or other adverse occurrences, may result in a significant
decline in the utilization of credit union services or demand for our products
and services. Any event that results in decreased use of credit union services,
or increased pressure on credit unions toward the in-house development of
Internet banking systems, could have a material adverse effect on our business,
financial condition and results of operations.
Demand for our products and services by credit unions is driven by the
demand for Internet-based products and services by credit union members. Our
business would be adversely affected if Internet use does not continue to grow
or grows more slowly than expected. Internet usage may be inhibited for a number
of reasons, including inadequate network infrastructure, security concerns,
inconsistent
7
quality of service, and unavailability of cost effective, high-speed access to
the Internet. If the market for Internet-based financial services fails to grow,
grows more slowly than anticipated, or becomes saturated with competitors, it is
likely that our business, financial condition and results of operations would be
materially and adversely affected.
WE CURRENTLY RELY ON A SINGLE DATA CENTER TO SUPPORT ALL OF OUR PRODUCTS AND
SERVICES.
Essential components of our communications and network equipment are
currently located at our corporate headquarters in Englewood, Colorado. A
natural disaster, such as fire, earthquake or flood, at or affecting our
facility could result in failures or interruptions in providing our network and
Internet banking services to our customers. In the event of a failure or
interruption in our systems, our reputation could be materially harmed and we
could lose many of our current and potential customers. We do not currently have
backup facilities for our network and Internet banking services. We are
currently constructing two additional data centers which will provide the
redundancy necessary to serve as backup facilities for our existing data center
and for each other, but they are not scheduled to be fully operational until the
third quarter of 2000. We also cannot be certain that these new data centers
will become operational as scheduled or that, when operational, they will
perform as expected. Even with the two new data centers, we could still
experience a failure or interruption in our systems, which could lead to delays,
loss of data or the inability to provide our services to our customers.
TECHNOLOGICAL CHANGES MAY RENDER OUR SOLUTIONS OBSOLETE.
The electronic banking and financial services industry is characterized by
rapidly changing technology and evolving industry standards. In addition, we
have several competitors who have been consistently introducing new products and
services, some of which compete with our products and services. Our future
success will depend on our ability to design, develop, sell and support new and
integrated products and services that will keep pace with technological
advances, industry standards and our competitors, as well as satisfy the
evolving needs of credit unions and their members. Our inability to develop and
introduce such products and services in a timely manner could limit the
marketability of our products and services which would adversely affect our
business. Furthermore, we cannot predict the time and costs involved in
developing new and integrated products and services. Actual development costs
could substantially exceed budgeted amounts and completion of such development
could be later than presently scheduled. In either case, our operating results
and business could be seriously harmed.
COMPETITION FROM THIRD PARTIES COULD REDUCE OR ELIMINATE DEMAND FOR OUR PRODUCTS
AND SERVICES.
The market for Internet banking services is highly competitive, and we
expect that competition will intensify in the future. We may not be able to
compete successfully against our current or future competitors and, accordingly,
we cannot be certain that we will be able to expand the number of our customers,
or retain our current customers or third-party service providers. A number of
public and private companies compete with one or more of the individual products
and services offered by cavion.com. Any of these companies, as well as other
potential competitors, could in the future offer a combination of products and
services to credit unions similar to the combination we presently offer. Many of
our current and potential competitors have longer operating histories and may be
in a better position to produce and market their services due to their greater
financial, technical, marketing and other resources, as well as their
significantly greater name recognition and larger installed bases of customers.
UNDETECTED DEFECTS MAY EXIST IN THE HARDWARE AND SOFTWARE THAT WE USE TO DELIVER
OUR PRODUCTS.
The hardware and software used by our systems in the delivery of our
products and services currently or in the future may contain undetected errors,
defects or bugs. Although we have not
8
suffered significant harm from any errors or defects to date, we may discover
significant errors or defects in the future that we may or may not be able to
correct. Any such defects could result in a loss of sales and additional costs
as well as damage to our reputation and our relationships with our customers.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS AS THE VOLUME OF TRAFFIC ON OUR SYSTEMS
INCREASES.
If the volume of traffic and transactions on our system increases
substantially, we could periodically experience temporary capacity constraints,
resulting in unanticipated system disruptions, slower response times and lower
levels of customer service. We may be unable to project accurately the rate or
timing of increases, if any, in the use of our services or to expand and upgrade
our systems and infrastructure to accommodate these increases in a timely
manner. Any inability to do so could harm our business.
IMPLEMENTATION OF OUR SOLUTION BY OUR CREDIT UNION CUSTOMERS MAY TAKE LONGER
THAN WE ANTICIPATE.
During the course of an initial implementation of our products and services,
we must integrate our Internet banking software with a credit union's core
processing software. This involves the installation of an interface to permit
communication between our products and services and the credit union's core
processing software, which typically takes an average of 60 to 90 days from the
date the credit union contracts with us. From time to time, we may experience
delays in the integration process, particularly if we do not already have an
established interface for a particular core processing software. We also rely on
Convergent and the customer's telecommunications provider to establish
connectivity between our systems and the customer. The process of connecting a
customer to CUINET-Registered Trademark- takes an average of 60 days from the
date the credit union contracts with us to implement by Convergent. A longer
implementation period for either the integration or connectivity process will
increase our costs associated with the implementation and delay our recognition
of revenues. Moreover, changes to the core software systems used by existing
customers, or custom implementations for new customers, may cause integration
delays. Significant delays of customer implementation, however caused, could
materially and adversely affect our operating results for subsequent periods.
BECAUSE OF THE IMPORTANCE TO US OF DAVID SELINA'S EXPERIENCE AND RELATIONSHIPS
IN THE CREDIT UNION INDUSTRY, AND JEFF MARSHALL'S TECHNICAL EXPERTISE, OUR
SUCCESS MAY BE DEPENDENT ON OUR ABILITY TO RETAIN THESE INDIVIDUALS.
We believe that the credit union and related management experience of David
J. Selina, our President, Chief Executive Officer and Chief Operating Officer,
is important to our future success. We also believe that the software
development ability of Jeff Marshall, Vice President of Software Development, is
important to our future success. We have employment contracts with
Messrs. Selina and Marshall, and we have purchased $1,000,000 of key man
insurance on each of them. The loss of the services of Messrs. Selina or
Marshall could have a significant adverse effect on our business.
OUR FUTURE SUCCESS WILL BE DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL.
Our growth plan will require us to hire more people in sales, customer
service, research and development and other areas during 2000 and the
foreseeable future. Competition for qualified people in the Internet services
and software industry, particularly in the network services field, is intense.
We compete with bigger and better financed software and Internet services
companies for these employees. Our future success depends on our ability to
attract, retain and motivate highly qualified personnel.
Our ability to expand our business will depend significantly on our ability
to expand our sales and marketing forces and our strategic partnerships. To
continue our growth we must cross-market products and services to existing
customers and enter into agreements with new customers. This requires us to
9
locate and hire experienced sales and marketing personnel and to establish and
maintain key marketing relationships.
SECURITY BREACHES COULD DAMAGE OUR REPUTATION AND BUSINESS.
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. We transmit confidential information in providing our
services. Users of Internet banking and other e-commerce services are concerned
about the security of transmissions over public networks. Therefore, it is
critical that our facilities and infrastructure remain secure and are perceived
by the marketplace to be secure. A material security breach affecting us could
damage our reputation, deter credit unions from purchasing our products, deter
their members from using our products, or result in liability to us. Further,
any material security breach affecting our competitors could affect the
marketplace's perception of Internet banking in general and have the same
effects.
Concerns about security and privacy may inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. Any well-publicized compromise of security could deter
people from using the Internet or using it to conduct transactions that involve
the transmission of confidential information. We may need to expend significant
capital or other resources to protect against the threat of security breaches or
alleviate problems caused by breaches. Although we intend to continue to
implement state of the art security measures, it may nevertheless be possible to
circumvent any such measures. In addition, the process of eliminating computer
viruses and alleviating other security problems may result in interruptions,
delays or cessation of service to users accessing websites that deliver our
services, any of which could harm our business.
OUR GROWTH MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES THAT COULD ADD ADDITIONAL COSTS TO DOING BUSINESS ON THE INTERNET.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address such issues, including user privacy, pricing,
and the characteristics and quality of products and services offered. For
example, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on those companies. Any such regulation could increase the
cost of transmitting data over the Internet.
Federal or state authorities may adopt regulations addressing the electronic
operations of financial institutions that could require us to modify our current
or future products and services. For example, the U.S. Congress is currently
considering financial services reform legislation that may include limitations
on the ability of financial institutions to disclose nonpublic consumer
financial information. The adoption of laws or regulations affecting our
customers' businesses could reduce our growth rate or otherwise have a material
adverse effect on our business, financial condition and operating results. See
"Business--Government Regulation."
TAXATION OF OUR INTERNET PRODUCTS AND SERVICES COULD AFFECT OUR PRICING POLICIES
AND REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES.
Any legislation that substantially impairs the growth of e-commerce could
have a material adverse effect on our business, financial condition and
operating results. The tax treatment of the Internet and e-commerce is currently
unsettled. A number of proposals at the federal, state and local levels in the
United States would, if enacted, impose taxes on the sale of goods and services
over the Internet. In October 1998, the U.S. Congress passed the Internet Tax
Freedom Act, which generally imposes a three year moratorium on new federal,
state and local taxation of online services. Taxation of Internet commerce could
have a material adverse affect on our business, financial condition and
operations.
10
THE UNPREDICTABILITY OF FUTURE FINANCIAL RESULTS AND EVENTS BEYOND OUR CONTROL
MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK.
Our financial results and the price of our common stock may fluctuate
substantially in the future. These fluctuations may be caused by several
factors, including the price we are able to charge for our services,
competition, new product offerings from our competition and changes in
technology. Other factors which may cause your investment in our common stock to
be adversely affected or which may cause significant fluctuations in our stock
price include:
- our actual or anticipated operating results;
- changes in our actual or anticipated growth rates;
- changes in analysts' estimates;
- competitors' announcements;
- regulatory actions;
- industry conditions;
- general economic conditions; and
- a variety of other factors that we have discussed elsewhere in "Risk
Factors."
Furthermore, the market for Internet and technology companies has
experienced extreme price and volume volatility that have often been unrelated
or disproportionate to the operating performance of those companies. These broad
market and industry factors may materially and adversely affect our stock price.
The trading prices of the stocks of many Internet and technology companies are
at or near new historical highs and reflect relative valuation levels
substantially above historical levels. These trading prices and relative
valuation levels may not be sustained or may not prove to be applicable to our
common stock.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the public
market following this offering, including sales by our officers and directors,
or the perception by the market that these sales may occur, could lower the
market price of our common stock. After this offering, 6,735,308 shares of our
common stock will be outstanding. Of these shares, 4,153,900 shares including
all 2,300,000 shares being sold in this offering, will be freely tradeable in
the market without restriction. The remaining 2,581,408 shares of common stock
outstanding after this offering will be restricted as a result of securities
laws or lock-up agreements signed by all of our officers, directors and
principal shareholders, and by certain shareholders who purchased our common
stock prior to our initial public offering. These restricted shares will be
available for sale in the public market as follows:
- none of the 1,881,297 restricted shares held by our officers, directors
and principal shareholders will be eligible for sale until 180 days after
the date of this prospectus, when their lock-up agreements with the
underwriters expire; and
- approximately 2,414,009 restricted shares will become eligible for sale at
various times upon the expiration of their respective holding periods and
if otherwise sold in accordance with the provisions of Rule 144 of the
Securities and Exchange Commission.
We have registered 750,000 shares reserved for issuance under our stock
option plan, which will be available for sale in the public market upon
issuance. Our Board has approved an increase in the number of shares issuable
under our stock option plan to 995,000, subject to shareholder approval. As of
March 31, 2000, we had options outstanding to purchase a total of 1,183,000
shares of common stock under this plan and other warrants and stock option
agreements. See "Shares Eligible for Future Sale."
11
MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY.
Our management will have broad discretion in how we use a significant
portion of the net proceeds of this offering. We currently intend to use a
portion of the net proceeds received by us to repay outstanding promissory notes
in the principal amount of $470,000, and the remaining net proceeds will be used
to expand our sales and marketing efforts, for product development, for
developing and marketing Member Emporium-TM- and for general corporate purposes,
including working capital and potential acquisitions. Investors will be relying
on the judgment of our management regarding the application of the proceeds from
this offering. If management is unable to apply these funds effectively, our
business will be materially and adversely affected.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE
NET TANGIBLE BOOK VALUE OF THEIR SHARES.
The estimated public offering price of $15.31 per share is substantially
higher than the pro forma net tangible book value per share of our outstanding
common stock immediately after this offering. Accordingly, purchasers of common
stock in this offering will experience immediate and substantial dilution in the
net tangible book value of their shares of approximately $10.77 in pro forma net
tangible book value per share, or approximately 70% of the assumed offering
price. Investors will incur additional dilution upon the exercise of outstanding
stock options and warrants.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend
the forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. We make forward-looking statements
regarding our expectations and projections for cavion.com. We use words such as
"anticipate," "believe," "expect," "future," "may," "will," "should," "plan,"
"projected," "intend" and similar expressions to identify forward-looking
statements. These statements are based on our beliefs and the assumptions we
made using information currently available to us. Because these statements
reflect our current views and assumptions concerning future events, these
statements involve substantial risks and uncertainties. Our actual results could
differ materially from the results discussed in the forward-looking statements.
Some, but not all, of the important factors that could cause actual results to
differ from our expectations are disclosed under "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
"Business" and in other parts of this prospectus. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
this prospectus.
12
USE OF PROCEEDS
We estimate that we will receive net cash proceeds of approximately $25.1
million, after deducting underwriting discounts and estimated offering expenses
(assuming a public offering price of $15.31 per share) from our sale of
1,800,000 shares in this offering. We will not receive any proceeds from the
sale of shares by the selling shareholders.
We currently intend to use a portion of the net proceeds received by us to
repay outstanding promissory notes in the principal amount of $470,000 and the
remaining net proceeds will be used to expand our sales and marketing efforts,
to develop and market Member Emporium-TM-, for product development, and for
general corporate purposes, including working capital and potential
acquisitions. The notes to be repaid were issued in a private placement in 1998
and 1999 that provided us with bridge financing prior to our initial public
offering. The notes bear interest at a rate of 15%, are secured by substantially
all of our assets and are due on October 19, 2000.
From time to time in the ordinary course of business, we evaluate the
acquisition of businesses and technologies that complement our business, so it
is possible we will elect to use a portion of the net proceeds from this
offering to fund these acquisitions. Currently, however, we do not have any
understandings, commitments or agreements with respect to any acquisitions, and
we may not be able to identify suitable acquisition candidates or complete any
acquisition.
The amount of funds that we actually use for these purposes, other than debt
repayment, will depend on many factors, including revisions to our business
plan, material changes in our revenues or expenses, and other factors described
under "Risk Factors." Accordingly, our management will have significant
discretion over the use and investment of the net proceeds from the offering.
Pending the uses described above, we will invest the net proceeds in
interest-bearing accounts or short-term, interest-bearing securities, or both.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
intend to pay cash dividends on our common stock. We plan to retain our future
earnings, if any, to finance our operations and for expansion of our business.
The decision whether to pay cash dividends on our common stock will be made by
our board of directors, in their discretion, and will depend on our financial
condition, operating results, capital requirements and other factors that the
board of directors considers significant.
PRICE RANGE OF OUR COMMON STOCK
Since October 29, 1999, our common stock has traded on the Nasdaq SmallCap
Market under the trading symbol "CAVN." Prior to this offering, we made
application for our common stock to trade on the Nasdaq National Market. The
following table gives the high and low bid prices for the common stock for the
quarters indicated. The prices reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
The information presented has been provided by The Nasdaq Stock Market, Inc.
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 1999
Fourth quarter (commencing October 29, 1999)............. $ 9.00 $ 5.13
YEAR ENDING DECEMBER 31, 2000
First quarter............................................ $ 37.63 $ 6.13
Second quarter (through April 13, 2000).................. $ 21.25 $12.88
On April 13, 2000, the closing price of our common stock on the Nasdaq
SmallCap Market was $15.31 per share. As of April 13, 2000, there were
83 holders of record of our common stock and in excess of 1,000 beneficial
owners of our common stock.
13
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
Our capitalization is presented:
- on an actual basis;
- on an unaudited as adjusted basis to reflect: (1) our receipt of net
proceeds of $2.2 million from the sale of 205,000 shares of common stock
in a February 2000 private placement; (2) the recent conversion of the
28,648 outstanding shares of Class B common stock into 28,648 shares of
common stock; and (3) the exercise of options to purchase 4,334 shares of
common stock by employees during March 2000; and
- on an unaudited as further adjusted basis to reflect: (1) the transactions
described above; (2) the issuance and sale by cavion.com of 1,800,000
shares of common stock in this offering, after deducting underwriting
discounts and estimated offering expenses (assuming a public offering
price of $15.31 per share); and (3) the repayment of $470,000 of debt from
the net proceeds of this offering, as if each of them had occurred as of
December 31, 1999.
The information in the table should be read in conjunction with the
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
DECEMBER 31, 1999
-----------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
-------- ----------- ----------
(DOLLARS IN THOUSANDS)
Short-term portion of notes and capital
leases payable............................................ $ 608 $ 608 $ 138
------- ------- -------
Long-term portion of capital leases
payable................................................... 386 386 386
------- ------- -------
Putable Class B common stock, $.0001
par value; 30,000 shares authorized;
28,648, 0, and 0 shares outstanding
actual, as adjusted and as further
adjusted, respectively.................................... 201 -- --
------- ------- -------
Shareholders' equity:
Common stock, $.0001 par
value; 19,970,000 shares authorized;
4,697,326, 4,935,308 and 6,735,308
shares issued and outstanding actual,
as adjusted and as further adjusted, respectively....... 1 1 1
Warrants and options...................................... 507 638 638
Deferred compensation..................................... (108) (108) (108)
Additional paid-in-capital................................ 11,426 13,722 38,794
Accumulated deficit....................................... (4,854) (4,854) (4,854)
------- ------- -------
Total shareholders' equity.............................. 6,972 9,399 34,471
------- ------- -------
Total capitalization...................................... $ 8,167 $10,393 $34,995
======= ======= =======
14
DILUTION
The estimated public offering price of $15.31 per share exceeds the pro
forma net tangible book value per share of cavion.com. As of December 31, 1999,
our net tangible book value was approximately $3.1 million or $0.66 per share.
Pro forma net tangible book value was approximately $5.5 million or $1.12 per
share. Pro forma net tangible book value per share is determined by subtracting
our total liabilities from our total tangible assets as of December 31, 1999,
and dividing this difference by the number of shares of common stock issued and
outstanding, assuming that the following transactions had occurred as of
December 31, 1999:
- the conversion of the 28,648 outstanding shares of our Class B common
stock to common stock on March 31, 2000;
- the sale of 205,000 shares of common stock at $12.00 per share in February
2000; and
- the exercise of options to purchase 4,334 shares of common stock by
employees during March 2000.
The sale of 1,800,000 shares of common stock by us in this offering and the
application of the estimated net proceeds therefrom will result in an immediate
increase in pro forma net tangible book value to $30.6 million or $4.54 per
share to existing shareholders and an immediate dilution of $10.77 per share to
investors purchasing shares of common stock in this offering. The following
table illustrates this per share dilution:
Assumed public offering price per share..................... $ 15.31
Net tangible book value at December 31, 1999................ $0.66
Increase per share attributable to pro forma adjustment..... $0.46
-----
Pro forma net tangible book value per share at December 31,
1999...................................................... $1.12
Increase per share attributable to this offering............ $3.42
-----
Pro forma net tangible book value per share after this
offering.................................................. $ 4.54
-------
Dilution per share purchased in this offering............... $ 10.77
=======
The following table summarizes on a pro forma basis as of December 31, 1999
the number of shares of common stock we will sell in this offering, the total
price to be paid for these shares, the number of shares of common stock
previously issued, the total consideration paid, and the average price per share
paid.
SHARES SOLD BY
CAVION.COM TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PURCHASE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- -------- ----------- -------- ----------------
Existing shareholders.................. 4,935,308 73% $16,151,788 37% $ 3.27
New investors.......................... 1,800,000 27% $27,563,400 63% $ 15.31
--------- --- ----------- -----
Total................................ 6,735,308 100% $43,715,188 100%
========= === =========== =====
The foregoing tables assume:
- no exercise of the underwriters' over-allotment option; and
- no exercise of any of the 1,183,000 outstanding options and warrants to
purchase common stock as of March 31, 2000.
Sales by the selling shareholders in this offering will reduce the number of
shares of common stock held by existing shareholders to 4,435,308 or 65.9% of
the total number of shares of common stock to be outstanding after this
offering, and will increase the number of shares to be held by new investors to
2,300,000, or 34.1% of the total number of shares to be outstanding after this
offering. If the underwriters exercise their over-allotment option in full, the
percentage of shares to be held by existing shareholders will decrease further
to 62.6% of the total shares to be outstanding after the exercise, and the
number of shares held by new investors will increase to 2,645,000 or 37.4% of
the total shares to be outstanding after the exercise. To the extent that any
options or warrants that are currently outstanding or will be issued in the
future are exercised, purchasers of the common stock in this offering would
incur further dilution.
15
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
In this section, we have provided you with our unaudited pro forma statement
of operations for the year ended December 31, 1999. This financial information
gives effect to our acquisition of the LanXtra business as if it occurred as of
January 1, 1999.
We based our unaudited pro forma statement of operations for the year ended
December 31, 1999, in part on our audited financial statements for the year
ended December 31, 1999 and LanXtra's audited financial statements for the month
ended January 31, 1999.
These financial statements do not project what our results of operations
will be as of any future date or for any future period. You should read this
financial information together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited financial
statements and accompanying notes located in other parts of the prospectus.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
HISTORICAL
----------------------- PRO FORMA
CAVION.COM LANXTRA ADJUSTMENTS PRO FORMA
----------- --------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue:
Network access and connectivity................... $ 448 $ 24 $ -- $ 472
Installation services and software licensing...... 170 14 -- 184
------- ----- ---- ---------
Total revenue................................... 618 38 -- 656
Cost of revenue:
Network access and connectivity................... 329 16 -- 345
Installation services and software licensing...... 164 16 -- 180
------- ----- ---- ---------
Total cost of revenue........................... 493 32 -- 525
------- ----- ---- ---------
Gross profit........................................ 125 6 -- 131
------- ----- ---- ---------
Operating expenses:
Selling, general and administrative............... 2,933 182 -- 3,115
Research and development.......................... 586 31 -- 617
Amortization of goodwill and other intangible
assets.......................................... 874 -- 79(a) 953
------- ----- ---- ---------
Total operating expenses........................ 4,393 213 79 4,685
------- ----- ---- ---------
Income (loss) from operations....................... (4,268) (207) (79) (4,554)
Other income (expense).............................. (486) (64) 53(b) (497)
------- ----- ---- ---------
Net income (loss)................................... (4,754) (271) (26) (5,051)
Dividends on preferred stock........................ (64) -- -- (64)
------- ----- ---- ---------
Net income (loss) applicable to common
shareholders...................................... $(4,818) $(271) $(26) $ (5,115)
======= ===== ==== =========
Basic and diluted net income (loss) per share
applicable to common shareholders................. $ (1.64)
=========
Weighted and average common shares outstanding...... 3,112,424
=========
PRO FORMA ADJUSTMENTS:
(a) Amortization of goodwill recorded in the acquisition of the LanXtra business
for the month ended January 31, 1999.
(b) Reduction of interest expense to reflect the change in our capital
structure.
16
SELECTED FINANCIAL AND OTHER INFORMATION
The following table sets forth selected historical and pro forma financial
and operating information for cavion.com. The selected historical financial
information presents our predecessor from 1995 through January 31, 1999,
cavion.com from inception (August 18, 1998) through December 31, 1999, and pro
forma results of operations for the year ended December 31, 1999. We acquired
LanXtra on February 1, 1999; however, the pro forma financial information is
presented as if the acquisition occurred on January 1, 1999. The purchase method
of accounting was used to record our purchase of the LanXtra business and the
related assets acquired and liabilities assumed by us. This accounting method
reflects the assets acquired and the liabilities assumed at their estimated fair
market value, and resulted in the recording of intangible assets, including
goodwill. Goodwill represents the excess of purchase price over the net fair
market value of tangible and other assets acquired. This goodwill will be
amortized in future periods. The accompanying historical financial information
of LanXtra on and before January 31, 1999, is not comparable in all material
respects with our financial information subsequent to February 1, 1999, since
that financial information reports financial position and results of operations
on a different basis of accounting. Historical earnings per share information
for LanXtra has been omitted because it is not meaningful given the significant
differences in our capital structure compared to LanXtra's capital structure.
The business that we purchased from LanXtra was started by LanXtra during
1997. In December 1997, LanXtra sold all operations that were not related to the
business later acquired by us, and the results of the operations that were sold
have been reported as discontinued operations. Accordingly, the accompanying
financial information of our predecessor for the years ended December 31, 1995
and 1996 do not include the results of operations of the LanXtra business that
we acquired.
The selected historical financial information as of December 31, 1997, 1998,
and 1999, for the years then ended and for the one-month period ended
January 31, 1999 have been derived from the financial statements of cavion.com
and LanXtra included in this prospectus, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected historical financial
information as of and for the years ended December 31, 1995 and 1996 have been
derived from LanXtra's unaudited financial statements that are not included in
this prospectus. The selected historical and pro forma financial information is
qualified by reference to, and should be read in conjunction with, our financial
statements and the notes to the financial statements, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The pro forma statement of operations for 1999 reflects the acquisition of
LanXtra as if it had occurred on January 1, 1999. Pro forma earnings per share
are calculated as if the purchase was completed on January 1, 1999 and the
related 1,029,218 shares of common stock issued to acquire the LanXtra business
were issued on that date. The pro forma financial information for 1999 does not
represent what our results of operations would have been if the acquisition had
actually occurred on January 1, 1999, nor is it indicative of our future results
of operations.
17
PREDECESSOR CAVION.COM
------------------------------------------------------- ---------------------------
FROM PRO FORMA
FOR THE INCEPTION ------------
FOR THE YEAR ENDED DECEMBER 31, MONTH (AUGUST 18, FOR THE FOR THE
ENDED 1998) TO YEAR ENDED YEAR ENDED
----------------------------------------- JANUARY 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1999 1998 1999 1999
-------- -------- -------- -------- ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS
DATA:
Revenue:
Network access and
connectivity........... $ -- $ -- $ 24 $ 148 $ 24 $ -- $ 448 $ 472
Installation services and
software licensing..... -- -- -- 67 14 -- 170 184
---- ----- ------- ------- ------- ---------- ---------- ----------
Total revenue.......... -- -- 24 215 38 -- 618 656
---- ----- ------- ------- ------- ---------- ---------- ----------
Cost of revenue:
Network access and
connectivity........... -- -- 51 137 16 -- 329 345
Installation services and
software licensing..... -- -- -- 85 16 -- 164 180
---- ----- ------- ------- ------- ---------- ---------- ----------
Total cost of
revenue.............. -- -- 51 222 32 -- 493 525
---- ----- ------- ------- ------- ---------- ---------- ----------
Gross profit (loss).... -- -- (27) (7) 6 -- 125 131
---- ----- ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administration......... -- -- 673 869 182 7 2,933 3,115
Research and
development............ -- -- 364 249 31 -- 586 617
Amortization of goodwill
and other intangible
assets................. -- -- -- -- -- -- 874 953
---- ----- ------- ------- ------- ---------- ---------- ----------
Total operating
expenses............. -- -- 1,037 1,118 213 7 4,393 4,685
---- ----- ------- ------- ------- ---------- ---------- ----------
Income (loss) from
operations............... -- -- (1,064) (1,125) (207) (7) (4,268) (4,554)
Interest income (expense),
net...................... -- -- (809) (998) (64) (29) (462) (473)
Other income (expense)..... -- -- 38 152 -- -- (24) (24)
---- ----- ------- ------- ------- ---------- ---------- ----------
Income (loss) from
continuing operations.... -- -- (1,835) (1,971) (271) (36) (4,754) (5,051)
Discontinued operations.... (57) (481) 1,072 -- -- -- -- --
---- ----- ------- ------- ------- ---------- ---------- ----------
Net income (loss).......... $(57) $(481) $ (763) $(1,971) $ (271) (36) (4,754) (5,051)
==== ===== ======= ======= =======
Dividends on preferred
stock(1)................. -- (64) (64)
---------- ---------- ----------
Net income (loss)
applicable to common
shareholders............. $ (36) $ (4,818) $ (5,115)
========== ========== ==========
Basic and diluted net
income (loss) per share
applicable to common
shareholders............. $ (0.02) $ (1.56) $ (1.64)
========== ========== ==========
Weighted average common
shares outstanding....... 2,078,170 3,081,156 3,112,424
========== ========== ==========
Pro forma EBITDA(2)........ $ (3,566)
OTHER OPERATING DATA (at
end of period):
Customers under
contract............... 26 100
Customers connected...... 16 56
DECEMBER 31, DECEMBER 31,
----------------------------------------- JANUARY 31, ---------------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- ------------ ------------ ------------
BALANCE SHEET DATA:
Cash.................... $ (8) $ 9 $ 350 $ 52 $ -- $ 20 $ 4,347
Working capital......... (31) (666) (578) (1,762) (2,014) (14) 2,542
Total assets............ 258 777 768 456 428 2,274 9,603
Long-term debt, net of
current maturities.... 80 -- 20 33 33 253 386
Putable common stock.... -- 261 838 1,650 1,700 -- 201
Total shareholders'
equity................ (78) (770) (1,133) (3,103) (3,375) 1,988 6,972
- ------------------------------
(1) All preferred stock was converted to common stock effective October 29,
1999.
(2) Pro forma earnings before interest, taxes, depreciation and amortization, or
pro forma EBITDA, represents the sum of net loss before income taxes plus
net interest expense, depreciation and amortization. Pro forma EBITDA is
presented here to provide additional information about our ability to meet
our obligations. Pro forma EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
as an alternative either to net loss as an indicator of our operating
performance, or to cash flow as a measure of our liquidity.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH THE FINANCIAL STATEMENTS AND RELATED
NOTES INCLUDED IN ANOTHER PART OF THIS PROSPECTUS. THOSE FINANCIAL STATEMENTS
AND NOTES SHOULD BE CONSIDERED TO BE INCORPORATED INTO THIS SECTION. THIS
DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS RELATED TO SUCH MATTERS AS OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY AND FINANCING PLANS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS THAT
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DETAILED IN "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
cavion.com offers a secure private network and Internet banking products and
services to credit unions that connect them to other credit unions, their
business partners and members. cavion.com builds and maintains a suite of
network products and services for the credit union industry that currently
includes:
- a secure private network, CUINET-Registered Trademark-, that connects
credit unions with their business partners, enabling business-to-business
movement of data and e-commerce;
- secure Internet banking products, bill payment and secure automated loan
application software with access to third party decision products;
- secure Internet access services for credit unions; and
- e-commerce services for credit union members.
The following discussion of our results of operations includes the results
of our predecessor, LanXtra, Inc., for periods prior to February 1, 1999.
LanXtra was incorporated in June 1992 and was originally engaged in the business
of integrating computer networks and communications technologies for large
business and government clients. In 1997, LanXtra created a software development
division to develop network-based financial services software for credit unions.
In December 1997, LanXtra sold all of its assets except its credit union
financial services business, which we acquired in February 1999. We were
originally incorporated under the name Network Acquisitions, Inc. in August 1998
for the purpose of acquiring the assets and business operations of LanXtra. This
acquisition was completed on February 1, 1999. At that time, we changed our name
to Cavion Technologies, Inc. and began to conduct some of our business under the
trade name cavion.com.
Prior to our acquisition of LanXtra, we did not conduct any business
operations except preparation for the acquisition, including providing bridge
funding to LanXtra with funds raised through a private placement of promissory
notes and related warrants.
The following discussion relates to LanXtra's historical results of
operations since January 1, 1998, the date on which LanXtra began to focus
solely on the business later acquired by us. In the following discussion, "we"
refers both to the business we purchased from LanXtra on February 1, 1999, and
to cavion.com since its inception (referred to below as the combined results).
We have not included a comparison of 1998 operations to those conducted in 1997
since our current business was begun in January 1998 and therefore any such
comparison would not be meaningful.
Our revenues have been historically derived from recurring monthly
connectivity fees, installation services and software licensing fees associated
with our secure Internet access services and secure Internet financial products.
Beginning in January 2000, we changed our pricing policy and eliminated
implementation fees for access to CUINET-Registered Trademark- and our Internet
banking products. Currently, credit unions pay us a flat monthly fee based on
bandwidth requirements and the mix of products and services we provide to them.
In addition, we charge vendors connected to CUINET-Registered Trademark- a flat
monthly fee
19
to be connected to CUINET-Registered Trademark- in addition to charges based
upon the number of credit unions to which such vendors provide services. We
market a connection to CUINET-Registered Trademark- and our Internet banking
products as a packaged solution to credit unions.
In addition, we offer bill payment services, secure forms servers, secure
Internet access and an online loan application, CUILOAN-TM-, with access to
third party approval products. Included in the monthly fee is the cost of
hardware, software installation, set up, maintenance, technical assistance for
our services, and any hardware or software upgrades. We do not charge end user
transaction fees or per user fees. Customers pay for a full year of services in
advance when they initially connect with us and on each anniversary date
thereafter. This payment is reflected on the balance sheet as an increase in
deferred revenue offset by an increase in cash. As revenues are deemed earned,
deferred revenues are amortized into revenue.
We have recently developed and are beginning to market our e-commerce
product, Member Emporium-TM-, which will allow credit unions to offer their
members products and services at discounted prices. In the future, we expect to
earn a substantial portion of our revenue from commissions and fees for
transactions conducted over Member Emporium-TM-.
As of March 31, 2000, we had 130 customers under contract to connect to
CUINET-Registered Trademark-, which included 119 credit unions and 11 business
critical vendors. Of the 119 credit unions that contracted to connect to
CUINET-Registered Trademark-, 57 had also subscribed to our Internet banking
products. We believe that our new pricing policy, combined with our new strategy
of marketing a CUINET-Registered Trademark- connection and Internet banking
products as a packaged solution will increase the percentage of our credit union
customers who also subscribe for Internet banking products. In the first quarter
of 2000, 66% of credit unions that contracted to connect to
CUINET-Registered Trademark- also subscribed to our Internet banking products,
as compared to 42% through December 31, 1999.
Our cost of revenue consists of network access and connectivity expenses and
installation services. Network access and connectivity expenses include our
monthly connection costs paid to Convergent and other telecommunications
providers, hardware costs, as well as the ongoing personnel and system
maintenance costs associated with our data center. Our installation services
expenses consist of the initial equipment and personnel costs required to
implement our secure private network and Internet banking products.
Our operating expenses consist of selling, general and administrative
expenses, research and development expenses, and amortization of goodwill and
other intangible assets. Selling, general and administrative expenses include
marketing expenses, sales commissions, employee compensation and benefits, and
occupancy and general office expenses incurred in the ordinary course of
business. Research and development expenses consist of programmers and engineers
allocated salaries applicable to the amount of time they devoted to development
activities. Amortization of goodwill and other intangible assets is related to
the purchase of LanXtra.
RESULTS OF OPERATIONS FOR CAVION.COM AND THE PREDECESSOR
The following table sets forth the results of operations of our predecessor
for the years ended December 31, 1997 and 1998 and for the one month ended
January 31, 1999, our results of operations for the period from inception
(August 18, 1998) to December 31, 1998 and for the year ended December 31, 1999.
Combined operating information for the years ended December 31, 1998 and 1999
has been presented to facilitate comparison between these periods.
20
CAVION.COM
-----------------------
FOR THE
PREDECESSOR PERIOD COMBINED
------------------------------- FROM ---------------------
INCEPTION
FOR THE FOR THE (AUGUST FOR THE
YEAR ENDED MONTH 18, FOR THE YEAR ENDED
DECEMBER 31, ENDED 1998) TO YEAR ENDED DECEMBER 31,
------------------- JANUARY 31, DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1999 1998 1999 1998 1999
-------- -------- --------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Revenue:
Network access and
connectivity............ $ 24 $ 148 $ 24 $ -- $ 448 $ 148 $ 472
Installation services and
software licensing...... -- 67 14 -- 170 67 184
------- ------- ----- ---- ------- ------ ------
Total revenue........... 24 215 38 -- 618 215 656
------- ------- ----- ---- ------- ------ ------
Cost of revenue:
Network access and
connectivity............ 51 137 16 -- 329 137 345
Installation services and
software licensing...... -- 85 16 -- 164 85 180
------- ------- ----- ---- ------- ------ ------
Total cost of revenue... 51 222 32 -- 493 222 525
------- ------- ----- ---- ------- ------ ------
Gross profit (loss)..... (27) (7) 6 -- 125 (7) 131
------- ------- ----- ---- ------- ------ ------
Operating expenses:
Selling, general and
administrative.......... 673 869 182 7 2,933 876 3,115
Research and
development............. 364 249 31 -- 586 249 617
Amortization of goodwill
and other intangible
assets.................. -- -- -- -- 874 -- 874
------- ------- ----- ---- ------- ------ ------
Total operating
expenses.............. 1,037 1,118 213 7 4,393 1,125 4,606
------- ------- ----- ---- ------- ------ ------
Income (loss) from
operations................ (1,064) (1,125) (207) (7) (4,268) $1,132 $4,475
====== ======
Interest income (expense),
net....................... (809) (998) (64) (29) (462)
Other income (expense)...... 38 152 -- -- (24)
------- ------- ----- ---- -------
Income (loss) from
continuing operations..... (1,835) (1,971) (271) (36) (4,754)
Discontinued operations..... 1,072 -- -- -- --
------- ------- ----- ---- -------
Net income (loss)........... $ (763) $(1,971) $(271) $(36) $(4,754)
======= ======= ===== ==== =======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 (COMBINED
CAVION.COM AND LANXTRA)
REVENUE
Total revenue increased approximately $441,000 or 205% from approximately
$215,000 for 1998 to approximately $656,000 for 1999. This increase consisted of
an increase of approximately $324,000 in network access and connectivity revenue
and an increase of approximately $117,000 for installation services and software
licensing revenue.
NETWORK ACCESS AND CONNECTIVITY. Network access and connectivity revenue
increased approximately $324,000 or 219% from approximately $148,000 for 1998 to
approximately $472,000 for 1999. This
21
increase was due to the increase in the number of customers connected to
CUINET-Registered Trademark- from 16 as of December 31, 1998 to 56 as of
December 31, 1999.
INSTALLATION SERVICES AND SOFTWARE LICENSING. Installation services and
software licensing revenue increased approximately $117,000 or 175% from
approximately $67,000 for 1998 to approximately $184,000 for 1999. This increase
was due to the increase in the number of customers connected to
CUINET-Registered Trademark- from 16 as of December 31, 1998 to 56 as of
December 31, 1999. As a result of the change in the way we sell our products, we
expect this category of revenue to decrease significantly as a percentage of
total revenue.
COST OF REVENUE
Total costs of revenue increased approximately $303,000 or 136% from
approximately $222,000 for 1998 to approximately $525,000 for 1999. This
increase consisted of an increase of approximately $208,000 in costs related to
network access and connectivity revenue and an increase of approximately $95,000
for costs related to installation services and software licensing. Total cost of
revenue as a percentage of total revenue decreased from 103% in 1998 to 80% in
1999.
COST OF NETWORK ACCESS AND CONNECTIVITY. Costs related to network access
and connectivity revenue increased approximately $208,000 or 152% from
approximately $137,000 for 1998 to approximately $345,000 for 1999. This
increase was due to an increase in the number of customers connected to
CUINET-Registered Trademark-, and related increased telecommunications charges,
personnel and network maintenance and data center expenses. This increase was
somewhat offset by the reduction in prices we were charged for installation
services by telecommunications providers. Cost of network access and
connectivity as a percentage of related revenue decreased from 93% in 1998 to
73% in 1999.
COST OF INSTALLATION SERVICES AND SOFTWARE LICENSING. Costs related to
installation services revenue increased approximately $95,000 or 112% from
approximately $85,000 for 1998 to approximately $180,000 for 1999. This increase
was due to an increase in the number of customers connected to
CUINET-Registered Trademark-, and related increases in personnel and equipment
costs. Cost of installation services and software licensing as a percentage of
related revenue decreased from 127% in 1998 to 98% in 1999.
OPERATING EXPENSES
Total operating expenses increased approximately $3.5 million or 309% from
approximately $1.1 million for 1998 to approximately $4.6 million for 1999. This
increase consisted of an increase of approximately $2.2 million in selling,
general and administrative expenses, $368,000 in research and development
expenses, and $874,000 of amortization of goodwill and other intangible assets.
Total operating expenses as a percentage of total revenue increased from 523% in
1998 to 702% in 1999. This increase was primarily due to the amortization of
goodwill from the LanXtra acquisition, increased personnel and occupancy costs
to support our recent growth and increased commissions paid to sales personnel.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased approximately $2.2 million or 256% from $876,000 for 1998 to
$3.1 million for 1999. This increase was primarily due to increased personnel,
increased occupancy costs for additional sales offices, and increased
commissions paid to sales personnel. We anticipate that our salaries and
commissions will increase as we hire additional personnel to handle the expected
growth of our business. We also expect increased occupancy expenses and
corporate infrastructure costs as we grow. Selling, general and administrative
expenses increased as a percentage of total revenue from 407% in 1998 to 475% in
1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
approximately $368,000 or 148% from $249,000 for 1998 to $617,000 for 1999. This
increase was primarily due to increased personnel devoted to development
activities. We anticipate that our salaries and commissions will
22
increase as we hire additional personnel to handle the expected growth of our
business. Research and development expenses decreased as a percentage of total
revenue from 116% in 1998 to 94% in 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and other intangible assets increased approximately $874,000 from $0 in
1998 due to the February 1, 1999 acquisition of LanXtra, and the related
goodwill and other intangible assets.
INTEREST INCOME AND EXPENSE
cavion.com's interest expense totaled approximately $462,000 for 1999,
compared to approximately $29,000 for 1998. The increase is due to additional
borrowings during 1999 prior to our initial public offering and obligations
assumed from LanXtra, as well as to the recording of a full year of interest on
borrowings in 1998. We expect that interest expense related to borrowings will
decrease in 2000, as we have repaid substantial portions of our debt, however
interest expense related to capital leases will increase as we expand our
network infrastructure and customer base.
cavion.com's interest income was approximately $30,000 in 1999 and was
derived from interest earned on short-term cash investments.
DIVIDENDS ON PREFERRED STOCK
cavion.com's dividends on preferred stock totaled approximately $64,000 for
1999, reflecting dividends payable on cavion.com's Series A preferred stock,
which was converted to common stock on November 3, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through cash flow from operations,
net proceeds from the public and private sale of equity and debt securities, and
through debt which has subsequently been repaid. On December 31, 1999, we had
approximately $4.3 million in cash and cash equivalents.
cavion.com's operating activities used cash of approximately $13,000 in 1998
and approximately $3.3 million in 1999. Cash used by operating activities in
each of these periods primarily resulted from our net losses, which were
partially offset by depreciation and amortization, accretion of debt discount
and putable stock, loss on disposal of assets, and by increases in accrued
liabilities and deferred revenue.
cavion.com's investing activities used cash of approximately $335,000 in
1998, and generated approximately $79,000 in 1999, which was the net effect of
approximately $207,000 for the purchase of new equipment and receiving
approximately $286,000 from the sale of network equipment to Convergent
Communications Services, Inc.
cavion.com's financing activities generated cash of approximately $368,000
and $7.6 million in 1998 and 1999, respectively. The cash generated by financing
activities during 1998 and 1999 resulted primarily from debt financing and the
sale of equity, which was offset somewhat in 1999 by the repayment of debt.
We received net proceeds of $470,000 from the private placement of 15%
secured notes that began in October 1998 and ended in February 1999. The notes
are due in October 2000 and are secured by substantially all of our assets. The
funds were used to provide bridge funding to LanXtra in anticipation of our
acquisition of LanXtra's assets, which occurred in February 1999. We intend to
repay these notes with a portion of the proceeds of this offering.
In March and April 1999, we received net proceeds of approximately $1.8
million from the private placement of 700,000 shares of our preferred stock.
These shares were converted into 700,000 shares of common stock on November 3,
1999.
23
On August 31, 1999, we received net proceeds of $273,000 from the private
placement of 14% notes, which included warrants to purchase 30,000 shares of our
common stock at an exercise price of $6.50 per share. The notes were repaid on
November 5, 1999.
In November 1999, we received net proceeds of approximately $6.7 million in
our initial public offering of 1,290,500 shares of our common stock. The net
proceeds were used primarily to pay off debt, purchase equipment, for working
capital and to continue the expansion of our secure private network.
On February 17, 2000, we received net proceeds of $2.2 million through a
private placement to two investors of 205,000 shares of our common stock.
We currently lease all of the equipment in our data center. We have a lease
line from Data Sales Company which enable us to lease up to $500,000 of computer
hardware. Interest on the outstanding balance accrues at the rate of 10%
annually. As of March 31, 2000 a total of $164,283 was outstanding on this line.
In the future, we expect to incur substantial costs in connection with
expanding our telecommunications infrastructure, establishing a sales presence
in key strategic markets, and developing new products. We also expect to incur
increased marketing costs and general and administrative expenses in connection
with the growth of our secure network for the credit union industry.
Management expects that we will continue to operate at a loss as we 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.
Management believes that we have sufficient capital to fund our operations
through the end of the year 2000. We plan to use most of the proceeds from this
offering to fund the substantial costs that will be incurred with our expansion,
including the development and promotion of Member Emporium-TM-, our e-commerce
solution.
INFLATION
Although our operations are influenced by general economic conditions, we do
not believe that inflation had a material effect on the results of our
operations during the fiscal year ended December 31, 1999, nor do we expect that
inflation will have a material effect on the results of our future operations.
RECENT ACCOUNTING GUIDELINES
During December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. SAB 101 clarifies basic criteria for when revenues are taken into
account for purposes of a company's financial statements. SAB 101 is effective
for the quarter ended June 30, 2000. We are currently assessing the implications
of adopting SAB 101. In the period of adoption, the cumulative impact will be
reported as a change in accounting principle as dictated by SAB 101.
24
BUSINESS
OVERVIEW
We are a leading provider of secure private network connectivity and
Internet solutions that connect credit unions to their business partners and
members. Through CUINET-Registered Trademark- (Credit Union INTERACTIVE
Network), our secure private communications network, individual credit unions
can offer Internet banking products and e-commerce services to their members via
the Internet and they can engage in business-to-business communications and
e-commerce with other credit unions, credit union leagues, trade associations,
corporate credit unions and third party vendors. We also offer secure Internet
access for credit unions' personnel with multiple layers of security and
dedicated connections designed to satisfy credit unions' need for confidential
communications and secure transaction processing through one digital connection
to our private network. As of March 31, 2000, we had contractual arrangements to
connect 130 entities to CUINET-Registered Trademark-, 92 of which had been
connected.
Our Internet banking products provide a cost-effective, outsourced, secure
and scalable solution that enables credit unions to offer their members a wide
array of financial products and services over the Internet. Our product offering
includes account management, funds transfer, bill payment, online loan
application with access to third party approval products, and share draft
imaging services over a secure Internet connection. These products and services
are branded with the credit union's own name and logo and other distinctive
branding characteristics. This branded solution enables credit unions to provide
their members with the convenience of banking on the Internet without losing the
personal relationship and service associated with the credit union. In addition,
our Internet banking products make credit unions more accessible to their
members without the expense of building additional facilities.
Through our recently introduced e-commerce solution, Member Emporium-TM-, we
identify, develop and implement e-commerce relationships with third party
merchants and suppliers and, in turn, offer their products and services to
credit union members. Member Emporium-TM- is designed to enable a credit union
to provide its members with access to products and services such as mortgage
lending, insurance, online stock trading, tax preparation, retail Internet
access services and retail merchandise at a discount to regular retail or
Internet-based prices. Member Emporium-TM- is co-branded with each individual
credit union's own name and logo. We anticipate that creating such e-commerce
opportunities for credit union members will increase lending opportunities for
credit unions, generate significant transaction fees and commissions for us and
increase member retention for the credit union.
We currently earn the majority of our revenue from recurring flat monthly
fees for a connection to CUINET-Registered Trademark- and for our Internet
banking products and ancillary services. We also generate monthly recurring
revenue from third party vendors for providing them with a connection to
CUINET-Registered Trademark- and additional fees based upon the number of credit
unions to which such vendors provide services. We do not charge our credit union
customers software licensing, implementation or per user fees. In the future, we
expect to earn a substantial portion of our revenue from commissions and fees on
transactions conducted over Member Emporium-TM-.
Our system is supported by our data center, which provides a secure hosting
environment for our Internet products and deploys them to customers connected to
our secure network. We expect to open two additional data centers in the third
quarter of 2000 to provide redundancy and additional capacity. Through our
network design and our relationship with data processing vendors, we are able to
interface our products and services with a credit union's existing core
transaction and data processing systems. To date, we have successfully
interfaced our products and services with eight different core processing
systems and two bill payment systems. Additionally, we have the capability of
building additional interfaces as necessary.
25
INDUSTRY OVERVIEW
THE INTERNET AND E-COMMERCE
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. For example, financial institutions are
rapidly adopting network communications to conduct electronic banking and
provide customers with access to their account information.
Due to these benefits, the Internet has emerged as the fastest growing
global communications and transactional medium in history. International Data
Corporation (IDC), a leading provider of research for the information technology
industry, estimates that the number of Internet users worldwide will increase
from approximately 230 million in 1999 to 602 million by 2003, a compound annual
growth rate of approximately 27%. In addition, Nielsen//Net Ratings estimates
that the number of people who had Internet access from home in the United States
in 1999 was 119 million, or approximately 50% of the U.S. population.
Both businesses and consumers are looking to the Internet to conduct
e-commerce. As a result, many companies have developed and are increasingly
developing websites that are interactive and transaction-enabled, allowing them
to provide a wide range of e-commerce capabilities. IDC estimates that revenue
from business-to-consumer e-commerce will increase from approximately
$40 billion in 1999 to more than $210 billion in 2003, a compound annual growth
rate of approximately 52%. IDC estimates that revenue from business-to-business
e-commerce will increase from approximately $97 billion in 1999 to more than
$1.4 trillion in 2003, a compound annual growth rate of approximately 96%.
THE CREDIT UNION INDUSTRY
A credit union is a non-profit, cooperative financial institution, owned and
controlled by its members, or customers, who use its services. Historically,
credit unions have been limited to serving specific populations. As such, credit
unions traditionally have not competed with each other but coexisted in a
cooperative spirit. For example, credit unions may engage in shared branching
whereby members of one credit union can conduct their business using another
credit union's facility.
Beginning in 1998, changes in applicable law resulting from the adoption of
the Credit Union Membership Access Act of 1998 have permitted federally
chartered credit unions to greatly expand the range of persons they can serve.
These changes also expanded the types of services federal credit unions can
provide to their members so that they are now generally the same as the retail
services offered by banks and savings and loans. As a result, credit unions can
now compete more effectively with banks and savings and loans.
According to information released by Callahan and Associates, a credit union
consulting firm, in December 1999, in the United States: (i) there are
approximately 10,800 credit unions with combined assets of over $418 billion;
and (ii) these 10,800 credit unions service approximately 77 million members.
Callahan's most recent database, released in December 1999, reports that
approximately 6,200 of these credit unions have assets of over $5 million. These
larger credit unions service approximately 73 million members and have combined
assets of approximately $409 billion.
According to the Credit Union National Association's 1998 National Member
Survey, a typical credit union member is 45 years old and has an average annual
household income of approximately $50,000. Approximately 72% of credit union
members are homeowners.
26
The credit union industry includes credit union leagues, trade associations
and corporate credit unions. Credit union leagues and trade associations are
non-profit organizations made up of credit unions and are supported through the
payment of their members' dues. Credit union leagues and trade associations act
as a common voice for their members in legislative and other matters, and may
also provide services to credit unions, such as processing of share drafts
(checks drawn on credit union accounts). A corporate credit union, which is
essentially a credit union for credit unions, is a non-profit organization that
provides liquidity services, loans, deposit accounts and investment services to
credit unions. Corporate credit unions can also provide other services,
including share draft processing services and bill pay settlement services for
online bill payment products.
THE INTERNET, PRIVATE NETWORKS AND CREDIT UNIONS
We believe financial institutions' customers are increasingly demanding
Internet banking, bill payment and online loan application services. IDC
estimates that approximately 8.1 million people were banking over the Internet
at the end of 1998 and projects that number will increase to approximately 39.8
million by 2003. The number of financial institutions offering Internet banking
is expected to increase from 1,150 in 1998 to 15,845 by 2003, according to IDC.
These competitive pressures are driving credit unions to offer Internet banking
products and services to their members. The emergence of the Internet has
provided credit unions with a new platform to offer their traditional services
to their members and the flexibility to market non-traditional products and
services, such as brokerage services, insurance policies and retail Internet
access, to those members.
While the Internet has developed into a medium that facilitates credit
unions' ability to communicate with and offer services to their members, the
Internet lacks the network security that is desired by credit unions to transfer
their members' financial data. Private networks provide a secure communications
medium that is faster and more efficient than the public Internet. We believe
credit unions will increasingly demand a high speed, secure private network for
transferring funds, clearing share drafts, transferring data, accessing vendors
and trade associations, and transferring members' financial information.
Communications of this nature require a secure private network that does not
have the risks associated with transferring members' data over the public
Internet.
Due to their traditionally smaller size and nonprofit status, most credit
unions do not have the technological infrastructure and in-house support staff
to develop and maintain a secure private network and an Internet banking
solution. We believe credit unions need a cost-effective, integrated and
outsourced solution that offers access to a secure private network and Internet
banking products and services. We also believe that many credit unions demand a
single source provider of connectivity and Internet banking services that is
fast, secure and scalable. In addition, the solution must provide the
flexibility to allow for new products and services.
OUR SOLUTION
We provide secure private network connectivity and Internet banking products
and services and solutions to credit unions. Through
CUINET-Registered Trademark-, we connect individual credit unions to their
business partners and members and enable them to engage in business-to-business
communications and e-commerce. Our cost-effective, secure and scalable solution
enables credit unions to offer their members a wide array of financial products
and services over the Internet. Through our Member Emporium-TM- product, we also
will enable credit union members to access products and services at significant
discounts from regular retail or Internet-based prices.
Our solution provides our customers and their members with the following
advantages:
- AFFORDABLE PRICING MODEL. We charge a flat monthly fee to connect a credit
union to our secure private network and for the use of our Internet
banking products and services. The amount of this monthly fee is based on
the credit union's transmission capacity, or bandwidth, requirement
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and the mix of services provided. We do not charge our credit union
customers any implementation, transaction or end user fees.
- PRIVATE CONNECTIVITY NETWORK. CUINET-Registered Trademark- is a secure,
private network that enables business critical data transfers and
communication between credit unions, credit union leagues, trade
associations, corporate credit unions and vendors.
- INTERNET BANKING SERVICES. We provide credit unions with a robust and
secure Internet banking product that enables their members to access
account and loan information, transfer funds between accounts, make loan
payments, view share draft images and download information into personal
money management software programs, such as Microsoft
Money-Registered Trademark- and Quicken-Registered Trademark-. We also
offer online bill payment and a loan application and approval product
through CUILOAN-TM-.
- BUSINESS-TO-BUSINESS TRANSACTIONS THROUGH
CUINET-REGISTERED TRADEMARK-. Through CUINET-Registered Trademark-, we
provide credit unions with a digital connection to each other, to their
business partners and to vendors. These vendors provide credit unions with
business critical services such as credit bureau reports and loan
approval, data archiving and share draft clearing.
- MEMBER EMPORIUM-TM-. We have recently introduced Member Emporium-TM-, a
network of e-commerce portals for credit union members. This product
aggregates credit union members into a demographically attractive audience
to which merchants can offer products and services such as home mortgages,
online brokerage services, retail Internet access, insurance, online
brokerage services and consumer goods at a discount to regular retail or
Internet-based prices.
- SECURE INTERNET ACCESS FOR CREDIT UNIONS. Through
CUINET-Registered Trademark- we are able to provide credit union personnel
with secure Internet access. Our ISP service provides multiple layers of
security to ensure that credit unions have confidential communications and
secure transactional processing with one connection. In addition, our ISP
service provides credit unions with e-mail and website hosting.
- SINGLE TURNKEY CONNECTIVITY SOLUTIONS. We provide all of the proprietary
software and the hardware necessary to operate our Internet banking system
and to connect to CUINET-Registered Trademark-. Credit unions that use our
solution do not need to develop in-house software, purchase or maintain
expensive equipment, contact or deal with telecommunication companies, or
hire a technical staff. In addition, we provide all software upgrades
internally at our data center.
- COMPATIBILITY WITH EXISTING CORE PROCESSING SYSTEMS. Both our Internet
banking system and CUINET-Registered Trademark- are designed to interface
with multiple core processing providers and data processing services. At
present, we have successfully installed Internet banking products and
services that interface with eight different core processing software and
data processing systems. Furthermore, we believe that we have the ability
to interface with additional core processing systems.
OUR STRATEGY
We believe that by combining our secure private network with our Internet
banking products, ancillary services and Member Emporium-TM-, we can become the
leading single source provider of connectivity and e-commerce solutions for the
credit union industry. Credit unions can utilize our system to create
relationships with new members, to enhance relationships with their existing
members, to connect with business partners and to conduct business critical
operations. To accomplish these goals, we intend to:
- LEVERAGE OUR EXISTING NETWORK. We intend to leverage our current position
as a leading provider of network connectivity services to credit unions to
connect additional credit unions to CUINET-Registered Trademark-.
CUINET-Registered Trademark-'s integrated network allows credit unions to
benefit from the connection to additional credit unions and business
critical partners, such as credit union leagues, trade
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associations, corporate credit unions and vendors. We plan to increase the
number of credit unions connected to CUINET-Registered Trademark- by
increasing our direct sales force and developing strategic relationships
with third party vendors to market our connectivity solution.
- CROSS SELL ADDITIONAL PRODUCTS AND SERVICES THROUGH
CUINET-REGISTERED TRADEMARK-. We intend to market our Internet banking
products, secure Internet access services, secure forms server,
CUILOAN-TM-, and Member Emporium-TM- applications to our existing
CUINET-Registered Trademark- credit union customer base. In addition, we
have recently begun to market our Internet banking product as a blended
solution with a connection to our CUINET-Registered Trademark- network.
- INCREASE BUSINESS-TO-BUSINESS E-COMMERCE ON
CUINET-REGISTERED TRADEMARK-. We intend to expand
CUINET-Registered Trademark- by increasing the number of vendors and other
business partners connected to CUINET-Registered Trademark-. As of
March 31, 2000, we had 11 such entities under contract to connect to
CUINET-Registered Trademark-. With the addition of providers of business
critical services to credit unions on CUINET-Registered Trademark-, we
increase the service available to our credit union customers. Through this
expansion, we can increase the number of connections to, and
business-to-business transactions conducted on, our network.
- PROMOTE MEMBER EMPORIUM-TM-. Through CUINET-Registered Trademark-, we have
access to 119 credit unions with approximately 2.5 million members. We
intend to encourage credit union members to visit the Member Emporium-TM-
website through advertising on credit union websites, and through e-mail,
statement inserts, direct mail and in-branch advertising. We intend to
attract additional merchants to advertise and sell their products by
offering them direct access to this aggregated potential customer base.
- DEVELOP NEW SERVICE OFFERINGS. We have a research and development staff
that is focused on expanding and enhancing our current products and
services. We plan to offer new and improved services to attract new credit
unions to CUINET-Registered Trademark- as well as provide credit unions
with additional products and services to offer their members.
PRODUCTS AND SERVICES
We offer credit unions, their business partners and members a variety of
products and services, including secure network connectivity, Internet banking
products, business-to-business communication, secure Internet access and our
e-commerce solution, Member Emporium-TM-. Our products and services consist of
the following:
- Our secure private network, CUINET-Registered Trademark-, connects credit
unions, credit union leagues, trade associations, corporate credit unions
and vendors. CUINET-Registered Trademark- facilitates business-to-business
communications and e-commerce, and enables credit unions to offer products
and services to their members over the Internet. For example, we recently
entered into an agreement with Mission Critical Recovery, Inc. to offer
secure electronic storage of critical data files and data disaster
recovery services to credit unions. Data is transferred to Mission
Critical Recovery from credit unions on CUINET-Registered Trademark-.
- Our secure Internet banking products enable credit union members to view
their account and loan balances, obtain information on particular share
drafts, transfer funds between accounts, pay bills online and apply for
and obtain approval of loans over the Internet.
- Our recently introduced e-commerce product, Member Emporium-TM-, will
enable credit unions to offer products and services to their members, such
as mortgage loan services, insurance policies, retail Internet access,
co-branded portals, personal start pages, online shopping and on-line
brokerage services. Member Emporium-TM- also provides credit unions and
vendors with website promotion and traffic control tools, such as ad
serving, search engine placement, e-mail and visitor analysis.
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CUINET-REGISTERED TRADEMARK-
CUINET-Registered Trademark- is a fully-managed, private, frame relay
communications network that connects credit unions with other credit unions,
credit union leagues, trade associations, corporate credit unions and third
party vendors. These entities can use CUINET-Registered Trademark- to transfer
business critical data without the risks associated with transferring data over
the public Internet.
Through CUINET-Registered Trademark-, we provide secure ISP services to
credit union personnel. Our secure ISP access provides credit unions with
multiple layers of security features and dedicated connections to ensure
confidential communications and secure transactional processing with one
connection. We also provide web hosting and e-mail functionality for credit
union customers utilizing our secure ISP services.
Vendors use CUINET-Registered Trademark- to communicate and transact
business with credit unions. Among the services that are currently provided by
vendors on CUINET-Registered Trademark- are:
- SHARE DRAFT CLEARING SERVICES. Credit unions settle their share drafts
through corporate credit unions and credit union leagues.
- SHARED BRANCHING. Shared branching networks are groups of credit unions
that have agreed to allow their members to do business at each other's
locations and at shared locations.
- DATA ARCHIVING. Through Mission Critical Recovery, credit unions can
obtain secure electronic storage of critical data files and data disaster
recovery services.
- CREDIT BUREAU SERVICES. Through Factual Data Corporation, a vendor of
credit bureau reports, credit unions can obtain a credit bureau report on
a prospective borrower from any of the three major credit bureaus.
- WEBSITE DESIGN. Through CyberBranch Corporation, a credit union website
design firm, credit unions can outsource the development and deployment of
their websites.
In addition to the products we currently offer, we are targeting numerous
vendors, including statement processing and printing companies to connect to
CUINET-Registered Trademark-.
CUINET-Registered Trademark- uses frame relay phone lines to each credit
union and vendor connected to the network, limiting access to the network and
maintaining constant control of the information being transmitted. When a credit
union customer provides its members with Internet access to their personal
account information and financial services, the concern with security becomes
more acute. Accordingly, the Internet side of our network uses multiple security
safeguards--firewalls, data encryption, digital certificates and the
JAVA-Registered Trademark- programming language.
Firewalls act as the gatekeeper between the Internet and the private
network. They are designed to allow external access to networks only from
authorized sources, and can also block data packets from specified addresses
from entering or exiting the network. Our network uses industry standard
firewall products.
Our network also uses data encryption whenever data is exchanged with the
Internet for Internet banking and bill payment services or for our share draft
repository system. Encryption is the process of coding data so that only
specified users can access the information. In this way, personal information
can be sent across public networks without compromising its confidentiality.
Digital certificates verify the identity of the web server being used and that
the owner of that server is authorized to allow encryption. We use digital
certificates provided by an independent certificate authority on all of our
secure web servers.
As an added layer of security for the user, we use the
JAVA-Registered Trademark- programming language to control Internet banking and
bill pay sessions. The JAVA-Registered Trademark- "applets" used in these
sessions run only within the user's Internet browser, and are not allowed to
access the user's hard drive without specific authorization. Because the
programmer of the applet cannot read or write to memory locations in the user's
computer, this technology minimizes the opportunity to introduce destructive
coding, such as a virus, to the user's computer.
30
INTERNET BANKING PRODUCTS AND SERVICES
Our Internet banking products enable credit union members to access the
following services:
- ACCOUNT INFORMATION. Credit union members can view current account and
loan information as well as historical information.
- FUNDS TRANSFER. Credit union members can transfer funds among accounts and
make electronic loan payments.
- SHARE DRAFT SERVICES. Credit union members can obtain information about
the status of a particular share draft, view images of their share drafts,
request stop payment of a share draft and reorder share drafts online.
- COMPATIBILITY WITH PERSONAL MONEY MANAGEMENT PROGRAMS. Credit union
members can download account information for use with their personal money
management programs, such as Microsoft Money-Registered Trademark- and
Quicken-Registered Trademark-.
- BILL PAYMENT. Credit union members can pay their bills electronically 24
hours a day, seven days a week, can customize their payee list, make
recurring and non-recurring payments, obtain payment status and history
and provide for payments to be made in the future.
- LOAN APPLICATION AND APPROVAL DECISIONS. Through our proprietary software
CUILOAN-TM-, credit union members can apply for loans and obtain approval
decisions online through our third party vendor, Experian Credit Bureau.
- ACCESS VIA WEB-ENABLED CELLULAR DEVICES. Our Internet banking products and
services are accessible through the use of web-enabled cellular devices,
such as cell phones and personal digital assistants.
MEMBER EMPORIUM-TM-
We have developed and are beginning to offer our integrated network of
e-commerce portals called Member Emporium-TM-. Member Emporium-TM- is designed
to enable a credit union to provide its members with access to a variety of
products and services, typically at a discount from regular retail or
Internet-based prices. Through Member Emporium-TM-, demand from credit unions'
members can be aggregated to achieve higher discounts or rebates than individual
credit unions could achieve on their own. Through preferred merchants, Member
Emporium-TM- will offer financial and other services that are complementary to
those provided by credit unions, such as mortgage lending, insurance, online
brokerage and retail Internet access services. Member Emporium-TM- will also
offer consumer merchandise through shopping portals connected to over 130
merchants and vendors. Each credit union selects the merchants and portals that
link to or appear on the credit unions' website, Internet banking website and
co-branded personal start page portal. In addition, all lending opportunities
generated from the purchase of products and services are referred back to the
sponsoring credit union.
All portals are co-branded by the sponsoring credit union and Member
Emporium-TM- and contain no advertisements featuring products and services that
are competitive with those offered by credit unions. We anticipate that Member
Emporium-TM- will increase a credit union's presence on the Internet by
attracting its members to the products and services advertised on the credit
union's website using ad banners, e-mail, and search engine placements. Credit
union members can access Member Emporium-TM- through their credit union's
website, through their credit union co-branded personal start page, through the
Member Emporium-TM- preferred merchant websites, and through Member Emporium-TM-
vendor portals.
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Our Member Emporium-TM- solution includes the following features:
- PREFERRED MERCHANTS. Preferred merchants are vendors of Internet and
financial services that complement those offered by credit unions, such as
mortgage lending, insurance, online stock trading, online tax preparation
and retail Internet access. Preferred merchants' products and services
receive greater exposure through advertising on credit union websites and
on the co-branded personal start page portal of credit union members. We
receive advertising revenue as well as commissions and fees from these
merchants when their products and services are purchased by credit union
members. All advertising on the preferred merchant sites is controlled by
Member Emporium-TM-.
- SHOPPING PORTALS. Shopping portals will provide credit union members with
access to non-financial products and services offered by over 130
merchants. Through Member Emporium-TM-, demand from credit unions' members
can be aggregated to achieve higher discounts or rebates than individual
credit unions could achieve on their own. In addition, these shopping
portals will offer integrated ad serving and search engine capabilities
that will provide credit unions with increased advertising and promotional
opportunities. We will receive advertising revenue as well as commissions
and fees when credit union members purchase products and services through
the shopping portals.
- MEMBER EMPORIUM-TM- WEB TOOLS. Member Emporium-TM- provides tools designed
to provide credit unions and merchants with the ability to manage
advertising, e-mail, marketing and web promotions, and traffic on their
websites. We receive fees for providing these services. These capabilities
are available for use on the credit union's website and Internet banking
programs as well as on the Member Emporium-TM- portals.
SYSTEMS ARCHITECTURE
CUINET-REGISTERED TRADEMARK-
CUINET-Registered Trademark- is our secure private frame relay network used
to connect credit unions to each other and to their business partners. It is not
a virtual private network (VPN) transmitted over the Internet but a truly
private network which ensures reliable and high speed connectivity and enhanced
security for our customers' communications and data transmission. Credit unions
can use our private network to process shared branch activity, move share draft
information, interact with corporate credit unions, communicate with credit
bureaus, and engage in other business-to-business activity.
Our existing data center houses firewalls, web servers, Internet banking
servers, domain name servers, database servers, gateway servers, routers and a
variety of other interrelated telecommunications equipment to serve our private
network. We also co-locate servers for credit unions or credit union vendors in
our existing data center and will do the same in the two new data centers
planned to open in the third quarter of 2000. Once they are operational, these
two new data centers will house similar equipment which will load balance
network traffic and provide disaster recovery by virtue of their redundant
connections to both the Internet and CUINET-Registered Trademark-. Excess
bandwidth will be available to each data center to enable it to carry the
additional traffic when needed.
Each credit union has its own dedicated server or servers in our data center
based on processing demand. This arrangement allows a high degree of control
over the performance of an individual credit union's connection. One credit
union's processing demand is independent of all other credit unions and hardware
overloads or failures only impact the credit union being served. Another
advantage to having discrete hardware dedicated to individual credit unions is
that upgrades are done at the credit union level, and we do not have to upgrade
large and expensive computer systems to accommodate the growth of a few credit
unions.
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INTERNET BANKING
For our Internet banking products, which connect our credit union customers
with their members through an Internet connection, our computer systems utilize
a "thin client" architecture. Thin client architecture is a system in which
applications reside in an off-site server rather than in the user's computer.
The most significant advantage of thin client architecture is the added security
provided by isolating the sensitive data network from computer viruses and other
potential disruptions or intrusions. In a thin client environment, the security
on the host server governs and limits the thin client's access. After the online
connection is terminated, the applications are erased from the user's computer
memory.
Thin client architecture also reduces the risk of system interruptions and
other maintenance problems because there is less ability for thin client users
to affect system settings which are critical to the business or workflow
operation. Thin client architecture also enables us to maintain control over our
proprietary software since we do not provide permanent copies to our users, and
therefore can make upgrades of our software immediately and efficiently without
having to distribute individual copies. Thin client architecture also minimizes
our credit union customers' need to upgrade their hardware constantly in order
to keep up with the technology required to store and maintain our application
software. This results in cost savings to our credit unions and minimizes the
burdens associated with administering hardware and software upgrades.
Because our systems use the JAVA-Registered Trademark- programming language,
which is platform independent, it allows many kinds of systems to communicate
with each other and share applications. Our transactional banking products also
provide scalability, distributive and centralized implementation, and permit
access using Web-enabled cellular devices.
In our case, the credit union or credit union member logs onto our server,
and can then access and run the applications remotely to process data. Through
JAVA-Registered Trademark- applets, we enable the user's computer to remove
processing load from our server with regard to formatting numbers and graphical
presentation. Unlike conventional servers, which are burdened by numerous
processing cycles needed to format data, a distributed environment frees our
server to handle more requests.
STRATEGIC ALLIANCES
On October 22, 1999, we entered into a five-year, nonexclusive agreement
with Convergent Communications Services, Inc. (Nasdaq: CONV), to establish and
maintain connectivity between our network and our customers. When we sign a
contract with a new institution, Convergent establishes the circuit and
implements the institution's connectivity to CUINET-Registered Trademark-. As
noted above, our architecture is designed for load balancing, redundancy and
disaster recovery, allowing us, with Convergent's assistance and the cooperation
of the telecommunications provider, to pick up traffic temporarily from a
nonfunctional data center.
In connection with our business-to-business services, we entered into a
contract with CyberBranch Corporation, a credit union-owned content and design
firm and loan decision engine, under which CyberBranch will purchase and license
for resale our Internet banking products, bill payment, and kiosk enabling
software at a discount, which they will then offer to their credit union
customers. We refer our credit union clients and prospects to CyberBranch for
website design. CyberBranch will refer its credit union clients and future
prospects to us for connectivity and secure Internet products and services.
We recently entered into a non-exclusive five-year agreement with Mission
Critical Recovery, Inc. under which Mission Critical will use
CUINET-Registered Trademark- to offer secure electronic storage of critical data
files, called electronic vaulting, and data disaster recovery services. In
addition to paying us for connection to CUINET-Registered Trademark-, Mission
Critical agreed to provide us with electronic vaulting services. For credit
unions
33
located outside Florida that want to connect to Mission Critical, Mission
Critical refers these credit unions to CUINET-Registered Trademark- for a cost
effective network connection.
DATA CENTERS
We maintain a data center in Englewood, Colorado that became fully
operational in January 2000. The data center presently consists of a server farm
comprised of one Sun Microsystems Ultra 5 server for each Internet banking
customer and other servers as needed for our other business needs. We utilize
Cisco Systems equipment for all network routing.
We have our own backup power supply for 15 hours of continuous operation in
the event of a power outage. We have two separate HVAC units for the data center
to maintain constant temperatures irrespective of outside conditions. We have a
wireless, microwave backup link that enables us to maintain connectivity in the
event that cable at our data center is mistakenly cut or otherwise interrupted.
We plan to add a power generator to our Denver facility during the third quarter
of 2000.
Our data centers in Livonia, Michigan and Memphis, Tennessee, are currently
under construction. These data centers will utilize substantially identical
equipment and will have the same capabilities as our existing center in
Colorado. The most important feature of the two new centers, however, will be
the establishment of redundancy for our overall network. This redundancy will
enable us to utilize each of the centers as backup systems for the others in the
event of a natural disaster or other unforeseen data center outage. Our
redundant connectivity will be provided by Sprint Corp., Global Crossing Ltd.
and Level 3 Communications. These communication companies are known as Tier 1
Internet Service Providers because of their national presence, redundant
infrastructure and connections to major Network Access Points. We expect both of
our new data centers to be fully operational by the third quarter of this year.
CUSTOMERS
Our target market consists of credit unions with assets greater than
$5 million, credit union leagues and trade associations, corporate credit unions
and vendors that provide products and services to credit unions and their
members. According to Callahan and Associates, as of December 30, 1999, there
were approximately 6,200 credit unions with assets in excess of $5 million in
the United States.
There are 50 credit union leagues and trade associations in the United
States, approximately one in each state, and most credit unions belong to the
organization in their state. As of March 31, 2000, we had four credit union
leagues and trade associations connected to CUINET-Registered Trademark-.
CUINET-Registered Trademark- enables credit union leagues and trade associations
to transfer financial data to and from their credit union members. Examples of
our relationships with credit union leagues include the Colorado Credit Union
League, with whom we have established an informal marketing/endorsement
arrangement, and the Missouri Credit Union System, which uses
CUINET-Registered Trademark- to transport its share draft clearing data using
our share draft software. We plan to feature these relationships in our sales
efforts with credit unions.
There are 38 corporate credit unions in the United States, two of which have
signed contracts with us. While membership is not mandatory, most credit unions
choose to be a member of a corporate credit union and may do business with more
than one. Our corporate credit union customers can use
CUINET-Registered Trademark- to transfer financial data to and from their
members. An example of our relationship with corporate credit unions is the
Volunteer Corporate Credit Union, located in Tennessee, that joined us for the
business-to-business opportunities available through
CUINET-Registered Trademark-.
As of March 31, 2000, our network included 119 credit unions and 11 credit
union leagues, trade associations, corporate credit unions, vendors and other
entities. The number of members of our credit union customers aggregates
approximately 2.5 million. None of these individual customers accounted for more
than 10% of our total revenues.
34
SALES AND MARKETING
We intend to place a direct sales force in each of our 18 planned sales
territories. As of March 31, 2000, we had opened a sales office in 14 of these
territories. We intend to place sales professionals in the four remaining sales
territories over the next 12 months. Our sales team currently consists of 11
sales professionals, as well as Eastern and Western Regional Sales Managers and
our Vice President of Sales and Marketing.
We target to hire sales people with experience and established contacts in
the credit union industry. We use a face-to-face sales strategy in which our
sales people initially assess a prospective customer's web strategy over the
telephone, then visit the credit union in person. Our primary customer contact
for sales to credit unions is generally the chief executive officer, the chief
financial officer or the chief operating officer. A typical sales presentation
first focuses on our Internet banking and online bill pay products. We then
feature the benefits of our CUINET-Registered Trademark- network, such as its
secure nature, Internet access, and the ability of the credit union to reduce
personnel and administrative costs. Our sales people sell the connection to
CUINET-Registered Trademark- and Internet banking as a bundled product.
Our products and services are advertised in credit union statement stuffers
circulated to members, in credit union lobby displays and in credit union
newsletters. We frequently advertise in two weekly trade publications: THE
CREDIT UNION JOURNAL and THE CREDIT UNION TIMES. Furthermore, we attend regional
and national conventions and trade shows, and we currently plan to attend a
minimum of 34 of these events during 2000.
We charge the credit unions connected to our network a fixed monthly rate
based on the amount of bandwidth they anticipate using. A credit union must
increase its bandwidth as the number of transactions conducted through its
website exceeds certain levels. Our customers pay more for each incremental
increase in bandwidth. We have implemented an automated system to measure each
credit union's usage of the network. By monitoring each credit union's connect
usage, our sales people can advise customers of their need to increase
bandwidth.
Our sales strategy to increase business-to-business commerce over
CUINET-Registered Trademark- includes initiatives to connect additional credit
union leagues, trade associations, corporate credit unions and vendors. We have
sales personnel focused on selling directly to these entities. We believe this
strategy is effective since many of the credit union leagues and corporate
credit unions serve a single state or region. Our Vice President of Sales and
Marketing manages these state and regional sales and also takes the lead in
sales to national credit union organizations and vendors that serve credit
unions on a national basis. We plan to increase our sales efforts in the
business-to-business area.
In addition to connecting with CUINET-Registered Trademark-, some of our
non-credit union customers participate with us in marketing and sales referral
agreements. We believe these marketing efforts supplement our direct sales
activities.
Our sales force markets Member Emporium-TM- products and services to credit
unions in their assigned sales territories. Marketing materials specifically
presenting Member Emporium-TM- features and benefits have been developed and
include a direct mail advertising campaign, full-page advertisements in the two
primary credit union trade publications, and special websites for product and
service demonstrations. We have developed an outbound call center to contact
credit unions and promote Member Emporium-TM-. Sales efforts in the field are
backed by specialist account executives based at our offices in Englewood,
Colorado, who schedule and coordinate marketing programs for our credit union
customers' members. In the near future, we plan to have program managers
available to assist the sales force to effectively communicate the unique
functionality of Member Emporium-TM- services, as well as to provide customer
support. We believe that once we establish our initial relationship with our
customers, our sales force will have the opportunity to cross sell Member
Emporium-TM-.
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COMPETITION
We operate in a highly competitive environment against a number of network
application developers and providers of online banking services. Additionally,
there is continuous market pressure among market participants to offer new and
innovative products and services. Moreover, in this field, technological and new
product development progresses rapidly and market share can be gained or lost in
very short time periods.
A number of public and private companies compete with one or more of our
Internet banking products. These competitors include Concentrex, Inc., Corillian
Corporation, Database Management Services, Digital Insight Corporation, Fiserv
Correspondent Services, Inc., FundsXpress, Inc., Home Account Network, Inc.,
Marshall & Isely Corporation, Online Resources and Communications Corporation,
Phoenix International, S1 Corporation, Sanchez Computer Associates, Inc., Source
One Software, Inc., Symitar Systems, Inc., and Virtual Financial Services, Inc.
Member Emporium-TM- competes with a variety of websites that offer consumer
products and services over the Internet. These sites include CUShopper.com,
CU-Village.com, Good2CU.com and uMember.com. Although we are not aware of any
direct competitors that provide a secure private network to credit unions, such
competitors may emerge in the future.
Any of these companies, as well as other potential competitors, could in the
future offer a combination of products and services to credit unions similar to
the combination we presently offer. Many of these companies have greater
financial, personnel and operational resources than we have. We think that, as
the Internet transaction and network services we sell are purchased by more of
our customers, other competitors will enter the market to compete aggressively
with us, including some larger, established companies. Competition may also
increase if there is a consolidation in the software and networking industries,
particularly if one or more of our competitors is acquired by a larger provider
of products and services to the banking industry as a means for the larger
company to penetrate the credit union market.
GOVERNMENT REGULATION
Credit unions are cooperative, non-profit financial institutions, owned and
controlled by the credit union members who use their services. Credit unions may
be state or federally chartered and are regulated and, in most cases, federally
insured by the National Credit Union Administration. A small number of credit
unions are insured by state-authorized deposit insurance organizations. While it
is the responsibility of our customers to ensure that their use and marketing of
our products and services to their customers is permitted by the NCUA's
regulatory requirements, we do not believe that any of our current products or
services are restricted by such requirements. Nevertheless, we do not make
representations to customers regarding applicable regulatory requirements but
leave it to them to determine whether their use of our system and the design of
their website conform to applicable legal requirements. It is not possible to
predict the impact that any of these evolving regulatory requirements could have
on our business in the future.
We are not subject to the Glass-Steagall Act of 1933, the Bank Holding
Company Act of 1956, the Competitive Equality Banking Act of 1987, the Federal
Credit Union Act of 1934, nor are we regulated by the NCUA or the Federal
Reserve Board. Naturally, however, we are vitally concerned with laws and
regulations governing financial institutions, especially credit unions, and how
any changes to those laws and regulations affect the market for financial
services and, in turn, our ability to provide products and services to our
credit union customers.
On August 7, 1998, the Credit Union Membership Access Act of 1998 was signed
into law. Title I of the Act permits federally chartered credit unions to
solicit credit union members from more than one occupational group so long as
each group has fewer than 3,000 members. The Act also allows credit unions to
make business loans to its members as long as the total of such loans does not
exceed
36
1.75 times the credit union's actual net worth. This limitation does not apply
to credit unions chartered primarily to make business loans, to serve low-income
members, or as community development financial institutions. Full implementation
of the Act requires issuance of regulations by the NCUA, which the NCUA expects
to be complete by August 2000. In light of these new opportunities to expand
their customer base, the Act has the potential to increase the activity of
federal credit unions in the financial marketplace.
Title IV of the Act requires the U.S. Treasury Department to study the
regulatory, tax and other differences between credit unions and other federally
insured financial institutions, including a review of the potential effect of
applying federal tax laws to credit unions. The study will consider whether the
competitive advantage produced by credit unions' tax exemption may endanger the
viability of smaller banks. The Treasury Department may ultimately recommend
imposing taxation on credit unions or enacting legislative or administrative
measures to cut taxes for smaller depository institutions which compete with
credit unions. Any such new laws or regulations which subject credit unions to
taxation or reduce the tax liability of competing financial institutions could
adversely affect credit unions and the size of our potential market.
We also cannot be certain that federal or state governmental authorities
will not adopt new laws or regulations constricting the credit union industry
addressing electronic financial services or operations generally that could
require us to modify our current or future products and services. The adoption
of laws or regulations affecting our business or our credit union customers'
business could have a material adverse effect on our business, financial
condition and results of operations.
A number of proposals at the federal, state and local level would, if
enacted, expand the scope of regulation of Internet-based financial services and
could impose taxes on the sale of goods and services made over the Internet and
certain other Internet activities. Any development that substantially impairs
the growth of the Internet or its acceptance as a medium for commerce or
transaction processing could have a material adverse effect on our business,
financial condition and operating results.
INTELLECTUAL PROPERTY
Although we believe that our success depends more upon our technical
expertise than our proprietary rights, our future success and ability to compete
may still depend in part on our own proprietary technology and on the
proprietary technology we may license from others. None of our technology is
currently patented. Instead, we rely on a combination of contractual rights and
copyright, trademark and trade secret laws to establish and protect our
proprietary technology. We generally enter into confidentiality agreements with
our employees, consultants, strategic partners, customers and potential
customers. We also limit access to and distribution of our source code, and
further limit the disclosure and use of other proprietary information. We cannot
be certain that the steps taken by us in this regard will be adequate to prevent
misappropriation of our technology or technology we license from others or that
our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology or that which we license from
others. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
37
PROPERTIES
We currently lease the following properties:
LOCATION PRIMARY USE SQUARE FOOTAGE
- -------- ----------------------------------- --------------
Bloomington, MN............. Sales/Technical Support Center 1,098
Bradenton, FL............... Sales/Technical Support Center 1,077
Braintree, MA............... Sales/Technical Support Center 1,083
Chesterfield, MO............ Sales/Technical Support Center 1,111
Englewood, CO............... Corporate/Sales/Data Center 14,490
Livonia, MI................. Sales/Technical Support/Data Center 3,387
Memphis, TN................. Sales/Technical Support/Data Center 2,956
Newark, DE.................. Sales/Technical Support Center 1,047
Portland, OR................ Sales/Technical Support Center 982
Raleigh, NC................. Sales/Technical Support Center 879
Richardson, TX.............. Sales/Technical Support Center 1,211
Roseville, CA............... Sales/Technical Support Center 1,459
San Diego, CA............... Sales/Technical Support Center 1,162
Schaumberg, IL.............. Sales/Technical Support Center 1,291
We are in the process of identifying additional facilities to accommodate
our growth. We believe we will be able to identify additional space for sales
and technical support offices in the future on commercially reasonable terms as
needed.
EMPLOYEES
As of March 31, 2000, we had a total of 58 full-time employees, including
eight in development, 22 in engineering, 20 in sales, and eight in general and
administrative, five of whom are in accounting. None of our employees are
represented by a labor union or a collective bargaining agreement. We have not
experienced any work stoppages and consider our relationships with our employees
to be good.
LEGAL PROCEEDINGS
A LanXtra shareholder holding 50,000 shares of LanXtra stock exercised his
right to dissent from the sale of LanXtra's assets to us and demanded payment of
the "fair value" of his shares. Fair value means the value immediately before
the corporate action to which the dissenter objects. We have assumed the
liability, if any, of LanXtra to the dissenting shareholder which he asserted to
be $250,000. The question of his "fair value" is now in litigation. LANXTRA,
INC. V. KIRK W. DENNIS, Case No. 99 CV 3583 in the District Court, City and
County of Denver, Colorado. We believe the value which would have been received
by the dissenting shareholder on account of his shares under the asset purchase
agreement, however, is greater than the maximum amount which he can now recover
under Colorado law. Therefore, we have not reserved any funds to cover payment
of the liability because management views the possibility of such payment as
remote.
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our directors and
executive officers as of March 31, 2000:
NAME AGE POSITION
- ---- -------- ------------------------------------------
David J. Selina........................... 50 Chairman of the Board, President, Chief
Executive Officer and Chief Operating
Officer
Marshall E. Aster......................... 46 Vice President, Chief Financial Officer
and Secretary
Jeffrey W. Marshall....................... 34 Vice President of Software Development and
Director
Daniel W. Dudley.......................... 40 Vice President of E-Commerce
Marvin C. Umholtz......................... 48 Vice President of Sales and Marketing
John R. Evans............................. 45 Director
Stephen B. Friedman....................... 58 Director
David E. Maus............................. 49 Director
DAVID J. SELINA has served as our President, Chief Operating Officer and a
Director since February 1, 1999, and has served as our Chief Executive Officer
and Chairman of the Board since March 19, 1999. Mr. Selina was the President and
Chief Operating Officer of our predecessor, LanXtra, Inc., from December 1997,
and a director from January 1998, until that company's dissolution in July 1999.
From June 1995 to June 1997, Mr. Selina was the President and Chief Executive
Officer of Lasertec, Inc., a mailing and fulfillment operation in Auburn Hills,
Michigan. He was the Regional Manager of the Credit Union Services Division for
Electronic Data Systems from November 1993 to June 1995. From March 1986 to
November 1993, Mr. Selina held various management positions, including President
and Chief Executive Officer, at World Computer, a provider of data processing
systems and services to credit unions throughout the U.S. and Canada.
Mr. Selina has over 26 years experience in the credit union industry.
MARSHALL E. ASTER became our Chief Financial Officer on March 8, 1999, our
Secretary on March 22, 1999, and a Vice President on March 22, 2000. Mr. Aster
was the Chief Financial Officer at Intertech Plastics, Inc., a plastics
manufacturer in Denver, Colorado, from May 1997 to July 1998. Prior to that
time, he served in the positions of Vice President of Finance and Administration
and Senior Vice President of Finance and Administration at EDI, Inc., a
technology based information service located in Los Angeles, California, from
October 1989 until May 1997. Mr. Aster served in the positions of Director, Vice
President and Senior Vice President of Corporate Financial Planning at
Lorimar-Telepictures Corporation, an entertainment company, from March 1984 to
October 1989.
JEFFREY W. MARSHALL has served as our Vice President of Software Development
since February 1999, and as a Director since May 1999. He was the Vice President
of Software Development of our predecessor, LanXtra, Inc. from December 1997 and
a co-founder of our company. He was employed by LanXtra as a software engineer
from July 1996 until he was promoted to Vice President in December 1997.
Mr. Marshall was a programmer for Chemical Waste Management, a waste treatment
concern in Denver, Colorado, from September 1994 to July 1996. From October 1991
to September 1994, Mr. Marshall developed relational database software for
Williams Thatcher Rand/Milliman & Robertson, actuarial consultants in Denver,
Colorado.
39
DANIEL W. DUDLEY has served as our Vice President of e-commerce since
June 1, 1999. From April 1997 to May 1999, Mr. Dudley was the Senior Vice
President and General Manager at SkyTeller, L.L.C., a financial services firm in
Denver, Colorado. From December 1991 to April 1997, he held various positions,
including Vice President of Data Products, at The Polk Company, a marketing firm
in Denver, Colorado.
MARVIN C. UMHOLTZ has served as our Vice President of Sales and Marketing
since September 1, 1999. He served as our Eastern Regional Sales Manager from
April 1, 1999 to September 1, 1999. From October 1997 to April 1999,
Mr. Umholtz was an independent consultant and strategic planner serving credit
unions, credit union service organizations and credit union vendors. From April
1990 to September 1997, he held various positions, including Senior Vice
President of the Government and Public Affairs Group and Executive Vice
President and Chief Operating Officer of Association Services, at the Michigan
Credit Union League and its subsidiary, CUcorp, in Lansing and Plymouth,
Michigan.
JOHN R. EVANS has served as a director of cavion.com since October 1999. He
was one of the founders of Convergent Communications, Inc. in Englewood,
Colorado, and has served as a board member of that company since 1995.
Mr. Evans served as Chief Executive Officer and Chairman of the Board of
Convergent from 1995 until March 2000. Prior to that time, he served as the
Chief Financial Officer and Executive Vice President of ICG Communications, Inc.
in Englewood, Colorado, from 1991 until December 1995. Before joining ICG,
Mr. Evans served as the Controller of Shaw Industries, an electrical products
company, for approximately three years.
STEPHEN B. FRIEDMAN has served as a director of cavion.com since April 1999.
He has been a business consultant to various companies since January 1997.
Mr. Friedman was the President of the Asia/Pacific division of American Express
Company from July 1993 to December 1996. Prior to that time he served in various
executive positions at American Express from October 1978 to June 1993.
DAVID E. MAUS has served as a director of cavion.com since March 2000. Since
1979, Mr. Maus has served as President and Chief Executive Officer of the Public
Service Credit Union, Denver, Colorado, which has over $300 million in assets
and a loan portfolio in excess of $250 million. Since 1999, Mr. Maus has also
served as Chairman of the Credit Union National Association, which represents
over 10,000 credit unions nationally. In addition, Mr. Maus has served as
Chairman of the Division of Financial Services Board, the regulatory agency in
Colorado which oversees state chartered credit unions and savings and loan
associations since 1993, and as Chairman of the Board of Directors of Members'
Insurance since 1985. For the past 17 years, Mr. Maus has served as a board
member of the Colorado Credit Union System, and he has served as a board member
of Credit Union Service Network, Shared Branching Network for Colorado credit
unions since 1992.
All members of the Board of Directors hold office until the next annual
meeting of shareholders and the election and qualification of their successors,
or until death, resignation or removal. Executive officers of cavion.com are
appointed annually by the Board of Directors and serve until their successors
are duly appointed and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee consists of Messrs. Friedman, Maus and Evans. The
Compensation Committee consists of Messrs. Friedman and Evans.
The Audit Committee reviews the scope and timing of our audit services, the
engagement of our independent auditors and their audit reports. The Audit
Committee also meets with the financial staff to review accounting procedures
and reports.
40
The Compensation Committee evaluates our compensation and benefits policies
and makes recommendations to the board concerning them. The Compensation
Committee also administers our Equity Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the members of our Compensation Committee, John R. Evans, is a
director of Convergent Communications Services, Inc. and served as Convergent's
Chief Executive Officer and Chairman of the Board until March 31, 2000. In
October 1999, we contracted with Convergent to provide connectivity between our
network and our customers for a monthly fee. Convergent also purchased our
existing host site equipment at the time for $286,000. Convergent owns 67,603
shares of our common stock.
DIRECTOR COMPENSATION
While we do not pay cash compensation to our directors, they are reimbursed
for the expenses they incur in attending meetings of the Board or committees of
the Board. Directors may also receive options to purchase common stock awarded
under our Equity Incentive Plan at the discretion of the Compensation Committee.
We have granted to each of our non-employee directors an option to purchase
27,500 shares of common stock, which vests in four equal quarterly installments
commencing within four months of its grant date. The Compensation Committee has
also granted stock options to the two other directors who are also employees.
See "Executive Compensation." The exercise price of each of these options was
equal to the fair market value of our common stock at the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us or our
predecessor, LanXtra, during each of the three most recently completed fiscal
years, to our Chief Executive Officer, a former Chief Executive Officer and the
two other most highly compensated executive officers during 1999 (the "Named
Executive Officers").
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
FISCAL ------------ UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY OPTIONS COMPENSATION
- ----------------- -------- ------------ ------------ ------------
David J. Selina................................. 1999 $120,083 150,000 --
CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER 1998 $105,402 -- --
AND 1997 $ 8,333(1) -- --
CHIEF OPERATING OFFICER
Jeffrey W. Marshall............................. 1999 $113,833 50,000 --
VICE PRESIDENT OF SOFTWARE DEVELOPMENT 1998 $ 76,333 -- --
1997 $ 56,426 -- --
Marshall E. Aster .............................. 1999 $ 87,047(2) 40,000 --
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY
Craig E. Lassen(3) ............................. 1999 $ 37,369 -- $35,000(4)
FORMER CHAIRMAN OF THE BOARD AND 1998 $ 75,481 -- --
CHIEF EXECUTIVE OFFICER 1997 $ 68,747 -- --
- ------------------------
(1) Mr. Selina joined LanXtra in December 1997.
(2) Mr. Aster joined cavion.com in March 1999.
41
(3) Mr. Lassen resigned as Chief Executive Officer and a Director of cavion.com
in February 1999 and as an employee in April 1999.
(4) Consists of payments for consulting services.
OPTION GRANTS IN 1999
The following table provides information regarding options granted during
1999 to the Named Executive Officers:
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
SHARES GRANTED PRICE APPRECIATION(1)
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION ---------------------
NAME OPTIONS IN 1999 PRICE DATE 5% 10%
- ---- ---------- ---------------- -------- ---------- --------- ---------
David J. Selina..................... 150,000(2) 30% $3.00 3/19/09 $283,500 $715,500
Jeffrey W. Marshall................. 50,000(2) 10% $3.00 3/19/09 $ 94,500 $238,500
Marshall E. Aster................... 40,000(3) 8% $3.00 3/19/09 $ 75,600 $190,800
Craig E. Lassen..................... -- -- -- -- -- --
- ------------------------
(1) The dollar amounts under these columns represent the potential realizable
value of each option grated assuming that the market price of the common
stock appreciates in value from the date of grant at the 5% and 10% annual
rates prescribed by the SEC, and are not intended to forecast possible
future appreciation of the price of the common stock.
(2) Options vest in three equal semi-annual installments commencing
September 19, 1999.
(3) Options vest in four equal quarterly installments commencing September 8,
1999.
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
No options were exercised by any of the Named Executive Officers during
1999. The following table provides information regarding the amount and value of
options held by the Named Executive Officers at December 31, 1999.
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
David J. Selina................................ 50,000 100,000 $237,500 $475,000
Jeffrey W. Marshall............................ 16,667 33,333 $ 79,168 $158,332
Marshall E. Aster.............................. 20,000 20,000 $ 95,000 $ 95,000
Craig E. Lassen................................ -- -- -- --
EMPLOYMENT AGREEMENTS
Under an employment agreement dated February 1, 1999, David J. Selina agreed
to serve as our President and as Director. Under the agreement, Mr. Selina is
entitled to a minimum base salary of $125,000 per year, participation in a cash
bonus pool based upon our business goals and profitability as determined by
disinterested members of our Board of Directors, as well as other employee
benefits. Effective March 1, 2000, our Board increased Mr. Selina's salary to
$160,000 per year.
Under an employment agreement dated February 1, 1999, Jeffrey W. Marshall
agreed to serve as our Vice President of Software Development. The agreement
provides that Mr. Marshall is entitled to receive a minimum base salary of
$100,000 per year, to participate in the bonus pool described above,
42
and to receive other employee benefits. Effective March 1, 2000, our Board
increased Mr. Marshall's salary to $131,000 per year.
Marshall E. Aster agreed to serve as our Chief Financial Officer under an
employment agreement effective March 8, 1999. Under the agreement, Mr. Aster is
entitled to a minimum base salary of $105,000, participation in the bonus pool
described above and other employee benefits. Effective March 1, 2000, our Board
increased Mr. Aster's salary to $120,000 per year.
Under each of these employment contracts, if the employment of the executive
is terminated for any reason other than the dissolution of cavion.com, the death
or disability of the executive, or for cause, or if the executive resigns for
good reason within three months after a change of control of cavion.com, the
executive will be entitled to severance compensation. Severance pay is equal to
twelve months of base salary as in effect at the time of termination, except for
Mr. Aster, whose severance pay is equal to six months of base salary, increasing
to twelve months at the earlier of: the first anniversary of his employment if
cavion.com is profitable on an after-tax basis at that time or, if not
profitable at the first anniversary, on the second anniversary of employment, or
a change of control.
Craig E. Lassen agreed to serve as our Chairman of the Board and Chief
Executive Officer under an employment agreement dated February 1, 1999. Under
the agreement, Mr. Lassen was to receive a base salary of $125,000,
participation in the bonus pool described above, and other employee benefits.
Mr. Lassen resigned as Chairman of the Board, Chief Executive Officer and a
director effective March 18, 1999. His resignation as an employee was effective
April 16, 1999. In June 1999, we entered into an agreement with Mr. Lassen under
which we will pay Mr. Lassen an aggregate of $75,000 for consulting services.
In addition, each of Messrs. Selina, Aster, Marshall and Lassen agreed under
his respective employment contract to protect our confidential information, to
refrain from soliciting our customers or employees for a competing business, and
to assign to us all rights in intellectual property developed during the term of
employment that relates to our business. These obligations generally survive
termination of employment for periods of one to three years.
EQUITY INCENTIVE PLAN
Our Board of Directors adopted the Equity Incentive Plan as of March 19,
1999 and it was approved by our shareholders on March 8, 2000. Under this Plan,
we may grant to our designated employees, officers, directors, advisors and
independent contractors incentive stock options, nonqualified stock options,
restricted stock and stock appreciation rights. By encouraging stock ownership,
we seek to motivate Plan participants by allowing them an opportunity to benefit
from any increased value of our company which their effort, initiative, and
skill help produce.
GENERAL. Up to 995,000 shares of common stock are authorized for issuance
under the terms of the Plan. No more than 250,000 shares may be granted to any
individual in any three year period. If options granted under the Plan expire or
are terminated for any reason without being exercised, or shares of restricted
stock are forfeited, the shares of common stock underlying such grant will again
be available for purposes of the Plan.
ADMINISTRATION OF THE PLAN. The Compensation Committee determines which
individuals will receive grants, the type, size and terms of the grants, the
time when the grants are made and the duration of any applicable exercise or
restriction period, including the criteria for vesting and the acceleration of
vesting, and the total number of shares of common stock available for grants.
ELIGIBILITY FOR PARTICIPATION. Grants may be made to employees, officers,
directors, advisors and independent contractors of cavion.com and its
subsidiaries, including any non-employee member of the
43
board of directors. As of the date of this prospectus, options to purchase
837,500 shares of common stock were outstanding under the Plan.
OPTIONS. Incentive stock options may be granted only to officers and
directors who are employees. Nonqualified stock options may be granted to
employees, officers, directors, advisors and independent contractors. The
exercise price of an option will be determined by the Compensation Committee and
may be equal to, greater than, or less than the fair market value but in no
event less than 50% of the fair market value of a share of common stock at the
time of grant; provided that:
- the exercise price of an incentive stock option must be equal to or
greater than the fair market value of a share of common stock on the date
of grant; and
- the exercise price of an incentive stock option granted to an employee who
owns more than 10% of the issued and outstanding common stock must not be
less than 110% of the fair market value of the underlying shares of common
stock on the date of grant.
The Compensation Committee determines the term of each option, which may not
exceed ten years from the date of grant, except that the term of an incentive
stock option granted to an employee who owns more than 10% of the common stock
may not exceed five years from the date of grant. The Compensation Committee may
accelerate the exercisability of any or all outstanding options at any time for
any reason.
RESTRICTED STOCK. The Compensation Committee determines the number of
shares of restricted stock granted to a participant and may subject any grant to
performance requirements, vesting provisions, transfer restrictions and other
restrictions and conditions as the Compensation Committee may determine in its
sole discretion. The restrictions shall remain in force during a restricted
period set by the Compensation Committee.
STOCK APPRECIATION RIGHTS. The Compensation Committee may grant a
participant the right to receive, in cash or stock, the amount of any
appreciation in the value of our common stock over the exercise price of the
stock appreciation right, which is set by the committee at the time of grant.
The Compensation Committee has the same discretion to determine the terms of
stock appreciation rights, including exercise price and vesting schedule, that
it has in the case of nonqualified stock options.
TERMINATION OF EMPLOYMENT. If a participant leaves our employment, other
than because of retirement, death or disability, the participant will forfeit
any stock options or stock appreciation rights that are not yet vested, and any
restricted stock for which the restrictions are still applicable, unless the
participant remains as a non-employee director, advisor or independent
contractor.
AMENDMENT AND TERMINATION OF THE PLAN. The Compensation Committee may amend
or terminate the plan at any time, except that it may not make any amendment
that requires shareholder approval as provided in Securities Exchange Act
Rule 16b-3 or Section 162(m) of the Internal Revenue Code without shareholder
approval. The Plan will terminate on the day immediately preceding the tenth
anniversary of its effective date, unless terminated earlier by the Compensation
Committee.
44
RELATED PARTY TRANSACTIONS
We believe that each of the following transactions was made on terms no less
favorable to us than could have been obtained from an unaffiliated third party
on an arm's length basis. The Company has adopted a policy under which any
future transactions with our shareholders, officers and directors, or their
affiliates, will be subject to the approval of a majority of the independent and
disinterested outside directors and will be conducted on terms no less favorable
to us than could be obtained from unaffiliated third parties on an arm's length
basis.
THE LANXTRA REORGANIZATION
We were incorporated in August 1998 for the purpose of acquiring the assets
and business operations of LanXtra, Inc. Prior to the acquisition, we and
certain of our current directors, executive officers and 5% shareholders
provided bridge funding (in the form of loans) to LanXtra in the principal
amounts of $335,000 and $115,000, respectively. On February 1, 1999, we
completed the acquisition of LanXtra's assets. In that acquisition, we issued to
LanXtra 376,299 shares of our common stock and 28,648 shares of our Class B
common stock and assumed LanXtra's liabilities. The loans made by our affiliates
were repaid in November 1999 in accordance with the terms of the notes executed
in connection with such loans.
The following table sets forth (i) the number of shares of our common stock
and Class B common stock received by our affiliates in connection with the
acquisition of LanXtra; (ii) the amount of funds loaned to LanXtra by our
affiliates; and (iii) the amount of principal and interest repaid to our
affiliates.
SHARES OF SHARES OF CLASS B
COMMON STOCK COMMON STOCK AMOUNT LOANED AMOUNT REPAID
OFFICER, DIRECTOR OR 5% SHAREHOLDER RECEIVED RECEIVED(1) TO LANXTRA BY CAVION.COM
- ----------------------------------- ------------ ------------------ ------------- -------------
David J. Selina...................... -- 3,306 $30,000 $40,500
Jeffrey W. Marshall.................. -- 5,509 $50,000 $67,500
Craig E. Lassen...................... 98,520 -- $45,000 $54,763
- ------------------------
(1) Each issued and outstanding share of Class B common stock was converted to
one share of common stock on March 31, 2000. See "Description of Capital
Stock."
EQUITY TRANSACTIONS
In August 1998, our founding shareholders, Venture Funding, Ltd. and Boutine
Capital, LLC, (who are also selling shareholders in this offering), purchased
1,100,000, and 900,000 shares, respectively, of our common stock at a purchase
price of $.0001 per share. In December 1998, each of David Selina and
Jeff Marshall, members of our management, and Craig Lassen, a former executive
officer, purchased 208,452 shares of common stock at a purchase price of $.01
per share.
OTHER TRANSACTIONS
In connection with the private placements of our securities conducted in
February 1999, August 1999, and February 2000, we paid First Capital
Investments, Inc. an 8%, 9% and 8% placement agent commission, respectively,
which totaled approximately $251,600, and warrants to purchase 5,640 shares of
our common stock exercisable at $.01 per share, and 20,500 shares of our common
stock exercisable at $13.20 per share. Julie Graham, the sole shareholder of
First Capital, is the sole member of Boutine Capital, LLC, one of our principal
shareholders and a selling shareholder in this offering.
On August 18, 1999, we entered into an agreement with MoneyLine America, LLC
to provide online mortgage lending services for our credit unions and their
members, via CUINet-Registered Trademark-. Under this
45
agreement, MoneyLine paid us an annual fee for the year 2000 of $300,000.
Boutine Capital owned 50% of MoneyLine America on August 18, 1999, the date of
the agreement, and currently owns 5% of MoneyLine.
In October 1999, we entered into a contract with Convergent Communications
Services, Inc., pursuant to which Convergent provides connectivity between our
network and our customers for a monthly fee, the amount of which fluctuates
based on the total number of connections maintained and the amount of bandwidth
provided. For the month ended March 31, 2000, the amount of this fee was
approximately $40,000. We also sold our host site equipment to Convergent for a
purchase price of $286,000 in October 1999, pursuant to the same contract. In
addition, in December 1997, our predecessor, LanXtra, purchased equipment from
Convergent for $78,673 in connection with a network upgrade performed by
LanXtra. Convergent also received 67,603 shares of our common stock in
connection with our purchase of the assets of LanXtra in February 1999. One of
our directors, John R. Evans, is a director of Convergent and served as its
Chief Executive Officer and Chairman until March 31, 2000.
46
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of March 31, 2000, and as adjusted to reflect
our sale of the common stock in this offering, by (i) each of our directors and
the Named Executive Officers; (ii) each shareholder known by us to be the
beneficial owner of more than 5% of our common stock; (iii) each selling
shareholder; and (iv) all of our executive officers and directors as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
------------------------- SHARES -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ -------- -------- --------- -------- --------
Andrew Telsey(1)....................... 926,102 18.6% -- 776,102 11.5%
Venture Funding, Ltd.(2)............... 898,602 18.2% 150,000 748,602 11.1%
Boutine Capital, LLC(3)................ 738,370 15.0% 125,000 613,370 9.1%
David J. Selina(4)..................... 314,361 6.2% -- 314,361 4.7%
Craig E. Lassen(5)..................... 307,575 6.2% 74,219 213,356 3.2%
Jeffrey W. Marshall(6)................. 248,898 5.0% -- 248,898 3.7%
Marshall E. Aster(7)................... 30,000 * -- 30,000 *
David Maus............................. -- -- -- -- --
John R. Evans(8)....................... 29,130 * 10,000 19,130 *
Stephen B. Friedman(9)................. 27,500 * -- 27,500 *
Herman D. Axelrod...................... 98,520 2.0% 33,000 65,520 *
William M.B. Berger Living Trust....... 19,704 * 19,704 -- --
Fiscal Dynamics Corporation............ 13,000 * 13,000 -- --
Oyen Family Joint Trust................ 13,000 * 13,000 -- --
Fairway Realty Associates.............. 12,077 * 12,077 -- --
William F. Kilzer...................... 10,000 * 10,000 -- --
Gregory Werts.......................... 10,000 * 10,000 -- --
James F. Seifert....................... 7,500 * 2,500 5,000 *
Jeffrey Telsey......................... 7,500 * 7,500 -- --
Randal A. Alford....................... 5,000 * 5,000 -- --
Thomas R. Ashford...................... 5,000 * 5,000 -- --
Mariusz Witek.......................... 5,000 * 5,000 -- --
Robert L. Young and Anna M. Young...... 5,000 * 5,000 -- --
All directors and executive officers as 659,889 12.8% 10,000 649,889 8.8%
a group (8 persons)(10)..............
- ------------------------
* Less than 1% of the outstanding common stock.
(1) Includes 898,602 shares owned by Venture Funding, Ltd. prior to the offering
and 748,602 owned by Venture Funding after the offering. Andrew Telsey, a
former director of cavion.com, is the sole shareholder of Venture Funding.
Also includes 27,500 shares underlying presently exercisable options held by
Mr. Telsey. Mr. Telsey's address is 12835 E. Arapahoe Road, Englewood, CO
80112.
(2) The address of Venture Funding, Ltd. is 12835 E. Arapahoe Road, Englewood,
CO 80112.
(3) The address of Boutine Capital, LLC is 5460 South Quebec Street, #220,
Englewood, Colorado 80111.
47
(4) Includes 100,000 shares underlying presently exercisable options.
(5) Mr. Lassen's address is 245 Poplar Street, Denver, Colorado 80220.
(6) Includes 33,333 shares subject to presently exercisable options.
(7) Represents 30,000 shares subject to presently exercisable options.
(8) Includes 13,750 shares subject to presently exercisable options. Excludes
67,603 shares owned by Convergent Communications Services, Inc., of which
Mr. Evans serves as a director.
(9) Represents 27,500 shares subject to presently exercisable options.
(10) Includes an aggregate of 224,584 shares subject to presently exercisable
options.
48
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is only a summary and is
subject to the provisions of our Articles of Incorporation and Bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and the provisions of applicable law.
Our authorized capital stock consists of 19,970,000 shares of common stock,
$.0001 par value per share, and 10,000,000 shares of preferred stock, $.0001 par
value per share. As of March 31, 2000, 4,935,308 shares of common stock were
outstanding, held by 83 holders of record, and no shares of preferred stock were
outstanding.
COMMON STOCK
Holders of our common stock are entitled to receive, as, when and if
declared by the Board of Directors from time to time, such dividends and other
distributions in cash, stock or property from our assets or funds legally
available for such purposes, subject to any dividend preferences that may be
attributable to preferred stock that is outstanding. Holders of the common stock
are entitled to one vote for each share held of record on all matters on which
shareholders may vote.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable. In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in the assets
available for distribution.
CLASS B COMMON STOCK
In connection with the purchase by cavion.com of the assets of LanXtra in
February 1999, 28,648 shares of putable Class B common stock were issued to
LanXtra. The Class B common stock was subject to a put option which entitled the
holder to sell any and all shares of the Class B common stock to us at a price
of $7.00 per share, which could be exercised at any time during the 60-day
period beginning 30 days after the date we connected our 100(th) customer to
CUINET-Registered Trademark-. This 60-day period ended on March 31, 2000, at
which time no holder of Class B common stock had exercised the put option. On
that date, pursuant to our Articles of Incorporation, (i) each share of Class B
common stock was automatically converted to one share of common stock, (ii) our
authority to issue Class B common stock terminated, and (iii) our only other
class of common stock, which had until that time been designated as Class A
common stock, was designated as common stock.
PREFERRED STOCK
Our Board of Directors, without further action by the shareholders, is
authorized to issue an aggregate of 10,000,000 shares of preferred stock in one
or more series. Our Board also may, without shareholder approval, determine the
dividend rates, redemption prices, preferences on liquidation or dissolution,
conversion rights, voting rights and any other preferences of such stock.
Holders of preferred stock may not have any voting rights except as provided by
Section 7-110-104 of the Colorado Business Corporation Act which requires voting
by the holders of any class of shares on amendments to articles of incorporation
that would affect the rights of holders of such class. Nevertheless, the
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control without further action of the shareholders. The
Board of Directors previously authorized the issuance of 770,000 shares of
Series A preferred stock in February 1999. 700,000 of those shares were issued
to accredited investors in March and April 1999 in a private placement, and the
other 70,000 shares were reserved for the exercise of preferred stock purchase
warrants issued to Neidiger, Tucker, Bruner, Inc. (NTB), the placement agent in
connection with the private placement. On November 3, 1999, the date of the
closing of our initial public offering, each issued and outstanding share of
Series A preferred
49
stock was converted to one share of common stock, and the preferred stock
purchase warrants were cancelled at that time at the request of NTB.
COMMON STOCK WARRANTS
We have warrants outstanding for the purchase of 30,000 shares of our common
stock, which were issued in our August 1999 private placement of notes and
warrants. These warrants are exercisable at $6.50 per share until November 3,
2004.
We also have warrants outstanding for the purchase of 20,500 shares of our
common stock, which were issued to the placement agent in connection with our
February 2000 private placement of 205,000 shares of common stock. These
warrants are exercisable at $13.20 per share until February 16, 2005.
We issued to NTB, in connection with its acting as lead underwriter in our
initial public offering, warrants to purchase 120,000 shares of our common stock
at $8.125. These warrants are exercisable for a period of four years beginning
October 29, 2000, and permit the cashless exercise of the warrants utilizing the
value of the warrants being surrendered. We have agreed with certain of the
present holders of these warrants that 112,500 of these warrants will be
exercised without a cash payment on November 3, 2000, in return for the issuance
of 65,625 shares of common stock (representing an implied valuation of the
common stock of $19.50 per share). In connection with the negotiation of this
net exercise price, NTB forfeited its right of first refusal to act as our
investment banker for future private or public securities offerings. The
warrants issued to NTB and the underlying common shares are restricted from
sale, transfer, assignment or hypothecation until October 29, 2002, except to
officers of NTB, co-underwriters, selling group members, and their officers or
partners. On and after that date, the warrants and the underlying shares of
common stock will be transferable provided such transfer is in accordance with
the provisions of the Securities Act.
SHAREHOLDER ACTION BY WRITTEN CONSENT
Our bylaws provide that any action that may be taken at a meeting of the
shareholders may be taken without a meeting only if such action is authorized by
the unanimous written consent of all shareholders entitled to vote at a meeting
for such purposes. Since we have numerous shareholders, it is unlikely that
action by unanimous written consent of the shareholders is feasible.
SPECIAL MEETINGS
Our Bylaws provide that special meetings of our shareholders may be called
by our Board of Directors, by our President or by one or more written demands
for the meeting, stating the purposes for which it is to be held, signed and
dated by the holders of shares representing at least 10 percent of all the votes
entitled to be cast on any issue proposed to be considered at the meeting. This
provision may make it difficult for shareholders to take action opposed by
the Board.
AMENDMENTS TO OUR BYLAWS
Our Bylaws provide that they may be amended or repealed by the shareholders
or, except to the extent limited by Colorado law, by our Board of Directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Colorado Business Corporation Act provides the power to indemnify and
pay the litigation expenses of any officer, director or agent who is made a
party to any proceeding. Our Articles of Incorporation also provide for
indemnification of our officers and directors for liabilities arising out of
their service to us to the maximum extent permitted by law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers, or persons controlling
50
cavion.com as provided in the foregoing provisions, we have been informed that,
in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and thus cannot be enforced.
Our Bylaws provide that we shall indemnify any person against all liability
and expense incurred by any reason of the person being or having been a director
or officer of cavion.com to the full extent and in any manner that directors may
be indemnified under Colorado law, our bylaws, a resolution of the board of
directors or shareholders, by contract or otherwise so long as such provision is
legally permissible. At the discretion of the Board of Directors, we may also
indemnify any employee, fiduciary or agent who is not a director or officer to
the same extent as a director or officer.
Our Bylaws authorize us to take steps to ensure that all persons entitled to
the indemnification are properly indemnified, including if the Board of
Directors so determines, purchasing and maintaining insurance.
We have also entered into indemnification agreements with each of our
officers and directors to indemnify them and to advance expenses to the fullest
extent permitted by law either in connection with the investigation, defense,
adjudication, settlement or appeal of a proceeding or in connection with
establishing or enforcing a right to indemnification or advancement of expenses.
In addition, the agreements provide that no claim or cause of action may be
asserted by us against such director or officer after two years from the date of
the alleged act or omission, provided that if in fact the person has
fraudulently concealed the facts, then no claim or cause of action may be
asserted after two years from the earlier of the date we discover the facts or
the date we should have discovered such facts by the exercise of reasonable
diligence. The term of the agreements and our obligations apply while the person
is our agent and continues so long as the person is subject to any claim by
reason of the fact that he or she served as our agent.
LIMITATION OF LIABILITY
Our articles of incorporation provide that none of our directors shall be
personally liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty;
- for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- for the payment of unlawful dividends and specified other acts prohibited
by Colorado corporate law; or
- for any transaction resulting in receipt by the director of an improper
personal benefit.
We have obtained directors and officers' liability insurance to provide
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. At
present, there is no material pending litigation or proceeding, and we are not
aware of any material threatened litigation or proceeding, involving any
director, officer, employee or agent in which indemnification will be required
or permitted under our articles of incorporation, bylaws or any indemnification
agreement.
TRANSFER AGENT
The transfer agent for our common stock is American Securities Transfer &
Trust, Inc. in Lakewood, Colorado.
51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 6,735,308 shares
of common stock, assuming no exercise of the underwriter's over-allotment option
and no exercise of options or warrants after March 31, 2000. Of these shares,
the 2,300,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act; provided, however,
that if shares are purchased by "affiliates" as that term is defined in Rule 144
of the Securities Act, their sales of shares would be subject to certain
limitations and restrictions that are described below.
Prior to this offering, there were 4,935,308 shares of common stock
outstanding. Of these shares, 1,853,900 shares are freely tradable and 448,325
shares are freely tradable subject to lock up agreements imposed by Neidiger,
Tucker, Bruner, Inc. ("NTB"), the lead underwriter in our initial public
offering, which restricts shareholders from selling such shares for a period of
nine months, or in some cases 12 months, from October 29, 1999, the date of our
initial public offering, without the prior consent of NTB. NTB, however, may in
its sole discretion, at any time and without notice, release all or any portion
of the shares subject to its lock-up agreement. The remaining 2,633,083 shares
are "restricted" shares subject to restriction upon resale under Rule 144 of the
Securities Act of 1933, as amended, and are also subject to the lock up
arrangement described above.
As of March 31, 2000, we had 837,500 shares subject to outstanding stock
options issued under our Equity Incentive Plan, and 152,666 shares of common
stock available for future grants pursuant to such plan. Of these outstanding
options 771,000 are subject to lock-up agreements imposed by NTB, as described
above. We have registered 750,000 of the shares reserved to the plan, which will
be freely tradable upon issuance, subject to any lock-up agreements. We intend
to register all 995,000 shares reserved to the plan and this registration will
permit resale of shares by non-affiliates in the public market without
restriction, beginning on the expiration of any applicable lock up agreement.
We also have 345,500 shares of common stock underlying outstanding warrants
and options granted outside of our Equity Incentive Plan. Of these shares,
17,500 will be freely tradeable upon issuance and 153,000 will be freely
tradeable upon issuance, subject to lock up agreements that expire between July
and October 2000. Once issued, the remaining 175,000 shares will be eligible for
resale in the public market upon expiration of the holder's respective one-year
holding periods under Rule 144, which will begin upon the date of exercise or,
in the case of a net exercise, on the date of grant of the option or warrant.
Each of our officers, directors and 5% shareholders have agreed with The
Robinson-Humphrey Company, LLC not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this prospectus without the
prior written consent of The Robinson-Humphrey Company, LLC. The
Robinson-Humphrey Company, LLC, however, may in its sole discretion, at any time
and without notice, release all or any portion of the shares subject to its
lock-up agreement.
In general, under Rule 144 as currently in effect, a person or persons whose
shares are aggregated, who has beneficially owned shares for at least one year
is entitled to sell within any three-month period commencing 90 days after the
date of this prospectus a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of common stock (approximately 67,353
shares immediately after the offering), or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the date upon which a Form 144 was filed with
respect to the sale.
Persons selling under Rule 144 must also comply with the requirements of
Rule 144 concerning the availability of specific public information about us,
the manner of sale and filing with the SEC of a notice of sale. However, a
person, or persons whose shares are aggregated, who is not deemed to have been
an affiliate of ours at any time during the three months immediately preceding
the sale and who has beneficially owned his or her shares for at least two years
is entitled to sell his or her shares under Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates must always sell
under Rule 144 even after the one-year holding period has been satisfied.
52
UNDERWRITING
The Robinson-Humphrey Company, LLC and SunTrust Equitable Securities
Corporation are acting as representatives of the underwriters named below.
Subject to the terms and conditions contained in the underwriting agreement
between us, the selling shareholders and the representatives of the
underwriters, each underwriter named below has severally agreed to purchase from
us and the selling shareholders the number of shares of common stock indicated
opposite the name of each underwriter, at the public offering price less the
underwriting discount set forth on the cover page of this prospectus:
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
The Robinson-Humphrey Company, LLC..........................
SunTrust Equitable Securities Corporation...................
---------
Total................................................. 2,300,000
=========
The underwriters are obligated to purchase all of the shares, other than
those covered by the over-allotment option described below, if they purchase any
of the shares. The offering is a firm underwritten offering. However, the
underwriting agreement generally contains standard terms found in an
underwriting agreement for an offering of this type that give the underwriters
the right to withdraw, cancel or modify the offering and to reject orders in
whole or in part. These rights would generally be exercised upon the occurrence
of a materially adverse change in our business, financial condition or results
of operations or upon the occurrence of a major downturn in the general economy.
The underwriters propose to offer part of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
part of the shares to dealers at that price less a concession not in excess of
$ per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share on sales to other dealers. After
the offering, the representatives may change the public offering price and the
other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 345,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to each underwriter's initial purchase commitment.
We and the selling shareholders will pay the underwriters a commission of
% of the per share public offering price for each share of common stock that
the underwriters purchase in the offering. The following table shows the
underwriting fees that we and the selling shareholders will pay to the
underwriters in connection with the offering. These amounts are shown assuming
both no exercise and
53
full exercise of the underwriters' over-allotment option to purchase additional
shares of our common stock.
TO BE PAID BY
TO BE PAID BY SELLING
CAVION.COM SHAREHOLDERS
------------------- -------------------
NO FULL NO FULL
EXERCISE EXERCISE EXERCISE EXERCISE
-------- -------- -------- --------
Per share.................................................. $ $ $ $
Total...................................................... $ $ $ $
We estimate our expenses of this offering, exclusive of the underwriting
discount, will be approximately $700,000. Additionally, we and the selling
shareholders have agreed to indemnify the underwriters against specified
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
The representatives have informed us that the underwriters do not expect to
make sales of common stock offered by this prospectus to accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
common stock offered by this prospectus.
All of our directors, executive officers and principal shareholders have
agreed that, during the 180-day period following the date of this prospectus,
they will not, without the prior written consent of The Robinson-Humphrey
Company, LLC:
- directly or indirectly make, agree to or cause any offer, sale (including
short sale), loan, pledge or other disposition of, or grant any options,
rights or warrants to purchase with respect to, or otherwise transfer or
reduce any risk of ownership of, directly or indirectly, any shares of our
common stock or any, securities convertible into or exchangeable or
exercisable for our common stock;
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of the common
stock; or
- make any demand for, or exercise any right with respect to, the
registration of shares of our common stock or any securities convertible
into or exchangeable or exercisable for our common stock.
In addition, during the 180-day period, we have also agreed not to issue, or
to file any registration statement with respect to the registration of, any
shares of our common stock or any securities convertible into or exercisable for
our common stock, except registration statements on Form S-8 under the
Securities Act to register shares of common stock issuable under or reserved for
issuance under our Equity Incentive Plan. This will permit holders of those
shares to sell them in the public market without compliance with any holding
period requirement and, except for officers and directors, without compliance
with Rule 144.
Prior to this offering, our common stock has traded on the Nasdaq SmallCap
Market under the symbol "CAVN." We have applied for listing on the Nasdaq
National Market.
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and specified selling group members to
bid for and purchase the common stock. As an exception to these rules, the
representatives of the underwriters are permitted to engage in specified
transactions that stabilize the price of the common stock. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock. If the underwriters create a short position in
the common stock in connection with this offering (that is, if they sell more
shares of common stock than are set forth on the cover page of this prospectus),
the representatives may reduce that short position by purchasing common stock in
the open market. The
54
representatives of the underwriters may also elect to reduce any short position
by exercising all or part of the over-allotment option described above. The
representatives of the underwriters may also impose a penalty bid on
underwriters and selling group members in some cases. This means that if the
representatives purchase shares of common stock in the open market to reduce the
underwriters' short position or to stabilize the price of the common stock, they
may reclaim the amount of the selling concession from the underwriters and
selling group members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases. The imposition of a penalty bid
might also have an effect on the price of a security if it discourages resale of
the security. None of cavion.com, the selling shareholders or any of the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, the underwriters are not required to
engage in these activities and may end any of these activities at any time. The
representatives intend to make a market in the common stock after the completion
of the offering.
From time to time in the future in the ordinary course of business, the
representatives may provide investment banking services to us.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.
Each underwriter has also agreed that it has:
- not offered or sold, and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell, any shares of
common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
- complied, and will comply with, all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relating to the shares of common stock in, from or otherwise involving the
United Kingdom; and
- only issued or passed on, and will only issue or pass on, in the United
Kingdom any document received by it in connection with the issuance of the
shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
is a person to whom the document may otherwise lawfully be issued or
passed on.
55
EXPERTS
The financial statements of cavion.com and LanXtra included in this
prospectus and registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of Arthur
Andersen LLP as experts in accounting and auditing in giving said reports.
Reference is made to the report with regard to LanXtra, which includes an
explanatory paragraph with respect to the uncertainty regarding LanXtra's
ability to continue as a going concern as discussed in Note 1 to those financial
statements.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Gorsuch Kirgis LLP, Denver, Colorado. Smith, Gambrell & Russell,
LLP, Atlanta, Georgia, is representing the underwriters in this offering.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company under the Securities Exchange Act of 1934. We
file annual and quarterly reports, special reports, proxy statements, and other
information with the Securities and Exchange Commission. These filings and other
information can be read and copied at the SEC's Public Reference Room, 450 Fifth
Street N.W., Washington, D.C. 20549. You may obtain information on the operation
of Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
a website at (http://www.sec.gov.) that contains all information filed
electronically by us.
This prospectus constitutes a part of a registration statement on Form S-1,
together with amendments and exhibits, filed by us with the SEC under the
Securities Act of 1933, for the securities offered in this prospectus. This
prospectus does not contain all the information which is in the registration
statement, as allowed by the rules and regulations of the SEC. We refer you to
the registration statement and to the exhibits for further information with
respect to us and the securities offered in this prospectus. Copies of the
registration statement and the exhibits are on file at the offices of the SEC
and may be obtained upon payment of the prescribed fee. They may be examined
without charge at the SEC's Public Reference Room or through the SEC's website
described above. Statements contained in this prospectus concerning the
provisions of documents are necessarily summaries of the material provisions of
such documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the SEC.
This prospectus includes statistical data regarding Internet usage and the
credit union industry which were obtained from industry publications, including
reports generated by Callahan and Associates, International Data Corporation,
Credit Union National Association, and Nielsen// NetRatings. These industry
publications generally indicate that they have obtained information from sources
believed to be reliable, but do not guarantee the accuracy and completeness of
such information. While we believe those industry publications to be reliable,
we have not independently verified such data. We also have not sought the
consent of any of these organizations to refer to their reports in this
prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with additional or different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information contained
in this prospectus is accurate as of any date other than the date on the front
of this prospectus.
56
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Cavion Technologies, Inc.
Report of Independent Public Accountants.................. F-2
Balance Sheets at December 31, 1999 and 1998.............. F-3
Statements of Operations for the year ended December 31,
1999, and for the period from Inception (August 18,
1998) to December 31, 1998.............................. F-4
Statements of Stockholders' Equity for the year ended
December 31, 1999 and for the period from Inception
(August 18, 1998) to December 31, 1998.................. F-5
Statements of Cash Flows for the year ended December 31,
1999, and for the period from Inception (August 18,
1998) to December 31, 1998.............................. F-6
Notes to Financial Statements............................. F-8
LanXtra, Inc.
Report of Independent Public Accountants.................. F-27
Balance Sheets at January 31, 1999, December 31, 1998 and
1997.................................................... F-28
Statements of Operations for the one month period ended
January 31, 1999, for the years ended December 31, 1998
and 1997................................................ F-29
Statements of Stockholders' Deficit for the one month
ended January 31, 1999 and for the years ended
December 31, 1998 and 1997.............................. F-30
Statements of Cash Flows for the one-month period ended
January 31, 1999, for the years ended December 31, 1998
and 1997................................................ F-31
Notes to Financial Statements............................. F-32
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Cavion Technologies, Inc.:
We have audited the accompanying balance sheets of CAVION TECHNOLOGIES, INC.
(a Colorado corporation doing business as cavion.com; formerly Network
Acquisitions, Inc.; the "Company") as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity and cash flows for the
year ended December 31, 1999 and for the period from inception (August 18, 1998)
to December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cavion Technologies, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999 and for the period from inception
(August 18, 1998) to December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 4, 2000, except with respect to
certain matters discussed in Note 10, as
to which the date is February 17, 2000.
F-2
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
1999 1998
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $4,346,699 $ 19,735
Accounts receivable....................................... 94,190 --
Prepaid assets............................................ 141,949 --
Other..................................................... 2,558 --
---------- ----------
Total current assets.................................... 4,585,396 19,735
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................... 164,357 --
Furniture and fixtures.................................... 16,851 --
Network equipment and licensed software................... 530,466 --
---------- ----------
711,674 --
Less--accumulated depreciation............................ (45,066) --
---------- ----------
Property and equipment, net............................. 666,608 --
---------- ----------
DEPOSIT FOR LETTER OF CREDIT................................ 300,000 --
DEFERRED LANXTRA ACQUISITION COSTS.......................... -- 2,204,814
GOODWILL, net of accumulated amortization of $873,632 and
$0, respectively.......................................... 3,891,636 --
OTHER ASSETS................................................ 159,637 49,412
---------- ----------
TOTAL ASSETS................................................ $9,603,277 $2,273,961
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 213,098 $ --
Accrued liabilities....................................... 375,524 31,185
Accrued interest.......................................... -- 2,116
Deferred revenue and deposits............................. 547,639 --
Deferred revenue--license agreements...................... 300,000 --
Current portion of capital lease obligations.............. 137,500 --
Notes payable............................................. 470,000 --
---------- ----------
Total current liabilities............................... 2,043,761 33,301
---------- ----------
LONG-TERM LIABILITIES:
Capital lease obligations................................. 386,494 --
Notes payable............................................. -- 252,833
---------- ----------
Total long-term liabilities............................. 386,494 252,833
---------- ----------
PUTABLE CLASS B COMMON STOCK: 30,000 shares authorized;
28,648, and 0 shares issued and outstanding, respectively
(stated at redemption value).............................. 200,537 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock; $.0001 par value, 19,970,000 shares
authorized; 4,697,326 and 2,625,356 issued and
outstanding, respectively............................... 470 263
Warrants and options...................................... 507,096 13,284
Deferred compensation..................................... (107,735) --
Additional paid-in capital................................ 11,426,314 2,010,224
Accumulated deficit....................................... (4,853,660) (35,944)
---------- ----------
Total stockholders' equity.............................. 6,972,485 1,987,827
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $9,603,277 $2,273,961
========== ==========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
1999 1998
----------- ----------
REVENUE:
Network access and connectivity fees...................... $ 447,756 $ --
Installation services..................................... 157,081 --
Software licensing fees................................... 13,668 --
----------- ----------
Total revenue........................................... 618,505 --
----------- ----------
COST OF REVENUE:
Network access and connectivity........................... 329,359 --
Installation services and software licensing fees......... 163,885 --
----------- ----------
Total cost of revenue................................... 493,244 --
----------- ----------
Gross profit............................................ 125,261 --
----------- ----------
OPERATING EXPENSES:
Selling and marketing..................................... 1,384,946 --
General and administrative................................ 1,547,941 6,877
Research and development.................................. 586,250 --
Amortization of goodwill and other intangible assets...... 873,632 --
----------- ----------
Total operating expenses................................ 4,392,769 6,877
----------- ----------
LOSS FROM OPERATIONS........................................ (4,267,508) (6,877)
INTEREST INCOME............................................. 30,627 --
INTEREST EXPENSE............................................ (492,306) (29,067)
LOSS ON SALE OF EQUIPMENT................................... (24,332) --
----------- ----------
NET LOSS.................................................... $(4,753,519) $ (35,944)
=========== ==========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss.................................................. $(4,753,519) $ (35,944)
Dividends on preferred stock.............................. (64,197) --
----------- ----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.................. $(4,817,716) $ (35,944)
=========== ==========
BASIC AND DILUTED NET LOSS PER SHARE........................ $ (1.56) $ (0.02)
=========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC AND
DILUTED................................................... 3,081,156 2,078,170
=========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
F-4
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
AND FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
SERIES A PREFERRED CLASS A COMMON ADDITIONAL WARRANTS
---------------------- -------------------- PAID-IN AND DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS COMPENSATION
-------- ----------- --------- -------- ----------- --------- -------------
BALANCES, Inception (August 18,
1998)............................ -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock for
$.0001 per share............... -- -- 2,000,000 200 -- -- --
Issuance of common stock for $.01
per share, recorded at
December 21, 1998 estimated
fair value of $3.00 per
share.......................... -- -- 625,356 63 1,876,005 -- --
Fair value of warrants issued to
note holders................... -- -- -- -- -- 133,775 --
Repurchase of common stock....... -- -- (44,400) (4) -- -- --
Fair value of warrants issued to
Selling Agent.................. -- -- -- -- -- 13,284 --
Exercise of warrants by note
holders........................ -- -- 44,400 4 134,219 (133,775) --
Net loss......................... -- -- -- -- -- -- --
-------- ----------- --------- ---- ----------- -------- ---------
BALANCES, December 31, 1998........ -- -- 2,625,356 263 2,010,224 13,284 --
-------- ----------- --------- ---- ----------- -------- ---------
Issuance of common stock for
LanXtra business, recorded at
February 1, 1999, estimated
fair value of $3.00 per
share.......................... -- $ -- 375,214 $ 38 $ 1,125,604 $ -- $ --
Fair value of warrants issued to
note holders................... -- -- -- -- -- 35,885 --
Repurchase of common stock....... -- -- (311,884) (32) -- -- --
Fair value of warrants issued to
Selling Agent.................. -- -- -- -- -- 3,590 --
Exercise of warrants by note
holders and Selling Agent...... -- -- 17,640 2 52,937 (52,759) --
Issuance of Series A Preferred
Stock for $3.00 per share and
detachable warrants, net of
cash offering costs of
$252,000....................... 700,000 1,682,800 -- -- -- 165,200 --
Fair value of warrants issued in
connection with 1999 Bridge
Loan........................... -- -- -- -- -- 33,127 --
Warrants canceled................ -- 165,200 -- -- -- (165,200) --
Dividends on preferred stock,
paid in cash................... -- -- -- -- -- -- --
Shares issued upon initial public
offering, net of offering costs
of $1,512,395 and related fair
value of warrants issued to
underwriters................... -- $ -- 1,200,000 $120 $ 5,921,251 $366,234 $ --
Conversion of Class A Preferred
Stock to Common Stock.......... (700,000) (1,848,000) 700,000 70 1,847,930 -- --
Issuance of shares upon exercise
underwriters overallotment
option, net of offering costs
of $121,382.................... -- -- 90,500 9 466,868 -- --
Options issued to
non-employees.................. -- -- -- -- -- 107,735 (107,735)
Shares issued upon exercise of
options........................ -- -- 500 -- 1,500 -- --
Net loss......................... -- -- -- -- -- -- --
-------- ----------- --------- ---- ----------- -------- ---------
BALANCES, December 31, 1999........ -- $ -- 4,697,326 $470 $11,426,314 $507,096 $(107,735)
======== =========== ========= ==== =========== ======== =========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
BALANCES, Inception (August 18,
1998)............................ $ -- $ --
Issuance of common stock for
$.0001 per share............... -- 200
Issuance of common stock for $.01
per share, recorded at
December 21, 1998 estimated
fair value of $3.00 per
share.......................... -- 1,876,068
Fair value of warrants issued to
note holders................... -- 133,775
Repurchase of common stock....... -- (4)
Fair value of warrants issued to
Selling Agent.................. -- 13,284
Exercise of warrants by note
holders........................ -- 448
Net loss......................... (35,944) (35,944)
----------- -----------
BALANCES, December 31, 1998........ (35,944) 1,987,827
----------- -----------
Issuance of common stock for
LanXtra business, recorded at
February 1, 1999, estimated
fair value of $3.00 per
share.......................... $ -- $ 1,125,642
Fair value of warrants issued to
note holders................... -- 35,885
Repurchase of common stock....... -- (32)
Fair value of warrants issued to
Selling Agent.................. -- 3,590
Exercise of warrants by note
holders and Selling Agent...... -- 180
Issuance of Series A Preferred
Stock for $3.00 per share and
detachable warrants, net of
cash offering costs of
$252,000....................... -- 1,848,000
Fair value of warrants issued in
connection with 1999 Bridge
Loan........................... -- 33,127
Warrants canceled................ -- --
Dividends on preferred stock,
paid in cash................... (64,197) (64,197)
Shares issued upon initial public
offering, net of offering costs
of $1,512,395 and related fair
value of warrants issued to
underwriters................... $ -- $ 6,287,605
Conversion of Class A Preferred
Stock to Common Stock.......... -- --
Issuance of shares upon exercise
underwriters overallotment
option, net of offering costs
of $121,382.................... -- 466,877
Options issued to
non-employees.................. -- --
Shares issued upon exercise of
options........................ -- 1,500
Net loss......................... (4,753,519) (4,753,519)
----------- -----------
BALANCES, December 31, 1999........ $(4,853,660) $ 6,972,485
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-5
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
1999 1998
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(4,753,519) $ (35,944)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization......................... 989,295 --
Accretion of debt discount............................ 321,719 16,608
Accretion of putable stock............................ 33,340 4,232
Loss on disposal of assets............................ 24,332 --
Change in operating assets and liabilities--
Accounts receivable..................................... (77,732) --
Prepaids and inventories................................ (105,555) --
Other assets............................................ (137,822) --
Accounts payable........................................ (72,486) --
Accrued liabilities..................................... 75,881 2,116
Deferred revenue........................................ 632,927 --
Addition to certificate of deposit...................... (280,000) --
----------- ---------
Net cash used in operating activities............... (3,349,620) (12,988)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (207,209) --
Proceeds from sale leasehold.............................. 285,976 --
Acquisition of LanXtra.................................... -- (335,000)
----------- ---------
Net cash provided by (used in) investing
activities........................................ 78,767 (335,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 470,000 370,000
Repurchases of Common Stock............................... (32) --
Proceeds from issuance of Common Stock.................... 180 6,898
Proceeds from issuance of Series A Preferred Stock........ 2,100,000 --
Proceeds from initial public offering..................... 8,388,250 --
Proceeds from the exercise of employee options............ 1,500 --
Proceeds from issuance of warrants........................ 100 --
Series A Preferred Stock offering costs................... (252,000) --
Payment of debt issuance costs............................ (137,612) (9,175)
Payments on line of credit................................ (600,000) --
Payment of related party debt............................. (313,410) --
Payment on bridge loan.................................... (300,000) --
Principal payments on capital leases...................... (61,135) --
Common Stock offering costs............................... (1,633,777) --
Payment of dividends on Series A Preferred Stock.......... (64,197) --
----------- ---------
Net cash provided by financing activities........... 7,597,867 367,723
----------- ---------
The accompanying notes to financial statements are an integral part of these
statements.
F-6
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
FROM INCEPTION (AUGUST 18, 1998) TO DECEMBER 31, 1998
1999 1998
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... $4,326,964 $ 19,735
CASH AND CASH EQUIVALENTS,
beginning of period....................................... 19,735 --
---------- ----------
CASH AND CASH EQUIVALENTS,
end of period............................................. $4,346,699 $ 19,735
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 229,480 $ 6,111
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Property acquired with capital leases................... $ 528,258 $ --
========== ==========
Debt issuance costs included in accrued liabilities..... $ -- $ 31,185
========== ==========
Estimated value of shares issued to LanXtra management
shareholders.......................................... $ -- $1,876,068
========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
F-7
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS:
ORGANIZATION
Cavion Technologies, Inc. (the "Company") offers products and services for
business to business communications, secure Internet financial products, such as
online banking and bill paying services, and secure Internet access and services
for its customers. The Company is also building and managing a secure private
communications network exclusively for the credit union industry. This network
acts as a communications platform for the delivery of services and information
to and from credit unions and related businesses.
The Company was incorporated in Colorado on August 18, 1998 as Network
Acquisitions, Inc. to acquire the assets of Cavion Technologies, Inc., now known
as LanXtra, Inc. ("LanXtra"), which was engaged in providing internet, intranet,
and extranet services to the credit union industry. On February 1, 1999, the
Company acquired the business of LanXtra, and the Company changed its name to
Cavion Technologies, Inc., doing business as cavion.com.
On October 29, 1999, the Company successfully completed an Initial Public
Offering ("IPO"). The number of shares offered and sold were 1,200,000, with an
underwriter's over allotment option for an additional 180,000 shares. Total
gross proceeds of $7,800,000 were raised in the offering, and the Company, after
offering expenses, netted proceeds of approximately $6,288,000. In November
1999, the Company sold 90,500 additional shares from the underwriters
overallotment option, raising additional gross proceeds of approximately
$588,000, and net proceeds of approximately $467,000. The total number of shares
outstanding after the offering was 4,696,826, reflecting the automatic
conversion of 700,000 shares of Convertible Preferred Stock into 700,000 shares
of common stock upon the closing of the offering. In addition, at the closing of
the IPO, the Company issued warrants to purchase 120,000 shares of the Company's
Common Stock to the Representative of the underwriter at a price of 125% equal
to the IPO price, or $8.125 per share.
Prior to the IPO, the Company financed its operations through a private
placement of its 15% notes, which were offered commencing on October 20, 1998
(the "Offering"), the sale of Series A Preferred Stock and funding through a
Bridge Loan. The Company advanced a portion of the proceeds from the Offering to
LanXtra in anticipation of the acquisition of LanXtra. Through December 31,
1998, the Company had raised $370,000 in the private placement and had advanced
LanXtra a total of $335,000 under an agreement dated September 14, 1998.
PURCHASE OF LANXTRA'S ASSETS, LIABILITIES AND OPERATIONS
In August 1998, the Company signed a letter of intent to purchase LanXtra's
business. In December 1998, the Company signed an Asset Purchase Agreement (the
"Purchase Agreement") with LanXtra to purchase substantially all the assets of
LanXtra in exchange for approximately 375,214 shares and 28,648 shares of the
Company's Class A and B Common Stock, respectively, and the 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.
F-8
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS: (CONTINUED)
One of these shareholders held directly and through irrevocable proxies
sufficient voting shares to approve the transaction. The shares are
non-forfeitable and not contingent upon the management's continued employment
with the Company. As a result, the shares have been considered additional
purchase consideration and are recorded at their estimated fair value of $3 per
share.
The estimated fair value of assets acquired, liabilities assumed, and
consideration issued in the transaction with LanXtra are as follows:
Consideration:
Class A Common Stock...................................... $3,001,710
Class B Common Stock...................................... 167,197
Cash...................................................... 338,735
----------
3,507,642
Add: Net liabilities (assets) assumed:
Working capital deficit assumed........................... 706,044
Property and equipment.................................... (331,020)
Borrowings assumed........................................ 924,417
Other assets.............................................. (41,815)
----------
Goodwill.................................................... $4,765,268
==========
The Company has recorded the fair value of its stock issued to LanXtra at $3
per share based principally upon its private placement of Series A Preferred
Stock completed in February 1999. The transaction with LanXtra resulted in
approximately $4,760,000 of goodwill, and will be amortized over five years.
Because the business now operated by the Company has never been profitable, and
due to the other risks and uncertainties discussed herein, it is reasonably
possible that an analysis of these long-lived assets in future periods could
result in a conclusion that they are impaired, and the amount of the impairment
could be substantial.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-9
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONCENTRATION RISKS
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.
Cavion purchases substantially all of its telecommunications services from
Convergent Communications Services, Inc. ("Convergent"). Cavion has entered into
a non-exclusive agreement with Convergent to establish and maintain connectivity
between Cavion's network and substantially all its customers. Cavion's business
depends upon the ability of Convergent, or some other telecommunications service
provider, to establish and maintain connectivity with
CUINET-Registered Trademark-. If Convergent is unable to provide connectivity in
a timely manner to new customers or experiences problems in delivering services
to existing customers, the business could be adversely affected. If Cavion is
unable to continue to obtain services from Convergent or some other provider on
economically favorable terms, the operations of the business and its financial
performance may be adversely affected.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
short-term trade payables, putable common stock and borrowings. The carrying
values of the instruments acquired from LanXtra approximate the fair value
placed upon them on February 1, 1999, in connection with their assumption. Fair
values were principally determined by discounting expected future cash flows at
a market cost of debt. The fair value of the Company's other borrowings
approximate their carrying values based upon current market rates of interest.
PROPERTY AND EQUIPMENT
Property and equipment acquired from LanXtra was recorded at its estimated
fair value. Additions are recorded at cost. Property and equipment are
depreciated using the straight-line method over the lesser of the lease term or
their estimated lives as follows:
Furniture and fixtures..................................... 7 years
Network equipment.......................................... 3-5 years
Licensed software.......................................... 3 years
Leasehold improvements..................................... Life of the lease
The Company recorded depreciation expense of approximately $116,000 in 1999.
F-10
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived assets. The acquisition of LanXtra generated approximately $4,760,000
of intangible assets, which are continuously reviewed by the Company for
impairments.
OFFERING COSTS
The Company has incurred offering costs which total $1,885,777 for the year
ended December 31, 1999. Such costs represent legal and other professional fees
incurred related to the Company's IPO and issuance of Series A Preferred Stock.
Such costs were recorded as a reduction of IPO proceeds upon the consummation of
the IPO on October 29, 1999. In addition to cash offering costs, warrants were
issued to the selling agent and underwriter valued at $366,234, which excludes
$165,200 worth of warrants issued and later canceled.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
Accrued payroll and vacation........................ $ 53,938 $ --
Accrued professional fees........................... 67,854 --
Accrued Telecom and Telecom termination fees for
Convergent contract............................... 81,392 --
Other liabilities................................... 172,340 31,185
-------- -------
Total accrued liabilities....................... $375,524 $31,185
======== =======
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
F-11
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
amount of any tax benefits which, more likely than not based on current
circumstances, are not expected to be realized.
NET LOSS PER SHARE
The Company reports net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
requires the presentation of both basic and diluted earnings (loss) per share.
Basic net loss per common share has been computed based upon the weighted
average number of shares of common stock outstanding during the period. Weighted
average common shares excludes 28,648 shares of putable Class B Common Stock as
an assumed cash settlement is more dilutive. Diluted net loss per share is
computed by dividing the net loss applicable to common stockholders for the
period by the weighted average number of common and potential common shares
outstanding during the period if the effect of the potential common shares is
dilutive. The Company has also excluded the weighted average effect of common
stock issuable upon exercise of all warrants and options from the computation of
diluted earnings per share as the effect of all such securities is anti-dilutive
for the periods presented. The shares excluded related to outstanding options
and warrants (without regard to the treasury stock method) at December 31, 1999
and 1998 were 511,000 and 4,440, respectively.
STOCK BASED COMPENSATION
The Company accounts for its employee stock option plan and other employee
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. The Company adopted the
disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which allows entities to continue to apply the
provisions of APB No. 25 for transactions with employees and provide pro forma
disclosures for employee stock grants as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to these transactions. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and related interpretation.
REVENUE RECOGNITION
The Company generates revenue from three sources: (1) service revenue for
the installation of equipment for internet access and access to the Company's
secure financial network at customer sites, (2) software license fees, and
(3) recurring monthly network access and connectivity fees. Service revenue is
recognized as the services are performed. Software license arrangements
typically provide for enhancements over the term of the arrangement, and
software license fees are generally received in advance, deferred and recognized
ratably over the term of the arrangement. Network access and connectivity fees
are typically billed in advance and recognized in the month that the
access/connectivity is provided.
F-12
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs when a software product
is determined to be technologically feasible. The Company's software products
are deemed to be technologically feasible at the point the Company commences
field testing of the software. The period from field testing to general customer
release of the software has been brief and the costs incurred during this period
were insignificant. Accordingly, the Company has not capitalized any qualifying
software development costs.
ADVERTISING
The Company expenses advertising as incurred. Advertising expense was
$141,196 and $0 for the years ended December 31, 1999 and 1998, respectively.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting comprehensive income and its components in the financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. From inception through December 31,
1999, there have been no differences between the Company's comprehensive loss
and its net loss.
SEGMENT INFORMATION
In accordance with the provisions of SFAS No. 131, the Company has
determined that it does not have separately reportable operating segments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), and in June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB 133" ("SFAS No 137"). SFAS No. 137 requires the Company to adopt
SFAS No. 133 for all quarters in the year ended December 31, 2001. SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
During December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. SAB 101 clarifies basic criteria for when revenues are taken into
account for purposes of a company's financial statements. SAB 101 is effective
for the quarter ended June 30, 2000. The Company is currently assessing the
implications of adopting SAB 101. In the period of adoption, the cumulative
impact will be reported as a change in accounting principle as dictated by
SAB 101.
F-13
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
3. BORROWINGS:
The Company's borrowings at December 31, 1999 and 1998, consisted of the
following:
1999 1998
---------------------- ----------------------
FACE UNAMORTIZED FACE UNAMORTIZED
VALUE DISCOUNT VALUE DISCOUNT
-------- ----------- -------- -----------
Notes payable.................... $470,000 $ -- $370,000 $(117,167)
-------- ---- -------- ---------
$470,000 $ -- $370,000 $(117,167)
======== ==== ======== =========
BRIDGE LOAN
In August 1999, the Company raised $300,000 through Neidiger, Tucker,
Bruner, Inc. and First Capital Investments, Inc. ("FCI" or the "Selling Agent").
The Bridge Loan bore interest at 14% and was to mature upon the earlier of the
closing of the Company's IPO or one year from the date of the note. The loan was
paid in full upon the closing of the IPO. FCI, is a related party through its
substantial ownership of the Company's common stock.
Upon their issuance, the proceeds of the Bridge loan were discounted to
reflect the estimated fair value of warrants issued to the holders of the bridge
loan debt. The discount was amortized as interest expense over the estimated
term of the notes. Debt issuance costs in the amount of $31,045 were paid in
conjunction with the issuance of these notes and were amortized as interest
expense over the term of the notes. The estimated fair value of the warrants was
$33,127 and was determined utilizing the Black-Scholes option pricing model,
assuming a volatility factor of .001%, a risk free rate of 6.22% and a fair
market value of the underlying stock of $6.75 per share. The warrants are still
outstanding at December 31, 1999.
NOTE PAYABLE
Beginning on October 20, 1998, the Company offered through its officers,
directors and FCI, up to $2,000,000 of 15% secured notes due October 19, 2000
(the "Notes") along with warrants to purchase Class A Common Stock (the
"Warrants"). At December 31, 1998, the Company had raised $370,000 through the
Offering. The Company raised a total of $470,000, and the Offering closed on
February 8, 1999.
The Notes are secured by substantially all of the assets now owned and
hereafter acquired by the Company, including the assets acquired from LanXtra in
February 1999. There is no pre-payment penalty.
In connection with the Offering, the Company granted note holders Warrants
to purchase 1,200 shares of the Company's Class A Common Stock for every $10,000
of Notes purchased. Accordingly, at December 31, 1998, the Company had issued
Warrants for 44,400 shares, and in February 1999, issued Warrants for an
additional 12,000 shares. Such Warrants had an exercise price of $0.01 per
share. These detachable Warrants were valued at a total of $169,660 utilizing
the Black-Scholes option pricing
F-14
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
3. BORROWINGS: (CONTINUED)
model, assuming a volatility factor of 70%, a risk free interest rate of 4.31%
and a fair market value of the underlying common stock of $3 per share. All
Warrants have been exercised.
REVOLVING LINE OF CREDIT
As part of the Purchase Agreement, a $600,000 Revolving Line of Credit was
assumed by the Company. The line of credit accrued interest at a rate equal to
the bank's reference rate plus 1.5% (9.25% at December 31, 1998). The Revolving
Line of Credit was collateralized by letters of credit issued by the Company and
certain LanXtra stockholders as well as by agreements among certain LanXtra
stockholders. The Revolving Line of Credit was paid in full and cancelled after
the IPO proceeds were received, at which point the corresponding collateralized
letters of credit were released.
NOTES PAYABLE TO STOCKHOLDERS
The Company assumed notes payable to certain LanXtra stockholders as part of
the Purchase Agreement. The maturity date on these notes was extended to the
date on which the Company obtains 100 credit union customers (the "100 Credit
Union Date"). The 100 Credit Union Date was reached on December 31, 1999. In
addition, interest terms were amended such that no interest was to accrue for
the remaining term of the notes payable. At the acquisition date, the notes were
discounted to reflect their fair value. The discount was amortized as interest
expense over the remaining estimated term of the notes. The notes payable to
stockholders were repaid in full after the IPO proceeds were received.
As additional consideration for shareholder notes with a face value of
$240,000, LanXtra issued 28,648 shares of its putable common stock. These
putable shares were exchanged for 28,648 shares of the Company's Class B Putable
Common Stock. The lenders have the right to sell these shares back to the
Company for a purchase price of $7 per share, through March 30, 2000, or can
convert these shares into equivalent shares of Class A Common Stock. If these
shares are not redeemed or converted at the request of the shareholder, they
will automatically be converted on March 31, 2000. As a result of this
transaction, the Class B shares were recorded at their estimated fair value of
$167,197. The difference between this amount and the put value of $200,537 was
accreted as interest expense over the estimated term of the notes.
RELATED PARTY COLLATERALIZED LOANS
The Company also assumed certain factoring agreements (the "Agreements")
with management and a stockholder of the Company as part of the Purchase
Agreement. The interest terms were amended such that no interest would be
accrued for the remaining term of the loans and the maturity of these loans was
extended to the 100 Credit Union Date. The related party collateralized loans
were paid in full after the IPO proceeds were received and cancelled.
F-15
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
3. BORROWINGS: (CONTINUED)
MATURITIES OF BORROWINGS
The Company's borrowings as of December 31, 1999, totaling $470,000 mature
in year 2000.
4. RELATED PARTY TRANSACTIONS:
MONEYLINE AMERICA, LLC
In August 1999, the Company entered into an agreement with MoneyLine
America, LLC, (the "MoneyLine Agreement"), which provides that the Company will
receive payments under an agreement with MoneyLine to provide on line mortgage
lending services for credit unions and their members through the Company's
network. This agreement calls for a minimum payment of $300,000 in the first
year, beginning September 1999, escalating to $1,000,000 in years six through
ten, provided the Company has at least 1,500 credit unions, or 12% of the U.S.
credit unions on its network by the end of year three. The amounts received are
reflected as deferred revenue--license agreements in the accompanying balance
sheets. Fifty percent of MoneyLine America is owned by Boutine Capital, LLC, a
principal shareholder of the Company.
CONVERGENT COMMUNICATIONS
Effective October 22, 1999, the Company entered into a five-year agreement
with Convergent. This agreement includes a sale lease back of certain network
equipment. Equipment with a net book value of $265,394 was sold for $285,976. A
corresponding deferred gain of $20,582 was recorded and will be recognized over
the life of the leases. Under this agreement, Convergent will establish,
maintain and support network connectivity between the Company's network and its
customers, including providing, equipment, maintenance and related services for
the network. One of the Company's directors is the Chief Executive Officer and
chairman of the board of Convergent Communications, Inc. the parent company of
Convergent. In addition, Convergent owns 64,000 shares of the Company's stock at
December 31, 1999.
F-16
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
5. CAPITAL LEASE OBLIGATIONS:
The Company assumed several capital lease agreements related to computers
and various office equipment in conjunction with the Purchase Agreement. The
Company has also entered into additional capital lease agreements during the
year ended December 31, 1999. The capital leases have terms ranging from 24 to
60 months with interest rates ranging between 9% and 20.3%.
As of December 31, 1999, the present value of the future minimum lease
payments is as follows:
2000........................................................ $ 196,163
2001........................................................ 184,782
2002........................................................ 119,455
2003........................................................ 93,065
2004........................................................ 77,555
---------
671,020
Less: amounts representing interest......................... (147,026)
---------
523,994
Less: current portion....................................... (137,500)
---------
Long-term capital lease obligation.......................... $ 386,494
=========
The net book value of assets under capital lease obligations as of
December 31, 1999 was approximately $530,779.
6. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 20,000,000 shares of common stock, par
value $.0001 per share. The common stock is segregated into two classes: Class A
and Class B. Of the 20,000,000 shares of common stock, 19,970,000 are designated
as Class A and 30,000 are designated as Class B.
CLASS A COMMON STOCK
At December 31, 1999, 4,697,326 shares of Class A Common Stock were issued
and outstanding. Two million shares were issued for consideration of $.0001 per
share (par value). Certain LanXtra shareholders and management were issued
625,356 shares for cash consideration of $.01 per share. The estimated fair
value assigned to these shares was $3 per share which is consistent with the
value assigned to the 375,214 shares issued to LanXtra in February 1999. The
holders of Class A Common Stock are entitled to one vote for each share held on
record on each matter submitted to a vote of shareholders. Cumulative voting for
election of directors is not permitted. Holders of Class A Common Stock have no
preemptive rights or rights to convert their Class A Common Stock into any other
securities.
F-17
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY: (CONTINUED)
CLASS B COMMON STOCK
As of December 31, 1999, there were 28,648 shares of the Class B voting
Common Stock issued and outstanding. These shares were issued in exchange for
similar securities of LanXtra as partial consideration for the purchase of
LanXtra's business, and are callable by the Company at $7 per share. The holders
of Class B Common Stock have the right to sell the Class B Common Stock to the
Company at $7 per share or convert their shares to equivalent units of Class A
Common Stock on March 30, 2000. If these shares are not redeemed or converted at
the request of the shareholder, they will automatically be converted on
March 31, 2000. The Class B Common Stock was authorized so that the Company
could exchange its Class B Common Stock for LanXtra's existing nonvoting putable
common stock with similar terms.
PREFERRED STOCK
In February 1999, the Board of Directors authorized the Company, without
further action by the shareholders, to issue 10,000,000 shares of one or more
series of preferred stock at a par value of $.0001, all of which is nonvoting.
The Board of Directors may, without shareholder approval, determine the dividend
rates, redemption prices, preferences on liquidation or dissolution, conversion
rights, voting rights and any other preferences. In addition, the Company
authorized the sale of 700,000 shares of Series A Convertible Preferred Stock in
conjunction with a private placement offering of the stock. Each share of the
Series A Preferred Stock was convertible at any time at the holder's option into
an equal number of shares of Class A Common Stock of the Company at a conversion
price initially equal to the offering price, which was established at $3 per
share. Each share of the Series A Preferred Stock was automatically convertible
into an equal number of Class A shares upon certain conditions, including an
IPO.
The Company sold 700,000 shares of Series A Preferred Stock at $3 per share,
raising proceeds of $2,100,000. All Series A preferred shares were converted to
Class A Common Stock on the closing date of the IPO. The Series A Preferred
Stock bore dividends a the rate of 5% per year, payable in cash or shares of the
Company's Class A common stock. During 1999, the Company paid $64,197 of
dividends.
WARRANTS
As part of the underwriter's compensation for the funds raised in the
Company's IPO, the Company agreed to sell, for $100, warrants to purchase
120,000 shares of the Class A Common Stock. The warrants are exercisable at any
time during a five-year term at an exercise price equal to 125% of the offering
price, or $8.125. The warrants outstanding were valued at a total of $366,234,
utilizing the Black-Scholes option pricing model assuming a volatility factor of
53%, a risk free interest rate of 6.22% and a fair market value of the
underlying shares of $6.50. The value of these warrants were recorded as a
reduction of additional paid in capital received from the initial public
offering.
In conjunction with the issuance of the August 1999 Bridge Loan, the Company
granted the Bridge Loan holders warrants to purchase 5,000 shares of the
Company's Class A common stock for every
F-18
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY: (CONTINUED)
$50,000 of notes purchased. The warrants are exercisable for a period of five
years beginning on the earlier to occur of (i) the closing of the IPO or
(ii) one year from the date of the warrant. These detachable warrants were
valued at a total of $33,127 utilizing the Black-Scholes option pricing model,
assuming a volatility factor of 70%, a risk free rate of 6.22% and a fair value
of the underlying common stock of $6.75 per share.
The Company issued warrants with the private placement of notes payable in
October 1998 which allow the purchase of 1,200 shares of the Company's Class A
Common Stock for every $10,000 of notes payable. The exercise price was $0.01
per share. Originally, the warrant exercise period was for a period of one year
beginning on the maturity date of the notes payable. On December 22, 1998, the
Company accelerated the exercise period to begin immediately and end one year
after each note's issuance date. All holders of warrants at that date elected to
immediately exercise their warrants. Warrants for 44,400 shares of Class A
Common Stock were issued and exercised at December 31, 1998. Warrants for an
additional 12,000 shares of Class A Common Stock were issued and immediately
exercised during 1999.
The Company redeemed 17,640 and 44,400 shares of Class A Common Stock from
its existing shareholders for a redemption price of $.0001 per share during the
year ended December 31, 1999 and 1998, respectively. The redeemed shares were
reissued in connection with the exercise of the warrants issued to note holders
and the Selling Agent.
As part of the Selling Agent's compensation, the Company agreed to issue
additional warrants for the Company's Class A Common Stock. The warrants are
exercisable at any time during a five-year term at 110% of the price paid by the
holders of the Notes for the Class A Common Stock. At December 31, 1998, the
Selling Agent earned the right to purchase 4,440 shares of the Company's
Class A Common Stock at an exercise price of $.011 per share. At September 30,
1999, the Selling Agent earned the right to purchase an additional 1,200 shares
under the same terms. The 4,440 warrants outstanding at December 31, 1998, were
valued at a total of $13,284 and the additional 1,200 warrants were valued at
$3,590, utilizing the Black-Scholes option pricing model assuming a volatility
factor of 70%, a risk free interest rate of 4.31% and a fair market value of the
underlying shares of $3 per share. The warrants were recorded as debt issuance
costs and are being amortized into interest expense over the life of the debt.
All such warrants have been exercised.
STOCK OPTIONS
Effective March 19, 1999, the Company adopted a stock option plan (the
"Plan"). The Plan provides for grants of incentive stock options, nonqualified
stock options and restricted stock to designated employees, officers, directors,
advisors and independent contractors. The Plan authorizes the issuance of up to
750,000 shares of Class A Common Stock. Under the Plan, the exercise price per
share of a non-qualified stock option must be equal to at least 50% of the fair
market value of the common stock at the grant date, and the exercise price per
share of an incentive stock option must equal the fair market value of the
common stock at the grant date. Through December 31, 1999, options for 505,500
shares of Class A Common Stock have been issued under the Plan. The
F-19
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY: (CONTINUED)
outstanding stock options have an average exercise price of $4.19 per share,
with a range of $3.00 to $6.25, and vest over various terms with a maximum
vesting period of 18 months and expire after the contract period of ten years.
During the year ended December 31, 1999, the Company granted options for
20,000 shares of Class A Common Stock to non-employees in exchange for services.
The exercise price of these options range from $3.00 to $6.00 per share. The
fair value of these options on the date of grant was approximately $107,000.
Expense related to such options will be recorded over the term the services are
provided. The fair value of each non-employee option grant was estimated on the
date of the grant using the Black-Scholes option pricing model. Assumptions used
to calculate the fair value were risk free interest rates of 4.48% to 6.22%, no
dividend yields, a life of five to ten years and volatility of 53%.
The following table summarizes stock option activity under the Plan:
GRANTED TO GRANTED TO
EMPLOYEES NON-EMPLOYEES
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
Outstanding at January 1, 1999........... -- $ -- -- $ --
Granted................................ 505,500 4.19 20,000 $4.50
Exercised.............................. (500) 3.00 -- --
Canceled............................... (14,000) 3.38 -- --
------- ----- ------ -----
Outstanding at December 31, 1999......... 491,000 4.41 20,000 $4.50
======= ===== ====== =====
Exercisable at December 31, 1999......... 157,124 $3.45 -- $ --
======= ===== ====== =====
Weighted average fair value of options
granted during the year................ $1.64 $2.67
===== =====
F-20
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
6. STOCKHOLDERS' EQUITY: (CONTINUED)
Under the fair value approach of SFAS 123, the total fair value of options
granted under the Plan during 1999 was $829,509. If the Company had accounted
for its stock option plan in accordance with SFAS 123, the Company's net loss
and pro forma net loss would have been reported as follows:
YEAR ENDED
DECEMBER 31,
1999
-------------
Net loss: As reported.................... $(4,753,519)
===========
Pro forma...................... $(5,180,247)
===========
Per share data: As reported.................... $ (1.56)
===========
Pro forma...................... $ (1.71)
===========
The fair value of each option grant was estimated on the date of the grant
using the minimum value method. Assumptions used to calculate the fair value
were risk free interest rates of 6.22% to 6.25%, no dividend yields, an expected
life of three to five years and volatility of .001% to 53%.
7. COMMITMENTS AND CONTINGENCIES:
LEGAL MATTERS
In connection with the Purchase Agreement transaction, a shareholder of
LanXtra exercised his rights as a dissenting shareholder. The Company assumed
LanXtra's obligation (if any) to this dissenting shareholder. If the shareholder
is permitted to pursue his claim in a legal proceeding, LanXtra could be
required to pay the shareholder the fair value of his shares immediately before
the closing date of the Purchase Agreement. The Company's and LanXtra's
management believes that the value paid on account of these shares pursuant to
the Purchase Agreement is greater than the amount which the dissenting
shareholder could recover under Colorado law. The dissenting shareholder has
asserted that the value of his 50,000 LanXtra shares immediately before the
closing date of the Purchase Agreement would be approximately $250,000. The
ultimate resolution of the matter, which is expected to occur within one year,
could result in an obligation to such shareholder. Further, should LanXtra, or
the Company as successor, be required to make a payment to this shareholder,
such payment could result in the purchase transaction being treated as a taxable
transaction which could subject the Company to a significant tax liability.
In accordance with the Purchase Agreement, the Company may become legally
obligated to satisfy additional liabilities of LanXtra, including liabilities
arising on or after the closing date with respect to LanXtra's assets or
business. To date, no liabilities other than those identified in the Purchase
Agreement have arisen, however, other liabilities could arise in the future.
The Company is exposed to legal claims arising in the ordinary course of
business. In management's opinion, none of the claims currently asserted will
result in a material liability or change to earnings.
F-21
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
8. INCOME TAXES:
The Company has had losses since its Inception, and therefore has not been
subject to federal or state income taxes. As of December 31, 1999, the Company
had an accumulated net operating loss ("NOL") carryforward for income tax
purposes of approximately $5,179,000. Approximately $1,800,000 of this NOL was
acquired through the purchaser of LanXtra. This acquired NOL is subject to
certain limitations and if utilized would be recorded as a reduction of
purchased goodwill. The carryforward is subject to examination by the tax
authorities and expires at various dates through the year 2014. The Tax Reform
Act of 1986 contains provisions that may limit the NOL carryforwards available
for use in any given year upon the occurrence of certain events, including
significant changes in ownership interest. A change of ownership of a company
greater than 50% within a three-year period results in an annual limitation on
the Company's ability to utilize its NOL carryforwards from tax periods prior to
the ownership change.
Deferred tax assets and liabilities consist of the following:
1999 1998
----------- --------
Current deferred tax assets (liabilities):
Deferred revenue.................................... $ 70,637 $ --
Accrued compensation................................ 6,134 --
Other............................................... 15,086 --
----------- --------
91,857 --
Less valuation allowance.............................. (91,857) --
----------- --------
Total current deferred tax assets (liabilities)..... -- --
Non-current deferred assets (liabilities):
Net operating loss carryforwards.................... $ 1,968,155 $ 13,659
Depreciation differences............................ (12,129) --
Other............................................... 12,129 --
----------- --------
1,968,155 13,569
Less valuation allowance.............................. (1,968,155) (13,659)
----------- --------
Total non-current deferred tax assets (liabilities)... -- --
----------- --------
Net deferred taxes.................................... $ -- $ --
=========== ========
Included in the Company's deferred tax assets is a benefit resulting from
the accumulated NOL and other previously unrecognized tax benefits. Recognition
of the NOL and these benefits requires future taxable income, the attainment of
which is uncertain, and therefore, a valuation allowance has been established
for the NOL benefit and for the deferred tax assets in excess of deferred tax
liabilities, and no benefit for income taxes has been recognized in the
accompanying statements of operations.
F-22
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
8. INCOME TAXES: (CONTINUED)
The Company recorded income tax expenses and benefits for the years ended
December 31 as follows:
1999 1998
----------- --------
Current tax benefit................................... $(1,275,298) $ (3,017)
Deferred tax benefit.................................. (61,444) (10,642)
Valuation provision................................... 1,336,742 13,659
----------- --------
$ -- $ --
=========== ========
The differences in income taxes provided and the amounts determined by
applying the federal statutory rate to income taxes result from the following:
1999 1998
----------- --------
Income tax benefit using federal statutory rate....... $(1,616,196) $(12,221)
State income tax benefit, net......................... (190,141) (1,438)
Goodwill amortization................................. 331,981 --
Accretion of debt discount............................ 122,253 --
Meals, entertainment and other........................ 15,361 --
Change in valuation allowance......................... 1,336,742 13,659
----------- --------
$ -- $ --
=========== ========
9. ACQUISITION OF LANXTRA BUSINESS (UNAUDITED):
As discussed above, the Company acquired the business of LanXtra on February
1, 1999. The following is pro forma operating information. For purposes of the
pro forma statement of operations, the transaction was assumed to be consummated
on January 1, 1998. Pro forma earnings per share are calculated as if the
Purchase Agreement was completed on January 1, 1998 and the related 1,029,218
shares of common stock were issued on that date.
F-23
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
9. ACQUISITION OF LANXTRA BUSINESS (UNAUDITED): (CONTINUED)
The pro forma statement of operations for the year ended December 31, 1998
is as follows:
PRO FORMA
LANXTRA CAVION ADJUSTMENTS PRO FORMA
----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue...................... $ 215,022 $ -- $ -- $ 215,022
Cost of revenue.............. 222,419 -- -- 222,419
----------- -------- --------- -----------
Gross profit............... (7,397) -- -- (7,397)
Operating expenses........... 1,117,892 6,877 914,146 (1) 2,038,915
Nonoperating expenses........ 845,213 29,067 (584,480)(2) 289,800
----------- -------- --------- -----------
Loss from continuing
operations............... $(1,970,502) $(35,944) $(329,666) $(2,336,112)
=========== ======== ========= ===========
Unaudited pro forma net loss
from continuing operations
per basic and diluted
share...................... $ (.77)
===========
Weighted average shares
outstanding................ 3,029,218
===========
The pro forma statement of operations for the year ended December 31, 1999
is as follows:
PRO FORMA
LANXTRA CAVION ADJUSTMENTS PRO FORMA
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue..................... $ 37,850 $ 618,505 $ -- $ 656,355
Cost of revenue............. 31,898 493,244 -- 525,142
--------- ----------- -------- -----------
Gross profit.............. 5,952 125,261 -- 131,213
Operating expenses.......... 213,311 4,392,769 79,421 (1) 4,685,501
Interest expense and
other..................... 64,069 486,011 (52,932)(2) 497,148
--------- ----------- -------- -----------
Net loss.................. $(271,428) $(4,753,519) $(26,489) $(5,051,436)
========= =========== ======== ===========
Net loss per basic share.... $ (1.06) $ (1.56) $ (1.64)
========= =========== ===========
Weighted average shares
outstanding............... 3,112,424
===========
- ------------------------
ADJUSTMENTS
(1) Amortization of goodwill
(2) Reduction of interest expense to reflect Cavion's capital structure
F-24
CAVION TECHNOLOGIES, INC.
(FORMERLY NETWORK ACQUISITIONS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998)
TO DECEMBER 31, 1998
10. SUBSEQUENT EVENTS:
On February 14, 2000, the Company entered into an agreement for investor
relations consulting services with Strategic Growth International, Inc. ("SGI").
In connection with the agreement, the Company granted SGI options to purchase
175,000 shares of our class A common stock exercisable at $11.1875 for a period
of five years. The agreement has a term of one-year and requires monthly
payments of $8,000 to SGI for the services.
On February 17, 2000, the Company entered into an agreement to issue, for
$12.00 per share, the closing price on February 14, the date of the offering to
the investors, 205,000 shares of its Class A Common Stock in a private
transaction. Gross proceeds of $2,460,000 were raised, and the Company, after a
reduction of $196,800 for the selling agent's commission, netted proceeds of
$2,263,200. In conjunction with this private placement, warrants to purchase
20,500 shares of the Company's Class A Common Stock were issued to the selling
agent.
F-25
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION)
FINANCIAL STATEMENTS
AS OF JANUARY 31, 1999, DECEMBER 31, 1998,
AND DECEMBER 31, 1997
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LanXtra, Inc.:
We have audited the accompanying balance sheets of LANXTRA, INC. (a Colorado
corporation; formerly Cavion Technologies, Inc. and Sigmacom Corporation) as of
January 31, 1999, December 31, 1998 and 1997, and the related statements of
operations, stockholders' deficit and cash flows for the one-month period ended
January 31, 1999 and for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LanXtra, Inc. as of
January 31, 1999, December 31, 1998 and 1997, and the results of its operations
and its cash flows for the one-month period ended January 31, 1999 and for the
years ended December 31, 1998 and 1997 all in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Effective February 1, 1999,
substantially all of the Company's assets were transferred to Cavion
Technologies, Inc. in exchange for common stock and the assumption of the
Company's liabilities. Subsequent to this transaction, the Company's activities
will be limited to holding warrants to purchase the common stock of Convergent
Communications Services, Inc. and common stock of Cavion Technologies, Inc. In
April 1999, the Board of Directors resolved to form a limited liability company
and contribute the Company's remaining assets into such company. The ability of
the Company and its successor limited liability company to continue operations
depends upon the ultimate value, if any, of the financial instruments held and
the resolution of the matters discussed in Note 7. This raises substantial doubt
about the Company and its successor's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado,
May 18, 1999.
F-27
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION)
BALANCE SHEETS
DECEMBER 31,
JANUARY 31, -------------------------
1999 1998 1997
------------ ----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 52,116 $ 350,443
Accounts receivable....................................... 16,458 17,695 114,599
Prepaids.................................................. 33,120 38,295 --
Inventories............................................... 5,832 5,641 --
----------- ----------- -----------
Total current assets.................................... 55,410 113,747 465,042
----------- ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements.................................... 7,674 7,674 7,674
Furniture and fixtures.................................... 44,330 44,330 44,330
Network equipment and licensed software................... 391,880 354,577 233,471
----------- ----------- -----------
443,884 406,581 285,475
Less--Accumulated depreciation............................ (112,864) (104,712) (38,209)
----------- ----------- -----------
Property and equipment, net............................. 331,020 301,869 247,266
----------- ----------- -----------
DEBT ISSUANCE COSTS, net of accumulated amortization of
$67,500, $67,500 and $49,091, respectively................ -- -- 18,409
DEPOSIT FOR LETTER OF CREDIT................................ 20,000 20,000 20,000
OTHER ASSETS................................................ 21,815 20,179 17,313
----------- ----------- -----------
TOTAL ASSETS................................................ $ 428,245 $ 455,795 $ 768,030
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 256,222 $ 118,942 $ 81,032
Bank overdraft............................................ 19,397 -- --
Accrued liabilities....................................... 186,444 171,908 211,347
Accrued interest.......................................... 114,322 105,401 9,095
Deferred revenue and deposits............................. 214,712 198,884 8,695
Related party collateralized loans........................ 13,410 13,410 75,190
Current portion of capital lease obligations.............. 30,279 32,363 17,661
Notes payable to stockholders............................. 300,000 300,000 40,000
Note payable to Cavion.................................... 335,000 335,000 --
Revolving line of credit.................................. 600,000 600,000 600,000
----------- ----------- -----------
Total current liabilities............................... 2,069,786 1,875,908 1,043,020
----------- ----------- -----------
LONG-TERM LIABILITIES:
Capital lease obligations................................. 32,832 32,832 20,475
PUTABLE COMMON STOCK; 58,648, 58,648 and 30,000 shares
issued and outstanding, respectively (stated at accreted
value; total redemption value of approximately
$2.0 million)............................................. 1,700,236 1,650,236 837,500
COMMITMENTS AND CONTINGENCIES
(Notes 1 and 7)
STOCKHOLDERS' DEFICIT:
Common stock; $.01 par value, 1,000,000 shares authorized;
315,112, 315,112 and 286,464 shares issued, and
outstanding including 58,648, 58,648 and 30,000 shares,
respectively, of putable common stock................... 3,151 3,151 2,865
Additional paid-in capital.................................. 410,735 410,735 410,735
Accumulated deficit......................................... (3,788,495) (3,517,067) (1,546,565)
----------- ----------- -----------
Total stockholders' deficit............................. (3,374,609) (3,103,181) (1,132,965)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................. $ 428,245 $ 455,795 $ 768,030
=========== =========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-28
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION)
STATEMENTS OF OPERATIONS
ONE-MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
JANUARY 31, -------------------------
1999 1998 1997
------------ ----------- -----------
REVENUE:
Network access and connectivity fees................. $ 24,381 $ 147,965 24,430
Installation services................................ 12,800 63,031 --
Software licensing fees.............................. 669 4,026 --
--------- ----------- -----------
Total revenue...................................... 37,850 215,022 24,430
--------- ----------- -----------
COST OF REVENUE:
Network access and connectivity...................... 15,645 136,903 51,688
Installation services................................ 16,253 85,516 --
--------- ----------- -----------
Total cost of revenue.............................. 31,898 222,419 51,688
--------- ----------- -----------
Gross profit (loss)................................ 5,952 (7,397) (27,258)
--------- ----------- -----------
OPERATING EXPENSES:
General and administrative........................... 181,731 869,293 673,034
Research and development............................. 31,580 248,599 363,741
--------- ----------- -----------
Total operating expenses........................... 213,311 1,117,892 1,036,775
--------- ----------- -----------
LOSS FROM OPERATIONS................................... (207,359) (1,125,289) (1,064,033)
INTEREST EXPENSE....................................... (64,069) (997,503) (808,822)
OTHER INCOME........................................... -- 152,290 37,361
--------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS........................ (271,428) (1,970,502) (1,835,494)
DISCONTINUED OPERATION:
Gain from disposal of discontinued operation......... -- -- 418,848
Income from operations of discontinued operation..... -- -- 653,528
--------- ----------- -----------
-- -- 1,072,376
--------- ----------- -----------
NET LOSS............................................... $(271,428) $(1,970,502) $ (763,118)
========= =========== ===========
BASIC AND DILUTED NET LOSS FROM CONTINUING OPERATIONS
PER SHARE............................................ $ (1.06) $ (7.66) $ (8.86)
========= =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE................... $ (1.06) $ (7.66) $ (3.68)
========= =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC AND
DILUTED.............................................. 256,464 257,319 207,205
========= =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-29
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE ONE MONTH ENDED JANUARY 31, 1999
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK
----------------------------
SHARES
(INCLUDING ADDITIONAL TOTAL
SHARES OF PUTABLE PAID-IN ACCUMULATED STOCKHOLDERS'
COMMON STOCK) AMOUNT CAPITAL DEFICIT DEFICIT
----------------- -------- ----------- ----------- -------------
BALANCES, December 31,
1996....................... 230,000 $2,300 $ 11,250 $ (783,447) $ (783,447) $ (769,897)
Exercise of stock options
by an employee at an
exercise price of $.01 in
May 1997................. 5,000 50 -- -- -- 50
Issuance of common stock
for cash at $7.77 per
share in connection with
the sale of discontinued
operation................ 51,464 515 399,485 -- -- 400,000
Net loss................... -- -- -- (763,118) (763,118) (763,118)
------- ------ -------- ----------- ----------- -----------
BALANCES, December 31,
1997....................... 286,464 2,865 410,735 (1,546,565) (1,546,565) (1,132,965)
Issuance of putable common
stock.................... 28,648 286 -- -- -- 286
Net loss................... -- -- -- (1,970,502) (1,970,502) (1,970,502)
------- ------ -------- ----------- ----------- -----------
BALANCES, December 31,
1998....................... 315,112 3,151 $410,735 $(3,517,067) $(3,517,067) $(3,103,181)
Net loss................... -- -- -- (271,428) (271,428) (271,428)
------- ------ -------- ----------- ----------- -----------
BALANCES, January 31, 1999... 315,112 $3,151 $410,735 $(3,788,495) $(3,788,495) $(3,374,609)
======= ====== ======== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-30
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION)
STATEMENTS OF CASH FLOWS
ONE-MONTH YEARS ENDED
PERIOD ENDED DECEMBER 31,
JANUARY 31, -----------------------
1999 1998 1997
------------ ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(271,428) $(1,970,502) $(763,118)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................... 8,152 84,912 58,284
Gain from disposal of discontinued operations........... -- -- (418,848)
Provision for doubtful accounts......................... -- -- 20,923
Accretion of putable stock.............................. 50,000 612,200 577,500
Accretion of discount on bridge loan.................... -- 200,536 --
Change in operating assets and liabilities--
Accounts receivable..................................... 1,237 96,904 (135,522)
Prepaids and inventories................................ 4,984 (43,936) --
Other assets............................................ (1,636) (2,866) (7,970)
Accounts payable........................................ 137,280 37,910 69,186
Accrued liabilities..................................... 23,457 56,867 184,169
Deferred revenue........................................ 15,828 190,189 8,695
Decrease in net assets of discontinued operations....... -- -- 64,884
--------- ----------- ---------
Net cash used in operating activities................. (32,126) (737,786) (341,817)
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (37,303) (71,154) (181,422)
Proceeds from disposal of discontinued operations......... -- -- 475,000
--------- ----------- ---------
Net cash (used in) provided by investing activities... (37,303) (71,154) 293,578
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft............................................ 19,397 -- --
Proceeds from notes payable............................... -- -- --
Proceeds from issuance of common stock.................... -- 286 400,050
Repayments of related party loans......................... -- (61,780) (50,000)
Cash received on related party loans...................... -- -- 75,190
Repayments of stockholder notes........................... -- -- (28,721)
Cash received from stockholder notes...................... -- 260,000 --
Cash received from Cavion................................. -- 335,000 --
Payment on capital lease obligations...................... (2,084) (22,893) (6,625)
--------- ----------- ---------
Net cash provided by financing activities................. 17,313 510,613 389,894
--------- ----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (52,116) (298,327) 341,655
CASH AND CASH EQUIVALENTS, beginning of period.............. 52,116 350,443 8,788
--------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ -- $ 52,116 $ 350,443
========= =========== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Property acquired with capital leases..................... $ -- $ 49,952 $ 44,761
========= =========== =========
Putable common stock issued in conjunction With
stockholder notes....................................... $ -- $ 200,536 $ --
========= =========== =========
Cash paid for interest.................................... $ 5,148 $ 88,461 $ 66,496
========= =========== =========
The accompanying notes to financial statements are an integral part of these
statements.
F-31
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) DESCRIPTION OF BUSINESS
ORGANIZATION
Sigmacom Corporation ("Sigmacom") was incorporated under the laws of the
state of Colorado on June 26, 1992. In 1998 Sigmacom changed its name to Cavion
Technologies, Inc. Effective January 1999, Cavion Technologies, Inc. changed its
name to LanXtra, Inc. ("LanXtra" or the "Company"). Before 1998, the Company was
engaged in integrating computer networks and communications technologies for
financial institutions, Fortune 1000 companies and government agencies. On
December 3, 1997, the Company entered into an asset purchase agreement with
Convergent Communications Services, Inc. ("Convergent") for the sale of certain
assets of the Company, including all assets related to the Company's network
integrator business, including, without limitation, the name, "Sigmacom".
Since January 1, 1998, the Company has been engaged in developing and
marketing a suite of network products and services for the credit union industry
that includes: (1) a secure network that enables access via the internet or an
intranet; (2) secure internet financial products such as internet banking
software; and (3) secure internet access services for credit unions.
Subsequent to the transaction discussed below, the Company's activities will
be limited to holding warrants for the purchase of Convergent common stock and
common stock of the new Cavion Technologies, Inc. Further, in April 1999, the
Board of Directors resolved to form a limited liability company and contribute
the Company's remaining assets into such company. The ability of the Company and
its successor limited liability company to continue operations depends upon the
ultimate value, if any, of the financial instruments held and the resolution of
the matters discussed in Note 7. This raises substantial doubt about the Company
and its successor's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
TRANSFER OF THE COMPANY'S ASSETS, LIABILITIES AND OPERATIONS
In August 1998, the Company signed a letter of intent to transfer its assets
and operations to a company to be renamed Cavion Technologies, Inc. ("Cavion").
In December 1998, the Company signed an Asset Purchase Agreement (the "Purchase
Agreement") with Cavion for the transfer of substantially all the assets of the
Company in exchange for 375,214 shares and 28,648 shares of Cavion's Class A and
B common stock, respectively, and the assumption of liabilities. Also in
December 1998, management shareholders of LanXtra received 625,356 shares of
Class A common stock directly from Cavion. These management shareholders held
sufficient voting shares, directly and indirectly through irrevocable proxies,
to approve the transaction with Cavion.
The Class A common stock and Class B common stock of Cavion are alike in all
respects, except that the Class B common shareholders have the option to put
those shares to Cavion for $7 per share and a parallel call option is held by
Cavion. The Class A common stock issued to the Company represents approximately
12% of the common equity of Cavion. The Purchase Agreement was consummated on
February 1, 1999 and Cavion has subsequently assumed the operations of the
F-32
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(1) DESCRIPTION OF BUSINESS (CONTINUED)
Company. During the period from August 1998 through February 1, 1999, Cavion
provided loans to the Company totaling $335,000 at January 31, 1999. Such loans
were forgiven as part of the transaction. In management's opinion, the purchase
of the Company's assets and assumption of its liabilities by Cavion will qualify
under Internal Revenue Code regulations as a tax free reorganization.
Upon consummation of the Purchase Agreement, several of the Company's
contractual arrangements were significantly modified. The Company's Investment
Agreement, warrant and option agreements were cancelled and certain debt
maturities were rescheduled by the creditors (see Notes 3 and 5).
Cavion is an entity formed by various third parties to acquire the business
conducted by the Company. Through January 31, 1999, Cavion had raised $370,000
through debt offerings, $335,000 of which was advanced to the Company as of
January 31, 1999. In February 1999, Cavion conducted a private placement of its
Series A preferred stock, raising approximately $2 million.
The business now conducted by Cavion has never been profitable, and there is
substantial risk associated with the Company's investment in Cavion common
stock. It is probable that the value of this common stock will be highly
volatile and it is reasonably possible that the ultimate value realized from the
stock could be zero.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Accounting for transactions during the one-month period ending January 31,
1999, is on the same basis of accounting as for the years ended December 31,
1998 and 1997. The Company has presented information as of and for the one-month
period ended January 31, 1999, as this represents the final period in which the
business transferred to Cavion was conducted by the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considered all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-33
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents, trade receivables
and payables approximated their carrying amounts due to their short-term nature.
The fair value of the Company's other financial instruments are as follows:
JANUARY 31, 1999 AND DECEMBER 31, 1998
-----------------------------------------
APPROXIMATE
CARRYING FAIR
AMOUNT VALUE
----------------------- ------------
Related party collateralized loans.......... $ 13,410 $ 11,000
Notes payable to stockholders............... 300,000 260,000
Revolving line of credit.................... 600,000 600,000
Putable stock............................... 1,700,236/1,650,236 175,000
DECEMBER 31, 1997
----------------------
APPROXIMATE
CARRYING FAIR
AMOUNT VALUE
-------- -----------
Related party collateralized notes.................... $ 75,190 $ 6,000
Notes payable to stockholders......................... 40,000 3,000
Revolving line of credit.............................. 600,000 600,000
Putable stock......................................... 837,500 15,000
Fair values at January 31, 1999 and December 31, 1998 have been estimated
using the values placed on them by the buyer in the transaction described above.
Fair values at December 31, 1997, have been estimated based upon the terms of
subsequent financings.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subjected the Company to
concentrations of credit risk were accounts receivable, which were concentrated
among credit union customers. The Company performed ongoing credit evaluations
of its customers' financial condition and generally required no collateral.
Additionally, the Company managed a portion of its credit risk by billing
certain services in advance. The Company had no significant financial
instruments with off-balance sheet risk of accounting loss, such as foreign
exchange contracts, option contracts or other hedging arrangements.
F-34
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment were recorded at cost and depreciated using the
straight-line method over the lesser of the lease term or their estimated lives
as follows:
Furniture and fixtures..................................... 7 years
Computer equipment......................................... 3-5 years
Licensed software.......................................... 3 years
Leasehold improvements..................................... Life of the lease
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviewed its long-lived assets for impairment whenever events or
changes in circumstances indicated that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. During 1997 and 1998 and in
January 1999, no impairment losses were recorded.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
JANUARY 31, -------------------
1999 1998 1997
------------ -------- --------
Wages payable and accrued vacation........... $ 48,545 $ 44,661 $ 30,924
Accrued vendor payable....................... 78,673 78,673 78,673
Accrued professional fees.................... 41,257 27,500 9,657
Other liabilities............................ 17,969 21,074 92,093
-------- -------- --------
Total accrued liabilities.................. $186,444 $171,908 $211,347
======== ======== ========
INCOME TAXES
A current provision for income taxes was recorded for actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each year.
Deferred income tax assets and liabilities were recorded for the expected future
income tax consequences, based on enacted tax laws, of temporary differences
between the financial reporting and tax bases of assets and liabilities and
carryforwards. The overall change in deferred tax assets and liabilities for the
period measured the deferred tax expense for the period. Effects of changes in
tax laws on deferred tax assets and liabilities were reflected as adjustments to
tax expense in the period of enactment. Deferred tax assets were recognized for
the expected future tax effects of all deductible temporary differences, loss
carryforwards and tax credit carryforwards. Deferred tax assets were then
reduced, if deemed necessary, by a valuation allowance for the amount of any tax
benefits which, more likely than not based on current circumstances, were not
expected to be realized.
F-35
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
The Company reports net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which
requires the presentation of both basic and diluted earnings (loss) per share.
Basic net loss per common share has been computed based upon the weighted
average number of shares of common stock outstanding during the period,
excluding putable common stock as an assumed cash settlement is more dilutive
than a share settlement. Diluted net loss per share is computed by dividing the
net loss for the period by the weighted average number of common and potential
common shares outstanding during the period if the effect of the potential
common shares is dilutive. The Company has excluded the weighted average effect
of common stock issuable upon exercise of all warrants and options for common
stock from the computation of diluted earnings per share as the effect of all
such securities is anti-dilutive for all periods presented. The shares excluded
(without regard to the treasury stock method) are as follows:
For the year ended December 31:
1998...................................................... 531,978
1997...................................................... 307,113
There are no such shares excluded for the month ended January 31, 1999, due
to the cancellation of options and warrants at December 31, 1998.
Basic and diluted net loss per share is computed using the following average
shares outstanding:
YEARS ENDED
MONTH ENDED DECEMBER 31,
JANUARY 31, -------------------
1999 1998 1997
------------ -------- --------
Weighted average shares outstanding........... 315,112 304,130 237,205
Less: Weighted average shares of putable
stock....................................... (58,648) (46,811) (30,000)
------- ------- -------
Net weighted average shares outstanding....... 256,464 257,319 207,205
======= ======= =======
STOCK BASED COMPENSATION
The Company accounted for its employee stock option plans and other employee
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. The Company adopted the
disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which allows entities to continue to apply the
provisions of APB 25 for transactions with employees and provide pro forma
disclosures for employee stock grants made in 1997 and future years as if the
fair-value-based method of accounting in SFAS No. 123 had been applied to these
transactions. The Company accounted for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123.
F-36
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generated revenue from three sources: (1) service revenue for
the installation of internet access equipment at customer sites, (2) software
license fees, and (3) recurring monthly network access and connectivity fees.
Service revenue was recognized as the services were performed. Software license
arrangements typically provided for enhancements over the term of the
arrangement, and software license fees were generally received in advance,
deferred and recognized ratably over the term of the arrangement. Network access
and connectivity fees were typically billed in advance and recognized in the
month that the access/connectivity was provided.
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs commenced upon the
establishment of technological feasibility of the software product. The
Company's software products were deemed to be technologically feasible at the
point the Company commenced field testing of the software. The period from field
testing to general customer release of the software was brief and the costs
incurred during this period were insignificant. Accordingly, the Company did not
capitalize any qualifying software development costs.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. From its inception
through January 31, 1999, there were no differences between comprehensive loss
and net loss.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. In accordance with the provisions of SFAS
No. 131, the Company has determined that it had one reportable operating segment
at December 31, 1998 and January 31, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to
adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. The
F-37
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's derivative financial instruments include a written put on the
Company's common stock and the Convergent warrants (Note 8).
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the current year presentation.
(3) DEBT
REVOLVING LINE OF CREDIT
In 1996, the Company entered into a two-year revolving line of credit (the
"Revolving Line of Credit") with a bank which allows for borrowings up to
$600,000. Interest accrues at a rate equal to the Bank's reference rate plus
1.5% (9.25%, 9.25% and 10% at January 31, 1999, December 31, 1998 and 1997,
respectively). The Revolving Line of Credit is collateralized by letters of
credit issued by the Company and certain stockholders as well as by agreements
among certain stockholders (see Note 5). In 1998, the Revolving Line of Credit
was extended and all amounts outstanding were due on January 31, 1999. As part
of the Purchase Agreement, the Revolving Line of Credit was assumed by Cavion
and the maturity date of the loan was extended to December 31, 1999.
As part of the 1997 asset sale agreement with Convergent, it was agreed that
the Company would be reimbursed for interest expense incurred on the Revolving
Line of Credit if certain revenue targets were achieved on the line of business
sold. In 1998, Convergent reimbursed the Company for interest expense totaling
$30,334 until June 30, 1998, when such reimbursements were discontinued because
the revenue targets were not met.
NOTES PAYABLE TO STOCKHOLDERS
The notes payable to stockholders consist of eight notes totaling $300,000
at January 31, 1999, and December 31, 1998. Two of the notes have an aggregate
principal balance of $40,000 and accrue interest at a rate of prime plus 2%
(9.75%, 9.75% and 10.5% as of January 31, 1999, December 31, 1998 and 1997,
respectively). During 1999, 1998 and 1997, the Company continued to accrue
interest in accordance with the terms of the notes. The notes are unsecured.
Effective May 28, 1998, the Company entered into six note payable agreements
(the "Bridge Loans") with certain stockholders and management (the "Lenders"),
whereby the Company borrowed $260,000. Interest on the Bridge Loans was payable
at the rate of 42% per year. Under the original terms of the Bridge Loans, the
principal was payable in monthly installments and the balance, including accrued
interest, was due on January 1, 1999. In connection with the Purchase Agreement,
the maturity was extended to the date on which Cavion obtains 100 credit union
customers (the "100 Credit Union Date"). In addition, interest terms were
amended such that no interest will accrue after December 31, 1998. The Bridge
Loans are unsecured.
F-38
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(3) DEBT (CONTINUED)
As additional consideration for the Bridge Loans, the Lenders were issued
28,648 shares of the Company's nonvoting common stock for $.01 per share. The
Lenders had the right to sell these shares back to the Company for a purchase
price of $7 per share, during a 60-day period beginning January 1, 1999. As a
result of this transaction, $200,536 was recorded as a debt discount and
accreted as interest expense in 1998. The common stock was accreted to its
redemption value at December 31, 1998. The right to sell shares back to the
Company was canceled in conjunction with the Purchase Agreement, in exchange for
the stockholders being granted the same rights in 28,648 shares of Cavion's
Class B common stock.
NOTE PAYABLE
On September 14, 1998, the Company entered into a loan agreement with Cavion
to borrow up to $300,000, at an interest rate of 16% and a maturity date of
March 14, 1999. The note was secured by substantially all of the tangible and
intangible assets of the Company (including its technology). On December 29,
1998, Cavion agreed to lend up to an additional $55,000 under the same terms,
and advanced $35,000 of this amount. As part of the Purchase Agreement, this
loan was forgiven.
RELATED PARTY COLLATERALIZED LOANS
The Company entered into factoring agreements (the "Agreements") with
management and a stockholder of the Company. Accrued interest as of January 31,
1999, December 31, 1998 and 1997, under the Agreements was $27,952, $27,952 and
$6,905, respectively, and is included in accrued interest in the accompanying
financial statements. Under the terms of the Agreements, interest accrued on the
outstanding balances at a rate of 3% for the first 30 days and 1% for each
additional 10 days until the outstanding balances were paid in full. In
connection with the Purchase Agreement, the maturity of these loans was extended
to the 100 Credit Union Date. In addition, interest terms were amended such that
no interest will accrue after February 1, 1999.
(4) CAPITAL LEASE OBLIGATIONS
The Company entered into various capital lease agreements related to
computers and various office equipment. The capital leases have terms ranging
from 24 to 36 months with interest rates ranging between 11.4% and 20.3%.
F-39
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(4) CAPITAL LEASE OBLIGATIONS (CONTINUED)
As of December 31, 1998, the present value of future minimum lease payments
are as follows:
Year Ending December 31,
1999...................................................... $ 39,509
2000...................................................... 21,513
2001...................................................... 15,578
--------
76,600
Less: amounts representing interest....................... (11,405)
--------
65,195
Less: current portion..................................... (32,363)
--------
Long-term capital lease obligation........................ $ 32,832
========
The net book value of assets under capital lease obligations as of January
31, 1999 was $65,069.
(5) STOCKHOLDERS' DEFICIT
INVESTMENT AGREEMENT
In August 1996, the Company entered into an investment agreement (the
"Investment Agreement") under which the Company sold 30,000 shares of common
stock to an investor group at par value, subject to a put option agreement (the
"Put Options"). The investor group provided letters of credit for $600,000 to
secure the Company's Revolving Line of Credit. The Put Options were exercisable
for a 60-day period beginning August 1, 1999.
The original terms of the Put Options provided that they would be canceled
if the Company completes a public stock offering and repaid the Revolving Line
of Credit. The amounts to be redeemed under the Put Options were being accreted
over the period to their exercise date using the straight line method, and has
been included in interest expense in the accompanying statements of operations.
Contingent upon consummation of the Purchase Agreement with Cavion, the investor
group, under a separate agreement, has agreed to cancel the Put Options. The
letters of credit provided by the investor group continue to secure the
Company's Revolving Line of Credit until it is repaid by Cavion. However,
LanXtra is obligated to reimburse the investor group in the event of foreclosure
on their collateral.
If Cavion defaults on the Revolving Line of Credit, 171,000 shares of the
Company's outstanding common stock held by certain members of the Company's
investor group are to be forfeited and transferred back to the Company.
WARRANTS
The Investment Agreement required that if the Company repaid its Revolving
Line of Credit but failed to complete a qualified initial public offering by
January 31, 2000, the investor group would be issued warrants to purchase 30,000
shares of common stock. The warrants will have an exercise price
F-40
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(5) STOCKHOLDERS' DEFICIT (CONTINUED)
equal to the book value per share on December 31, 1999, and are exercisable
anytime within three years from the date of issuance. As part of the Purchase
Agreement, such warrants were canceled.
The Company also issued a stockholder warrants to purchase 7,113 shares of
common stock in consideration for services performed in connection with the
Investment Agreement. The warrants had an exercise price of $7.70 and are
exercisable upon the expiration or the exercise of the Put Option. No value was
attributed to these warrants as it was unlikely these warrants would be
exercised prior to the exercise date. As part of the Purchase Agreement, such
warrants were canceled.
STOCK OPTIONS
In 1997, the Company adopted a stock option plan. Stock options to employees
were granted at various exercise prices and vested between one and five years.
The following table summarizes stock option activity for the plan:
1998 1997
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
Outstanding at beginning of year.......................... 270,000 $ 7.50 5,000 $0.01
Granted................................................. 196,217 4.60 292,105 $6.94
Cancelled............................................... (466,217) (5.93) (22,105) $0.01
Exercised............................................... -- -- (5,000) $0.01
-------- ------ ------- -----
Outstanding at end of year................................ -- $ -- 270,000 $7.50
======== ====== ======= =====
Weighted average fair value of options granted during the
year.................................................... $ 1.79 $1.63
====== =====
As of December 31, 1998, all outstanding options for common stock were
canceled.
Under the fair value approach of SFAS 123, the total fair value of options
granted under the Plan during 1997 was approximately $478,000. If the Company
had accounted for its stock option plan in accordance with SFAS 123, the
Company's net loss and pro forma net loss would have been reported as follows:
1998 1997
----------- ---------
Net loss: As reported.............. $(1,970,502) $(763,118)
=========== =========
Pro forma................ $(2,321,196) $(819,242)
=========== =========
Per share data: As reported.............. $ (7.66) $ (3.68)
=========== =========
Pro forma................ $ (9.02) $ (3.95)
=========== =========
F-41
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(5) STOCKHOLDERS' DEFICIT (CONTINUED)
The fair value of each option grant was estimated on the date of the grant
using the minimum value method. Assumptions used to calculate the fair value
were risk free interest rates of 6.22% to 6.25%, no dividend yields, an expected
life of three to five years and volatility of .001%.
(6) INCOME TAXES
From inception, the Company has generated losses for both financial
reporting and tax purposes. At January 31, 1999, December 31, 1998 and 1997, the
Company had a net operating loss carryforward for income tax purposes of
approximately $1,550,000, $1,328,000 and $530,000, respectively. These would
expire beginning in 2011 through 2018, if not utilized. The net loss
carryforwards resulted in a deferred tax asset of approximately $613,000,
$530,000 and $199,000 at January 31, 1999, December 31, 1998 and 1997,
respectively. Due to the uncertainty relating to the realization of the benefit
of the net operating loss carryforward, a valuation allowance has been recorded
for the full amount.
The Company paid no federal or state income taxes in 1998 or 1997.
The effective tax rate differs from the statutory tax rate applied to the
loss from continuing operations for the following reasons:
JANUARY
1999 1998 1997
-------- --------- ---------
Expected federal benefit..................... $(92,285) $(669,971) $(624,067)
Expected state benefit, net of federal....... (8,957) (65,027) (60,571)
Non-deductible accretion..................... 18,650 403,998 229,039
Increase in valuation allowance.............. 82,592 331,000 455,599
-------- --------- ---------
Provision/benefit for income taxes related
to loss from continuing operations....... $ -- $ -- $ --
======== ========= =========
No taxes were provided against the gain and results from discontinued
operations as no incremental taxes were due.
(7) COMMITMENTS AND CONTINGENCIES
LEASES
The Company had operating lease agreements relating to office facilities and
equipment which expire through 2000. Future minimum lease payments under these
agreements were as follows:
Year Ended December 31,
1999...................................................... $60,049
2000...................................................... 2,298
-------
$62,347
=======
F-42
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the years ended December 31, 1998 and 1997 was
approximately $60,621 and $73,000, respectively, and approximately $5,000 for
January 1999. Obligations for payments under these leases were assumed by
Cavion.
LEGAL MATTERS
In the normal course of business, the Company is subject to, and may become
a party to, litigation arising out of its operations. In management's opinion,
none of the matters currently in actual or threatened litigation will have a
material impact on the Company's financial position or results of operations.
In connection with the Purchase Agreement transaction, a shareholder of the
Company exercised his rights as a dissenting shareholder. If the shareholder is
permitted to pursue this claim in a legal proceeding, the Company could be
required to pay the shareholder the fair value of his shares immediately before
the closing date of the Purchase Agreement. Management believes that the value
paid on account of these shares pursuant to the Purchase Agreement is greater
than the amount which the dissenting shareholder could recover under Colorado
law. The dissenting shareholder has asserted, however, that the value of his
50,000 LanXtra shares immediately before the closing date of the Purchase
Agreement is approximately $250,000. The ultimate resolution of the matter,
which is expected to occur within one year, could result in an obligation to the
shareholder. Further, should the Company, or Cavion as successor, be required to
make a payment to this shareholder, such payment could result in the Cavion
purchase transaction being treated as a taxable transaction which could subject
the Company to a significant tax liability.
(8) DISCONTINUED OPERATION
On December 3, 1997, the Company sold the network integrator operations (the
"Discontinued Operation") of the Company for cash of $475,000. This transaction
resulted in a gain of $418,848. The Company also received $30,334 in 1998 from
Convergent related to this transaction and has included this amount in other
income for 1998.
In conjunction with the sale, the Company also issued Convergent 51,464
shares of common stock in exchange for $400,000.
The Company also received a warrant to purchase 50,000 shares of
Convergent's common stock at an exercise price of $7.50 per share. The warrant
was exercisable immediately and expires on December 3, 1999. As of January 31,
1999, the Company had not exercised the warrant. No value has been attributed to
this warrant in the accompanying financial statements as management believes the
value of this warrant is nominal. Convergent is not a publicly traded company,
and based on information available to the Company, the exercise price is
significantly in excess of the estimated market value of Convergent's common
stock.
F-43
LANXTRA, INC.
(FORMERLY CAVION TECHNOLOGIES, INC. AND SIGMACOM CORPORATION )
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD ENDED JANUARY 31, 1999
AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
(8) DISCONTINUED OPERATION (CONTINUED)
Summarized results of operations financial position and earnings per share
data of the discontinued operations were as follows:
FOR THE YEAR ENDED
DECEMBER 31, 1997
------------------
Results of operations:
Revenue................................................... $3,723,130
Net income from discontinued operation.................... 653,528
Basic and diluted per share information:
Basic and diluted net income from discontinued
operation............................................... $ 3.15
==========
Basic and diluted gain on sale of discontinued
operation............................................... $ 2.02
==========
(9) CONDENSED FINANCIAL STATEMENTS, AFTER CONSUMMATION OF PURCHASE AGREEMENT
(UNAUDITED)
The following unaudited balance sheet reflects the Company's balance sheet
following the transfer of the Company's assets to and assumption of its
liabilities by Cavion which was completed February 1, 1999 (see Note 1). The
investment in Cavion stock has been recorded at the net book value of the assets
transferred to and liabilities assumed by Cavion. Because the liabilities
assumed by Cavion exceeded the value of the assets transferred and the Company
was relieved from its obligations for those transferred liabilities, the
investment in Cavion was recorded at zero. As discussed in Note 8, management
believes that the fair value of the Convergent warrants was zero.
Investment in Cavion common stock........................... $ --
Investment in Convergent warrants........................... --
----
$ --
====
Stockholders' equity (deficit).............................. $ --
====
F-44
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Unless otherwise defined, all capitalized terms contained in this Part II
shall have the meanings ascribed to them in the prospectus which forms a part of
this registration statement. cavion.com is sometimes referred to in this
Part II as the "registrant."
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses that we expect to incur
in connection with the sale and distribution of the securities we are
registering pursuant to this registration statement, other than underwriting
discounts. All amounts are estimated except the SEC registration fee, the
National Association of Securities Dealers, Inc. filing fee and the Nasdaq
National Market listing fee.
SEC Registration fee........................................ $ 10,125
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,335
Nasdaq National Market listing fee.......................... 70,735
Blue Sky fees and expenses.................................. 5,000
Printing and mailing fees and costs......................... 135,000
Transfer Agent fees and costs............................... 300
Legal fees and costs........................................ 300,000
Accounting fees and costs................................... 90,000
Miscellaneous Expenses...................................... 89,865
--------
TOTAL..................................................... $700,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, bylaw, contract or arrangement under which any controlling
person, director or officer of cavion.com is insured or indemnified in any
matter against liability which he may incur in his capacity as such, are as
follows:
Article VIII of the Amended and Restated Articles of Incorporation of
cavion.com include the following provisions:
Indemnification
(a) The Corporation shall indemnify, to the fullest extent permitted by
applicable law in effect from time to time, any person, and the estate and
personal representative of any such person, against all liability and expense
(including attorneys' fees) incurred by reason of the fact that such person is
or was a director or officer of the Corporation or, while serving as a director
or officer of the Corporation, such person is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of, or in any similar managerial or fiduciary position of, another
domestic or foreign corporation or other individual or entity or of an employee
benefit plan. The Corporation shall also indemnify any person who is serving or
has served the Corporation as director, officer, employee, fiduciary, or agent,
and that person's estate and personal representative, to the extent and in the
manner provided in any bylaw, resolution of the shareholders or directors,
contract, or otherwise, so long as such provision is legally permissible.
II-1
(b) The Corporation shall pay for or reimburse the reasonable expenses
incurred by a director or officer who is a party to a proceeding in advance of
final disposition of the preceding if:
(i) the director or officer furnishes to the Corporation a written
affirmation of his or her good faith belief that he or she has met the
standard of conduct described in Section 7-109-102 of the Colorado Business
Corporation Act;
(ii) the director or officer furnishes to the Corporation a written
undertaking, executed personally or on the director's or officer's behalf,
to repay the advance if it is ultimately determined that he or she did not
meet the standard of conduct; and
(iii) a determination is made that the facts known to those making the
determination would not preclude indemnification under Article 109 of the
Colorado Business Corporation Act.
Article V of the Bylaws of cavion.com includes the following provisions:
1. INDEMNIFICATION. The Corporation shall indemnify any person against all
liability and expense incurred by reason of the person being or having been a
director or officer of the Corporation to the full extent and in any manner that
directors may be indemnified under the Colorado Business Corporation Act, as in
effect at any time. The Corporation shall also indemnify any person who is
serving or has served the Corporation as director or officer to the extent and
in any manner provided in any bylaw, resolution of the directors or
shareholders, contract or otherwise, so long as such provision is legally
permissible. In the discretion of the board of directors, the Corporation may
indemnify an employee, fiduciary or agent who is not a director or officer to
the same extent as a director or officer.
2. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee, fiduciary,
or agent of this Corporation or who, while a director, officer, employee,
fiduciary, or agent of this Corporation, is or was serving at the request of
this Corporation as a director, officer, partner, trustee, employee, fiduciary,
or agent of any other entity (including without limitation an employee benefit
plan), against any liability asserted against or incurred by the person in that
capacity or arising from his or her status as a director, officer, employee,
fiduciary, or agent, whether or not the Corporation would have power to
indemnify the person against the same liability under this Article. Any such
insurance may be procured from any insurance company designated by the board of
directors, whether such insurance company is formed under this state or any
other jurisdiction of the United States or elsewhere, including any insurance
company in which the Corporation has equity or any other interest through stock
ownership or otherwise.
3. NOTICE TO SHAREHOLDERS OF INDEMNIFICATION OF DIRECTOR. If the
Corporation indemnifies or advances expenses to a director in connection with a
proceeding by or in the right of the Corporation, the Corporation shall give
written notice of the indemnification or advance to the shareholders with or
before the notice of the next shareholders' meeting. If the next shareholder
action is taken without a meeting at the instigation of the board of directors,
such notice shall be given to the shareholders at or before the time the first
shareholder signs a writing consenting to such action.
4. INDEMNIFICATION NONEXCLUSIVE; INUREMENT. The indemnification provided
by this Article shall not be deemed exclusive of any other rights and procedures
to which the indemnified party may be entitled under the articles of
incorporation, any bylaw, agreement, vote of the shareholders or directors,
contract or otherwise. Such indemnification shall continue as to a person who
has ceased to be a director, officer, employee, fiduciary or agent and shall
inure to the benefit of such person's heirs, personal representatives and
administrators.
II-2
The provisions of Article 109 of the Colorado Revised Statutes on
indemnification are as follows:
Section 7-109-101. Definitions. As used in this article:
(1) "Corporation" includes any domestic or foreign entity that is a
predecessor of a corporation by reason of a merger or other transaction in which
the predecessor's existence ceased upon consummation of the transaction.
(2) "Director" means an individual who is or was a director of a corporation
or an individual who, while a director of a corporation, is or was serving at
the corporation's request as a director, an officer, an agent, an associate, an
employee, a fiduciary, a manager, a member, a partner, a promoter, or a trustee
of, or to hold any similar position with, another domestic or foreign
corporation or other person or of an employee benefit plan. A director is
considered to be serving an employee benefit plan at the corporation's request
if the director's duties to the corporation also impose duties on, or otherwise
involve services by, the director to the plan or to participants in or
beneficiaries of the plan. "Director" includes, unless the context requires
otherwise, the estate or personal representative of a director.
(3) "Expenses" includes counsel fees.
(4) "Liability" means the obligation incurred with respect to a proceeding
to pay a judgment, settlement, penalty, fine, including an excise tax assessed
with respect to an employee benefit plan, or reasonable expenses.
(5) "Official capacity," means, when used with respect to a director, the
office of director in a corporation and, when used with respect to a person
other than a director as contemplated by Section 7-109-107, the office in a
corporation held by the officer or the employment, fiduciary, or agency
relationship undertaken by the employee, fiduciary, or agent on behalf of the
corporation. "Official capacity" does not include service for any other domestic
or foreign corporation or other person or employee benefit plan.
(6) "Party" includes a person who was, is, or is threatened to be made a
named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative and
whether formal or informal.
Section 7-109-102. Authority to indemnify directors. (1) Except as
provided in subsection (4) of this section, a corporation may indemnify a person
made a party to a proceeding because the person is or was a director against
liability incurred in the proceeding if:
(a) The person conducted himself or herself in good faith; and
(b) He reasonably believed:
(I) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best
interests; and
(II) In all other cases, that his or her conduct was at least not
opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had no reasonable
cause to believe his or her conduct was unlawful.
(2) A director's conduct with respect to an employee benefit plan for a
purpose the director reasonably believed to be in the interests of the
participants in or beneficiaries of the plan is conduct that satisfies the
requirements of subparagraph (II) of paragraph (b) of section (1) of this
section. A director's conduct with respect to an employee benefit plan for a
purpose that the director did not
II-3
reasonably believe to be in the interests of the participants in or
beneficiaries of the plan shall not be deemed not to satisfy the requirements of
paragraph (a) of subsection (1) of this section.
(3) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with any proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
(b) In connection with any proceeding charging that the director derived
an improper personal benefit, whether or not involving action in an official
capacity, in which proceeding the director was adjudged liable on the basis
that he or she derived an improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 7-109-103. Mandatory indemnification of directors. Unless limited
by its articles of incorporation, a corporation shall indemnify a person who was
wholly successful, on the merits or otherwise, in defense of any proceeding to
which the person was a party because the person is or was a director, against
reasonable expenses incurred by him or her in connection with the proceeding.
Section 7-107-104. Advance of expenses to directors. (1) A corporation
may pay for or reimburse the reasonable expenses incurred by a director who is a
party to a proceeding in advance of the final disposition of the proceeding if:
(a) The director furnishes to the corporation a written affirmation of
the director's good faith belief that he or she has met the standard of
conduct described in section 7-109-102;
(b) The director furnishes to the corporation a written undertaking,
executed personally or on the director's behalf, to repay the advance if it
is ultimately determined that he or she did not meet the standard of
conduct; and
(c) A determination is made that the facts then known to those making
the determination would not preclude indemnification under this article.
(2) The undertaking required by paragraph (b) of subsection (1) of this
section shall be an unlimited general obligation of the director but need not be
secured and may be accepted without reference to financial ability to make
repayment.
(3) Determinations and authorizations of payments under this section shall
be made in the manner specified in section 7-109-106.
Section 7-109-105. Court ordered indemnification of directors. (1) Unless
otherwise provided in the articles of incorporation, a director who is or was a
party to a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court considers necessary,
may order indemnification in the following manner:
(a) If it determines that the director is entitled to mandatory
indemnification under section 7-109-103, the court shall order
indemnification, in which case the court shall also order the corporation to
pay the director's reasonable expenses incurred to obtain court-ordered
indemnification.
(b) If it determines that the director is fairly and reasonably entitled
to indemnification in view of all the relevant circumstances, whether or not
the director met the standard of conduct set
II-4
forth in section 7-109-102(1) or was adjudged liable in the circumstances
described in section 7-109-102(4), the court may order such indemnification
as the court deems proper; except that the indemnification with respect to
any proceeding in which liability shall have been adjudged in the
circumstances described in section 7-109-102(4) is limited to reasonable
expenses incurred in connection with the proceeding and reasonable expenses
incurred to obtain court-ordered indemnification.
Section 7-109-106. Determination and authorization of indemnification of
directors.
(1) A corporation may not indemnify a director under section 7-109-102
unless authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because the
director has met the standard of conduct set forth in section 7-109-102. A
corporation shall not advance expenses to a director under section 7-109-104
unless authorized in the specific case after the written affirmation and
undertaking required by section 7-109-104(1)(a) and (1)(b) are received and the
determination required by section 7-109-104(1)(c) has been made.
(2) The determinations required by subsection (1) of this section shall be
made:
(a) By the board of directors by a majority vote of those present at a
meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum; or
(b) If a quorum cannot be obtained, by a majority vote of a committee of
the board of directors designated by the board or directors, which committee
shall consist of two or more directors not parties to the proceeding; except
that directors who are parties to the proceeding may participate in the
designation of directors for the committee.
(3) If a quorum cannot be obtained as contemplated in paragraph (a) of
subsection (2) of this section, and a committee cannot be established under
paragraph (b) of subsection (2) of this section, or, even if a quorum is
obtained or a committee is designated, if a majority of the directors
constituting such quorum or such committee so directs, the determination
required to be made by subsection (1) of this section shall be made:
(a) By independent legal counsel selected by a vote of the board of
directors or the committee in the manner specified in paragraph (a) or
(b) of subsection (2) of this section or, if a quorum of the full board
cannot be obtained and a committee cannot be established, by independent
legal counsel selected by a majority vote of the full board of directors; or
(b) By the shareholders.
(4) Authorization of indemnification and advance of expenses shall be made
in the same manner as the determination that indemnification or advance of
expenses is permissible; except that, if the determination that indemnification
or advance of expenses is permissible is made by independent legal counsel,
authorization of indemnification and advance of expenses shall be made by the
body that selected said counsel.
Section 7-109-107. Indemnification of officers, employees, fiduciaries, and
agents. (1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification under
section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the same extent as
a director;
(b) A corporation may indemnify and advance expenses to an officer,
fiduciary, employee, or agent of the corporation to the same extent as a
director; and
II-5
(c) A corporation may also indemnify and advance expenses to an officer,
employee, fiduciaries, or agent who is not a director to a greater extent,
if not inconsistent with public policy, and if provided for by its bylaws,
general or specific action of its board of directors or shareholders, or a
contract.
Section 7-109-108. Insurance. A corporation may purchase and maintain
insurance on behalf of a person who is or was a director, officer, employee,
fiduciary, or agent of the corporation, or who, while a director, officer,
employee, fiduciary, or agent of the corporation, is or was serving at the
request of the corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of any other domestic or foreign corporation or other
person, or of an employee benefit plan, against liability asserted against or
incurred by the person in that capacity or arising from his or her status as a
director, officer, employee, fiduciary, or agent, whether or not the corporation
would have the power to indemnify the person against the same liability under
section 7-109-102, 7-109-103, or 7-109-107. Any such insurance may be procured
from any insurance company designated by the board of directors, whether such
insurance company is formed under the laws of this state or any other
jurisdiction of the United States or elsewhere, including any insurance company
in which the corporation has equity or any other interest through stock
ownership or otherwise.
Section 7-109-109. Limitation of indemnification of directors. (1) A
provision treating a corporation's indemnification of, or advance of expenses
to, directors that is contained in its articles of incorporation or bylaws, in a
resolution of its shareholders or board of directors, or in a contract, except
an insurance policy, or otherwise, is valid only to the extent the provision is
not consistent with sections 7-109-101 to 7-109-108. If the articles of
incorporation limit indemnification or advances of expenses, indemnification and
advance of expenses are valid only to the extent not inconsistent with the
articles of incorporation.
(a) Sections 7-109-101 to 7-109-108 do not limit a corporation's power
to pay or reimburse expenses incurred by a director in connection with an
appearance as a witness in a proceeding at a time when he or she has not
been made a named defendant or respondent in the proceeding.
Section 7-109-110. Notice to shareholders of indemnification of
director. If a corporation indemnifies or advances expenses to a director under
this article in connection with a proceeding by or in the right of the
corporation, the corporation shall give written notice of the indemnification or
advance to the shareholders with or before the notice of the next shareholders'
meeting. If the next shareholder action is taken without a meeting at the
instigation of the board of directors, such notice shall be given to the
shareholders at or before the time the first shareholder signs a writing
consenting to such action.
Section 7-108-402(2) of the Colorado Revised Statutes states as follows:
No director or officer shall be personally liable for any injury to person
or property arising out of a tort committed by an employee unless such director
or officer was personally involved in the situation giving rise to the
litigation or unless such director or director committed a criminal offense in
connection with such situation. The protection afforded in this
subsection (2) shall not restrict other common-law protections and rights that
an director or officer may have. This subsection (2) shall not restrict the
corporation's right to eliminate or limit the personal liability of a director
to the corporation or to its shareholders for monetary damages for breach of
fiduciary duty as a director as provided in subsection (1) of this section.
Article VII of the Amended and Restated Articles of Incorporation of
cavion.com includes the following provision:
A director of the Corporation shall not be personally liable to the
Corporation or to its shareholders for monetary damages for breach of fiduciary
duty as a director; except that this provision shall not eliminate or limit the
liability of the director to the Corporation or to its shareholders for
II-6
monetary damages otherwise existing for (i) any breach of the director's duty of
loyalty to the Corporation or to its shareholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) acts specified in Section 7-108-403 of the Colorado Business
Corporation Act; or (iv) any transaction from which the director derived an
improper personal benefit. If the Colorado Business Corporation Act is later
amended to eliminate or limit further the liability of a director, then, in
addition to the elimination and limitation of liability provided by the
preceding sentence, the liability of each director shall be eliminated or
limited to the fullest extent permitted by the Colorado Business Corporation Act
as so amended. Any repeal or modification of this Article VII shall not
adversely affect any right or protection of a director of the Corporation under
this Article VII, as in effect immediately prior to such repeal or modification,
with respect to any liability that would have accrued, but for this
Article VII, prior to such repeal or modification.
Also, cavion.com has entered into indemnification agreements with the
officers and directors to indemnify them and to advance expenses to the fullest
extent permitted by law either in connection with the investigation, defense,
adjudication, settlement or appeal of a proceeding or in connection with
establishing or enforcing a right to indemnification or advancement of expenses.
In addition, the agreements provide that no claim or cause of action may be
asserted by cavion.com against any director or officer after two years from the
date of the alleged act or omission, provided that if in fact the person has
fraudulently concealed the facts, then no claim or cause of action may be
asserted after two years from the earlier of the date cavion.com discovers the
facts or the date cavion.com should have discovered such facts by the exercise
of reasonable diligence. The term of the agreement and cavion.com's obligations
apply while the person is an agent of cavion.com and continues so long as the
person is subject to any claim by reason of the fact that he or she served as an
agent of cavion.com.
In addition, the Underwriting Agreement for our initial public offering
provides for indemnification by the representative of the underwriters for that
offering of cavion.com, its directors and officers against certain liabilities,
including liabilities under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling
cavion.com as provided in the foregoing provisions, cavion.com has been informed
that, in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and thus cannot be enforced.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
FOUNDERS SHARES. In August 1998, we issued 2,000,000 shares of $.0001
common stock to our two founding shareholders at $.0001 per share. These
issuances to the two accredited investors were effected without registration
under the Securities Act of 1933 in reliance upon the exemption from
registration contained in Section 4(2) of the Act. As founding shareholders,
they had access to complete information regarding our business at the time of
issuance.
1998-1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS. Between October 20, 1998
and February 8, 1999, we issued $470,000 in 15% secured promissory notes due
October 19, 2000 and a total of 56,400 warrants to purchase shares of Class A
common stock at an exercise price of $.01 per share in a private placement. We
relied on the exemption from registration provided by Section 4(2) of the Act
and Rule 505 of Regulation D adopted under the Act, as well as exemptions under
various state securities laws. The securities were sold to 13 private investors.
One was an accredited investor and 12 were sophisticated investors. Investors
received a private placement memorandum as well as copies of the documents
relating to the sale of the assets of LanXtra to cavion.com which closed in
February 1999 and the loan from cavion.com to LanXtra which has since been
extinguished. Between December 28, 1998 and February 8, 1999, all of the
warrants were exercised. In connection with the offering, the agent for the
offering, First Capital Investments, Inc. was issued an agent's warrant to
purchase 5,640 shares of Class A common stock at $.01 per share, which was
exercised on February 8, 1999. In addition, First Capital received a total
offering commission of $37,600.
II-7
MANAGEMENT SHARES. In December 1998, we issued 625,356 shares of Class A
common stock to our management shareholders at $.01 per share. These issuances
to the three sophisticated investors were effected without registration under
the Act in reliance upon the exemption from registration contained in
Section 4(2) of the Act, relating to the sale of securities by an issuer not
involving a public offering. As these individuals were part of management at the
time the shares were issued, they had access to complete information regarding
our business at the time of issuance.
LANXTRA ASSET PURCHASE. In February 1999, we issued 375,214 shares of
Class A common stock and 28,648 shares of Class B common stock to LanXtra, Inc.
in exchange for the assets and liabilities of LanXtra. This issuance was
effected without registration under the Act in reliance upon the exemption from
registration contained in Section 4(2) of the Act. Since cavion.com was formed
to purchase the assets and liabilities of LanXtra, the management and
shareholders of LanXtra had access to complete information regarding our
business at the time of issuance.
1999 PRIVATE PLACEMENT OF PREFERRED STOCK. In March and April 1999, we
issued 700,000 shares of convertible preferred stock, Series A, convertible into
Class A common stock, for an aggregate of $2,100,000, prior to expenses and
commissions. The initial conversion price was $3.00 per share of Class A common
stock, but the conversion price was subject to adjustment upon certain events
affecting cavion.com's capitalization. The shares of preferred stock were
automatically converted into Class A common stock on November 3, 1999, when we
closed our initial public offering. The convertible preferred stock was sold in
reliance on the exemption from registration provided by Section 4(2) of the Act
and Rule 506 of Regulation D adopted thereunder, as well as exemptions under
various state securities laws. The offering was sold to accredited investors
only. Investors received a private placement memorandum including financial
statements. In connection with the offering, the agent for the offering, NTB was
issued a five year agent warrant to purchase 70,000 shares of preferred stock at
an exercise price of $3.00 per share. Those warrants were subsequently
terminated at NTB's request. In addition, NTB received a commission of $210,000
and a non-accountable expense allowance of $42,000.
AUGUST 1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS. In August 1999 we
raised $300,000 through the issuance of 14% promissory notes along with warrants
to purchase 30,000 shares of common stock. Each $50,000 note entitled the
subscriber to warrants to purchase 5,000 shares of Class A common stock. The
notes were due on the closing of our initial public offering or one year from
the date of their issuance. The notes were paid in full on November 5, 1999. The
warrants are exercisable for period of five years from November 3, 1999. The
warrant exercise price is $6.50, the price at which common stock was offered in
our initial public offering. The notes and warrants were sold to four accredited
investors. We relied on the exemption from registration provided by
Sections 4(2) and 4(6) of the Act and Rule 506 of Regulation D adopted under the
Act, as well as exemptions under various state securities laws.
FEBRUARY 2000 PRIVATE PLACEMENT. On February 17, 2000, we raised $2,460,000
through a private placement of 205,000 shares of Class A common stock at $12.00
per share, the closing price on February 14, the date of the offering to the
investors. The securities were sold in reliance on the exemption from
registration provided by Section 4(2) and 4(6) of the Act and Rule 506 of
Regulation D adopted under the Act, as well as exemptions under various state
securities laws. The offering was sold to two accredited investors who each
received a copy of our most recent registration statement on Form SB-2
(No. 333-93929) which was declared effective by the SEC on February 4, 2000. In
connection with the offering, First Capital Investments, Inc. acted as our
placement agent and received a commission of 8%, or $196,000, and a warrant to
purchase 20,500 shares of our Class A common stock, exercisable at 110% of the
offering price, $13.20, for a period of 5 years from February 17, 2000. We also
agreed to register the shares issued to the investors and the shares for which
the warrants are exercisable as soon as practicable.
II-8
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
*1.1 Form of Underwriting Agreement
2 Asset Purchase Agreement with Cavion Technologies, Inc.
dated December 31, 1998 (incorporated by reference from
Exhibit 2 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
3.1a Amended and Restated Articles of Incorporation as filed with
the Colorado Secretary of State on February 1, 1999
(incorporated by reference from Exhibit 3.1a of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
3.1b Articles of Amendment to the Amended and Restated Articles
of Incorporation setting forth Statement of Designation of
Series and Determination of Rights and Preferences of
convertible preferred stock, Series A, as filed with the
Colorado Secretary of State on February 26, 1999
(incorporated by reference from Exhibit 3.1b of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
3.2 Amended and Restated Bylaws of the Company as adopted by its
Board of Directors on March 22, 1999 (incorporated by
reference from Exhibit 3.2 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
4.1 Specimen Certificate for $.0001 par value Class A common
stock of the Company (incorporated by reference from
Exhibit 4.1 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
4.2 Specimen Certificate for $.0001 par value Class B common
stock of the Company (incorporated by reference from
Exhibit 4.2 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
4.3 Specimen Certificate for $.0001 par value Series A preferred
stock of the Company (incorporated by reference from
Exhibit 4.3 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
4.4 Form of Subscription Agreement in the Offering of
convertible preferred stock of the Company (incorporated by
reference from Exhibit 4.4 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
4.5 Form of Preferred Stock Warrant issued to Neidiger, Tucker,
Bruner, Inc. (incorporated by reference from Exhibit 4.5 of
the Company's Registration Statement on Form SB-2
(No. 333-80421))
4.6 Form of Subscription Agreement in the 1999 offering of
Promissory Notes and Warrants (incorporated by reference
from Exhibit 4.6 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
4.7 Form of Warrant in the 1999 offering (incorporated by
reference from Exhibit 4.7 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
*5 Opinion of Gorsuch Kirgis LLP
10.1 Promissory Note to Herman D. Axelrod dated July 1, 1992
(incorporated by reference from Exhibit 10.1 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.2 Promissory Note to Craig E. Lassen dated August 1, 1992
(incorporated by reference from Exhibit 10.2 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.3 Factoring Agreements to Herman D. Axelrod dated
September 8, 1997 and September 15, 1997 (incorporated by
reference from Exhibit 10.3 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
II-9
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
10.4 Factoring Agreement to Craig E. Lassen dated October 15,
1997 (incorporated by reference from Exhibit 10.4 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.5 Bridge Loan Agreement, Promissory Notes and Put Agreement
with Far East Holdings, Ltd., Martin Cooper and Fairway
Realty Associates with Sigmacom Corporation dated May 28,
1998 (incorporated by reference from Exhibit 10.5 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.6 Additional Bridge Loan Agreement, Promissory Notes and Put
Agreement with Jeff Marshall, David Selina and Randal Burtis
dated May 28, 1998 (incorporated by reference from
Exhibit 10.6 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.7 Termination and Modification Agreement dated September 28,
1998, and Amendment to Termination and Modification
Agreement dated January 15, 1999, with British Far East
Holdings, Ltd., William M.B. Berger Living Trust, Martin
Cooper, Fairway Realty Associates, Craig Lassen, Herman
Axelrod and David Selina (incorporated by reference from
Exhibit 10.7 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.8 Engagement Letter with First Capital Investments, Inc. dated
September 20, 1998 (incorporated by reference from
Exhibit 10.8 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.9 Form of 15% Secured Promissory Notes due October 19, 2000
(incorporated by reference from Exhibit 10.9 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.10 Agreement for Post-Closing Adjustments by and among Venture
Funding, Ltd., Boutine Capital, LLC, Network
Acquisitions, Inc., Cavion Technologies, Inc., Craig E.
Lassen, David J. Selina and Jeff Marshall dated February 1,
1999 (incorporated by reference from Exhibit 10.10 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.11 Share Allocation Agreement by and among Venture
Funding Ltd., Boutine Capital, LLC, Cavion
Technologies, Inc., LanXtra, Inc., Craig E. Lassen,
David J. Selina and Jeff Marshall, dated April 16, 1999
(incorporated by reference from Exhibit 10.11 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.12 Office Lease Agreement with TTD Associates dated
December 4, 1996 for the corporate offices located at
7475 Dakin Street, Denver, Colorado (incorporated by
reference from Exhibit 10.12 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.13 Business Loan Agreement and Promissory Note with US Bank
dated January 18, 1999, and First Amendment to Business Loan
Agreement with US Bank dated March 24, 1999 (incorporated by
reference from Exhibit 10.13 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.14 Executive Employment Agreement with David J. Selina
effective February 1. 1999 (incorporated by reference from
Exhibit 10.14 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.15 Executive Employment Agreement with Marshall E. Aster
effective March 8, 1999 (incorporated by reference from
Exhibit 10.15 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.16 Executive Employment Agreement with Jeff Marshall effective
February 1, 1999 (incorporated by reference from
Exhibit 10.16 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
II-10
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
10.17 Executive Employment Agreement with Craig E. Lassen
effective February 1, 1999 (incorporated by reference from
Exhibit 10.17 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.18 Equity Incentive Plan dated March 19, 1999 (incorporated by
reference from Exhibit 10.18 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.19 Form of Indemnification Agreement with officers and
directors (incorporated by reference from Exhibit 10.19 of
the Company's Registration Statement on Form SB-2
(No. 333-80421))
10.20 Agreement to Modify Deferred Obligations dated May 28, 1999
with British Far East Holdings, Ltd., William M.B. Berger
Living Trust, Martin Cooper, Fairway Realty Associates,
David J. Selina, Jeff Marshall, Randal W. Burtis, Convergent
Communications, Inc., Craig E. Lassen and Herman D. Axelrod
(incorporated by reference from Exhibit 10.20 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.21 Form of Secure Network Services Agreement (incorporated by
reference from Exhibit 10.21 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.22 Forms of Lock-Up Agreements among the officers and directors
of the Company, 5% or more shareholders and the other
shareholders and the Representative (incorporated by
reference from Exhibit 10.22 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.23 Settlement Agreement and Mutual General Release with
Craig E. Lassen dated June 8, 1999 (incorporated by
reference from Exhibit 10.23 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.24 Form of Promissory Note in the 1999 offering (incorporated
by reference from Exhibit 10.24 of the Company's
Registration Statement on Form SB-2 (No. 333-80421))
10.25 License Agreement with MoneyLine America, LLC dated
August 18, 1999 (incorporated by reference from
Exhibit 10.25 of the Company's Registration Statement on
Form SB-2 (No. 333-80421))
10.26 Network Service Master Agreement with Convergent
Communications Services, Inc., dated October 22, 1999
(incorporated by reference from Exhibit 10.26 of the
Company's Registration Statement on Form SB-2
(No. 333-80421))
10.27 License and Referral Agreement with Cardinal Services
Corporation dated September 27, 1999 (incorporated by
reference from Exhibit 10.27 of the Company's Registration
Statement on Form SB-2 (No. 333-80421))
10.28 Office Lease with NY/BDP Flex I., LLC dated October 29, 1999
(incorporated by reference from Exhibit 10 of the Company's
Form 10-QSB for the quarter ended September 30, 1999)
10.29 Web Service Agreement with Planet Direct Corporation dated
November 12, 1999
10.30 Marketing Cooperation Agreement with Mission Critical
Recovery, Inc. dated December 8, 1999
10.31 Secure Network Services Agreement with Mission Critical
Recovery, Inc. dated December 8, 1999
10.32 Services Agreement with Engage Technologies, Inc. dated
January 9, 2000
10.33 Business and Trade Network of America, Inc. Agreement dated
February 24, 2000
II-11
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
10.34 Development and Promotion Agreement with
Stockwalk.com, Inc. dated March 9, 2000
10.35 Linking and Promotion Agreement with Colonial Direct
Financial Group, Inc. dated March 10, 2000
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Gorsuch Kirgis LLP contained in its opinion filed
as Exhibit 5
27.1 Financial Data Schedule
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing(s) specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of cavion.com in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
We undertake with respect to the securities being offered and sold in this
offering:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Act shall be deemed to be part of this registration statement as of the
time it was declared effective
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus as a new
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of such
securities at that time shall be deemed to be the initial bona fide thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and County of Denver, State
of Colorado, on April 14, 2000.
CAVION TECHNOLOGIES, INC.
By: /s/ DAVID J. SELINA
----------------------------------------
David J. Selina, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ DAVID J. SELINA
- -------------------------------------------
David J. Selina, Date: April 14,
DIRECTOR, PRESIDENT, CHIEF EXECUTIVE OFFICER, 2000
PRINCIPAL EXECUTIVE OFFICER AND CHIEF OPERATING
OFFICER
/s/ MARSHALL E. ASTER
- -------------------------------------------
Marshall E. Aster, Date: April 14,
CHIEF FINANCIAL OFFICER AND PRINCIPAL FINANCIAL AND 2000
ACCOUNTING OFFICER
/s/ STEPHEN B. FRIEDMAN
- ------------------------------------------- Date: April 14,
Stephen B. Friedman, DIRECTOR 2000
/s/ JEFFREY W. MARSHALL
- ------------------------------------------- Date: April 14,
Jeffrey W. Marshall, DIRECTOR 2000
/s/ DAVID MAUS
- ------------------------------------------- Date: April 14,
David Maus, DIRECTOR 2000
/s/ JOHN R. EVANS
- ------------------------------------------- Date: April 14,
John R. Evans, DIRECTOR 2000
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